First Nat'l Bank v. Noble

One Kelleck, having only $200 to the credit of his account, drew his check on First National Bank in favor of Mrs. Lillian S. Noble for $10,573.50. She deposited the check, for collection, to the credit of the joint account of her husband and herself with United States National Bank. Because of insufficient funds. First National refused payment. Two days afterwards, United States National presented the check to the drawee, by messenger. A teller, mistaking a rejection symbol which had been placed thereon for a symbol of approval, issued a cashier's check in payment. United States National, which had charged back the check to the Nobles' account when payment was refused, recredited the account and mailed the Nobles an advice of credit. The cashier's check was cleared through the clearing house. First National made timely demand for a refund of the credit thus procured, which was refused. Thereupon First National brought the present suit against the Nobles and United States National to recover the amount of the cashier's check as money paid under a mistake of fact. United States National interpleaded the Nobles and First National, and paid the money into court. The question is whether, under those circumstances, First National can recover. The lower court held in its favor.

Money paid under a mistake of fact may be recovered, unless the recipient has so changed his position that it would be unjust to require him to refund. 40 Am. Jur., Payment, section 187; Scottv. Ford, 45 Or. 531, 78 P. 742, 68 L.R.A. 469; Smith v. Rubel,140 Or. 422, 13 P.2d 1078, 87 A.L.R. 644; Security Savings Trust Co. v. King, 69 Or. 228, 138 P. 465.

Ordinarily, a cashier's check is not subject to countermand except for fraud. It has been held, however, that payment may be refused, for want or failure of consideration, while the check is still held by the payee, but, in the hands of a holder in due course, it is irrevocable. Kinder v. Fisher's Nat. Bank,93 Ind. App. 213, 177 N.E. 904; Annotations, 56 A.L.R. 532, 107 A.L.R. at 1464. By the weight of authority, a drawee who, through mistake of fact, pays a negotiable instrument to a holder in due course, cannot recover the money. There is a plausible reason for this. Bills and notes were devised and used by merchants, for reasons of safety and convenience, to take the place of money, and, in order that they might circulate freely in the channels of trade, it became necessary that they should be negotiable. Carter: History of English Legal Institutions, 3 ed., 274. If a holder in due course were subject to claims for refund of money paid under mistake of fact, the free flow of trade and commerce would be gravely hindered. A bill or note which remains in the hands of the payee is not in "the channels of trade". It does not enter such channels until it reaches a holder in due course. To say that payment to the payee, simpliciter, under mistake of fact, cannot be recovered, is to invest payee with the status of a holder in due course, a status which in his case cannot be justified, in point of law, by any amount of rationalization. The effect would be, moreover, to prevent the drawee from urging, as between immediate parties, that there was no consideration for the payment. It is true that, in AmericanNational Bank v. Kerley (1923) 109 Or. 155, 220 P. 116, 32 A.L.R. 262, this court did say that, within the purview of the negotiable instruments law, a payee may be a holder in due course. This statement, however, has been criticized (rightly, as I think) as dictum. The action was by the payee of a note against accommodation makers. Their defense was that they were induced to sign by fraud of the principal maker, of which fraud the payee, before delivery, had notice. The accommodation makers had intrusted the note, with their signatures thereon, to the principal maker, and had clothed him with apparent authority to make delivery to the payee. If the payee actually had no knowledge of the fraud before delivery (as to which the court made no finding) the decision, wherein it indicated that the accommodation makers would be liable to the payee as holder in due course, would have been more correctly based, I think, upon principles of estoppel. Baker County v. Huntington, 46 Or. 275, 79 P. 187;Wollenberg v. Sykes, 49 Or. 163, 89 P. 148; Anno: 15 A.L.R. at 445, 446. Under the circumstances, the court could have reached no different conclusion even if the note had been nonnegotiable.

In Jones v. Waring Gillow (1926) A.C. 670, 68 A.L.R. 944, it was finally settled as the law of England that, under a logical construction of the Bills of Exchange Act, the payee of a check cannot be a holder in due course. See, generally, annotations as follows: 15 A.L.R. 437; 21 A.L.R. 1365; 26 A.L.R. 769; 32 A.L.R. 289; 68 A.L.R. 962. This court, in Bank ofGresham v. Walch, 76 Or. 272, 147 P. 534, held that the payee of a note is not a holder in due course. In my opinion, such is the correct view. See Annotation, 32 A.L.R. at p. 291, in which the editors state that "a logical construction of the Negotiable Instruments Act supports the conclusion that the payee in a negotiable instrument cannot be `a holder in due course,' within the meaning of that phrase as used in the act".

United States National did not disburse any of the ultimate proceeds of the Kelleck check to the Nobles or to their order. The only change in the Nobles' position was that reflected by a mere bookkeeping entry upon the bank's books, which another bookkeeping entry could have cancelled. National Bank ofCalifornia v. Miner, 167 Cal. 532, 140 P. 27.

The drawer of a check "is discharged of liability as drawer when the drawee bank, out of funds in its hands to his credit, pays the check with money, or in any other medium accepted by the holder of the check." (Emphasis mine.) Dewey v. Margolis Brooks (1928) 195 N.C. 307, 142 S.E. 22. See Loland v. Nelson, 139 Or. 581, 8 P.2d 82; Texas Electric Service Co. v. Clark, (Tex.Civ.App. 1932) 47 S.W.2d 483; 7 Am. Jur., Banks, section 684; Annotations, 52 A.L.R. at 995; 87 A.L.R. 442. Moreover, the record plainly indicates that the drawer intentionally defrauded Mrs. Noble by giving her a worthless check. The law will not permit him to take advantage of his own fraud. 23 Am. Jur., Fraud and Deceit, section 182. In my opinion, he was not discharged.

