I therefore hold and adjudge that the trustee is vested by operation of law with the title to all ten of the policies in question, for the purpose of securing their cash surrender value and loan value, to be applied to the debts of the bankrupt; and it is so ordered.

In re SMITH, LOCKHART & CO. TRUSTEE IN BANKRUPTCY v. MERCANTILE TRUST & DEPOSIT CO. (District Court, D. Maryland. December 17, 1924.)

1. Banks and banking 142-Bankruptcy trustee held not entitled to recover fund which had legally vested in another before bankruptcy.

Where a bank received and credited to a depositor a check given by another depositor which had funds sufficient to pay it, and which, so far as the bank knew, was solvent, though in fact insolvent, the transaction between the parties was completed and the bank was required to apply so much of the drawer's funds as necessary to the payment of the check, and the fact that it failed to do so does not entitle the trustee of the drawer, on its subsequent bankruptcy, to claim the fund.

2. Banks and banking 320-Bank held to have made illegal disbursement of funds of bankrupt estate.

On the day of bankruptcy but before the filing of the petition and without knowledge of its insolvency, the bank in which bankrupt was a depositor received checks given by it through the clearing house and charged the same to its account. By the clearing house rules it had the right to return the checks at any time before 12 o'clock, and by custom the time limit might be waived and return permitted up to the time of closing of the exchange for the day. Learning of bankrupt's embarrassment and fearing that it might not have sufficient funds of bankrupt because of uncollected checks deposited, the bank sought and received permission to return the checks and duly credited them to bankrupt's account. This was after 12 o'clock and after filing of the petition. Later, finding that it had sufficient funds, the bank re-. funded the amount of the checks to the presenting banks. Held, that the waiver of the time limit by the presenting banks and accept ance of return of the checks put the parties in the same position as when the checks were first presented; that the bank was not legally bound to make the refund and was without right to do so from funds which then belonged to the bankrupt estate.

3. Banks and banking 320-Time of payment of checks presented through clearing

house.

In contemplation of law, payment of checks presented through a clearing house has not been made until expiration of the time within which,

under the clearing house rules, the presenting banks are bound, on demand, to accept their return.

4. Banks and banking 319-Clearing house rules may be waived.

The rules made by the members of a clearing house for their mutual convenience and protection may be waived by the bank which they aim to protect.

5. Banks and banking 319-Clearing house rules may have a bearing on rights of outside parties.

While the rules of a clearing house are not of their own force binding on persons not members, such rules and the practice under them may have a bearing on rights of third persons.

In Bankruptcy. In the Matter of Smith, Lockhart & Co., bankrupt. Petition of the trustee in bankruptcy against the Mercantile Trust & Deposit Company for an accounting. Credits of accounting bank determined.

J. Purdon Wright and Reuben Oppenheimer, both of Baltimore, Md., for trustee. Venable, Baetjer & Howard, of Baltimore, Md., for Mercantile Trust & Deposit Co.

ROSE, Circuit Judge. Adjudication in bankruptcy of the stock brokerage firm of Smith, Lockhart & Co., herein called the bankrupt, was made upon a petition filed at 12:30 in the afternoon of August 9, 1922. Subsequent investigation demonstrated that its insolvency was of long standing, but before the day upon which legal proceedings were instituted that fact does not appear to have been known to any one outside the bankrupt's offices. It banked with the Mercantile Trust Company, hereinafter styled the Mercantile. It is not claimed that at any time prior to the day on which the petition in bankruptcy was filed the Mercantile questioned the financial soundness of its customer.

At the close of business on August 8th, the books of the Mercantile indicated that it held on deposit $55,750.94 of the bankrupt's money. On the morning of the 9th, Jos. P. Hooper & Co., another customer of the Mercantile, deposited with it a check of the bankrupt's and in favor of the depositor for $9,084.46. This amount was entered in the Hooper passbook as cash and was at once credited to its account on the Mercantile's ledger. The Mercantile over its counter cashed a check of the bankrupt's for $500 in favor of one not connected with this controversy. In the usual course of

business, there had that morning been presented through the clearing house, to the Mercantile, more than a score of checks of the bankrupt's aggregating $20,078.17. In accordance with custom, all these were at once duly charged by the Mercantile to the bankrupt's account. The aggregate of the Hooper check, the check cashed over the counter, and these clearing house checks was $29,662.63, and the bankrupt's apparent balance with the Mercantile was thus reduced to $26,087.81.

Up to this time the Mercantile had no hint that the bankrupt's business was not going on as usual, although, unknown to it, much had happened. At or shortly before 9 o'clock that morning, representatives of the New York Stock Exchange presented themselves at the bankrupt's office, and under orders of the Exchange removed the stock ticker therefrom. This was done before the senior members of the bankrupt firm reached their place of business. So soon as they learned what had taken place, they went to the office of their lawyer and after a conference with him, they, about 11:30, caused the Mercantile to be telephoned that the ticker had been taken out and not to pay out any more money than they had in the account or more than they had collected, or words to the same general effect. The Mercantile thereupon summoned its counsel. He responded immediately and reached the Mercantile at 11:40. He was told what his client knew. He naturally assumed that the bankrupt might be on the verge of failure and busied himself to find out how it stood with his client. Before 12 o'clock he learned that while the apparent credit balance of the bankrupt with the Mercantile exceeded $26,000, that would be true only if the checks deposited by the bankrupt and provisionally accepted by the Mercantile as cash were honored. Without concerning himself as to the possibility that payment might be stopped upon a number of checks on out of town points for comparatively small amounts, as in fact proved to be the case as to some of them, he and the Mercantile concentrated their attention on two checks amounting in the aggregate to $13,500, which had been credited to the bankrupt. There were some special reasons to fear that one or both of these might not be paid. If neither of them was, the account of the bankrupt with the Mercantile would have been overdrawn by more than $17,000.

