
    I. P. GRAHAM, Receiver of Bank of Proctorville, v. PROCTORVILLE WAREHOUSE and J. R. LAWSON.
    (Filed 22 April, 1925.)
    1. Banks and Banking — Bills and Notes — Deposits—Debtor and Creditor.
    A bank is debtor to its depositor to the amount of the deposit, and when a note of the depositor to the bank becomes due, to the amount of the note the depositor becomes a debtor to the bank, and in this relationship the bank may credit the note in whole or in part, as the case may be, with the amount of the deposit.
    2. Same — Deposits for Collection — Payment.
    Where a bank has received a valid check of its depositor through a correspondent bank, and sends it with other items for payment against its reserve account in another bank, and tbe check of its depositor remains unpaid at tbe time tbe payee bank thereof goes into a receiver’s bands still owing its depositor a certain balance, and bolding a past due note of bis likewise, tbe double relationship of debtor and creditor exists in tbe receiver’s action upon tbe note, and tbe depositor is entitled to a credit to tbe extent of bis deposit; and, Held further, tbe fact that tbe payee bank marked tbe depositor’s check paid, returned it to him and bad this transaction entered regularly upon its books, cannot vary tbe fact that tbe check bad not been paid or affect tbe result.
    3. Same — Subrogation.
    Where a depositor in a bank has drawn a cheek thereon to a third person, and by reason of tbe afterward insolvency and receivership of tbe payee bank tbe cheek remains unpaid in tbe bands of a bank that has received it in tbe course of collection, by paying tbe check so held tbe depositor is subrogated to the rights of tbe bank thus bolding tbe check in an action thereon brought against him, by tbe receiver of tbe payee bank.
    Varser, J., did not sit.
    Appeal by defendant, J. R. Lawson, from judgment rendered, upon an agreed statement of facts, by Calvert, J., at December Term, 1924, of ROBESON.
    Plaintiff is tbe owner of a note, dated 28 November, 1922, executed by J. R. Lawson, payable to Proctorville Warehouse Company, for $542.62, upon wbicb tbe sum of $48.43 was paid on 21 December, 1923. Tbis action was begun on 2 February, 1924, to recover of defendants tbe amount due on said note. On 2 January, 1923, tbe Bank of Proc-torville was adjudged insolvent and plaintiff was duly appointed receiver. A few days prior to said date, J. R. Lawson bad on deposit in said bank tbe sum of $219.60. He drew bis check against said deposit in favor of A. Weinstein of Lumberton, N. 0., wbo at once endorsed and deposited tbe same to bis credit in a bank at Lumberton. Said check was forwarded by tbe Bank of Lumberton to tbe American Exchange National Bank of Greensboro, along with other checks, for collection in tbe usual course, and was thereafter forwarded by tbe said American Exchange National Bank to Bank of Proctorville for collection. Tbe Bank of Proctorville, upon receiving said check, marked same “Paid” and charged tbe amount thereof to tbe account of J. R. Lawson and thereafter returned tbe same with bis monthly bank statement to tbe said Lawson. On tbe same day that tbe check was thus marked “Paid” and charged to tbe account of tbe said Lawson, tbe Bank of Proctorville drew its check upon its reserve account in a bank at Wilmington, N. C., in favor of tbe said American Exchange National Bank covering tbe amount of tbe said Lawson check and other items received for collection. Tbe said check was thereux>on forwarded to tbe American Exchange National Bank at Greensboro, N. C. Before tbis check could be presented to tbe bank at Wilmington on which it was drawn for payment, tbe Bank of Proctorville bad closed its business and plaintiff bad been appointed receiver. Tbis check, including tbe amount of tbe Lawson check, has not been paid, but is now held by tbe American Exchange National Bank of Greensboro.
    Tbe American Exchange National Bank has charged tbe amount of tbe Lawson check to tbe bank at Lumberton and tbe bank at Lumberton has in turn charged tbe same to tbe account of A. Weinstein. J. R. Lawson has paid to Weinstein by another check on another bank tbe indebtedness for which be drew bis check on tbe Bank of Proctorville. Defendant, Lawson, contends that plaintiff, as receiver of tbe Bank of Proctorville, is now indebted to him in tbe sum of $219.60, and pleads same as a counterclaim, pro tanto, to tbe note upon which tbis action was brought. Tbe plaintiff contends that tbe Bank of Proctorville having paid Lawson’s check to Weinstein, by including tbe amount thereof in tbe check forwarded to tbe American Exchange National Bank, be is not indebted to Lawson in said sum, and that Lawson is not, therefore, entitled to tbe counterclaim as pleaded by him.
    Tbe Court being of tbe opinion that upon the statement of agreed facts, defendant Lawson was not entitled to tbe counterclaim, rendered, judgment that plaintiff recover of tbe said defendants tbe sum of $542.62 with interest thereon from 28 November, 1922, subject to a credit of $48.32 as of 21 December, 1923. To this judgment defendant Lawson excepted and appealed therefrom to the Supreme Court.
    
