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.
If the person to whom the money is paid by mistake receives it in good faith and without knowledge of the mistake under which it is paid, he cannot be compelled to repay it unless he can be placed in statu quo.1 If he has paid the money over to those who, as far as he is concerned are entitled to it2 he cannot be compelled to refund. If he has otherwise altered his position in reliance on such payment he is not liable therefor.3 Thus where A, a mortgagor, believes that certain realty which A and B, the mortgagee, intended to include under the mortgage, is covered thereby, and in that belief A pays money to B
7 Krumbhaar v. Yewdall, 153 Pa. St. 476; 26 Atl. 219. In this case the mortgagee had subsequently altered his position, on the assumption that there were no assessment liens upon such property, and he could not be placed in statu quo. The court, however, rest their opinion on the ground that the mortgagee took the payment in good faith, and had done nothing to mislead the sheriff.
8McCardell v. Miller, 22 R. I. 96; 46 Atl. 184.
1 Welch v. Goodwin, 123 Mass. 71; 25 Am. Rep. 24: Langevin v. St.
Paul, 49 Minn. 189; 15 L. R. A. 766; 51 X. W. 817; Behring v. Som-erville. 63 N. J. L. 568; 49 L. R. A. 578; 44 Atl. 641; Krumbhaar v. Yewdall, 153 Pa. St. 476; 26 Atl. 219; Richley v. Clark. 11 Utah 467; 40 Pac. 717.
2 Langevin v. St. Paul. 49 Minn. 189; 15 L. R. A. 766; 51 X. W. 817.
3 Krumbhaar v. Yewdall. 153 Pa. St. 476; 26 Atl. 219. (In this case defendant was held not liable, though his immunity was placed on other grounds.) to secure a release of such realty from such mortgage, and subsequently in a foreclosure suit such payment is credited on the debt and B's rights are fixed by decree, A cannot thereafter recover from B.4 The opinion of the majority was based on the theory that in such cases the more negligent of the two should suffer. One judge dissented for the reason that B knew of such mistake before the decree was rendered, but still allowed such payment to be credited on his debt. Thus A, the owner of a note and mortgage assigned it to B by assignment of record, but kept the mortgage. Subsequently A assigned it again to C, who had no actual notice of the assignment to B. X, the mortgagor, paid C's interest in the mortgage to C. Subsequently X was obliged to pay the entire debt to B. X then sued C to recover the amount paid to C, but it was held that X could not recover.5 The rule that a party who is guilty of negligence in not ascertaining facts and so makes a payment under a mistake of fact cannot recover6 applies with the greatest force where he has by his negligence misled the adversary party, who has altered his position and cannot be placed in statu quo.7 Thus A was the agent of B, the railroad company. X was A's cashier, and had worked in that capacity for A's predecessor. The rules of the railroad required prompt settlement each month of all money received for freight. X was an embezzler when A entered on his employment; but A allowed. X to neglect the rule requiring prompt payment and to transmit money, really received as cash on recent freight accounts, as payments on older accounts. X's defalcation was thus concealed for a time. When it was discovered, the railroad company claimed that the shortage had arisen since A's employment began; and A, believing such claim, paid X's shortage. The delay in discovering the shortage caused the release of a surety on X's bond, by lapse of time. It was held that A, on learning that X's shortage was created before A's employment began, could not recover the payment from the railroad.8
4Richley v. Clark, 11 Utah 467; 40 Pac. 717.
5Behring v. Somerville, 63 N. J. L. 568; 49 L. R. A. 578; 44 Atl. 641. C in reliance on X's payment had released the note and mortgage which he was holding as collateral.)
6 See Sec. 825.
7Fegan v. Ry., 9 N. D. 30; 81 X. W. 39.