~eva~ FACTS
DRAWER: Peter McCornack DRAWEE: Central State Bank
PAYEE: C.R. Kutsman (fictitious person)
-(July 1920) Halverson gained the confidence of McCornack and represented to him that he had a client who wished to borrow money to be secured by mortgage on land, and so McCornack consented to make the loan. Halverson delivered to McCornack a note purporting to be signed by CR Kutsman and secured by a mortgage. McCornack signed a check for $1,005.50 which he gave to Halverson. Halverson indorsed the name Kutsman and his own name on the check and deposited it in his account. The check was paid on presentation to Central State Bank and the amount charged to the account of McCornack.
-(1924) It was discovered that the note and the mortgage were forged instruments and no Kutsman in fact existed. Halverson, by like
fraudulent means, obtained other checks from McCornack. McCornack sued to recover, as for a conversion, the amount paid by the bank and charged against its (McCornack) account. Court decided in favor of McCornack. Bank now appeals.
-Defenses of drawee bank:
1. check paid to person to whom McCornack intended payment to be made
2. the bank was not guilty of negligence
3. McCornack was negligent in making the check in that he failed to ascertain that the payee was a fictitious person
4. that by accepting without objection the statement of their bank account with the check in question cancelled and charged against it, there was account stated, and the plaintiffs were thereby estopped to claim that the check was improperly paid
5. by failing to notify the bank within 6 months after receiving such statement of the alleged
irregularity in the payment of the check, the claim was barred by the statute of limitations
6. McCornacks were guilty of negligence in not sooner notifying the bank 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, thereby causing loss to the bank.
ISSUE
WON Central State Bank (drawee) is liable. HELD: YES.
a. A check payable to the order of a fictitious person with the knowledge of the drawer is payable to bearer. But where the fact that it is payable to a fictitious person is unknown to the drawer, that bank upon which it is drawn, or paying it, is in no different position than where it pays a check payable to a real party upon a forged instrument. McCornack did not know that the payee was fictitious; the check was not, therefore, payable to bearer, and the bank cannot escape liability on that ground.
b. 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. But where one represents himself to be the agent of a ficititious person and fraudulently procures the delivery to himself of a check payable to the order of such fictitious person as payee, and secures the payment of the check to himself by indorsing the name of the fictitious payee upon it, in the absence of estoppel or negligence on the part of the drawer, the loss must be borne by the drawee and not by the drawer.
c. The bank in paying the check was bound to know at its own risk that the indorsements by which the holder of the check claimed title were genuine. Its liability for payment not in accordance with the direction of the drawer did not depend upon negligence, but upon a violation of its implied contract with its depositor. The question WON the bank was negligent is immaterial upon the
naked and primary question of its liability for having paid a check upon a forged indorsement. Here, the check was paid by the bank without inquiry as to the indorsement of Kutsman. d. McCornack was not negligent. There is no showing
that anything had come to his knowledge respecting Halverson to put him upon inquiry as to his honesty. Moreover, McCornack’s failure to ascertain that the payee of his check was a fictitious person did not induce or contribute to the payment of the check by the bank. The drawer of the check, who, through failure to discover the fraud that is being practiced upon him, makes a check payable to the order of a fictitious payee in ignorance of that fact, stands in the same position with reference to the bank upon which it is drawn as where his check is payable to the order of a real person. His negligence in so drawing the check is immaterial unless directly and proximately affects the conduct of the bank in paying the check.
e. On Sec.9521 of Code 1924 (Sec.61 of NIL): This provision would seem to be, not for the benefit of
the drawee, nor designed to relieve the drawee of the duty to pay out the drawer’s money in accordance with his order, but for the protection of holders of the paper in case the drawee refuses to pay. It provides, not only that the drawer admits the existence of the payee and his capacity to indorse, but that he engages that upon dishonor and the necessary proceedings thereon he will pay the amount to the holder or any subsequent indorser who may be compelled to pay it. There is here no engagement to pay the amount to a drawee who has honored the check.
-When the payee is a fictitious person and this is unknown to the drawer the statute does not have the effect to bind the drawer by an indorsement of the name of the payee by one to whom he did not intend payment to be made.
-If the drawee demanded a genuine indorsement, as it was its duty to do before honoring the check, since there could be no such thing in the case of a fictitious payee, the check would not have been honored. In such case, an innocent holder, upon taking proper steps, would have been protected by Sec.9521. The purpose of that section was to protect the innocent holder of dishonored paper- not the drawee who paid it in violation of duty.
LOZANO V MARTINEZ