Robertson Banking Co. v. Brasfield

It is settled law that a bank, which pays out the funds of a depositor on a forged check or indorsement, does so at its peril, and the depositor can recover the amount so paid, unless the bank can show that the payment was made as the proximate result of the conduct or negligence of the depositor; and this rule applies to a forged indorsement of a fictitious payee in the same way as it does to the forged indorsement of a real or existing payee. Michie on Banks, pp. 1095, 1096; Jordan-Marsh Co. v. Nat. Bank, 201 Mass. 397, 87 N.E. 740, 22 L.R.A. (N.S.) 250; Armstrong v. Nat. Bank, 46 Ohio St. 512, 22 N.E. 866, 6 L.R.A. 625, 15 Am. St. Rep. 655; Shipman v. Bank of New York, 126 N.Y. 318, 27 N.E. 371, 12 L.R.A. 791, 22 Am. St. Rep. 821; Chism v. Bank, 96 Tenn. 641, 36 S.W. 387, 32 L.R.A. 778, 54 Am. St. Rep. 863; Harmon v. Old Detroit Bank, 153 Mich. 73,116 N.W. 617, 17 L.R.A. (N.S.) 514, 126 Am. St. Rep. 467; Hatton v. Holmes, 97 Cal. 208, 31 P. 1131; U.S. v. Nat. Bank, 205 Fed. 433, 123 C.C.A. 501; Vaglian Brothers v. Bank of England, 23 Q. B. D. 243.

While this rule is not seriously questioned by the appellant bank, it is contended that the check in question was payable to bearer under the negotiable instruments law, as declared in subdivision 3 of section 4966 of the Code of 1907, which provides that the instrument is payable to bearer "when it is payable to the order of a fictitious or nonexisting person,and such fact was known to the person making it so payable" (italics supplied). It is undisputed that the check in question was made payable to a fictitious person; but, in order for the defendant to have treated it as payable to bearer, the burden was upon it to show that Brasfield, the drawer, knew that Johnson, the payee, was a nonexisting person. Boles v. Harding, 201 Mass. 103, 87 N.E. 481 and cases supra. There is no pretense that Brasfield knew, at the time of drawing the check, that the payee was a fictitious person, and intended to make the same payable to a nonexisting person; but it is contended that he had constructive notice of this fact, because Kirven was his agent in negotiating the loan for Johnson, and knew of the nonexistence of Johnson, the payee, and that this knowledge by Kirven was imputable to his principal, Brasfield. It may be doubted whether or not Kirven was such an agent of Brasfield as to make him chargeable with notice to Kirven, who started in to perpetrate a fraud upon Brasfield, and whether or not he would, in this respect, be acting within the scope of his agency, if such a relationship existed.

But we may concede, for the purpose of deciding this case, that Kirven was Brasfield's agent, and that he would be chargeable with notice to Kirven, if acquired by him during the agency and while acting within the line of his authority. Yet, under the well-established law of this state, Brasfield was not bound by notice or knowledge acquired by Kirven before he became the former's agent. Marshall v. Lister, 195 Ala. 591,71 So. 411. "Knowledge acquired by an agent prior to his agency, or in regard to matters outside the line of his duty, or while pursuing his own or some other person's business, is not notice to his principal of such fact or facts, and is not binding upon him." 7 Mayf. Dig. 740, and cases there cited. "It was early settled in this state, and has been since followed, that notice or knowledge by an attorney, to carry home constructive notice to the client, must be shown to have been given or acquired after the relation of attorney and client was formed." McCormick v. Joseph and Anderson, 83 Ala. 401,3 So. 796. Kirven knew of the nonexistence of Johnson long before Brasfield authorized him to make a loan, and did not ascertain this fact after the relation of lawyer and client, or principal and agent, was formed. Therefore the check in question was not payable to bearer, so as to relieve the defendant bank from ascertaining the identity of the payee and the genuineness of his indorsement before paying the check; and, failing to perform this legally required duty, its neglect in this respect was the direct and proximate cause of the loss or injury.

