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X-4983 c r e d i t ' mature of collection 3 1 8 1tbms. ( A r t i c l e i n 13 V i r g i n i a Law R e g i s t e r , U . S . , 2 9 6 ) In an a b l e a r t i c l e appearing in the May, 1927 i s s u e of the Virg i n i a Law R e g i s t e r , Mr. George Bryan c o n s i d e r s the t r u s t nature of the proceeds of c o l l e c t i o n of items sent by one bank to another f o r c o l l e c t i o n , and without attempting to c o n s i d e r a t l e n g t h the reason and p r i n c i p l e of the q u e s t i o n , concludes that the c o u r t s o f V i r g i n i a , among o t h e r s , s t r o n g l y favor the t r u s t theory, w h i l e in North and South Carolina tho items are considered a simple debt. This a r t i c l e , without at t empting c i t a t i o n of supporting a u t h o r i t y a t l e n g t h w i l l attempt a c o n s i d e r a t i o n of t h e r e a s o n and p r i n c i p l e c o n t r o l l i n g the q u e s t i o n . two methods. In general there are two methods u t i l i z e d between banks f o r the c o l l e c t i o n of checks, known as the r e c i p r o c a l accounts method and the r e m i t t a n c e method. In the r e c i p r o c a l accounts method the sendee bank, upon c o l l e c t i o n , c r e d i t s the forwarding bank, and b a l a n c e s between the two are s e t t l e d from time to time on demand. In the remittance method, the sendee bank, upon c o l l e c t i o n , i s Required to make immediate r e m i t t a n c e . By banking p r a c t i c e ' t h i s r e - mittance u s u a l l y takes the form of an evidence of i n d e b t e d n e s s . A check or d r a f t may be drawn by the sendee bank on i t s e l f and t r a n s m i t t e d to the forwarding bank, or the sendee may draw a check or d r a f t payable - 2 - X-4S83 3 1 3 to the forwarding "bank and draw on funds on d e p o s i t by the sendee w i t h some t h i r d bank more c o n v e n i e n t l y l o c a t e d to the forwarding bank and to which the forwarding bank can more c o n v e n i e n t l y p r e s e n t f o r payment. r e l a t i o n b e f o r e c o l l e c t i o n i n b o t h methods. Mo d i f f i c u l t y can a r i s e in e i t h e r the r e c i p r o c a l accounts or remittance method of c o l l e c t i o n as to the r e l a t i o n of the forwarding and sendee banks up to the moment of c o l l e c t i o n by the l a t t e r of the forwarded i t e m s . The c o u r t s w i t h some u n i f o r m i t y hold that the r e l a t i o n i s that of P r i n c i p a l and Agent. This was o f d e c i s i o n in the case of F i r s t N a t i o n a l Bank v. Payne, 85 Va. 890 and i s r e c o g n i s e d in the l a t e case of Federal Reserve Bank v . P e t e r s , 139 7a. 45. r e c i p r o c a l ACCOUNTS method, r e l a t i o n a f t e r c o l l e c t i o n . In the r e c i p r o c a l accounts method no e s p e c i a l d i f f i c u l t y can a r i s e as to the r e l a t i o n of forwarding and sendee banks a f t e r c o l l e c t i o n by the l a t t e r of the forwarded i t e m s . The sendee bank c o l l e c t s the i t e m s , de- p o s i t s the p r o c e e d s w i t h i t s general a s s e t s and c r e d i t s the forwarding bank. The word 11 credit" g i v e s the keynote; the proceeds of c o l l e c t i o n have become a debt due to the forwarding bank as c l e a r l y as are the funds of any other d e p o s i t o r , and the r e l a t i o n of P r i n c i p a l and Agent between t h e two banks has become that of Creditor and Debitor. This i s hornbook law. i t i s founded? What i s the reason and p r i n c i p l e upon which I t i s submitted that the elemental and d i s t i n g u i s h i n g c h a r a c t e r - i s t i c between t h e r e l a t i o n of debtor and c r e d i t o r and a f i d u c i a r y r e l a t i o n s h i p i s , i n i t s l a s t a n a l y s i s , the question whether c r e d i t has been g i v e n or whether no c r e d i t has been given and, by agreement or requirement of law, the b e n e f i c i a l ownership of the funds c o n t i n u e s in the person who o t h e r w i s e would - 3 <- X-4983 "?