This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
Whether recovery of payment on a forged instrument can be had from one who has taken such instrument for value and in good faith is a question which arises not infrequently, and on which there is an unfortunate conflict of authority. Under one theory a bank is bound to know the signatures of its depositors; and if it pays a forged check, signed by the name of a depositor it cannot recover the money thus paid, if the payee has acted with reasonable prudence and in good faith.1 Thus, where A indorsed a forged check of which he was the innocent holder, to B, and B presented it at the bank and received payment, and the bank on discovering the fact of the forgery demanded repayment of B, and B complied with the demand, it was held that B had made such payment voluntarily and that he could not recover from A.2 This rule is not always placed on the ground that the bank was negligent. Sometimes the reason assigned is that between two equally innocent parties the loss must lie where it falls. Another line of cases holds that if the drawee bank is free from all negligence except that of paying the check in reliance on the indorsement of the holder, it may recover such payment.3 The right to recover is very materially affected by the negligence of either party. If the bank which forwards the forged check was negligent and could by the use of due diligence have discovered the forgery, the bank which pays such forged check may recover from the bank which forwards it.4 If, on the other hand, the drawee bank omits to give reasonably prompt notice of the fact of the forgery it cannot recover the payment even if such recovery would have been permitted otherwise.5 In jurisdictions in which the payee bank is ordinarily allowed to recover, only reasonably prompt notice is necessary.6 The right of recovery has been recognized under special circumstances. A sent a check to B on a bank, X. C, a person of almost the same name as B, obtained the check, endorsed it with his own name and deposited it with the bank Y, which forwarded it to X, but did not show that it was collecting it as agent merely. X paid Y and Y paid C. A then sued the bank X in Minnesota to recover the amount of his deposit without deducting this check. X gave notice to Y, which was located in Massachusetts, of the pendency of this action. Y did not defend and judgment was rendered against X. X then sued Y and recovered the payment. The ground of recovery was based on the theory that the judgment was conclusive against Y.7 As the bank, even if bound to know the signature of the depositor, is not charged with knowledge of the contents of all instruments executed by him, money paid out on an altered check may be recovered.8 Accordingly payment of a genuine check on a forged indorsement may be recovered.9 So if a bank, in reliance upon the representations of a person as to his identity, delivers a check to him which he indorses with the name of the person whom he represents himself to be, and delivers to A, to whom the bank pays it, the bank making the payment cannot recover from A if the representations as to the identity of the indorser are false and the indorsement is forged.10 A altered a cheek on the drawee bank, X, raising the amount and deposited it with a bank, Y, which sent it to X through the clearing house. X paid Y and Y paid A. On learning of the alteration X sued Y. It was held that no recovery could be had.11 Under any theory, no recovery can be had unless the bank making the payment can show that it has suffered a loss. If it has the means of charging such checks against the account of its depositor, it cannot maintain an action to recover such payment.12
10 Reed v. Horn, 143 Pa. St. 323; 22 Atl. 877.
1 United States Bank v. Bank, 10 Wheat. (U. S.) 333; Levy v. Bank, 4 Dall. (Pa.) 234; s. c, 1 Binn. (Pa.) 27; Chicago First National Bank v. Bank, 152 HI. 296; 43 Am. St. Rep. 247; 26 L. R. A. 289; 38 N. E. 739; First National Bank v. Bank, 107 la. 327; 44 L. R. A. 131; 77 N. W. 1045; Deposit Bank v. Bank, 90 Ky. 10; 7 L. R. A. 849; 13 S. W. 339; Commercial, etc., Bank v. Bank, 30 Md. 11; 96 Am. Dec. 554: Neal v. Cohurn, 92 Me. 139; 69 Am. St. Rep. 495; 42 Atl.
348; First National Bank v. Bank, 151 Mass. 280; 21 Am. St. Rep. 450; 24 N. E. 44; Germania Bank v. Boutell, 60 Minn. 189; 51 Am. St. Rep. 519; 27 L. R. A. 635; 62 N. W. 327; Bank v. Bank, 58 O. S. 207; 65 Am. St. Rep. 748; 41 L. R. A. 584; 50 N. E. 723. (Distinguish-ing Ellis v. Trust Co., 4 O. S. 628; 64 Am. Dec. 610, as decided under a local custom.) Moody v. Bank, 19 Tex. Civ. App. 278; 46 S. W. 660; Bank v. Bank, 10 Vt. 141; 33 Am. Dec. 188.
2Neal v. Coburn. 92 Me. 139, 69 Am. St. Rep. 495; 42 Atl. 348.
3 First National Bank v. Bank, 4 Ind. App. 355; 51 Am. St. Rep. 221; 30 N. E. 808; Corn Exchange Bank v. Bank, 91 N. Y. 73; 43 Am. Rep. 655; People's Bank v. Bank, 88 Tenn. 299; 17 Am. St. Rep. 884; 6 L. R. A. 724; 12 S. W. 716.
4 Canadian Bank v. Bingham, 30 Wash. 484; 60 L. R. A. 955; 71 Pac. 43.
5 United States v. Bank, 6 Fed. 134. 6 Schroeder v. Harvey, 75 111. 638, 7 First National Bank v. Bank, 182 Mass. 130; 94 Am. St. Rep. 637; 65 N. E. 24 (citing on the proposition that the judgment was binding on the other bank: Knickerbocker v. Wilcox, 83 Mich. 200; 21 Am. St. Rep. 595; 47 N. W. 123; and Kon-itsky v. Meyer, 49 N. Y. 571).