without proper precaution, or whose conduct | of fact, should be allowed to demand its rehas been such as to mislead the bank," the money may be recovered back. The opinion further cites the case of National Bank of North America v. Bangs, 106 Mass. 441, 8 Am. Rep. 349, where a stranger, giving his name as Riskford, drew his check, payable to the order of Bangs, on the National Bank of North America. Bangs indorsed the check, and the bank paid the money; and, upon discovering the forgery, the bank notified Bangs, the payee and indorser, and subsequently sued him to recover the money back. The bank recovered a judgment, and this court, approving the ruling of the Massachusetts court, said: "This, we think, was proper, as it would be an exceedingly harsh rule to permit one who negotiates with a forger, and obtains his check payable to the use of the party advancing the money, who then indorses it to a bank, to hold onto the money when the payee has himself contracted with the forger and given credit to the paper by his indorsement that led the bank to believe the paper was genuine." 90 Ky. 17, 13 S. W. 339, 11 Ky. Law Rep. 803, 7 L. R. A. 849.

The opinion of Judge Barbour, of the superior court, in the Georgetown Bank Case, supra, is reported in 10 Ky. Law Rep. 351, and is instructive as giving the reason for applying the exceptional rule in that case. Judge Barbour said: "The rule as stated is sustained by Price v. Neal, 3 Burr. 1534; Levy v. Bank of U. S., 4 Dall. 234 [1 L. Ed. 814]; Bank of U. S. v. Bank of Ga., 10 Wheat. 333 [6 L. Ed. 334]; First Nat. Bank v. Ricker, 71 Ill. 439 [22 Am. Rep. 104]. Notwithstanding these high authorities and numerous other cases to the same point, Mr. Daniel, in his work on Negotiable Instruments (section 1655a), questions the correctness of the rule and says: 'Where the bank discovers the forgery immediately and demands restitution, offering to return the check before the holder has lost anything, by regarding the matter as all right, we cannot help thinking that it should be entitled to recover back the amount.' In support of Mr. Daniel's opinion, it is argued that, though a bank is to be taken as knowing the signature of its customers or depositors, yet, if it fails in such knowledge and innocently pays a forged check, it does not necessarily follow that he who received the money shall keep it; that the rule is one of mercantile policy whereby the courts imply knowledge when the implication is necessary for the protection of the rights of the innocent person. To this much of the argument, which is but a statement of the reason of the rule, we see no objection. But it is further, and we think inconsistently, argued that where the bank and the party to whom the check is paid are both deceived without actual fault upon the part of either, there being no collateral hardship on either side, the bank,

turn. The adoption of the latter part of this proposition would effectively destroy the rule. As between the bank and the party to whom it has paid its depositor's check, there is no necessity or occasion for the application of the rule that the bank must know its depositor's signature except where both the bank and the party to whom the money is paid are equally innocent of any wrong. If the fault is with either, the loss is upon him in fault. If the party collecting the check is guilty of negligence, if he did not receive it in the usual course of business, or if he received it under circumstances which should have excited his suspicion, another principle is interposed to prevent him from holding the money he has received. While on the other hand, if the bank pays the check when it could, by the exercise of proper care, have discovered that it was a forgery, there would be no occasion for the interposition of the rule. It cannot be said that the bank, unless it has been misled by his conduct, paid the check upon its faith in the party who presented it. It paid, as the law presumes, upon the faith of its knowledge of the drawer's signature. With the single exception of the case of McKleroy v. Southern Bank of Ky., 14 La. Ann. 458 [74 Am. Dec. 438], all the cases cited by Daniel as supporting his view, so far as we have been able to examine, are cases where the party took the paper under circumstances which should have excited his suspicions, or cases where the forgery was not that of the drawer but of an indorser-very different cases. The drawer has no better means of knowing the signature of the indorser than the holder of the paper has. In such a case it is not incumbent upon the drawer to know the signatures of the indorsers, but such knowledge is incumbent upon the holder of the paper, as he must be presumed to know his title, and in presenting the paper he guarantees the genuineness of the signatures of the prior indorsers."

