Federal Reserve Bank of Richmond v. Malloy

Background

Malloy Brothers were the owners of a $9,000 check drawn on the Bank of Lumber Bridge, North Carolina. They endorsed and deposited the check with a Florida bank for collection. The item passed through correspondent banks and reached the Federal Reserve Bank of Richmond, which sent it to the Lumber Bridge bank for collection and return. The Lumber Bridge bank charged the drawer’s account, sent a draft back, and the Richmond bank accepted that draft. The draft proved worthless, the drawer could not pay, and the amount was ultimately charged back to Malloy Brothers. Malloy Brothers sued the Richmond bank and won in the lower courts.

Reasoning

The Court addressed whether Malloy Brothers could sue the Richmond bank and whether the Richmond bank became liable by accepting a draft instead of money. Relying on the Florida statute that governed the banks’ relationship, the Court treated the chain of collecting banks as agents for the check owners and allowed suit against the Richmond bank. The Court then held a collecting bank has authority to take only actual money; accepting an exchange draft in place of money was unauthorized. The Federal Reserve regulation invoked did not clearly permit accepting drafts instead of cash, and the alleged bank custom was too uncertain and unknown to the owners to bind them. For those reasons the Court found the Richmond bank liable and affirmed the judgments for Malloy Brothers.

Real world impact

The ruling makes clear that banks collecting checks generally must obtain payment in money, not by accepting drafts that displace the drawer’s funds, and that vague customs or internal regulations will not excuse an unauthorized acceptance that harms check owners.