McCornack v. Central State Bank

• Decision Date: 16 December 1926
• Citation: 211 N.W. 542,203 Iowa 833
• Parties: PETER MCCORNACK et al., Appellees, v. CENTRAL STATE BANK, Appellant
• Court: Iowa Supreme Court

211 N.W. 542

203 Iowa 833

PETER MCCORNACK et al., Appellees, v. CENTRAL STATE BANK, Appellant

Supreme Court of Iowa, Des Moines

December 16, 1926

REHEARING DENIED APRIL 7, 1927.

Appeal from Polk District Court.--JAMES DELAND, Judge.

The plaintiffs, having funds on deposit in the defendant bank sued to recover, as for a conversion, the amount paid by the bank and charged against the deposit upon a check drawn by plaintiffs to the order of a fictitious person as payee where the check was obtained from the plaintiffs by fraud of one who indorsed the check in the name of the payee and received the money. There was a verdict for the plaintiffs and from judgment thereon the defendant appeals.--Reversed and remanded.

Reversed and remanded.

George E. Brammer, for appellant.

Volney Diltz and Parsons & Mills, for appellees.

VERMILION, J. DE GRAFF, C. J., and MORLING, J., concur, STEVENS and FAVILLE, JJ., specially concur. EVANS and ALBERT, JJ., dissent.

OPINION

VERMILION, J.

It appears without dispute that the appellees, residents of Des Moines, had money in excess of the amount here involved, on deposit in the appellant bank; that one Halverson gained the confidence of the appellee Peter McCornack, and represented to him that he (Halverson) had a client who wished to borrow money, to be secured by mortgage on land; that McCornack consented to make the loan, and thereafter Halverson delivered to McCornack a note purporting to be signed by C. R. Kutsman, and secured by mortgage on land in Story County purporting to be signed by C. R. Kutsman and Mable Kutsman, and McCornack signed a check for $ 1,005.50, payable to the order of C. R. Kutsman, which he delivered to Halverson, for Kutsman; that Halverson indorsed the name C. R. Kutsman and his own name on the check, and deposited it in his account in the Shaffer State Bank at Altoona. The check was paid, on presentation to the appellant bank, and the amount charged to the account of the plaintiffs. This transaction took place in July, 1920. In 1924, it was discovered that the note and mortgage which Halverson had delivered to Peter McCornack were forged instruments; that no such person as C. R. Kutsman in fact existed; and that the land described in the mortgage belonged to others. Payments of interest had been made by Halverson. It is upon this state of facts that the charge of conversion made in the petition is based.

It further appears that, on one previous occasion, and in numerous instances after the transaction in question, Halverson, by like fraudulent means, obtained other checks from McCornack, which he cashed by the same procedure; and that, in August following the giving of the check in question, the appellant delivered to the appellees a statement of their account, accompanied by the canceled checks charged against it, including the one here involved; that the statement bore the words "Please examine at once. Failure to report errors in this statement within 12 days will release the Central State Bank from all liability;" and that no claim of error was made until in May, 1924. It also appears that, on numerous dates from March, 1921, to February, 1924, Halverson had on deposit in another bank amounts largely in excess of the amount of the check, but owed indebtedness to the bank that, in the language of the witness, "on the average exceeded his average daily balance." In 1920, he owned a farm worth $ 40,000, with an incumbrance of $ 10,000 on it, and in 1923, the farm was worth $ 24,000, with incumbrances amounting to $ 22,000. He was later adjudged a bankrupt.

The pleaded defenses, briefly stated, were: (1) That the check was paid to the person to whom McCornack intended payment to be made. (2) That the appellant bank was guilty of no negligence. (3) That the appellee Peter McCornack was guilty of negligence in making the check, in that he failed to ascertain that the payee was a fictitious person. (4) That, by the acceptance without objection of the statement of their bank account, with the check in question canceled and charged against it, there was an account stated, and plaintiffs were thereby estopped to claim that the check was improperly paid. (5) That, by the failure to notify appellant of the alleged irregularity in the payment of the check within six months after receiving such statement, the claim was barred by the statute of limitations. (6) That appellees were guilty of negligence in not sooner notifying appellant of the alleged error in the payment of the check, for the reason that they knew, or should have known, that Halverson was receiving the proceeds of checks turned over to him under similar circumstances, and so received the proceeds of the check in question; and that appellant suffered loss thereby, in that, for a considerable time after paying such check, Halverson was financially responsible, but when such notice was given, he was insolvent; and that thereby plaintiffs were estopped.