It is also contended, even though this court should determine that the check was not payable to bearer, that Brasfield, though innocent, furnished the means whereby the loss was sustained, and that, when one of two must suffer through the conduct of a third party, he who enabled the party to commit the act must bear the consequences. This just doctrine is not questioned, but does not apply when one is more culpable than the other, or where the injury could have been avoided by the ordinary diligence and prudence of the one, notwithstanding the other party furnished the means, which may have been the remote, though not direct, proximate, cause of the injury. Here we have a case in which Brasfield misplaced confidence in Kirven, who had started out to perpetrate a fraud, and issued a check which, as above demonstrated, was not payable to bearer, and which could have been only transferred by the genuine indorsement of the payee. Sections 4985 and 4980, Code 1907. When the instrument is not payable to bearer, but to a named person, it is the duty of the drawee bank, or one who buys the same, to procure a genuine indorsement; and the fact that the forged indorsement is the name of a nonexisting person does not afford relief against a noncompliance with its plain legal duty, and one who neglects this duty in paying out the funds of its depositors is guilty of proximate negligence. As was well said in the case of Jordan-Marsh v. Nat. Bank, supra:

"The question arises whether the making of a check payable to a fictitious or nonexisting person, through negligent failure to discover the fraud by which the check is obtained, stands differently from making a check to an actual person, in reference to its effect upon payment by the defendant. We are of opinion that there is no difference in law. In either case,it is the duty of the bank to see that there is a genuineindorsement. In some respects it would be more difficult to deceive a bank in this particular, as against vigilant investigation, if the payee was fictitious, than if he was real. In some respects it might be less difficult. We know of no decision that has recognized a difference in law between the two cases. It has been held that there is no difference. Armstrong v. National Bank, 46 Ohio St. 512 [22 N.E. 866, 6 L.R.A. 625, 15 Am. St. Rep. 655]."

Again, in the language of Minshall, C. J., speaking for the Ohio court in the Armstrong Case, supra:

"It is a saying frequently repeated, in The Doctor and Student, that 'he who loveth peril shall perish in it.' In other words, where a person has a safe way, and abandons it for one of uncertainty, he can blame no one but himself if he meets with misfortune."

Here the discharge of a plain legal duty upon the part of the paying bank would have inevitably led to the fact that the indorsement was a forgery and averted the injury, regardless of Brasfield's misplaced confidence in Kirven and the betrayal of the same by said Kirven.

Suggestion is made that section 5016 of the Code of 1907, among other things, provides that:

"The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse, and engages that on due presentment the instrument will be accepted or paid."

How this section harmonizes with subdivision 3 of section 4966, unless it applies to all instruments other than those payable to bearer, we are not called upon to decide; for, as above stated, the check in question was not payable to bearer, and if section 5016 makes Brasfield admit the existence of the payee, Johnson, and his capacity to indorse the check, this would but strengthen the reason and necessity of obtaining a genuine indorsement before paying the check. The section does not make Brasfield admit that any one other than his named payee could properly and legally indorse the check.

The case of Kohn v. Watkins, 26 Kan. 691, 40 Am. Rep. 336, comes nearer supporting the appellant's contention than any case we have found; but it is not in line with the authorities supra, and finds little or no support in other cases. In the first place, this case follows Mr. Daniel (section 139), to the effect that the check is payable to bearer if payable to a fictitious person, whether the drawer knew it or not, and which is not only contrary to the general rule of courts and text-writers, but to the negotiable instruments law (section 4966 of the Code); and if said instrument was payable to bearer, as there held, of course, the drawer was responsible for putting such an instrument in circulation and permitting it to fall in the hands of an innocent purchaser, who could acquire title by delivery. But under the well-considered authorities, as well as our statute, it was not payable to bearer unless the drawer knew that the payee was a nonexisting person. Indeed, this case is well criticized by the Tennessee court in the case of Chism v. First Nat. Bank, 96 Tenn. 641,36 S.W. 387, 32 L.R.A. 778, 54 Am. St. Rep. 863.

