Kohn v. Watkins

The opinion of the court was delivered by Horton, C. J.:

Upon the record of this case two different questions are presented for our decision. The first is, whether a draft or bill of exchange payable to) a real person known at the time to exist, and present to the mind of the drawer when-he made it, as the party to whose order it is to be paid, must bear the genuine indorsement of such payee in order that a bona fide indorsee may recover thereon, when such bill has-been drawn without the knowledge or consent of the person named therein as payee, through the false representations of a party forging the indorsement, who obtains it from the drawer by fraud and without consideration? Second, if a drawer be induced by the fraudulent representations of a party seeking to defraud him, to make a draft or bill of exchange payable to a fictitious person, not knowing the payee to be fictitious when he makes the bill and intending that such bill *697 shall be payable to a real person, may the bona fide holder thereof recover on it against a drawer as upon a bill payable to a fictitious payee?

The first inquiry arises upon the findings of the trial court in relation to the bill payable to the order of Michael A. Becker. It appears that he was a former resident of 1. Bill of ex-able torea!* doraemenT; recoveiy. Kingman county, and therefore a person in esse; that J r , name was forged to an application transmitted to Watkins by R. G. McLain without the knowledge or consent of Becker, asking for a loan of money upon premises purporting to be situated in Kingman county. It further appears that the defendant accepted the application transmitted by McLain, believing it to be genuine, and undertook to loan thereon the sum of $400, less commissions, and sent McLain a blank note and mortgage together with the draft; that McLain forged the name of Becker upon the draft, indorsed thereon his own name, and negotiated the same, and received from the plaintiffs the money therefor. The plaintiffs received the draft in the usual course of trade, and paid full value. It is argued by counsel for plaintiffs, that as to this draft Becker is to be deemed a fictitious person, because he had no knowledge of the draft, and no interest or concern in it. We do not think the position sound. The statute prescribes that to make a bill of exchange drawn payable to order negotiable, it must contain the indorsement of the person therein named as the payee. (Comp. Laws 1879, ch. 14, §1.) And we suppose that counsel for defendant will concede, as a general rule, that the plaintiffs could not recover as the indorsees of the note without proving the indorsement of the payee. Now while the authorities hold that when the drawer or maker of a bill of exchange knows that the payee is a fictitious person at the time he makes the draft, that a bona fide holder may recover on it against him as upon a bill payable to bearer; and, while some of the authorities hold that it will be no defense against a bona fide holder for the maker or drawer to set up that he did not know the payee to be fictitious, yet' none of these *698 authorities sustain the doctrine that if the payee be a real person, and such person was present to the mind of the maker or drawer when he made the draft as the party to whose order it is to be paid, a recovery can be had thereon without the genuine indorsement of the payee upon the mere indorsement of the party who induced the drawer to make the bill by fraudulent representations. Nor can such bill be considered as one running to a fictitious payee, and as if drawn payable to bearer. If the principle contended for by counsel be adopted, it would be wholly immaterial whether the indorsement is genuine or not, so far as to give to the instrument the character of negotiable paper when the indorser himself is not actually sued. For it would always be open to the dilemma, if he is a party, it is a genuine indorsement; if he is not, he is a fictitious payee and no indorsement is necessary. (Dana v. Underwood, 19 Pick. 99 ; Rogers v. Ware, 2 Neb. 29 .) In our opinion, the indorsement on the draft to Becker is a clear forgery, and the holders, however innocent, cannot recover from the drawer.

The second inquiry presents more difficulty. No such persons as Henry Greer or Geo. W. Cobb, the payees mentioned 2 Bm payable pl/ee^inyaiii defense. *n 0I^ drafts, resided in Kingman county, or owned land as purported by the applications transmitted by McLain. These payees are fictitious. The finding upon this matter is, that these applications (for loans) are wholly false and fradulent, and were manufactured by McLain with the design and for the purpose of obtaining money thereon fraudulently. In the draft to Becker, a real person was inserted as payee at the instance of McLain; but in the drafts to Greer and Cobb, fictitious names were transmitted by McLain, and such names adopted by the drawer from the applications so received by him from McLain; and these drafts, therefore, are not payable to persons in esse. Although the defendant made the bills in ignorance of the fact that these parties named as payees had no existence, yet, taking all the circumstances of the transaction together, we think the drafts to Greer and Cobb are controlled *699 by the line of decisions respecting bills and notes made payable to fictitious payees. Daniel on Negotiable Instruments, § 139, says:

“In the case of a note payable to a fictitious person, it appears to be well settled that any bona fide holder may recover on it against the maker as upon a note payable to bearer. It will be no defense against such bona fide holder for the maker to set up that he did not know the payee to be fictitious. By making it payable to such person he avers his existence, and he is estopped, as against the holder ignorant of the contrary, to assert the fiction.”

