Story Case

Two friends of Frank Smalley were negotiating an important contract. They had agreed upon the chief proposition, but several details remained to be discussed, adjusted, and compromised. Both were desirous of securing from the other an assurance of good faith, and a protection against any change of mind or unwillingness to complete the negotiations. It was, therefore, agreed that each should put up as a stake, $1,000 in money, to be returned if the contract was finally signed, but if the deal was cancelled by the fault of either party, then the $1,000 put up by the one man, was to be forfeited to the other. Frank Smalley was selected to hold this stake. He could not, of course, retain all this money in his possession, but made arrangements with the Bank of Commerce, for a slight charge, to hold the money for him, returnable on demand. While the money remained in deposit, the bank became involved in difficulties with its creditors, and was ordered, in the course of one suit, to account in court for all its funds and assets. Smalley appeared before the court in that suit, asking permission to intervene, in order to set up his claim to the $2,000, which had been separately kept in the vaults, asserting that it should not be counted as an asset of the bank. The creditors of the bank maintained that it had been deposited, as their money had been, and that the bank should turn the $2,000 into the general fund for the benefit of all of them, without giving Smalley any special benefit or treating him differently from the rest of them. Is Smalley limited to the rights of an ordinary creditor, or should this specific $2,000 in cash be set aside for him?

Ruling Court Case. Pratlier Vs. Preston, Volume 137 United States Reports, Page 604

Preston and others were the owners and operators of a bank in Chicago. Prather had been for several years a patron of that bank. At one time, Prather purchased from Preston about $12,000 worth of four per cent bonds of the United States, but directed Preston to keep them at the bank as a special deposit. Preston agreed to do this as an accommodation to Prather. These bonds were afterwards stolen by an assistant cashier, who had been speculating, and who, thereafter, left the state. About a year before the assistant cashier absconded, notice was given that this assistant was speculating on the Board of Trade. Preston knew that this assistant had only his salary as a means of acquiring capital, and he also knew that the man had free access to the vaults of the bank where special deposits of this kind were kept. But notwithstanding these known circumstances, Preston made no investigation until after an investigation was useless. Prather, thereupon, brought suit for the value of the bonds.

It was contended by Preston, that since the bonds were placed with them on special deposit for safekeeping, without any reward, promised or implied, they were gratuitous bailees, and were not chargeable for the loss of the bonds, unless the loss resulted from gross negligence, and they deny that they were guilty of any such negligence.

Decision: When money or other property is specially deposited with a banker, the bankers do not become owners of such deposit, but only the bailors thereof. If they accept the bailment without any promise of compensation, they are liable for loss of such property, only in case of gross negligence. In this case, Preston was a gratuitous bailee, and liable, only if the loss resulted from gross negligence. Under the circumstances of this case, the court was of the opinion that the loss did result from the gross negligence of Preston. Consequently, he is liable to Prather for the value of these bonds.

Mr. Justice Freed said in part: "Undoubtedly, if the bonds were received by the defendants (Preston and others) for safe-keeping, without compensation to them in any form, but exclusively for the benefit of the plaintiff, Prather, the only obligation resting upon them was to exercise over the bonds such reasonable care as men of common prudence would usually bestow for the protection of their own property of a similar character. The general doctrine, as stated by text and in judicial decisions, is that gratuitous bailees of another's property are not responsible for its loss, unless guilty of gross negligence in its keeping. But gross negligence is nothing more than a failure to bestow the care which the property in its situation demands. The omission of the reasonable care required is the negligence which creates the liability: and whether this existed is a question of fact for the jury to determine." Accordingly, judgment was given for Prather.

Ruling Law. Story Case Answer

If money or other property is deposited with a banker with special instructions to keep it safely, and not to mingle it with its money or property, and the bank accepts the money or property under these circumstances, the transaction is a special deposit. The bank becomes merely the custodian of that property, or in legal terms, the bailee, with possession but without title. If the depositor pays nothing to the bank for this custody undertaken, it becomes a gratuitous bailee, and is liable only for gross negligence in the safe-keeping of the deposit. If compensation is made for the services, the bank is a hired bailee, and is bound to exercise reasonable care in the custody of the property. Special deposits are most common in cases of stocks and bonds, silverware, and such property.

A general deposit may pay interest to the depositor, but a special deposit must usually be paid for. If the bank could have used the $2,000 deposited by Smalley, the profit from the use of the money would have made it worth while to take it. But since they were not to use the money, they charged Smalley for the accommodation of holding it for him. This kind of deposit does not give the bank any right to the money, and the creditors have no claim on it. It is in no way subject to be taken by them upon the bank's debts, but will be left in the bank or ordered turned back to Smalley. Judgment will be given for the intervenor, Smalley, granting his petition to have the certain $2,000 delivered to him.