Farmers' Nat. Bank of Augusta v. Farmers' & Traders' Bank of Maysville

• Decision Date: 22 May 1914
• Citation: 159 Ky. 141,166 S.W. 986
• Parties: FARMERS' NAT. BANK OF AUGUSTA v. FARMERS' & TRADERS' BANK OF MAYSVILLE.
• Court: Kentucky Court of Appeals

166 S.W. 986

159 Ky. 141

FARMERS' NAT. BANK OF AUGUSTA v. FARMERS' & TRADERS' BANK OF MAYSVILLE.

Court of Appeals of Kentucky.

May 22, 1914

Appeal from Circuit Court, Mason County.

Action by the Farmers' National Bank of Augusta against the Farmers' & Traders' Bank of Maysville. From a judgment on demurrer for defendant, plaintiff appeals. Reversed and remanded.

Worthington Cochran & Browning, of Maysville, and M. Hargett, of Augusta for appellant.

A. D Cole, of Maysville, for appellee.

MILLER J.

The appellant does a banking business at Augusta, Ky.; the appellee does a like business at Maysville, Ky. For brevity they will be called the Augusta Bank and the Maysville Bank, respectively.

On February 5, 1913, an unknown man, representing himself to be Fred. Schatzman, presented to the Maysville Bank, at its place of business in Maysville, a check drawn on the Augusta Bank, bearing the signature of "James Ware," as drawer, and payable to the order of Fred. Schatzman, for $375. Without inquiry or question, and without any identification of the holder, the Maysville Bank paid the check and forwarded it to its collecting bank, the Fifty-Third National Bank of Cincinnati, Ohio, which, in turn, forwarded it to the Augusta Bank, where it was received and paid on February 10th.

James Ware was a regular customer and depositor of the Augusta Bank; his account being kept in the name, however, of "James Ware, Agent." And, when the check was presented to the Augusta Bank on February 10th, an officer of that bank added the word "Agt." to Ware's name on the check, and then paid it and charged it to the account of "James Ware, Agent."

On March 14th, when Ware went over his checks, he at once discovered the check was a forgery; and it afterwards appeared that the indorsement of Fred. Schatzman was likewise a forgery, and that the man who received the money was not Fred. Schatzman. These facts are alleged in the petition and are conceded to be true.

The Maysville Bank having refused to repay to the Augusta Bank the money thus obtained upon the forged check, the Augusta Bank brought this action on August 21, 1913, to recover the money so paid; and, the circuit court having sustained a demurrer to the petition setting up the facts as above stated, the Augusta Bank appeals.

When the Maysville Bank indorsed the check to the Cincinnati Bank for collection, it in terms "guaranteed all prior indorsements."

It is a well-settled rule that a bank is bound to know the signature of its depositor; and if it pays the check of a depositor it thereby admits the genuineness of his signature, and is estopped to afterwards deny it to the detriment of an innocent third party. The reason for the rule is that the paying bank has in its records the genuine signature of its customer, or knows it, while the collecting bank is a stranger to the signature of the drawer.

Appellant insists, however, that, while the general rule is as above stated, it does not apply to the acts of indorsers; and furthermore that the holder is bound to know that all previous indorsements, including that of the payee, are the genuine handwriting of the parties whose names appear upon the check.

The rule that money paid under a mistake of fact may be recovered is too well established to need any discussion. And the exception to the rule that money paid by the drawee of a forged check cannot be recovered is equally well settled.

In 5 Cyc. 546, it is said: "Although money paid by mistake can generally be recovered, the payment of forged paper is an exception. When payment is made to the holder of the paper who has come into possession of it without any fault on his part, and his situation would be rendered worse if compelled to refund than it was before receiving payment, the money cannot be recovered from him. If, however, he has been negligent in any regard, he cannot retain the money. To justify him in doing so the bank alone must have been negligent. If neither party has been negligent, or both have been, then the bank can recover the money."

But the right of the drawee against a holder under a forged indorsement is different, and is thus stated in 2 Daniel on Negotiable Instruments, § 1663: "A bank is not bound to know the signature of an indorser. And besides, the holder of the check, whether he indorses it or not, warrants the genuineness of all prior indorsements. Therefore, if the bank pay a check upon which the name of a prior indorser is forged, it may recover back the amount from the party to whom it was paid, or from any party who indorsed it subsequent to the forgery."