This epitome of the answer does not correspond to its numbered divisions, some of which were stricken out on motion, but embodies the substance of the matters pleaded in defense and relied upon in this court.

The fraudulent scheme which is the occasion for the controversy is by no means a new one. Its counterpart, in all essential details, and others bearing many points of similarity, have been many times before the courts, resulting in the application of certain well established and clearly defined principles. Such confusion as is to be found in the adjudicated cases is usually to be accounted for by the application of the law to the facts, rather than in the statement of the controlling principles themselves, although there are cases that in some respects run counter to what we believe to be the great weight of authority.

I. We have said that it is a bank's business to see to it that its depositor's money is expended according to his directions, and that every expenditure is at the bank's risk of the validity of the direction and of the genuineness of the indorsement conveying title to the holder. German Sav. Bank v. Citizens' Nat. Bank, 101 Iowa 530, 70 N.W. 769.

"The implied contract between the banker and his depositor in regard to the depositor's checks is that the banker will pay them from his deposit to the persons to whom he orders payment to be made. When a definite order is made in the check, the duty of the banker is absolute, as a general rule, to pay only in accordance with the order. If payment is to be made to the order of a person named in the check, and if he orders the payment to be made to another person, it is the duty of the banker to see that the signature of the payee is genuine." Jordan Marsh Co. v. National Shawmut Bank, 201 Mass. 397 (87 N.E. 740, 22 L.R.A. [N. S.] 250).

This rule will be found variously stated in practically all the cases to which we shall have occasion to refer, and in many others that might be cited.

II. It is clear, upon the record, that, through the fraud of Halverson, McCornack was induced to draw the check in question, payable to a fictitious payee to whom he believed he was making a loan.

"To constitute forgery, the name alleged to be forged need not be that of any person in existence. It may be wholly fictitious, if the instrument is made or altered with intent to defraud * * *" 26 Corpus Juris 899.

The indorsement of a check payable to a fictitious payee, by one to whom the drawer did not intend payment to be made, is forgery. Shipman v. Bank of State of New York, 126 N.Y. 318 (27 N.E. 371, 12 L.R.A. 791); Jordan Marsh Co. v. National Shawmut Bank, supra; Armstrong v. National Bank, 46 Ohio St. 512 (6 L.R.A. 625, 22 N.E. 866); United Cigar Stores Co. v. American Raw Silk Co., 184 A.D. 217 (171 N.Y.S. 480); Padgett v. Young County (Tex. Civ. App.), 204 S.W. 1046; First Nat. Bank v. Farmers & Merch. Bank, 56 Neb. 149 (76 N.W. 430); Harmon v. Old Detroit Nat. Bank, 153 Mich. 73 (17 L.R.A. [N. S.] 514, 116 N.W. 617); American Exp. Co. v. Peoples Sav. Bank, 192 Iowa 366, 181 N.W. 701.

A check payable to the order of a fictitious person with the knowledge of the drawer is payable to bearer. Section 9469, Code of 1924. But where the fact that it is payable to a fictitious person is unknown to the drawer, the bank upon which it is drawn, on paying it, is in no different position from where it pays a check payable to a real party upon a forged indorsement. Shipman v. Bank of State of New York, supra; Harmon v. Old Detroit Nat. Bank, supra; Los Angeles Inv. Co. v. Home Sav. Bank, 180 Cal. 601 (182 P. 293); American Exp. Co. v. Peoples Sav. Bank, supra; Robertson Banking Co. v. Brasfield, 202 Ala. 167 (79 So. 651).

McCornack did not know that the payee was a fictitious person; the check was not, therefore, payable to bearer; and the bank cannot escape liability upon that ground.

III. It is insisted that the bank paid the check, through intermediate indorsing banks, to the person to whom McCornack intended it should be paid.

It is held that, where an impostor represents himself to be another, whether the person whom he so impersonates be a real or fictitious person, and procures a check payable to the order of such person, the bank is protected in paying the check to the impostor, because it made payment to the person to whom the drawer intended it should be made, no matter what name he assumed. United States v. National Exch Bank, 45 F. 163; Karoly Elec. Const. Co. v. Globe Sav. Bank, 64 Ill.App. 225; States v. First Nat. Bank, 17 Pa.Super. 256; Russell v. First Nat. Bank, 2 Ala.App. 342 (56 So. 868); Montgomery Garage Co. v. Manufacturers L. Ins. Co., 94 N.J.L. 152 (109 A. 296); Crippen, Lawrence & Co. v. American Nat. Bank, 51 Mo.App. 508; Townsend, Oldham & Co. v....