Story Case

Martin and Gorham were Chicago commission merchants, with many rural clients who shipped their farm produce in for sale. According to the custom of that business, the goods would be received by Martin and Gorham and sold, the commission deducted, and the remaining proceeds remitted to the farmer. One of the farmers, Joel Atkinson, desiring to make payments in Chicago, instructed Martin and Gorham not to send him the money, but to place it in some Chicago bank subject to his draft. The sum of $1,377 was, accordingly, deposited in the Marquette Bank by Martin and Gorham, "payable upon order of Joel Atkinson." It happened that one of their depositors had, in the regular course of business, indorsed to the Marquette Bank for collection a note made by Atkinson for $1,000. Instead of asking payment of this note, the bank reduced the amount of the deposit to $377, marked the note paid, and refused to honor the orders and drafts drawn by Atkinson for the $1,000. He brought suit, claiming that the bank had no authority to apply this fund to a general indebtedness, but that it was bound to pay it out upon his order.

Should he have judgment against the bank?

Ruling Court Case. The Loretta Gold And Silver Mining Company Vs. American Exchange National Bank, Volume 163, Illinois Reports, Page 103; Volume 56 American State Reports, Page 233

The Loretta Gold and Silver Mining Company was a corporation organized under the laws of Wisconsin, which owned and operated a mine at Baker, Montana. M. J. Dunn was the general superintendent of this mine. On July 21, 1893, the mining company sent a draft in the sum of $750 to the Exchange National Bank "for credit of account Merchants' National Bank, Great Falls, Montana, for the use of M. J. Dunn, our superintendent at Baker, Montana." The Exchange National Bank, instead of crediting this amount to the Merchants' Bank, to the use of M. J. Dunn, credited it to the latter bank generally. Immediately, the Exchange National Bank sent notice to the Merchants' bank of this credit. Before this notice reached the Merchants' bank, it had failed. At the time of the failure, it was indebted to the Exchange National Bank in a sum greater than $750. The Exchange National Bank sets up the claim that it is entitled to retain this amount in payment of the debt owed to it by the Merchants' bank.

The mining company, however, claims that it was a deposit for a specific purpose, and could not be used by the Exchange National Bank for any other purpose; that since the purpose of the specific deposit was made impossible by the failure of the Merchants' bank, the Exchange National Bank must refund the same to it, the mining company.

Decision: A deposit of money or negotiable paper with a bank "for credit of account" of its correspondent "to the use" of a designated party, as in this case, is a specific deposit with a designated beneficiary. Under such circumstances, the receiving bank becomes the special depository of the fund, to deal therewith in strict accordance with the terms of the deposit. If the correspondent bank fails before transmission of the fund, thus rendering impossible the purpose, the receiving bank must then hold the fund subject to the depositor's order, and cannot apply it to any other purpose. Thus, in this case, the Exchange National Bank must repay to the mining company the fund in question.

Mr. Chief Justice Magruder said in part:"The deposit made by the mining company with the Exchange National Bank was a specific deposit for a designated beneficiary, and could not be used or dedicated by the Exchange National Bank to any other purpose. The bank, having become the special depository of the fund, was bound to retain it until it was drawn out by the Montana bank for the use of the mining company's superintendent. Instead of transmitting the fund to the Montana bank for the mming company's use, or holding it subject to be drawn out by that bank for the mining company's use, the Exchange National Bank, on the very day on which it received the fund, credited it upon its books, to the general account of the Montana bank; but since the Montana bank was indebted to it for more than the amount of the fund, the Exchange National Bank subsequently refused to pay over the fund to the mining company when demand was made for it. The Exchange National Bank thus applied a fund belonging to the mining company to the payment of its own debt against the Montana bank." Judgment was given for the Loretta Gold and Silver Mining Company.

Ruling Law. Story Case Answer

Negotiable paper may be deposited with a bank with directions that it shall be used in a certain way, either collected and paid to a certain person, or collected and held for the use of a designated party; in such cases, the deposit is said to be a specific deposit. The nature of this transaction is such that the bank receives title to the deposit, not as beneficial owner, but as trustee for a designated person. The point of difference between a special and specific deposit is that in the case of the first, the bank is usually merely a custodian for safe-keeping, and, in the second, a bailee or trustee with instructions to act in a certain manner. If the bank used this deposit in any manner not authorized by the instructions of the owner, it is liable for any loss consequent upon its conduct.

The bank is not always required to keep separate the identical pieces of money in the case of a specific deposit. It may be enough, according to the terms of its undertaking, if it keeps ready a sufficient amount which it regards not as its own, but to meet the depositor's demand. Thus, in the Ruling Court Case, it would have been sufficient if the Exchange National Bank had at all times been ready to pay out the sum upon order of the Merchants' Bank, of Montana. And in the Story Case, the Marquette Bank would not be required to label the very money deposited; it could mingle it with a general fund of "trust moneys." But it did not have authority to mingle it with the general current funds of the bank, nor to pay it out in the course of business. It never became a simple creditor for the amount. The authority given was to pay out in a certain way, that is, upon order, and this did not include payment of a debt on a note. Since the deposit was not held in the way that the bank agreed to hold it, it is liable. This was a specific deposit, which could not be treated as a general indebtedness. Judgment should be given for Atkinson.