In the course of its opinion in the Bangs Case, supra, the Massachusetts court said: "If the suit were between the bank, or drawee, and a party who took the check in the usual course of business, finding it in circulation, or even by first indorsement from the payee, the loss would fall upon the bank, because, having greater means and opportunity to become familiar with the handwriting of their correspondents or depositors, the law presumes that drawees will know these signatures, and be able to detect forgeries. * But this responsibility, based upon presumption alone, is decisive only when the party recovering the money has in no way contributed to the success of the fraud or to the mistake of fact under which the payment was made."

*

And further citing Ellis v. Ohio Life Trust Co., 4 Ohio St. 628, 64 Am. Dec. 610, People's Bank v. Franklin Bank, 88 Tenn. 297, 12 S.

Espy v. Bank of Cincinnati, 18 Wall. 604, 21 | the bill to be genuine; and in case of payL. Ed. 947, and one or two other cases, and ment, notwithstanding he has done it in misdistinguishing First National Bank of Or- take, and parts with his money without releans v. State Bank, 22 Neb. 769, 36 N. W. ceiving the supposed equivalent, and not289, 3 Am. St. Rep. 294, Judge Pryor closed withstanding the holder has obtained the the opinion in the Georgetown Bank Case as money without consideration, the former canfollows: "While it rests upon one signing not be relieved from the consequences of his his own name, or that of a bank affixing its negligence at the expense of the latter, and signature to notes to pass as current money, the latter may in equity and good conscience to know that the signature is genuine, it retain what he has got. But this stern rule is also rests on a bank, where checks are drawn only exerted in favor of a holder without upon it in the name of its customer, to know | fault, and for a valuable consideration; and his signature, and, instead of the party to whom the money is paid being required to show negligence in the bank paying the money, it devolves on the drawee to show negligence in the indorser or holder who, in good faith, has received the money, before the drawee can escape liability. Where the parties are equally innocent, the drawee is the loser. There is no precedent in this court on the question; still we are not inclined to follow the views of text-writers, in the face of so many adjudications on the subject, and with no case presented that goes further than to modify the rule in cases where bad faith or negligence is to be attributed to the holder or indorser when taking the check."

And as no bad faith or negligence was attributed to the Fayette National Bank when it took the check, the exceptional rule was applied in that case, and the Georgetown Bank was denied a recovery. The effect of that decision, however, is that, when the holder or indorsing bank is guilty of bad faith or negligence, the exceptional rule does not apply, and money paid under mistake may be recovered under the general rule. As was well said by Judge Pryor, the exceptional rule which does not permit the drawee to recover money paid by mistake is a harsh rule and should be kept strictly within its bounds and not extended. If the indorser or holder has been guilty of the first negligence, there is no good reason why he should not bear the loss, under the general rule which permits the recovery of money paid under a mistake. This view is supported by the great weight of authority, although there are a few cases to the contrary.

In Ellis v. Ohio Life Insurance & Trust Co., 4 Ohio St. 628, 64 Am. Dec. 610, a check purporting to have been drawn by Davis & Co. on the Mechanics' & Traders' Bank was presented by a stranger to the defendant bank, which paid the check. The check proved to be a forgery. No question was asked as to who the presenter was, or as to his right to the check, and the forgery was not discovered until ten days afterwards, when the check was returned to the defendant and repayment demanded. In the course of a very able opinion by Judge Ranney it is said: "In all such cases, either of acceptance or payment, the foundation upon which the drawee is made to suffer the loss is the imputed negligence in

we deem it equally clear that he may, by his own negligent conduct, place himself in such an inequitable position in reference to the drawee as to deprive himself of the benefit of this rule and make it unjust and inequitable that he should keep what he has obtained by a mistake, and for which he has given no equivalent. We do not here speak of negligence as a matter at large. We only intend to deal with the case before us; and that only requires us to say that where the negligence reaches beyond the holder, and necessarily affects the drawee, and consists of an omission to exercise some precaution, either by the agreement of the parties or the course of business devolved upon the holder, in relation to the genuineness of the paper, he cannot, in negligent disregard of this duty, retain the money received upon a forged instrument. Both these propositions, we think, will be found fully sustained, if not in every particular, by direct adjudications, by the fixed principles upon which nearly all the cases have proceeded."