-a.L -= - be a c r e d i t o r of the second. The d i s t i n g u i s h i n g c h a r a c t e r i s t i c of t h e true t r u s t character of funds i s the p r o t e c t i o n of such funds imposed "by law. The d i s t i n g u i s h i n g charac- t e r i s t i c of the f i d u c i a r y character of funds in the hands of an a g e n t , s e r vant, or l i k e character i s the p r o t e c t i o n of such funds imposed "by law and contract. This p r o t e c t i o n to the c e s t u i que t r u s t i s the c o n t i n u i n g s e c u r i t y and i d e n t i t y of such funds, the requirement that such funds must be kept separate and apart by the f i d u c i a r y , from t h o s e o f h i s own. By keeping the funds separate they are n e c e s s a r i l y funds and not a c r e d i t extended by the c e s t u i que t r u s t to the f i d u c i a r y and a debt due by the l a t t e r to t h e former, CONSTRUCTIVE TRUSTS - IMPRESSING- 3WDS WITH A TRUST. This requirement that t r u s t funds be kept s e p a r a t e and apart from per^ sonal a s s e t s i s an elemental l e g a l duty in the f i d u c i a r y and i t s breach i s a v i o l a t i o n of t h a t duty f o r which e q u i t y g i v e s remedy by means of i t s maxim that "Equity regards, that done which ought to have been done." If the f i d u c i a r y has mingled f i d u c i a r y funds w i t h h i s own, has f a i l e d to keep such funds separate and a p a r t , e q u i t y a p p l i e s the maxim and s e c u r e s the prof t e c t i o n to the c e s t u i que t r u s t of i d e n t i t y and s e c u r i t y , of such funds by impressing t h e commingled a s s e t s w i t h a t r u s t . From t h e bare statement of t h e maxim, i t i s obvious that f a i l u r e to keep the funds separate and apart must be a l e g a l or c o n t r a c t duty to g i v e e q u i t y j u r i s d i c t i o n , a n d that where the funds are commingled by agreement, e q u i t y has no j u r i s d i c t i o n , in the absence of o t h e r f a c t s , to impress the commingled a s s e t s with a trust. Equity cannot do so because t h e r e i s no t r u s t , a debt has come i n t o b e i n g i n s t e a d . g i v e remedy. have been done, There i s no v i o l a t i o n of duty f o r which to Equity cannot impress a t r u s t to cause that done which should because the commingling of the funds by t h e once f i d u c i a r y — 4 — *-4983 -115 was the doing of e x a c t l y that which he should have done. I t was the execution of h i s agreement with the former c e s t u i que t r u s t , and by the execution of h i s agreement the funds have l o s t their f i d u c i a r y character, the p a r t i e s their f i d u c i a r y r e l a t i o n s h i p and the r e l a t i o n s h i p has become that of debtor and creditor* Pom. 2q. J u r i s . (3rd Ed.) Par. 1044 it* * * exhaustive a n a l y s i s would show, I think, t h a t a l l i n stances of c o n s t r u c t i v e t r u s t s properly, so c a l l e d may be r e f e r r e d to what equity denominates fraud, e i t h e r a c t u a l or c o n s t r u c t i v e , as an e s s e n t i a l element, and as t h e i r f i n a l source. Even in that s i n g l e c l a s s where equity proceeds upon the maxim that an i n t e n t i o n to f u l f i l l an o b l i g a t i o n should be imputed, and assumes that the purchaser intended to a c t in pursuance of h i s f i d u c i a r y duty, the notion of fraud i s not involved simply because i t i s not a b s o l u t e l y necessary -under the circumstances; the e x i s t e n c e of the trust in a l l c a s e s of t h i s c l a s s might be r e f e r r e d to cons t r u c t i v e fraud. Certain s p e c i e s of c o n s t r u c t i v e t r u s t s a r i s e from a c t u a l fraud; many others from the v i o l a t i o n of some posi t i v e duty ( i t a l i c s supplied); in a l l the remaining i n s t a n c e s there i s , l a t e n t perhaps, but none the l e s s r e a l , the necessary element of that unconscientious conduct which equity c a l l s fraud. Courts of e q u i t y , by thus extending the fundamental p r i n c i p a l of t r u s t s - that i s , the p r i n c i p a l of the l e g a l e s t a t e in one and the equitable e s t a t e in another - to a l l c a s e s of a l l c a s e s of a c t u a l or c o n s t r u c