The rule and the exception are well stated by Chief Justice Taney in Hortsman v. Henshaw, 11 How. 183, 13 L.Ed. 653, as follows: "The general rule undoubtedly is, that the drawee, by accepting the bill, admits the handwriting of the drawer, but not of the indorsers. And the holder is bound to know that the previous indorsements, including that of the payee, are in the handwriting of the parties whose names appear upon the bill, or were duly authorized by them. And, if it should appear that one of them is forged, he cannot recover against the acceptor, although the forged name was on the bill at the time of the acceptance. And if he has received the money from the acceptor, and the forgery is afterward discovered, he will be compelled to repay it. The reason of the rule is obvious. A forged indorsement cannot transfer any interest in the bill, and the holder therefore has no right to demand the money."

As the drawee is chargeable with notice of the drawer's signature, appellee contends appellant cannot recover, while appellant contends it should recover because the appellee, as holder, was charged with knowing the genuineness of the indorsement.

The exceptional rule which does not permit the drawee to recover money which it has paid upon the forged check of its customer was applied by this court in Deposit Bank of Georgetown v. Fayette National Bank, 90 Ky. 10, 13 S.W. 339, 11 Ky. Law Rep. 803, 7 L.R.A. 849. In that case Wolf forged the name of Burgess, a depositor of the Georgetown Bank, to 16 checks which Wolf collected from the Fayette National Bank, which, in turn, presented the checks to the Georgetown Bank, and they were there paid and charged to the account of Burgess. These transactions extended from early in December, 1883, to April, 1884; the forgery was discovered on May 7th. Wolf was identified when he collected the checks from the Fayette National Bank, and there was no reason on the part of that bank to suspect the good faith of the transaction. Neither was there any absence of good faith upon the part of the Georgetown Bank, since it believed that Burgess was in fact the drawer of the checks. The opinion at least twice lays stress upon the fact that Wolf was identified when he collected the checks from the Fayette National Bank. These facts, therefore, bring the case within the exceptional rule which does not permit money paid under a mistake to be recovered by the drawee who has paid the forged check of its customer. The decision goes no further, however, and does not apply to the class of cases represented by the case before us, where the indorsement was likewise forged, and the check was paid on the forged indorsement before it was finally paid by the drawee.

The exceptional rule was first announced by Lord Mansfield in 1762, in Price v. Neal, 3 Burr. 1357, where it is said: "It was incumbent upon the plaintiff, to be satisfied, 'that the bill drawn upon him was the drawer's hand,' before he accepted or paid it; but it was not incumbent upon the defendant to inquire into it."

In the opinion in Deposit Bank of Georgetown v. Fayette National Bank, supra, this court, speaking through Judge Pryor, recognized the fact that, while the decided weight of authority is with Lord Mansfield, it nevertheless criticised the rule laid down by him in Price v. Neal as being possibly too sweeping in its character, and that it could not be said that the rule which required a bank to know the signature of its depositor was without an exception, since it is undoubtedly true that the neglect or knowledge of intervening parties, who come into the possession of the check and receive the money on it from the bank where it is payable, would in some instances be of such a character as to enable the bank to recover back the money. In support of that qualification of the rule, Judge Pryor quotes from Daniel on Negotiable Instruments, vol. 2, p. 669, where it is said "that when one knows that it is a forgery, or takes it under circumstances of suspicion, without proper precaution, or whose conduct has been such as to mislead the bank," the money may be recovered back. The opinion further cites the case of National Bank of North America v. Bangs, 106 Mass. 441, 8 Am.Rep. 349, where a stranger, giving his name as Riskford, drew his check, payable to the order of Bangs, on the National Bank of North America. Bangs indorsed the check, and the bank paid the money; and, upon discovering the forgery, the bank notified Bangs, the payee and indorser, and subsequently sued him to recover the money back. The bank recovered a judgment, and this court, approving the ruling of the Massachusetts court, said: "This, we think, was proper, as it would be an exceedingly harsh rule to permit one who negotiates with a forger, and obtains his check payable to the use of the party advancing the money, who then indorses it to a bank, to hold onto the money when the payee has himself contracted with the forger and given credit to the paper by his indorsement that led the bank to believe the paper was genuine." 90 Ky. 17, 13 S.W. 339, 11 Ky. Law Rep. 803, 7 L.R.A. 849.

The opinion of Judge Barbour, of the...