In the later case of First National Bank of Belmont v. First National Bank of Barnesville, 58 Ohio St. 207, 50 N. E. 723, 41 L. R. A. 584, 65 Am. St. Rep. 748, the court reaffirmed the doctrine it had theretofore announced in Ellis v. Ohio Life Insurance & Trust Co., supra, saying: "In the case now under consideration the drawer's name was a forgery, but the name of the payee indorsed on the check was genuine, having been written by the cashier at the request of the payee. It has been urged that, if the payee had been required by the cashier to write his name upon the check, it might have shown that his name in the body of the check had been written by himself, and thus lead to a detection of the forgery. But in the above case of First National Bank of Danvers v. First National Bank of Salem, 151 Mass. 280, 24 N. E. 44, 21 Am. St. Rep. 450, the payee indorsed the check, and the handwriting was the same in both names, payee and indorser, and yet the forgery was not thereby detected, and the court attaches no importance to the fact in its decision of the case. In that case, and in the above case in 4 Ohio St. 628 [64 Am. Dec. 610], and in nearly all the cases in which the money has been recovered back, the bank purchasing the check or bill took it from an unidentified stranger, and this has

such negligence as would authorize a recov- | check, the People's Bank passed the amount ery of the money."

thereof to the credit of the Franklin Bank. The People's Bank did business in Springfield, Robertson county, Tenn., while the defendant bank did business at Clarksville, in Montgomery county. The forgery was discovered 31 days afterwards, when Young came to examine his passbook, together with the returned checks. Thereupon the People's Bank canceled the charge against Young, the depositor, and promptly notified the Franklin Bank of the forgery and demanded that it repay the amount it had received upon the check; and, upon its refusal to do so, the People's Bank sued to recover it.

It will thus be seen that the Tennessee case is on all fours with the case at bar; the names of the maker and the indorser both having been forged. The trial court in the Tennessee case applied the rule which required the drawee at its peril to know the genuineness of the signature of its depositor, and dismiss

In Germania Bank v. Boutell, 60 Minn. 189, 62 N. W. 327, 27 L. R. A. 635, 51 Am. St. Rep. 519, the action was by the Germania Bank against Boutell to recover money paid on a forged check drawn by Seymore to his own order and against the account of Osborne & Clark in the Germania Bank. Boutell cashed the check without making any inquiry to ascertain its genuineness, although the places of business of both Osborne & Clark and the bank were near by. The forgery was discovered in about two weeks, whereupon the bank returned the check to Boutell and demanded that he repay the money which he had received thereon. After referring to the general rule which allows money paid under mistake to be recovered, and the exceptional rule denying a recovery to the bank who pays the forged check of its customer, the court said: "But while the general doctrine is too well established to be overruled or disregarded the plaintiff's bill. In reversing that judged, yet it is undoubtedly true that the trend ment, the Supreme Court of Tennessee said: of the modern authorities is to impose upon it "Notwithstanding some conflict of authority some limitations and modifications, so that upon the subject, a careful investigation of it is not always easy to definitely state when the adjudged cases and of the text-books a case falls within the doctrine or comes leads us to the conclusion that the bank can within the general rule as to money paid by recover of a party to whom payment is made mistake. From what examination we have on a forged check, indorsed by the party to been able to make of the authorities, we have whom paid, where the party to whom paid arrived at the conclusion that there are very has been guilty of negligence in receiving and few well-considered cases which go further indorsing the check, for notwithstanding the than to hold that the bank may recover back negligence to some degree that the paying money paid on a check to which the signature bank has been guilty of in paying the forged of one of its customers was forged, when check, without detecting the forgery of its depositor's signature, it often happens, or there was a lack of good faith on the part of the payee towards the bank, as when he may happen, that the party to whom payknew the check was forged, or knew of cir- ment is made has been guilty of the first negcumstances casting suspicion, on its gen-ed paper. The bank upon whom the check is ligence in purchasing and indorsing the forguineness not known to the bank, and which he did not communicate to it, or where the banking business, may well be lulled to a less drawn, in the practical administration of holder was negligent in not making due careful scrutiny of its depositor's signature inquiry as to the validity of the check of a check, where the same is indorsed by before he took it, and the drawee, hav-another bank with which it is in corresponding a right to presume that he had made such ence or interchange of business, than it inquiry, was itself thereby excused from making inquiry before paying it. In the first case the holder is really a party to the fraud, and is not a good-faith holder. In the second case, he has, by his negligence, contributed to the consummation of the mistake on part of the drawee by misleading him."