      McIntyre, Lawrence & Proctor for plaintiff.
    
    
      McLean & Stacy for defendant.
    
   Connor, J.

Prior to the adjudication that it was insolvent and to the appointment of plaintiff as its receiver,' the Bank of Proetorville had on deposit to the credit of J. R. Lawson and subject to his check the sum of $219.60. The relation of debtor and creditor existed between the said Lawson and the said bank by reason of said deposit. Reid v. Bank, 159 N. C., 99; Boyden v. Bank, 65 N. C., 13. The Bank of Proetorville also held the note executed by J. R. Lawson, payable to Proetorville Warehouse Company, and transferred by endorsement to the bank. The bank was a creditor of said Lawson by virtue of said note. Both the indebtedness of Lawson to the bank by virtue of the note and the indebtedness of the bank to Lawson by virtue of the deposit arose out of contract. Each had a cause of action against the other, arising out of contract and existing at the commencement of this action, unless the indebtedness of the bank to Lawson had been paid prior to appointment of plaintiff as receiver; if not, each was entitled to a counterclaim against the cause of action of the other. C. S., 521, sec. 2; 14 R. C. L., 655, and cases cited.

The bank had the right to apply the deposit as a payment, pro tanto, on the note after same became due; Hodgin v. Bank, 124 N. C., 540; Moore v. Bank, 173 N. C., 180; Moore v. Trust Co., 178 N. C., 128; Trust Co. v. Trust Co., 188 N. C., 766; and so, defendant Lawson had the right to have any sum due him by the bank at the date of its insolvency applied as a payment on his note held by the bank; Davis v. Mfg. Co., 114 N. C., 321. In his opinion in this last cited case, Justice Burwell says: “We declare that, in our opinion, equity and justice require that the receiver, when he comes to make a settlement with one who is a creditor of the bank, shall deduct from his credit all those sums for which he is debtor, and when he settles with a debtor to the bank he shall allow him credit for all sums for which he is a creditor of the bank.”

Plaintiff contends, however, that the amount due by the bank to Lawson, by reason of said deposit, upon the facts agreed, has been paid, and that the relation of debtor and creditor between the bank and Lawson did not exist at the commencement of this action. Lawson contends that upon the agreed facts the amount has not b,een paid, but was and still is due him by the bank.

When Lawson’s check for $219.60, the amount of the deposit, payable to A. Weinstein, was presented for payment by the American Exchange National Bank of Greensboro to the Bank of Proctorville a few days before it became insolvent, and while it was open for the transaction of its usual business, it was the duty of the Bank of Proctorville, by virtue of its contract Avith Lawson, its depositor, to accept the check and pay the amount for which it was drawn to the payee or endorsee. Prior to acceptance it owed no duty to the payee or endorsee of said check; Perry v. Bank, 131 N. C., 118. It accepted the check, however, and undertook to pay the same by sending to the American Exchange National Bank its check, drawn on its correspondent bank at Wilmington, N. C., including in the amount for which it was drawn the amount of the Lawson check. It marked the Lawson check “Paid,” charged it to his account, and subsequently returned the same to Lawson, canceled. The check sent to the American Exchange National Bank was only a conditional payment of the Lawson check. No facts appear in the statement of agreed facts from which it can be found that it was agreed by the Bank of Proctorville and the American Exchange National Bank that said check was sent or accepted as an unconditional payment of the Lawson check or as a full and final discharge of the liability of the Bank of Proctorville for the proceeds of the collection of said check. In the absence of an agreement to the contrary, the delivery of a check by the debtor to the creditor and the acceptance by the creditor of the check is not a payment of the indebtedness until the check has been paid; Bank v. Barrow, ante, 303.

