In the 1927 case, The Equitable Trust Company of New York, Trustee in Bankruptcy of Knauth, Nachod & Kuhne v. The First National Bank of Trinidad, Colorado, the U.S Supreme Court dealt with a dispute over funds deposited by a bankrupt company. Prior to declaring bankruptcy, Knauth had deposited money into an account at the First National Bank of Trinidad (FNBT). After bankruptcy was declared and Equitable Trust became trustee for Knauth's assets; it sought to recover these deposits from FNBT. However, FNBT argued that they were entitled to set off their claim against this deposit because they had extended credit to Knauth before its insolvency was known. The court ruled in favor of FNBT stating that banks have a right under federal law to offset debts owed them by insolvent depositors using those depositor’s accounts even if bankruptcy proceedings are initiated later on.

In the dissenting opinion for The Equitable Trust Company of New York v. The First National Bank of Trinidad, Colorado, it was argued that the majority's decision failed to properly apply established principles regarding bankruptcy law and negotiable instruments. It was contended that a bank which cashes checks drawn on an insolvent depositor should not be held liable if they were unaware of the insolvency at the time. This is because banks operate under a presumption of solvency unless notified otherwise; therefore, they cannot be expected to bear losses resulting from their customers' financial failures without prior knowledge or warning. Furthermore, it was suggested that allowing such liability would disrupt banking operations and create unnecessary uncertainty in commercial transactions involving negotiable instruments.