t i v e fraud and breaches of good f a i t h , are enabled to w i e l d a remedial power of tremendous e f f i c a c y in p r o t e c t i n g the r i g h t s of property; they can f o l l o w the r e a l owner's s p e c i f i c property and preserve h i s r e a l ownership * * Thus i t i s submitted, there can be no f i d u c i a r y r e l a t i o n s h i p to a s s e t s commingled by agreement, to a s s e t s commingled not i n v i o l a t i o n of a l e g a l or duty or contract contract duty but i n s t e a d commingled pursuant to a c o n t r a c t / r i g h t . I t i s submitted that the a c i d t e s t in c a s e s of c o l l e c t i o n by one bank f o r another i s whether the sendee bank has, by agreement, express or implied, the r i g h t to commingle the proceeds of c o l l e c t i o n with i t s ovm a s s e t s , or d i f f e r e n t l y phrased - s i n c e the r e l a t i o n s h i p of debtor and c r e d i t o r i s d i a m e t r i c a l l y opposed to the f i d u c i a r y r e l a t i o n s h i p - whether the transaction c r e a t e s r i g h t f u l l y a debt due by the sendee to the forwarding bank. - 5 - x-49'83 31 REMITTANCE METHOD* In the so c a l l e d remittance method of c o l l e c t i o n the sendee "bank may "be required to remit the proceeds of c o l l e c t i o n "by shipment of cash or currency, or "by transmission of a check or draft drawn on i t s e l f or on some t h i r d bank at which i t has funds on d e p o s i t , or by e i t h e r method in i t s e l e c t i o n . .r.S$HMTCS S t CASH, In the case of remit r a r e e required to be made by shipment of cash or currency, i t i s obvious t h a t the agreement does not contemplate any commingl i n g of the c o l l e c t e d items with the general a s s e t s of the sendee, but i n f a c t s p e c i f i c a l l y provides against i t . The agreement does not contemplate a s u b s t i t u t i o n of c r e d i t f o r cash, but s p e c i f i c a l l y provides that the remittance be money. In short the agreement secures to the forwarding bank the pro- t e c t i o n s of i d e n t i t y and s e c u r i t y of the c o l l e c t e d funds f the hallmark of the f i d u c i a r y r e l a t i o n , thereby preserving the i n i t i a l r e l a t i o n s h i p of P r i n c i p a l and Agent throughout the t r a n s a c t i o n . REMITTANCE BY CHECK OR DRAFT. Checks and d r a f t s are evidences of debt, and i n the absence of a s p e c i a l s t i p u l a t i o n to the contrary, the sendee bank would be authorized to draw such check or d r a f t a g a i n s t i t s general a s s e t s . The transaction thus contemplates the issuance of an evidence of indebtedness against the general a s s e t s of the bank - the c r e a t i o n of ^ debt against i t s general a s s e t s due by the sendee to the forwarding bank. Correspondingly the sendee bank would be impliedly authorized to deposit the proceeds of c o l l e c t i o n with i t s own general a s s e t s to o f f - s e t or balance the debt created against such a s s e t s by the check or draft. The commingly of a s s e t s r i g h t f u l l y , the creation of a debt be- tween the p a r t i e s , the abandonment of the r i g h t of the c e s t u i que t r u s t to the s e c u r i t y and i d e n t i t y of s e p a r a t e l y kept funds are not the badges of a - 5 - 3 1 7 X-4983 t r u s t or f i d u c i a r y r e l a t i o n ; they are the l i v e r y of debtor and c r e d i t o r . In f a c t there i s l i t t l e to d i s t i n g u i s h the general depositor of the sendee bank fror.; the forwarding bank in t h e i r r e l a t i o n s with the sendee. The depositor e n t r u s t s h i s funds to the sendee bank of d e p o s i t , consenting that such funds be commingled with the sendee bank's general a s s e t s , becoming i t s c r e d i t o r and accepting i n l i e u of the p r o t e c t i o n of s e c u r i t y and i d e n t i t y of a s s e t s s e p a r a t e l y kept, the debt from the bank to him. The forwarding bank p l a c e s evidences of debt in the hands of the sendee bank, the l a t t e r c o l l e c t s them, and the forwarding bank consents that they be commingled with the general a s s e t s of the sendee bank, d i r e