Story Case

Both William Hanford and Arthur Nelson had bank accounts with the Fifth Street National. One day a stranger, who had bought a seven dollar suit case in Nelson's store, asked him if he would take in payment a check drawn by Hanford on the Fifth Street National for $12.40, which he said he had received from Hanford in settlement of an account. Nelson consented, on the condition that the stranger wait until he could make sure of the validity of the check. He sent his clerk over to the bank, with his pass book, and directed that the check be deposited to his account. When no question was raised at the bank, he delivered the suit case and the change to the stranger. It was not until after the first of the next month that it was discovered that several checks forged in the name of Hanford had been passed in the town. Hanford, of course, refused to accept his statement with these checks charged against him; thereupon, the bank charged them back against the persons from whom they had been received. Nelson objected having his account charged with the check for $12.40, on the ground that his deposit, made with the very bank upon whom the check was drawn, was equivalent to a presentment for payment. The bank, admitting the rule that a payment of a forged check by the drawee bank deprives it of any recourse against the one who receives the money, still denied that Nelson was entitled to this defense or that the check had been paid to him. Nelson then brought suit to recover from the bank the amount it refused to credit to his account. Is he entitled to recover?

Ruling Court Case. Burns Vs. City Bank Of Selma, Volume 68 Alabama Reports, Page 138

Hudson, Kennedy and Company was indebted to Burns in the sum of $1,031. In payment of this debt, it gave to Burns a check upon the City Bank of Selma. On the following business day, Burns presented this check to the bank for deposit, and it was placed to his credit. At the same time, it was charged against Hudson, Kennedy and Company. On the same day, Hudson, Kennedy and Company failed, and the bank discovered that the check was an overdraft. It then refused to recognize the claim of Burns.

Burns claimed that the acceptance of the check for deposit to his credit, and the charge against the drawer, was equivalent to payment, and that, therefore, the bank was liable for this amount.

Mr. Chief Justice Brickell said: "The bank could have received the check conditionally, and have come under obligation to account to the holder of it, only in the event that on an examination of the account of the drawers, it was found they had funds to meet it; or in the event that they provided funds for its payment. Or it could have asked for time to examine the accounts, that it might determine whether it would accept and pay, or dishonor the check. It would have been within the option of the holder to have accepted or rejected either of these propositions. But, when the holder presented the check with his pass book, that the check might be entered as a deposit to his credit, it was a request for the payment of the check, and, as was in effect said in another case, there can be no distinction between a request for payment in money, and a request for payment by a transfer to the credit of the holder." Judgment was given for Burns.

Ruling Law. Story Case Answer

"When a check drawn upon one bank is presented by a holder to that same bank, and the bank unconditionally accepts it for deposit, it cannot thereafter assert that the drawer of the check has no money. It virtually constitutes a payment to the holder, who then gives it back to the bank on deposit. If the bank, in such a case, wishes to protect itself, it should notify all depositors that such checks are accepted upon condition that they are genuine, or that the maker has money in the bank sufficient to cover it. If this be done, then the holder cannot complain if checks prove worthless. Practically every bank book will be found to contain the statement, " Checks on this bank will be credited conditionally. If not found good at close of business, they will be charged back to the depositor and the latter notified."

If Nelson's bank account was subject to any contract provision similar to the above, the bank is entitled to charge his account with the amount of the check, provided it has complied with the condition and has acted with promptness in investigating the validity of the check. But if there was no such provision, then Nelson is entitled to a recovery. The check was in effect paid to him, and the money paid could not be recovered by the bank in a suit, nor may it be deducted from Nelson's account without his consent.