In People's Bank v. Franklin Bank, 88 Tenn. 299, 12 S. W. 716, 6 L. R. A. 724, 17 Am. St. Rep. 884, the name of Young, a depositor of the People's Bank, was forged to a check drawn on that bank payable to the order of Morgan. Morgan's name was also forged as an indorser on the check. The check with the forged name of Young, the maker, and of Morgan, the indorser, was presented to the defendant, the Franklin Bank, which cashed it and transmitted it, after indorsing it, to the People's Bank, for payment. The People's Bank had an account with the

would exercise in accepting and paying the same check, not so indorsed, to a stranger. The indorsement of the check by the payee may be said ordinarily to be a guaranty of the genuineness of the indorsements theretofore on the paper, and also of the genuineness of the drawer's signature, subject, perhaps, to some exception in particular cases, as, for instance, where the indorsement is made after the genuineness of the preceding signatures has been approved by the paying bank. Applying these principles to the case at bar, we are of opinion, and so adjudge, that the first fault was with the defendant bank. This bank accepted and cashed a check drawn on a bank in another county, to which the name of the drawer and the payee had both been forged, and, so far as this record discloses, without requiring any identification of the parties to whom such payment was made,

the identity of such parties for the benefit of itself or of others who might be injured by such forgery. The complainant bank, upon receiving such check, in due course of mail, for deposit to credit of defendant, might well rely upon the exercise of due prudence and diligence on the part of its depositor, the defendant bank, and might well regard the latter's indorsement of the check as significant of the fact that such prudence had been exercised, and, if not, that the indorsement would stand as a guaranty to the paying bank from loss that might otherwise fall upon it by reason of its passing the amount of the check to the credit of such indorser." support of the conclusion there reached, the court cites 3 Am. & Eng. Enc. of L., 223, 225; Chitty on Bills (13th Am. Ed.) 431, 485; 2 Parsons on Notes & Bills, 80; Bolles on Banks & Depositors, § 189.

