Chism v. First Nat. Bank

• Decision Date: 23 May 1896
• Citation: 36 S.W. 387,96 Tenn. 641
• Parties: CHISM et al. v. FIRST NAT. BANK OF NEW YORK et al.
• Court: Tennessee Supreme Court

36 S.W. 387

96 Tenn. 641

CHISM et al. v. FIRST NAT. BANK OF NEW YORK et al.

Supreme Court of Tennessee.

May 23, 1896

Appeal from chancery court, Shelby county; John L. T. Sneed Chancellor.

Action by Chism, Churchill & Co. against the First National Bank of New York and the Mercantile Bank of Memphis as garnishee. Decree for complainants and defendants appeal. Affirmed.

Scruggs & Henderson, for appellants.

Surley & Wright, for appellees.

BEARD J.

The complainants are cotton factors in the city of Memphis. On the 13th day of July, 1894, they purchased from the First National Bank of Memphis a draft for $3,000, payable to their order, and drawn on the defendant, the First National Bank of New York. After getting this draft, they indorsed it "Pay to H. C. Hamilton or order," and then placed it in the hands of one Weems, to be delivered to the indorsee, Hamilton. The drawing, indorsement, and delivery of this draft were the result of a fraudulent scheme, which Weems practiced upon complainants. They were induced by him (at that time a man of fine reputation in the community) to think Hamilton was a real person, who had consigned to him as warehouseman, for storage and sale, a large lot of cotton and this draft represented the advance which complainants agreed to make to the supposed consignor upon this cotton, upon an understanding that they were to sell same and earn the commissions accruing therefrom. It turned out, however, that Hamilton was nonexistent, and that Weems had no such cotton under his charge. But the record discloses that complainants neither knew nor had occasion to suspect such to be the facts, but, believing that Hamilton was a real personage, and with the view of carrying out this agreement with Weems, they purchased this draft, and turned it over to him, indorsed as is stated above, for delivery to their indorsee. Immediately after its receipt, Weems indorsed it to himself or order, using for this purpose the name of Hamilton, and then carried it to the Mercantile Bank of Memphis, and that bank, without any suspicion of the bad faith of the transaction, or of the right of Weems to transfer title, upon his indorsement, paid him full value for it, and then forwarded it to its correspondent in New York, by whom in due time it was presented to the drawee, who, equally ignorant of the want of title in Weems, and in perfect good faith, paid it. Discovering within a few days the fraud practiced upon them, and at the same time that the draft had already been paid, this bill was filed by complainants, the payee, against the drawee, the First National Bank of New York, and the Mercantile Bank of Memphis; against the first upon an assumpsit implied from the wrongful appropriation of the draft and a refusal to account for its proceeds, and against the latter as a garnishee holding funds of the former subject to attachment. Two defenses are made: First, that complainants were guilty of such carelessness in their dealings with Weems as to estop them from setting up the present claim; second, that the indorsement by Chism, Churchill & Co. of this draft to a fictitious indorsee was in law an indorsement to bearer, and the result was that its payment through the usual channels of trade, without notice of the alleged defect, discharged the drawee.

As to the first of these grounds, it is sufficient to say that the record fails to show any recklessness or carelessness upon the part of complainants in this transaction to prevent a recovery, if for any sound reason this suit is maintainable. It is the second ground, however, upon which the defendants rest largely their defense to this claim. What is the effect of indorsing a bill to a fictitious person, the indorser not knowing that the indorsee was fictitious, but, on the other hand, believing him to be a real person, is a question of first impression in this state. There is no doubt it is true, as a general proposition, that the holder of commercial paper, payable to order, must trace his title through a genuine indorsement, including that of the payee. 2 Rand. Com. Paper, § 988; 1 Daniel, Neg. Inst. § 731; 1 Edw. Bills & N. § 519; Mead v. Young, 4 Term R. 28-30. And it is equally true that where a banker pays a draft or check drawn upon him, he, at his peril, pays it to any one but the payee, or to one who is able to trace his title back to the payee through genuine indorsements. The mere possession of the check or bill under apparent title does not necessarily imply the right to demand or receive payment, and when it is paid to such holder the drawer has put upon him the risk of seeing that the apparent is the real title to the paper; for the banker holds the funds of his depositor under an obligation to pay them to him or to his order, and if he pays them otherwise he cannot treat such a payment as a discharge of his liability. Shipman v. Bank, 126 N.Y. 318, 27 N.E. 371; Robarts v. Tucker, 16 Q. B. 575; Dodge v. Bank, 30 Ohio St. 1. It is otherwise as to his payment of a check or bill payable to bearer. In such a case, in the absence of knowledge that the party presenting the paper is wrongfully in possession of it, he can safely pay, because in so doing he is complying with the positive demand of his depositor. Tied. Com. Paper, § 312. And it is insisted for the defense that this was the legal effect of the indorsement by Chism, Churchill & Co. to Hamilton, the fictitious indorser. It seems from a note to Byles, Bills, p. 79, that the controversy over the effect of indorsement of bills to fictitious persons grew out of the bankruptcy of Linsay & Co. and Gibson & Co., who negotiated bills with fictitious names upon them to the amount of nearly a million sterling a year. A great many cases grew out of these indorsements in the various courts of England, one of which ( Minet v. Gibson, 3 Term R. 481) was carried to the house of lords. 1 H. Bl. 569. Mr. Chitty,

in his work on Bills (page 178), says: "The result of the discussion seems to be that a bill payable to a fictitious person or his order is, in effect, a bill payable to bearer, and may be declared on as such in favor of a bona fide holder ignorant of the fact against all the parties knowing that the payee was a fictitious person." In other words, whether such a bill was collectible by the holder, as if payable to bearer, depended upon the fact that the party against whom it was sought to be enforced, at the time he assumed liability upon it, knew that the payee was fictitious. Where he possessed such knowledge he was estopped from saying to a bona fide holder that he was not bound; otherwise he would be a party to the circulation of commercial paper, apparently good, yet with an inherent vice which rendered it worthless, at least as to him, though it fell into the hands of an innocent purchaser. Subsequently the bill of exchange act of 1882 was passed, the effect of which was in fact that a bill might be treated as payable to bearer when the party named as payee was a real person, but has not and...