c t i n g that in l i e u of the s e c u r i t y and i d e n t i t y of the proceeds of c o l l e c t i o n s e p a r a t e l y kept, an evidence of indebtedness against the general a s s e t s of the sendee bank be transmitted to i t , d i r e c t i n g that a debt to i t be c r e a t e d out of the general a s s e t s of the sendee bank. pseubo DISTINCTION. The d i s t i n c t i o n between the two c a s e s which suggests i t s e l f i s that a bank depositor has consented that the bank become h i s debtor f o r an i n d e f i n i t e time while the forwarding bank, s t i p u l a t i n g f o r an immediate transmission of check or d r a f t , at b e s t has consented that the proceeds of c o l l e c t i o n take the form of an evidence of debt only f o r a short and determinable period that required f o r .the check or d r a f t to be transmitted to i t and by i t presented. Again the forwarding contract suggests that the c r e d i t extended to the sendee f o r t h i s i n t e r v a l i s conditioned on the due payment o f the paper; that the paper i s not a payment u n t i l honored, and i f dishonored, the part i e s r e v e r t to t h e i r o r i g i n a l f i d u c i a r y r e l a t i o n s h i p . The argument, in short, i s that a c e s t u i que t r u s t can, by agreement, waive h i s r i g h t to the p r e s e r v a t i o n of the f i d u c i a r y a s s e t s separate and x 4983 ~ 318 apart from the personal a s s e t s of the f i d u c i a r y and pro tern become a simple c r e d i t o r of the f i d u c i a r y , but r e a s s e r t i n g the f i d u c i a r y r e l a t i o n s h i p and converting the debtor into a f i d u c i a r y again in the event of the l a t t e r 1 s f a i l u r e to pay the debt. The argument makes the mere f a i l u r e of a debtor to pay a debt, by agreement, r e v i v i f y or r e - c r e a t e a t r u s t r e l a t i o n s h i p . It invokes the doctrine of e q u i t y 1 s presumption that that was done which should have been done, and asks equity to impress a t r u s t on the commingled a s s e t s to preserve an e q u i t a b l e f i c t i o n that the funds have not been commingled, when that 'Mich was a c t u a l l y done with such a s s e t s - t h e i r corjmingling - was r i g h t f u l l y done pursuant to agreement and consent, and that which a c t u a l l y was done which should not have bsen done was the f a i l u r e j f a debtor to pay a*debt, at a time "hen the debtor was a debtor and nothing e l s e , was without a v e s t i g e of the character of a f i d u c i a r y . The argument needs no comment. If i t i s the law, reason has forsaken the law. THE VIRCHMIA CASES. Overseers of the Poor, Etc. v. Bank of Virginia,, 2 Gratt.544. An a t t o r n e y , r e c e i v i n g payment of a c l i e n t ' s judgment by check, deposited i t to h i s general bonk account f o r c o l l e c t i o n and died with h i s account some few d o l l a r s overdrawn. On the question whether the c l i e n t was e n t i t l e d to a p r e f e r e n t i a l claim on the d e p o s i t , Held; The deposit i s impressed with a t r u s t . Since the- attorney, in the absence of an agreement to the contrary, owed h i s c l i e n t the duty, a r i s i n g from the f i d u c i a r y r e l a t i o n , of preserving h i s c l i e n t ' s funds separate and apart from h i s own, h i s f a i l u r e to do so c r e a t e d a c o n s t r u c t i v e t r u s t , founded on the v i o l a t i o n of h i s duty, and the d e c i s i o n is clearly ri^it. I t i s submitted that the d e c i s i o n has not the s l i g h t e s t a p p l i c a t i o n to the case where t h e coiuningling of a s s e t s i s not the v i o l a t i o n of a t r u s t or — 8 — X—49 83 "t-*s f i d u c i a r y duty, out i s , instead, the exact performance of an agreement between the p a r t i e s . F i r s t National B-ank of Alexandria v. Payne, 85 Va.890, By agreement the forwarding and sendee banks c o l l e c t e d f o r and c r e d i t e d to each other the proceeds of c o l l e c t i o n items, s e t t l i n g balances between thems e l v e s from time to time. The sendee bank was a partnership. items f o r c o l l e c t i o n , thereupon one partner died It received