In

that a drawee of a check should be excepted from the ordinary rules relating to the right to recover money paid by mistake, is unsound and has never been adopted in this state by usage or statute, it would be nothing less than usurpation of legislative power by this court to declare that rule to be the law of this state because courts in other states have so held. That the rule in question is unsound in principle and unjust is almost universally admitted, and the courts are showing an increasing tendency to discard it. We think, therefore, that we are showing no disrespect to precedent in taking the stand towards which the modern decisions are unmistakably tending, and from which it is generally conceded there should have never been any departure. We therefore reject as unsound the doctrine that a drawee of a check should be excepted from the general rule in In First National Bank of Lisbon v. relation to the recovery of money paid by Bank of Wyndmere, 15 N. D. 299, 108 N. W. mistake. The drawee is presumed to know 546, 10 L. R. A. (N. S.) 49, 125 Am. St. Rep. the signature of the drawer of the check or 588, the plaintiff and defendant were banking draft; and the holder of such check or draft, corporations, located respectively at Lisbon who has acquired it in good faith, has the and Wyndmere, N. D. Bixby & Marsh were right to act in reliance on that presumption, depositors in the Lisbon bank. On July 1, provided he himself has omitted no duty, the 1905, the Bank of Wyndmere presented to the performance of which would have prevented Lisbon bank for payment a forged check pur- the success of the fraud. Consequently, if porting to have been drawn by Bixby & the drawee pronounces the check genuine by Marsh upon the Lisbon bank, in favor of paying it or otherwise honoring it, the holder, Theodore Larson, for $60.25, dated June 27, who has acted in good faith and without 1905, and indorsed in blank by the payee. It negligence, may safely rely upon the judgment also bore the indorsement of the Bank of of the drawee and act accordingly. The Wyndmere and each of the several banks drawee cannot, under such circumtances, rethrough whose hands it had passed in the call his acceptance or payment to the detriusual course of collection; each indorsing ment of the party who has rightfully relied bank having expressly guaranteed the gen- upon his decision. In such a case the party uineness of previous indorsements. Believ- who received the money has the superior ing the check to be genuine, the Lisbon bank equity, and he may justly retain the money, paid it and charged it to the account of Bix- although he was not originally entitled to by & Marsh; but, when that firm examined receive it. But, as is usually the case, when its checks on July 20th, it was immediately the party who has collected the check had discovered the check was a forgery. The previously cashed it or taken it in exchange Lisbon bank immediately notified the Bank for commodities, there is no reason why he of Wyndmere of the forgery, and, returning should not refund. Every one with even the the check, demanded repayment, and subse- least experience in business knows that no quently sued to recover the money. business man would accept a check in exchange for money or goods unless he is satisfied that the check is genuine. He accepts it only because * * * he has sufficient confidence in the honesty and financial responsibility of the person who vouches for it. If he is deceived, he has suffered a loss of his cash or goods through his own mistake. His own credulity or recklessness, or misplaced confidence, was the sole cause of the loss. Why should he be permitted to shift the loss, due to his own fault in assuming the risk, upon the drawee, simply because of the accidental circumstance that the drawee afterwards failed to detect the forgery when the check was presented? Our views find much support in many of the cases which still cling more or less tenaciously to the negligence rule, notably the following: First Nat. Bank

The North Dakota Supreme Court repudiated the rule announced in Price v. Neal, and held that the drawee of a forged check, who has paid the same without detecting the forgery, may, upon the discovery of the forgery, recover the money from the party who received the money, even though the latter was a good-faith holder, provided the latter had not been misled or prejudiced by the drawee's failure to detect the forgery, and that the burden of showing that he had been misled or prejudiced by the drawee's mistake rested upon him who claims the right to retain the money, for that reason. And, in refusing to follow the exceptional rule of Price v. Neal, the court further said: "Being convinced, as we are, that this doctrine, advocated by the great majority of the cases

reason of his own negligence, he could not be permitted to recover it back, the Oklahoma Supreme Court said: "The leading case sustaining this proposition is Price v. Neal,

21 Am. St. Rep. 450; Ellis v. Ohio Life Ins. & T. Co., 4 Ohio St. 628, 64 Am. Dec. 610; People's Bank v. Franklin Bank, 88 Tenn. 299, 12 S. W. 716, 6 L. R. A. 724, 17 Am. St. Rep. 884; Canadian Bank v. Bingham, 303 Burr. 1354, 1 W. Bl. 390, decided in 1762. Wash. 484, 71 Pac. 43, 60 L. R. A. 955; First Nat. Bank v. State Bank, 22 Neb. 769, 36 N. W. 289, 3 Am. St. Rep. 294; First Nat. Bank v. First Nat. Bank, 4 Ind. App. 355, 30 N. E. 808, 51 Am. St. Rep. 221. The case of McKleroy v. Southern Bank, 14 La. Ann. | 462, 74 Am. Dec. 438, directly supports our views, and we are gratified to note that our views are in accord with those generally advocated by the text-writers. We therefore hold that drawees of checks and drafts are not to be excepted from the general rule which permits the recovery of money paid by mistake. We hold that a drawee who has by mistake paid a spurious check or draft may recover the money paid unless the party receiving the money has been misled to his prejudice by the drawee's mistake. If any such facts exist, they are best known to the defendant, and it is his duty to prove them. The complaint discloses prima facie cause of action by alleging the payment by mistake." And in Ford v. People's Bank of Orangeburg, 74 S. C. 180, 54 S. E. 204, 10 L. R. A. (N. S.) 63, 114 Am. St. Rep. 986, 7 Ann. Cas. 744, it was held, under what is sometimes termed the fault or negligence rule, that the drawee of a forged check may recover the amount paid upon it to one whose conduct has been such as to mislead him or induce him to pay the draft without the usual security against fraud.