The check bn the Bank of Wilmington has not been paid; it must follow, therefore, that the proceeds of the collection of the Lawson check have not been paid. The Bank of Proctorville, at the date of the appointment of plaintiff as receiver, had, among its assets, which passed to plaintiff, the money which Lawson had deposited with it. Its balance in the Wilmington bank, on which it had drawn its check covering the amount of the Lawson check, had not been diminished by reason of said check, but passed to plaintiff, intact, so far as said check was concerned. Neither Lawson nor the payee or endorsee of his check for the amount of his deposit in the Bank of Proctorville had received any part of same, so that neither the proceeds of the collection nor the check have been paid by the Bank of Proctorville.

It is true that it is agreed that Lawson’s check after it came into the possession of the Bank of Proctorville was marked “Paid” by the said bank and that entries were made on the books of the bank showing that said check h^d been charged to Lawson’s account. Debts, however, can-' not be paid or obligations discharged by mere entries upon books, which are inconsistent with facts. Such entries, certainly wben made ex parte, cannot be beld as conclusive; they can be, at best, no more than evidence.

In Bank v. Bank, 119 N. C., 307, Justice Montgomery says: “Simply entering credits on mutual accounts between tbe actual collecting banks and tbeir intermediaries will not protect tbe actual collector of drafts or checks from tbe demands of tbe owner under tbe circumstances of tbis case.”

Tbe Bank of Proctorville, not having paid tbe amount due to Lawson' by reason of bis deposit, plaintiff, as receiver, still owes tbis amount. He does not owe it to tbe American Exchange National Bank, for tbis bank has been released of any obligation which it incurred to tbe Bank of Lumberton, from which it received tbe Lawson check for collection. He does not owe it to Bank of Lumberton, for it has charged tbe amount of tbe Lawson check to "Weinstein, from whom it received tbe check for deposit. Nor does be owe it to Weinstein, tbe payee; Lawson, doubtless, being advised that bis indebtedness to Weinstein has not been paid, because bis check given in payment thereof was not paid by tbe Bank of Proctorville, has fully paid Weinstein and discharged bis indebtedness to him. Tbe indebtedness of plaintiff, as receiver of Bank of Proctorville, on account of tbe deposit, not having been paid, is still due to J. R. Lawson, both in fact and in law. Upon tbe agreed facts, whatever rights to said indebtedness were acquired by Weinstein or tbe bank at Lumberton or tbe American Exchange National Bank by reason of Lawson’s check and its acceptance by tbe Bank of Proctorville have been released and extinguished. If there is any liability still existing against tbe Bank of Proctorville arising out of its check on tbe Bank of Wilmington to American Exchange National Bank, upon tbe agreed facts tbe same cannot be enforced by said bank so as to include tbe amount of tbe Lawson check. Lawson has acquired tbe right to enforce sucb liability by subrogation. In any event, at tbe commencement of tbis action, plaintiff was indebted to Lawson in tbe sum of $219.60, either because tbe amount of bis deposit has not been paid, or if it was paid, because be has been subrogated to tbe rights of tbe American Exchange National Bank in and to tbe check, which includes tbe proceeds of tbe collection of Lawson’s check, payable to Weinstein. Defendant, Lawson, is, therefore, entitled to have sucb indebtedness applied as a payment, pro tanto, upon bis note, in accordance with bis plea of counterclaim. There was error in rendering judgment denying defendant Lawson bis counterclaim.

We have not overlooked tbe contention of plaintiff that by reason of chapter 20, Public Laws 1921, tbe Bank of Proctorville bad tbe option to pay tbe check of J. R. Lawson, its depositor, wben same was sent to it for collection through the post office by draft on the bank at Wilmington. This statute has been declared by the Supreme Court of the United' States not to be in violation of the Constitution of the United States, and; therefore, valid; 262 U. S., 649; 67 L. Ed., 1157. The provisions of the statute, however, must be construed in accordance with well settled rules of law; it will not be held that a drawee bank can charge checks drawn on it by its customers to the accounts of such customers, remit in drafts or exchange to the forwarding bank, and thereby be released, notwithstanding that said drafts or exchange are, for valid and lawful reasons, not paid. Where a check drawn on a bank or trust company chartered by this State is presented to the drawee bank, “by or through any Federal Reserve Bank, post office or express company or any respective agent thereof,” and such bank or trust company, in the exercise of the option conferred by said statute, sends to the forwarding bank its draft on its reserve deposits in payment of such check, it will not be discharged of liability for the collection of its depositor’s check until such draft on its reserve deposit has been paid.

There was error in rendering the judgment and same is

Reversed.

YaeseR, J., did not sit.  