Section 33, Restatement, Restitution, appears to be authority against the right of the drawee to recover in this case. I submit, however, that the rule laid down therein should have been limited to denial of restitution from a holder in due course. The rule, in any event, is contrary to that adopted by this court inSecurity Savings Trust Co. v. King, supra and post, 69 Or. 228, 138 P. 465.

The error of First National's employee was a mere failure to exercise ordinary care, and not, I think, "intentional" negligence, such as intentional failure to investigate, which, it has been held, might have prevented the bank from recovering the money. See Smith v. Rubel, 140 Or. 422, 13 P.2d 1078, 87 A.L.R. 644; Scott v. Ford, 45 Or. 531, 78 P. 742, 68 L.R.A. 469; Security Savings Trust Co. v. King, supra.

"No matter how close at hand the means of knowledge may be, no matter how stupid or careless the failure to ascertain the truth may be, if one confers a benefit under an honest mistake, i.e. in unconscious ignorance of the truth, the retention of the benefit is ordinarily inequitable. By the weight of authority restitution may be enforced." Woodward, Quasi Contracts, section 15.

Appellants cite Price v. Neal, (1762) 3 Burr. 1354. Stated broadly, the rule of Price v. Neal is that the acceptor of a bill of exchange admits by his acceptance the genuineness of the signature of the drawer, and is estopped from afterwards asserting that such signature was forged. The decision does not aid appellants here, as Neal was a holder in due course. Where the negotiable instruments act has been adopted, the rule of Price v. Neal, as adopted by section 62, N.I.L. (section 69-503, O.C.L.A.) has no application unless the facts bring the case specifically within the purview of the act. For example, it has no application to a negotiable instrument properly signed by the drawer but bearing a forged indorsement. In such cases, common-law principles are applied, and the drawee who has paid the instrument is permitted to recover. First National Bank v.United States National, 100 Or. 264, 197 P. 547, 14 A.L.R. 479. It would seem, therefore, that the situation in the instant case, not having been provided for by the negotiable instruments act, should likewise be governed by common-law rules.

The situation here is analogous to that in which a bank has certified a check by mistake. The general rule is that such certification may be revoked, unless revocation would operate to the prejudice of an innocent party. Morse, Banks and Banking, 6 ed., section 419, (citing Security Savings Trust Co. v. King, supra); 7 Am. Jur., Banks, section 563; 9 C.J.S., Banks and Banking, section 376a; Metropolitan Life Ins. Co. v. Bank ofUnited States, 259 N.Y. 365, 182 N.E. 18; National Bank ofCommerce v. Baltimore Commercial Bank, 141 Md. 554, 118 A. 855,29 A.L.R. 135.

In Security Savings Trust Co. v. King, supra (69 Or. 228,138 P. 465) plaintiff bank received on deposit for collection a check drawn on Imperial Bank of Canada, Vancouver, B.C., under an agreement that the bank would be held liable only when proceeds of the check in actual funds or solvent credits should come into its possession. Plaintiff sent the check to its Vancouver correspondent, Northern Crown Bank, which bank procured certification by the drawee. In so certifying, the drawee "forgot" that it had previously received instructions from the drawer to stop payment. From its own funds, Northern Crown remitted to plaintiff the amount of the certified check. Later, the drawee discovered its error and notified Northern Crown, which informed plaintiff, by telegraph, of the situation, the telegram being received four days before Northern Crown's remittance reached plaintiff. Plaintiff meantime had honored other checks of the drawer to the extent that charging back the Canadian check caused an overdraft. Plaintiff reimbursed Northern Crown, and brought suit against the depositor to recover the amount of the overdraft. In the lower court, the defendant had judgment. On appeal, this court held that, under the express contract between the parties, no liability attached to plaintiff until the proceeds of the collection, in actual funds, came into its possession. We defined "actual funds" as "the real funds inuring from a collection of the check or negotiable paper freefrom embarrassment and convertible into cash." (Emphasis mine.) We held that, since defendant's position had not changed, and the rights of third parties had not intervened, the case came within the rule permitting recovery of money paid under a mistake of fact. The express agreement between the bank and the depositor contained the following proviso:

"this bank assumes no liability for the failure of any of its direct or indirect collecting agents whether the collecting agent be the person or concern on which the check for collection is drawn or not * * *."

There was, however, no such failure. Northern Crown, the plaintiff's collecting agent, caused the check to be certified, and immediately remitted to plaintiff out of its own funds. This was clearly a payment to plaintiff, but the court impliedly approved plaintiff's action in reimbursing the agent. The case expressly holds that certification of a check under a mistake of fact may be revoked if the payee has not changed his position.

Brannan, Negotiable Instruments, 6 ed., section 187, p. 1150, includes Securities Savings Trust Co. v. King, supra, as one of the cases opposed in principle to those cases which hold that a drawee bank cannot recover a payment made by mistake as to the condition of the drawer's account. I am of the opinion that, unless Securities Savings Trust Co. v. King, supra, be overruled, it must be considered as authority for First National in the present case.

In so far as the facts in the case at bar are concerned, there is no legal distinction affecting the bank's liability to the holder as between a certified check and a cashier's check. Zollmann, Banks and Banking, vol. 7, Perm. ed., section 4691; see also section 69-1004, O.C.L.A.

The position of the Nobles, when this action was instituted, was no worse than it was when they first received the worthless Kelleck check. In equity and good conscience, the funds in court are the property of First National. I am of the opinion that the trial court decided the case correctly, and that its judgment should be affirmed. I respectfully dissent from the opinion of the majority.