In Greenwald v. Ford, 21 S. D. 28, 109 N. W. 516, it was held that the principle that the drawee is bound to know the signature of the drawer of a bill or check which he undertakes to pay is not decisive in favor of the payee of a forged bill or check to which he has himself given credit by his indorsement.

In American Express Co. v. State National Bank, 27 Okl. 824, 113 Pac. 711, 33 L. R. A. (N. S.) 188, it was held that a payee receiving money from a bank upon a check purporting to be drawn upon it by one of its depositors, but the signature of which was in fact forged, was not entitled to retain the same except upon the following combination of facts: (1) That the payee was not negligent in receiving the check; (2) that the payer was lacking in due care in paying the same; and (3) that upon the payer's action the payee had changed his position, or would be in a worse condition if the mistake was corrected than if the payer had refused to pay the check at the time of its presentment. In speaking of what it calls the "old doctrine" that a bank was bound to know its correspondent's signature, and could not recover money paid upon a forgery of the drawer's name, because it was said the drawee was negligent not to know the forg

A great many of the courts that continue to follow the old rule criticise it, but follow it upon the ground that it has been established by decisions which have been so long acted upon that it is not proper to disturb them. All the text-book writers on banks and banking that we have access to disapprove the old rule as unsound and unjust. Mr. Morse says of it: "This doctrine is fast fading into the misty past, where it belongs. It is almost dead; the funeral notices are ready; and no tears will be shed, for it was founded in misconception of the fundamental principles of law and common sense.' 2 Morse, Banks & Bkg. § 464. Mr. Bolles says it is a hard rule. 'It runs against the great rule that money paid by mistake may be recov ered back, which is constantly growing in judicial favor.' 2 Bolles, Modern Law of Bkg. 721. Magee and Zane say that the rule formerly prevailing has been modified by the courts with a view to doing equity between the parties. Cyc. states the modern rule to be that when payment is made to the holder of forged paper who has come into possession of it without any fault on his part, and his situation would be rendered worse if compelled to refund than it was before receiving payment, the money cannot be recovered from him. If, however, he has been negligent in any regard, he cannot retain the money. To justify him in doing so, the bank alone must have been negligent. If neither party has been negligent, or both have been, then the bank can recover the money. A great many authorities are compiled in a note purporting to sustain the text, and all do so, we think, to a greater or less extent. That the old rule is unsound and illogical is unquestionably true. It is based upon the theory that the mere fact that B. was negligent gives A. a right to B.'s property, which A. did not have before the negligence, without regard to the question whether A. has sustained any loss by the negligence or not. In any other case involving the question of negligence, it is not enough to create legal liability, or to give A. a right to acquire or retain the property of B., to show merely that A. has not been negligent. One more element is necessary, namely, that damage to A., being himself innocent in the matter, should naturally and proximately result from B.'s negligence. 2 Morse, Banks & Bkg. supra."

[5] We are not, however, required in the decision of this case to disapprove the rule of Price v. Neal, since the facts here bring this case within the scope of the rule in cases of forged indorsement. According to the weight of authority, under the exceptional rule a bank which cashes a check drawn