and the surviving partner c o l l e c t e d the i t e ^ s and c r e d i t e d the forwarding bank. On i n s o l v e n c y , Held; claim of the forwarding bank i s p r e f e r e n t i a l . A c a r e f u l reading of the opinion w i l l demonstrate that the d e c i s i o n i s based on the l o g i c of the f o l l o w i n g chain; (1) Before c o l l e c t i o n of the items the sendee bank was an agent of the forwarding bank. (2) Had c o l l e c t i o n and d i s p o s i t i o n of the proceeds been made pursuant to and by a u t h o r i t y of the agreement, t h e r e l a t i o n between the two banks would have become thereupon that of debtor and c r e d i t o r . (3) By the p a r t n e r ' s death b e f o r e c o l l e c t i o n , the f i r m was d i s s o l v e d , and i t s a u t h o r i t y to proceed with the c o l l e c t i o n and d i s p o s i t i o n of the proceeds was at an end. (4) The a c t of the surviving partner in so doing was hence without a u t h o r i t y . (5) Being without a u t h o r i t y i t did not operate to terminate the i n i t i a l r e l a t i o n of P r i n c i p a l and Agent and s u b s t i t u t e that of Debtor and Creditor (6) The r e l a t i o n of P r i n c i p a l and Agent continuing, the Agent was under the duty to preserve h i s P r i n c i p a l ' s funds apart from h i s own. (7) His f a i l u r e to do so was a v i o l a t i o n of f i d u c i a r y duty, and equity, t r e a t i n g that done which should have been done, w i l l impress a t r u s t on the commingled a s s e t s . I t w i l l be n o t i c e d t h a t the e n t i r e d e c i s i o n hinges on the v i o l a t i o n of a f i d u c i a r y duty by a f i d u c i a r y , ( a g e n t ) at a time when he was a f i d u c i a r y - the commingling of f i d u c i a r y funds with personal a s s e t s and without a u t h o r i t y from the c e s t u i que t r u s t . I t i s submitted that the d e c i s i o n has no a p p l i c a t i o n to the case where the agreement to mingle t r u s t a s s e t s with individual a s s e t s - 9 i s i n force and operative at the time such commingling takes p l a c e . X-4983 In such case there i s no v i o l a t i o n of duty, no grounds f o r e q u i t y ' s j u r i s d i c t i o n to a t t a c h . The next case to he c i t e d i s s t a t e d "by Mr. Bryan in the a r t i c l e bn- him heretofore mentioned, to be the leading case i n V i r g i n i a and the opinion i s by him c h a r a c t e r i z e d as an informing and w e l l reasoned d i s c u s s i o n of the law in p o i n t . I t i s c e r t a i n l y informing and p r e s e n t s i n t e r e s t i n g c o n t r a s t s to the r a t i o n a l e of the foregoing d i s c u s s i o n , and i s indeed a landmark i n the law of the subject i n V i r g i n i a , i n carrying and applying the c o n s t r u c t i v e t r u s t theory to a case where, i t i s submitted, i t i s not p o s s i b l e to d i s cover a V i o l a t i o n of t r u s t duty.. Federal Reserve Bank v. P e t e r s , 139 Va. 45. The forwarding bank, in sending checks drawn on the sendee bank f o r c o l l e c t i o n , s t i p u l a t e d that a l l c o l l e c t i o n s of such items made by the sendee should be r e m i t t e d immediately to the forwarding bank by one of two methods; By ( l ) shipment of money of currency, or (2) by means of a d r a f t drawn by the sendee bank on some t h i r d bank with which i t had funds on d e o o s i t . In making remittance of c o l l e c t i o n s the sendee e l e c t e d to do so by the second method above, by means of a draft on a t h i r d bank l o c a t e d near the forwarding bank and a t which i t had ample funds on d e p o s i t to pay the d r a f t . The sendee f a i l e d b e f o r e the draft could be presented, and on the question whether the proceeds of c o l l e c t i o n c o n s t i t u t e d a t r u s t fund, Held: claim of forwarding bank i s p r e f e r e n t i a l . Had the sendee employed the f i r s t method of remittance given i t by contract - by shipment o f money or currency - the case would have been one i n which the hallmark of the t r u s t r e l a t i o n s h i p was p r e s e n t throughout the e n t i r e t r a n s a c t i o n and c