Unaka Nat. Bank v. Butler

• Decision Date: 19 December 1904
• Citation: 83 S.W. 655,113 Tenn. 574
• Parties: UNAKA NAT. BANK v. BUTLER.
• Court: Tennessee Supreme Court

83 S.W. 655

113 Tenn. 574

UNAKA NAT. BANK v. BUTLER.

Supreme Court of Tennessee.

December 19, 1904

Appeal from Circuit Court, Washington County; A. J. Tyler, Judge.

Action by Henry Butler, for the use of Thomas Davis, against the Unaka National Bank. Judgment for plaintiff, and defendant appeals. Reversed.

Kirkpatrick Williams & Bowman, for appellant.

J. B Cox, for appellee.

SHIELDS J.

This action involves the title of a bona fide purchaser of a bank check payable to a particular payee or order, and indorsed in blank by the payee, as against that of the rightful owner who lost it; and the construction of certain sections of the negotiable instrument law (chapter 94, p. 139, Acts 1899).

W. B Harris, a manufacturer, of Johnson City, Tenn., a regular depositor in the Unaka National Bank, of that city, plaintiff in error, drew his check upon that bank November 24, 1903, in favor of Henry Butler or order, for $16.25, and delivered it to him. Henry Butler indorsed it in blank and delivered it for value to Thomas Davis, who the next day lost it, presumably upon the public highway. On the second day, Thomas Davis gave notice to Harris, the drawer, of his loss; and both he and Harris then notified the bank, and directed it not to pay the check if presented for that purpose. The check was accepted by Ward & Fryberg, merchants in Johnson City, between November 24 and December 1, 1903, for goods sold, from a customer who was unknown to them, but supposed at the time to be the payee, without further indorsement, or inquiry of the identity of the holder or the nature of his title. They indorsed and presented it to the bank, and it was paid and charged to the account of the drawer, W. B. Harris. This action is brought by Henry Butler, for the use of Thomas Davis, against the plaintiff in error, to recover the proceeds of the check. The circuit judge tried the case without the intervention of a jury, and gave judgment in favor of the plaintiff below, and the bank brings the case here for review and assigns error.

The theory upon which this suit is brought is that the bank having been notified of the loss of the check by the former rightful owner and the drawer, and directed not to honor it, the subsequent payment was unauthorized, and a wrongful interference with the property of the defendant in error, for which it must answer, and, further, that Ward & Fryberg were not bona fide holders, and acquired no title to the check, because the suspicious circumstances attending its negotiation, and their negligence in failing to require identification of their customer, fixed them with constructive notice of the infirmity in his title.

1. The defendant in error, in support of his first contention, cites and relies upon the case of Chism v. Bank, 96 Tenn. 644, 36 S.W. 387, 32 L. R. A. 778, 54 Am. St. Rep. 863, in which it is said: "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 drawee 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."

And that of Pickle v. Muse, 88 Tenn. 381, 12 S.W. 919, 7 L. R. A. 93, 17 Am. St. Rep. 900, in which it is held that "a check drawn in favor of a particular payee or order is payable only to the actual payee, or upon his genuine indorsement; and, if the bank mistake the identity of the payee, or pay upon a forged indorsement, it is not a payment in pursuance of its authority, and it will be responsible."

The law undoubtedly is, as held in these cases, that a check payable to a particular payee or order cannot lawfully be paid to any other than the payee, or upon his genuine indorsement, and the bank must judge of the identity of the payee and the genuineness of his indorsement at its peril.

But these principles have no application to the case presented by this record. There was no mistake made in the identity of the payee, and the indorsement is genuine. The check, while payable to the payee or order, was indorsed by the payee in blank before it was lost, and was purchased by Ward & Fryberg in due course of business, for value, and without notice of any defect in the title of the holder from whom they received it. They acquired a perfect title, and payment to them by the bank was authorized.

A check drawn as this one is a negotiable instrument, and, when indorsed in blank, is payable to bearer, and passes by delivery as freely and absolutely as a bank note, and a bona fide purchaser in due course of business acquires a good title. Negotiable Instrument Law, Acts 1899, c. 94, § 9 (5), and sections 57 and 185; Chism v. Bank, 96 Tenn. 644, 36 S.W. 387, 32 L. R. A. 778, 54 Am. St. Rep. 863; Farmer v. Bank, 100 Tenn. 188, 47 S.W. 234; Gardner v. Bank, 1 Swan, 425; Neely v. Morris, 2 Head, 595, 75 Am. Dec. 753; King v. Fleece, 7 Heisk. 277; Bearden v. Moses, 7 Lea, 459; Smith v. Mosby, 9 Heisk. 501; Lookout Bank v. Aull, 93 Tenn. 647, 27 S.W. 1014, 42 Am. St. Rep. 934; Daniel on Negotiable Instruments, § 693; Morse on Banks & Banking, § 393.

The title of Ward & Fryberg was not affected by the fact that the check had been lost by Davis, and found by their customer, further than that, when this was made to appear, the burden was on the bank to show that they received it in due course of trade, for value and without notice; and, having successfully done this, the title of Davis was destroyed.

Mr. Daniels, in his work on Negotiable Instruments, § 1469, says: "Although the robber or finder of a negotiable instrument can acquire no title against the legal owner, still, if it be indorsed in blank, or payable or indorsed to bearer, a third party acquiring it from the robber or finder, bona fide, for a valuable consideration, and before (but not so, if after) maturity, without notice of the loss, may retain it, as against the true owner, upon whom the loss falls, and enforce payment by any party liable thereon, upon the principle that, whenever one of two innocent persons must suffer by the act of a third, he who has enabled such a third person to occasion the loss must sustain it."

See, also, Jordan v. Jordan, 10 Lea, 134, 43 Am. Rep. 294; Caulkins v. Gaslight Co., 85 Tenn. 693, 4 S.W. 287, 4 Am. St. Rep. 786; Smith v. Railroad, 91 Tenn. 221, 18 S.W. 546; Merritt v. Duncan, 7 Heisk. 156, 19 Am. Rep. 612; Hunt v. Sandford, 6 Yerg. 387; Van Wyck v. Norvell, 2 Humph. 195; Ryland v. Brown, 2 Head, 273; Memphis Bethel v. Bank, 101 Tenn. 131, 45 S.W. 1072; Cyc. of Law & Procedure, vol. 8, 57; Rand. on Commercial Paper, § 1683.

2. The contention of the defendant in error that Ward & Fryberg are not bona fide purchasers, because, while they had no actual knowledge that the check had been lost and was being fraudulently negotiated, the circumstances attending their purchase were calculated to excite suspicion and put an ordinarily prudent man upon inquiry which would have led to knowledge of the defect in the title of the holder, and this and their negligence in failing to require identification of their customer, charged them with constructive or implied notice of all the facts that inquiry would have developed, is also unsound and untenable, both in law and upon the facts disclosed in this record. The doctrine of constructive notice here insisted upon, contrary to the rule administered in the courts of nearly all the states, and those of the United States and England, did obtain for many years in this state and this court uniformly held that if a purchaser of negotiable paper had implied notice of prior equities or infirmities of any nature in the title of the holder from whom he purchased-- that is, if anything appeared upon the face of the paper, or from the facts and circumstances attending its possession or sale, which would put one of ordinary prudence upon inquiry that would lead to actual...