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.
Payment in counterfeit money is no payment in law and the debtor is not thereby discharged from his indebtedness though he pays it in good faith.1 The same principle applies to payment in cancelled United States Treasury notes.2 The exception to this rule is the case where a bank receives counterfeit notes which purport to be its own issue. As it is bound to know its own currency, it is bound by such payment.3 While this principle is recognized in all the books, the cases cited in its support are those in which, as indicated below, the same result might have been reached had the notes been those of another bank. In any event the creditor must give notice to the debtor within a reasonable time that the money was counterfeit, to prevent the payment from binding him.4 Even under an agreement to receive a note5 as payment, delivery of a forged instrument is no payment. The surety on the original instrument is therefore not discharged.6
1 Frontier Bank v. Morse, 22 Me. 88; 38 Am. Dec. 284; Ontario Bank v. Lightbody, 13 Wend. (N. Y.) 101; 27 Am. Dec. 179; affirming Lightbody v. Bank. 11 Wend. (N. Y.) 9; Westfall v. Braley, 10 O. S. 188; 75 Am. Dec. 509; Wainwright v. Webster, 11 Vt. 576; 34 Am. Dec. 707; Townsends v. Bank, 7 Wis. 185. " So long as they (bank notes) are in fact what they purport to be, payable on demand, common consent gives them the ordinary attributes of money. But upon the failure of the bank by which they were issued, when its doors are closed, and its inability to redeem its bills is openly avowed, they instantly lose the character of money, their circulation as currency ceases with the usage and consent upon which it rested and the notes become the mere dishonored and depreciated evidences of debt. When this change in their character tikes place, the loss must necessarily fall upon him who is the owner of them at the time; and this, too, whether he is aware or unaware of the fact. His ignorance of the fact can give him no right to throw the loss which he has already incurred upon an innocent third party." Westfall, etc., Co. v. Braley, 10 O. S. 188, 191; 75 Am. Dec. 509.
2 Corbit v. Bank, 2 Harr. (Del.) 235; 30 Am. Dec. 635; Magee v. Carmack, 13 111. 289.
3 Lowrey v. Murrell, 2 Port. (Ala.) 280; 27 Am. Dec. 651; Bayard v. Shunk, 1 W. & S. (Pa.) 92; 37 Am. Dec. 441; Ware v. Street. 2 Head. (Tenn.) 609; 75 Am. Dec. 755; Scruggs v. Gass, 8 Yerg. (Tenn.) 175; 29 Am. Dec. 114. See obiter, Young v. Adams, 6 Masa. 182.
4 Commonwealth v. Stone. 4 Met. (Mass.) 45; Hellings v. Hamilton, 4 W. & S. (Pa.) 462.
1 Jones v. Ryde. 5 Taunt. 488; Watson v. Cresap, 1 B. Mon. (Ky.) 195; 36 Am. Dec. 572; Atwood v. Cornwall, 28 Mich. 336; 15 Am. Rep. 219; s. c, 25 Mich. 142; Mar-kle v. Hatfield, 2 Johns. (N. Y.) 455; 3 Am. Dec. 446; Ware v. Street, 2 Head. (Tenn.) 609; 75 Am. Dec. 755.
2 United States v. Morgan, 11 How. (U. S.) 154. (The customs collector was here held liable to the United States for such payments received by him.)
3 United States Bank v. Bank, 10 Wheat. (U. S.) 333. In this case there is the complicating fact that the receiving bank was negligent, as examination of the notes would have shown that they bore serial numbers different from any of that denomination issued by that bank. In Gloucester Bank v. Bank, 17 Mass. 33, the additional fact existed that no notice was given of the doubtful character of the notes for fifteen days and no actual averment of forgery for fifty days.
4 Lawrenceburgh National Bank v. Stevenson, 51 Ind. 504; .Raymond v. Baar, 13 S. & R. (Pa.) 318; 15 Am. Dec. 603; McDonald v. Allen,
8 Baxt. (Tenn.) 446.
5 West Philadelphia National Bank v. Field, 143 Pa. St. 473; 24 Am. St. Rep. 562; 22 Atl. 829; Bank v. Buchanan, 87 Tenn. 32; 10 Am. St. Rep. 617; 1 L. R. A. 199;
9 S. W. 202.
6 Bank v. Buchanan, 87 Tenn. 32;
10 Am. St. Rep. 616; 1 L. R. A. 199; 7 S. W. 202.