The case of Snyder v. Corn Ex. Nat. Bank, 221 Pa, 599,70 A. 876, 128 Am. St. Rep. 780, is in line with the holding that the drawer must know that the payee is a fictitious or nonexisting person, in order that the check shall be deemed payable to bearer; but the court held in that case that it was payable to bearer for the reason that Greenfield, the agent, had notice of the fact which was chargeable to Snyder, the drawer, for the reason that said agent, Greenfield, had full authority under a power of attorney to draw checks in behalf of the plaintiff Snyder, and he knew of the nonexistence of the payee at the time and did not ascertain the fact before the relationship was formed. In the case of Equitable Co. v. Nat. Bank (St. Louis Court of Appeals) 181 S.W. 1176, the court imputed notice to the insurance company of the nonexistence of the payee of the check and the policy, because Davis, the agent, discovered the fact while the company's agent and while acting in the line of his employment, but did not charge the company with notice as to a fact known to Davis before he became such agent.

The case of First Nat. Bank v. Allen, 100 Ala. 476, 14 So. 335, 27 L.R.A. 426, 46 Am. St. Rep. 80, is not in conflict with the foregoing views. The court did not there charge Allen with notice as to a fact known to or discovered by the agent, Tomlin, before he became Allen's agent. The opinion held that Allen was in no way responsible for the forgeries committed by his agent, Tomlin, or for the collection and circulation by him of forged checks, but did invoke an estoppel against Allen as against recovering for certain checks which the bank paid after it had sent in the passbook and previously forged checks, upon the idea that, if Allen had previously gone over his account and checks, he would have discovered the forgeries in time to have prevented the payment of subsequently forged checks. It was also the duty of Tomlin, the agent, to go through the checks and examine the account; and the court held that, as this was within the scope of his employment, his negligence in failing to discover the forgeries was imputable to his principal, Allen. The court did not hold, however, that, because Tomlin knew that these forgeries were going on, Allen was chargeable with this notice, notwithstanding the agent did not communicate it to him, or that Allen was chargeable with notice acquired by Tomlin before he became his agent. The real holding in said case was that the negligence of Tomlin, while acting within the line and scope of his employment, in failing to detect the forgeries by an examination of the bank book and returned checks, was chargeable to the principal, Allen. As a matter of fact, Tomlin was the man committing the forgeries, and knew better than any one else that they were going on; but the court did not impute this knowledge to Allen simply because Tomlin was his agent, but only charged him with the neglect of his agent while acting in the scope of his employment.

The case of Hall v. Haley, 174 Ala. 190, 56 So. 726, L.R.A. 1918B, 924, is not opposed to the views above expressed, but is a strong supporter of same. As was said in that case, Somerville, J., speaking for the court:

"By a long line of decisions this court is thoroughly committed to the rule that knowledge acquired by an agent prior to his agency, or in regard to matters outside the line of his duty, or while pursuing his own or some other person's business, is not notice to his principal of such fact or facts, and is not binding upon him."

Again, it was said (174 Ala. on page 201, 56 So. 730, L.R.A. 1918B, 924) after qualifying or overruling the Lea Case,147 Ala. 421, 42 So. 415, 8 L.R.A. (N.S.) 279, 119 Am. St. Rep. 93, which extended the doctrine as to previously acquired notice:

"But there is a long line of decisions in this state which adopt the rule that notice to an agent, to bind his principal, must have been acquired by the agent during his employment; i. e., while he is actually engaged in the prosecution of his duties as agent, and not at a time antecedent to the period of his agency."

The judgment of the law and equity court is affirmed.

Affirmed.

SOMERVILLE, J., concurs in the opinion and conclusion. MAYFIELD and SAYRE, JJ., concur in the conclusion, and will express their views in another opinion. McCLELLAN, GARDNER, and THOMAS, JJ., dissent.