This section of the book is from the "Canadian Banking Practice" book, by John T. P. Knight.
Question 291.— Bank "A" deposits a cheque through the clearing house against Bank "B." The cheque bears several endorsements, one being by power of attorney. There are funds to meet the cheque. A month or so after the clearing Bank "B " finds (1) that the power of attorney is not legal, or (2) that one of the endorsements is a forgery. Bank " B " asks Bank "A" to take back the cheque, and Bank "A" replies that under the rules of the clearing house the demand should have been made before 12.30 on the day of clearing the cheque.
The cheque bore the endorsement of the clearing bank as follows: "The Bank of ------, Montreal," and not the stamp " prior endorsements guaranteed, etc." Which bank loses ? Is a guarantee of such endorsements necessary ?
Answer.—The rule of the clearing house respecting the return of items before 12.30 has no bearing on a case of this kind. The point involved is simply this: What is the position of a bank which, after the lapse of a month, discovers that one of the endorsements on a cheque, paid by it in ordinary course to another bank, is forged or unauthorized ?
The answer to this is that, under the Amendment to the Bills of Exchange Act, passed in 1897, the bank which received the money under these circumstances is bound to repay it, providing notice is given in accordance with the terms of the Act.
A guarantee of such an endorsement is not needed to establish this right, and the " Conventions and Rules" have no special bearing on the question, except to this extent, that by Rule 6 the stamp of the depositing bank is declared to be the endorsement of the bank. Under the amendment referred to the money may be recovered from the party to whom it was paid, or from an endorser who has endorsed subsequent to the defective endorsement, so that the bank receiving the money in this case would be liable on both grounds.