l e a r l y the d e c i s i o n would have been r i g h t . - 10 - X-4983 9« The sendee bank, however, adopted the second e l e c t i o n given i t by express• 1 contract with the forwarding "bank, and made or attempted to make remittance by a draft drawn by i t on a t h i r d bank. I t i s submitted that by so doing pursuant to agreement the sendee thereby terminated i t s r e l a t i o n o f agent to t h e forwarding bank and i n s t e a d became the l e t t e r ' s debtor. I t i s submitted t h a t , having once become the l a t t e r ' s debtor, the mere f a i l u r e of the l a t t e r to pay the debt did not and could not r e v i v i f y the t r u s t r e l a t i o n s h i p i n i t i a l l y e x i s t i n g between the two banks, nor charge the dead body of an i n s o l v e n t ' s debt with the l i f e b l o o d of a t r u s t . The sendee bank, having become the forwarding bank's debtor, remained i t s debtor. The court i n i t s opinion avoids t h i s conclusion by premising t h a t , under the remittance method of c o l l e c t i o n , the sendee a c t s throughout the t r a n s a c t i o n as the s p e c i a l agent of the forwarding bank. This being true i t n e c e s s a r i l y f o l l o w s t h a t as soon as the c o l l e c t i o n s are made they become the property of the forwarding bank; the sendee has no implied or express authority to l e n d or otherwise dispose of the proceeds of c o l l e c t i o n ; the d r a f t i n payment of c o l l e c t i o n s i s not payment u n t i l honored, and hence the draft did not upset the t r u s t . So reasons the court from i t s o r i g i n a l promise. THE BASIC FALLACY OF THE DECISION. I t i s submitted that the b a s i c fallacy, of the d e c i s i o n l i e s i n i t s threshhold holding t h a t , under the s o - c a l l e d remittance p l a n of c o l l e c t i o n the sendee continues i n a f i d u c i a r y capacity (agent 1 ) throughout the transaction. As has been e a r l i e r noticed, t h i s i s true only where the remittance i s made i n cash. Actually where the remittance i s made i n evidences of i n - debtedness pursuant t o contract, c r e d i t , at l e a s t pro tea, i s granted, and the d e s i g n a t i o n of the plan of c o l l e c t i o n as a remittance plan i s somewhat a misnomer. In i t s c r e d i t feature the plan i s , i n i t s l e g a l a t t r i b u t e s , more c l o s e l y a l l i e d to the r e c i p r o c a l accounts method than to the method of - 11 - X-4983 3 2 transmission of proceeds of c o l l e c t i o n by shipment of cash. I t i s submitted that hed the court approached the question, not by determining the r e l a t i o n between the two "banks as a premise, hut had examined the contract "between the two "banks and the mechanics and e s s e n t i a l i n c i d e n t s of the whole t r a n s a c t i o n with a view to determining from those f a c t o r s the color and character of the r e l a t i o n s h i p created "by the p a r t i e s themselves "by t h e i r contract, the d e c i s i o n would have "been otherwise. In t h i s c a s e the sendee "bank had the r i g h t "by contract to remit "by d r a f t , and did transmit such d r a f t to the forwarding "bank. The d r a f t was drawn on a t h i r d "bankat which i t had ample funds on deposit to pay the d r a f t . These funds or c r e d i t s were a part of the general a s s e t s of the sendee bank and in drawing a g a i n s t such general a s s e t s in the exact manner i n which the forwarding bank had s t i p u l a t e d , the sendee created a debit against such general a s s e t s . The items forwarded for c o l l e c t i o n c o n s i s t e d of checks drawn by thr depositors of the sendee bank a g a i n s t t h e i r r e s p e c t i v e deposits with such bank. C o l l e c t i o n c o n s i s t e d of debiting amount of such checks by him drawn. i n the hands of the sendee bank. credit? each d e p o s i t o r ' s Balance with the The t o t a l of such debits was a c r e d i t What was i t s duty with r e l a t i o n to t h i s 7;as i t required t o segregate s p e c i f i c money i n l i k e amount and hold i t i n a separate fund u n t i l the draft i n process of transmission to the f o r