At that time the rule of, the clearing house permitted a member bank to return a check charged to it at the morning clearing before noon on that day and provided that upon request made before 12, the time for return should be extended to 1. Instructions were given to some of the Mercantile's employees to use the telephone to secure an extension to that hour. These instructions were misunderstood and were not acted upon. Counsel further advised that the check of the bankrupt which had been credited to the Hooper Company should be charged back to the latter.

It was well after 12, and perhaps as late as 1, before he heard that nothing had been done with reference to the return of the checks of the bankrupt which that morning had come from the clearing house. In spite of the clearing house rule which in terms limited the right of return to 12, or to 1, when the extension had been seasonably requested, it is in evidence that the member banks were usually willing to waive its strict application and to accept return at any time before the close of business hours for the day. When a check is returned, either within or after the time fixed by the rules, it is the practice of the returning bank to attach to it a slip explaining the reason why it has been sent back. Such slips have printed upon them some 16 or 17 of the reasons for return most frequently occurring in practice. The one relied upon in the particular case is indicated by checking. Two of these reasons which appear in juxtaposition near the end of the slip are, "Drawn against uncollected funds," and, "Not sufficient funds according to our books." By some error or misunderstanding, the Mercantile checked the second of these on the slip it sent out with the return checks. That was not an accurate statement, for, as already stated, there were sufficient funds on the face of the Mercantile's ledgers to meet all these checks. The Mercantile could have appropriately stated that the checks had been "drawn against uncollected funds." It is true that by the time the checks were sent back the funds had been collected, but that fact was not then known to the Mercantile, in spite of the efforts that it had been making to obtain information on that very point. Whether a depositor's account is sufficient to meet a check drawn by him against it often depends upon whether some checks or drafts he has deposited have been or will be paid.

The bank which has his account may frequently be unwilling to honor his check until it knows whether the payment has been made or not. In view of the frequency with which in practice returns must be made upon this ground and that there is among the many reasons printed on the slip none more appropriate than the one, "drawn against uncollected funds," it would appear that in the understanding of the banks it covers such a case as that with which we are concerned. Considerations of space dictate that on the blanks as few words as possible should be used, and therefore the reasons are often indicated rather than fully stated. The Mercantile's request to accept the re turn was acceded to by all but one bank, the National Union, which refused to take back two checks for an aggregate of $7,705.27. The total amount returned by the other banks to the Mercantile footed up $12,372.90. On subsequent days, and after the Mercantile knew of the proceedings in bankruptcy and the appointment of a receiver for the bankrupt, it repaid this sum to the various banks which after 1 o'clock had accepted the return of the clearing house checks. In these proceedings the trustee in bankruptcy seeks to hold the Mercantile for the Hooper check of $9,084.46 and for the $12,372.90 thus paid out by it after it knew of the appointment of the receiver by the court in bankruptcy.

[1] In the Hooper passbook, there was a general warning given by the Mercantile to its customers that it would not be "bound to use more than ordinary diligence to make collection of any item left with it for collection or by it passed to the credit of any customer, and in case of loss in any item for failure to collect the trust company shall be entitled to charge such loss back to its customer or to collect the same from the customer at once." But there was no failure to collect. The Mercantile had in hands funds of the bankrupt sufficient to pay the check when it was presented, and due diligence required it to apply a sufficient portion of them to its payment. At that time it did not know, or suspect, that the bankrupt was embarrassed. The transaction as between it and the Hooper Company was closed when it credited the amount of the check to the latter subject to its right to call for a refund if it should subsequently turn out that it had been mistaken, as it was not, in supposing that at the time it had in hand moneys of the bankrupt adequate to the payment.

The legally unsustainable attempt of the Mercantile to charge back the amount of the check to the Hooper Company cannot help the trustee. The trustee did not change his position because the Mercantile tried to alter its. Disappointed hopes are not in themselves sufficient to support an estoppel. The amount of the bankrupt's check presented by the Hooper Company is a valid credit as against the trustee's claim upon the Mercantile.

[2] The answer to the question as to whether the Mercantile is entitled to charge against the bankrupt's account the amount it paid to the various clearing house banks, after it knew of the appointment of the receiver, depends upon other considerations. The petition in bankruptcy was not filed until after the hour at which, according to the literal wording of the clearing house rule, the Mercantile's right to return the checks had expired. It is therefore not necessary to consider whether the Mercantile, had it learned before 12 o'clock that a petition in bankruptcy had been filed, would have owed the bankrupt estate a duty to exercise reasonable diligence to return the checks.

[3] On the other hand, the Mercantile does not claim that, after it knew the court in bankruptcy had taken charge of the estate of the bankrupt, it had any right to use the funds of the latter in its possession to pay claims of third parties. In short, it admits that if it had not before the appointment of the receiver paid the checks in controversy or made itself personally liable for that payment, it cannot charge against the funds of the bankrupt the payments it made after it had knowledge of the appointment of the receiver. It does, however, contend that under clearing house rules it had once paid the checks. It is true that it did secure their refund from the banks which held them, but it argues that they made such refunds in reliance upon its inaccurate representations, and that consequently they had the right to demand that it should return the money and that they did. The Mercantile calls attention to the holding of Judge Dallas that, under circumstances similar to those with which we are here concerned, the checks had been finally paid when the bank upon which they were drawn received them from the clearing house and charged them to its customer, and it made no difference, so far as the trustee was concerned, that under the rules of the clearing house the Mercantile until 12 o'clock had the absolute