This section of the book is from the "Canadian Banking Practice" book, by John T. P. Knight.
Question 280.— A Canadian bank sells a sterling draft on London to a customer. It is made payable to a person in a foreign country. The draft is cashed by a foreign bank for a person who forges the payee's endorsement, which bank in turn collects the amount through its London agent from the drawee in London.
Under these circumstances, has the purchaser of the draft any right of action against the bank which drew it? We presume not, but if so, what remedy has the owner of the draft?
Answer.—The purchaser has, as you assume, no right of action against the hank which drew the draft; he could only have such a right upon the bill as a dishonoured bill, which he could not have unless it were in his possession.
The only other parties who would be liable are:
(1) The foreign bank,
(2) The London hank to which the bill was sent by it, and
(3) The bank on which the bill was drawn.
The true owner of the draft, who might be either the purchaser or the payee (this depending on facts not stated in the question), would probably have a claim on the foreign bank which cashed it on the forged endorsement, but his rights would be governed by the law of the country in which the transaction of cashing the draft took place. If this were like the English law, his claim on the foreign bank would be clear. He would also have a claim on the London bank which received the amount of the draft from the drawee bank, but their liability might be affected by the nature of their relations with the foreign bank. His claims on both of these arise from their having received and converted his property, and not out of any provision of law relating to bills.
The remaining question, namely, the owner's rights against the bank on which the bill was drawn, has not, so far as we are aware, been judicially decided. The question is very important and interesting, and we give the reasoning on both sides of it.
Section 24 of the Act in very clear terms declares that where a signature on a bill is forged, the forged signature is wholly inoperative, and no right to retain the bill or to give a discharge therefor or to enforce payment thereof against any party thereto can be acquired through or under that signature, unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery. If effect were given to these words in their unqualified form, we would say without hesitation that a person claiming to be the holder of a bill through a forged endorsement, even though he acquired the bill as a subsequent holder for value and without any notice of the forgery, could not discharge the acceptor by presenting the bills on the day of its maturity at the proper place and receiving payment from the acceptor and delivering the bill up to him. It must be borne in mind, however, that section 24 commences with the words " subject to the provisions of this Act."
" Holder in due course " is defined by section 29 to be a holder who has taken a bill complete and regular on the face of it, under conditions, of which one is, that he took the bill in good faith and for value, and that the time the bill was negotiated to him he had no notice of any defect in the title of the person who negotiated it.
By section 2, the expression " holder" is defined to mean "the payee or endorsee of a bill who has possession of it, or the drawer thereof." Section 3 declares that the rights and powers of the holder of a bill are, among other things, (b) where he is the holder in due course he holds the bill free from any defect of title of prior parties; and (c) where his title is defective, if he obtains payment of the bill, the person who pays him in due course gets a valid discharge for the bill.
Section 55 declares that the endorser of a bill by endorsing it (b) is precluded from denying to a holder in due course the genuineness and regularity in all respects of the drawer's signature and all previous endorsements; (c) is precluded from denying to his immediate or to a subsequent endorsee that the bill was, at the time of his endorsement, a valid and subsisting bill, and that he had then a good title thereto.
Section 59 provides that a bill is discharged by payment in due course by or on behalf of the drawee or acceptor, and that " payment in due course " means " payment made at or after the maturity of the bill to the holder thereof in good faith and without notice that his title to the bill is defective."
The arguments against the right of the drawee or acceptor to claim a discharge by payment to a person, a holder •under a prior forged endorsement, are of course based upon section 24, which declares that a forged signature is wholly inoperative, and no right to retain the bill or to give a discharge therefor, or to enforce payment thereof, can be acquired through or under that signature.
The arguments in favour of the right of the drawee or acceptor to claim a discharge by such payment arc the following :
1. The statement in section 24 referred to is expressly declared to " subject to the provisions of this Act." The statement that no right to give a discharge is also qualified by the words " unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery or the want of authority."
2. Under section 55, the first endorsee after the forged endorsement is precluded from denying to his endorsers the genuineness of the forged endorsement, and is also precluded from denying that he then had a good title.
The definition of "holder" by section 2 would include this endorsee and he would become a holder in due course within the meaning of section 55, at all events with respect to his endorsers subsequent to the forged endorsement. He could bring an action on the bill itself against the prior endorsers. In order to hold the endorsers he would have to duly present the bill for payment, and if payment were refused he would have to protest the bill for non-payment, or the endorsers would be discharged. He therefore has the right to present the bill for payment, and to protest it. If he presented it for payment and it was paid, he could not of course protest it for non-payment. The effect, therefore, of payment would be to discharge the liability of the prior endorsers.
Section 59 expressly declares that a bill is discharged by payment in due course, and that " payment in due course " means " payment to the holder in good faith and without notice that his title is defective." The holder mentioned in section 59 is the holder defined by section 2, namely. " the endorsee of the bill who is in possession of it." It would be a remarkable result if payment under such circumstances would discharge the prior endorsers, and would not discharge the drawee or acceptor who actually pays. The reference to good faith in section 59 refers to the good faith in making the payment and not to good faith of the holder. A way in which the various provisions of the statute relating to this question can be reconciled is to confine the statement in section 24, that "no right to retain the bill or give discharge therefor can be acquired through or under the forged signature," to the case of a party claiming to be the holder through the forged signature only. If he claims to be the holder through a genuine endorsement subsequent to the forgery, the other provisions of the Act mentioned would appear to give the right to present for payment and receive payment and give discharge to the drawee acceptor.
As above stated, we are not aware of any judicial decision on this very important question, but we think it probable that when it comes up for decision, the decision will be on the lines indicated.