warding "bank had been received, presented, and honored, and the sendee so notified? The contract between the two banks did not so s p e c i f y . It i s d i f f i c u l t to see how such a term might be w r i t t e n i n t o the contract by implication. The draft was against the general a s s e t s of the sendee. It was a g a i n s t funds or c r e d i t s c o n s t i t u t i n g part of the general a s s e t s of the sendee by the s p e c i f i c d i r e c t i o n s of the forwarding bank that transmission be by d r a f t , i f the sendee so e l e c t . form of c r e d i t s The sendee had a fund in hand in the withdrawn from the accounts of depositors whose checks - c o n s t i t u t e d the items f o r c o l l e c t i o n . l& - X-4983 This fund was i n the exact amount of the draft transmitted, the g e n e s i s of the d r a f t a g a i n s t the sendee's general assets. The conclusion i s unescapable that the contract between the two hanks contemplated that the d r a f t against the general a s s e t s of the sendee bank was intended to he o f f - s e t or balanced by a t r a n s f e r to such general a s s e t s of the various c r e d i t s r e s u l t i n g from c o l l e c t i o n . Any other would he a f o r c e d one, without foundation i n the contract of c o l l e c t i o n between the two banks, and v i o l a t i v e of bookkeeping p r a c t i c e . I t i s submitted that i f the contract of c o l l e c t i o n contemplated that the proceeds of c o l l e c t i o n should be p l a c e d with the general a s s e t s of the sendee bank and with such a s s e t s commingled, t h i s f a c t , together with t h e f a c t that the sendee bank should become, at l e a s t "pro tem, a debtor of the forwarding bank, demonstrates beyond question that the i n i t i a l r e l a t i o n of P r i n c i p a l and Agent was terminated and the r e l a t i o n of Debtor and Creditor came i n t o being. As has been o u t l i n e d i n the e a r l i e r part of t h i s a r t i c l e , i f such r e l a t i o n came into being, the mere f a i l u r e of the debtor sendee bank to pay i t s debt to the forwarding c r e d i t o r bank did not and could not operate to revive the t r u s t r e l a t i o n . As an i l l u s t r a t i o n of the d i f f i c u l t y the court met i n r e c o n c i l i n g i t s d e c i s i o n with the f a c t s and contract of the case, i t i s only necessary further to n o t i c e the c o u r t ' s holding with r e f e r e n c e to the sendee bank's a c t i n debiting i t s account with the t h i r d bank on which i t drew the d r a f t . As soon as the sendee drew a g a i n s t such funds, i t debited on i t s own books, i t s account with the drawee i n the amount of the d r a f t . The court i n i t s opinion h e l d that t h i s act demonstrated that the sendee bank intended to s e t apart such a balance as would be required to meet the d r a f t , and s i n c e equity regards that done which ought to have been - 13 - X-4983 'vm. do tie, the entry of t h i s debit on the books of the sendee "bank amounted to an equitable assignment and created a t r u s t fund. The f a l l a c y "becomes apparent i f the reasoning i s applied t o the r e c i p r o - ' cal accounts method of c o l l e c t i o n . I t s a p p l i c a t i o n to such method makes the sendee a f t e r c o l l e c t i o n a f i d u c i a r y i n the r e c i p r o c a l accounts method of c o l lection. In that method to sendee a f t e r c o l l e c t i o n d e p o s i t s the proceeds with i t s general a s s e t s and c r e d i t s the forwarding'"bank's account, n e c e s s a r i l y debiting i t s general a s s e t s to balance. This debiting of i t s general a s s e t s and c r e d i t i n g the forwarding bank's account are only the n e c e s s i t i e s of bookkeeping, as was the debit i n the i n s t a n t case, and i n cases a r i s i n g out of the reciprocal accounts method of c o l l e c t i o n there i s probably no case which construes the a c t of such debiting as the c r e a t i o n of a c o n s t r u c t i v e t r u s t . I t i s submitted that the Peters case i s contrary to the reason and p r i n c i p l e of our law. Richmond, Va. August, 12, 1927. HARDIN HAERIS.