The authority to sustain the rule announced is, Lane v. Krekle, 22 Iowa, 399 . This authority, so far as the actual points necessary to have been decided in that case, hardly goes so far as the text of the author, because the note in that action was made payable to bearer, and Dillon, J., remarks at the commencement of the opinion, “That this fact relieves the case of some difficulties that would arise were it payable to the person named, or order.” Yet that learned judge, in the opinion, presents a strong argument in support of the proposition stated by Daniel. He says:

“ Upon reason and principle we are clear that, if the plaintiff is a bona fide holder for value and without notice, the fact that the note is made payable to a fictitious person, is no defense. In such case, the defendant would be estopped, as against the plaintiff, from setting up the fact. It was the defendant who made the note. By making it payable, as he did, he affirmed the existence of such a person as the payee therein named; and he should not, against a person ignorant of that fact — one who may reasonably be presumed to have acted upon the faith of the fact thus represented — be allowed to assert the contrary. This principle of estoppel in pais has a very extended and just application in the law of bills and notes, the doctrines of which are designed to give credit and circulation to negotiable paper, and to that end throw its protection around the honest and fair holders thereof. In respect to such a holder, the maker is bound to know that the payee is a real person, or thereafter hold his peace.”

In the case of Phillips v. Im Thurn, 114 Eng. C. L. 694, the defense was that the payee was a fictitious person, in *700 ignorance of which fact the drawer drew the bill. It was decided by the court that since the drawer would be estopped to set up the fact that the payee was a fictitious name, the like estoppel would apply to an acceptor for the honor of the bill. In Forbes v. Espy, 21 Ohio St. 474 , the defendants drew upon their correspondents in New York city in favor of Cochran, Holmes & Co., and by them indorsed to Charles Clark (a fictitious name assumed by one William Mara), and in that name indorsed in blank. Forbes & King became the bona fide holders of the draft. It was presented, payment refused by previous directions of the defendants, protested, and due notice given to the defendants. Mr. Justice Mcllvaine, speaking for the court, says that the defendants were estopped from denying plaintiffs’ title. In Chalmers’ late Digest of the Laws of Bills of Exchange, p. 144, the law is thus stated : “B., at the request of X., makes a note payable to C.’s order. C. is a fictitious person, but B. does not know this. X. indorses the note in C.’s name, and it is negotiated to D., a bona fide holder for value, without notice. D. can sue B. Cooper v. Mayer (1830), 10 B. &. C. 468; Beeman v. Duck (1843), 11 M. &. W. 251; Schultz v. Astley (1836), 2 Bing. (N. C.) 544.”

Passing from these cases, and the authorities therein cited, to the reasons for these two drafts being held as payable to fictitious payees, we add, that of course if Watkins had not intended that such payees should become parties to the transaction, or, in other words, had knowledge of their non-existence, there could be no question as to error in the judgment of the court below. (1 Parsons on Bills, 32, 560, 591, 592, and notes; 2 Parsons on Bills, 40, 50; Story on Bills, §§ 56, 200; 4 E. D. Smith, 83.) Ought the defendant, who made the bills in ignorance of the fact that the persons named as payees are fictitious, and thus parted with them to a correspondent, be permitted to aver and prove this as against the innocent holders for value? Either plaintiffs or defendant must lose in this transaction. Watkins transmitted these drafts to his correspondent McLain, and McLain was thereby *701 enabled to fraudulently put them in circulation. If the payees had been known to defendant as fictitious, they could have been treated by McLain as well as the plaintiffs, as bills payable to bearer. Now when a drawer issues a bill to a fictitious payee, although ignorant of that fact at the time, and parts with the possession thereof, ought he in fairness and j ustice to be allowed to say that'such bill is void ? “ Where one of two innocent parties must suffer from the wrongful or tortious acts of a third party, the law casts the burden or loss upon him by whose act, omission or negligence such third party was enabled to commit the wrong which occasions the loss.” (Bank v. Rld. Co., 20 Kas. 520 .) While the finding is, that the defendant was not negligent in making and sending these drafts, and that McLain was not the agent of the defendant in these transactions, it fully appears from the other findings that the drafts were sent to McLain, and that only for the act and conduct of the defendant, induced by the wrongful acts of McLain, these bills would not have been issued and sent forth as commercial paper. To some extent, it must be conceded, defendant, by his conduct as to these bills, placed himself in the hands of his correspondent. For instance, if Greer and Cobb had been in existence, and McLain had passed over to them these drafts without taking back any note or mortgage, it will not be questioned that after Greer and Cobb had indorsed and negotiated them to innocent holders, the defendant could not set up the fraud of these parties as any defense. In this way, if such parties were insolvent, the defendant would have been also absolutely defrauded of his money. So we think that, having relied upon the applications received from McLain for the names of the payees in the drafts issued by him, and two of the payees being fictitious, and then having transmitted these drafts to McLain, and thus given him the opportunity to put them in circulation, the defendant is not now in a condition to claim that the drafts are void, and to set up as a defense that he did not know such payees to be fictitious. He acted upon the information derived from McLain; he is bound by *702 McLain’s knowledge, and must be conclusively presumed, as against the innocent holders for value, to have known that these two drafts are payable to fictitious payees. He can no more set up the fraud of McLain as to these two drafts, than he can the fraud of Greer and Cobb, had there been such persons actually existing in Kingman county, and they had obtained these drafts from McLain without complying with the request of the drawer as to the execution of the notes and mortgages, and then indorsed and negotiated them to innocent holders.

Counsel for defendant refer to cases making the indorsement by McLain upon the bills at the time he delivered them to plaintiffs a forgery. Even if this be so, we do not think it prevents the recovery by plaintiffs, because the principle of estoppel in pais is to be applied to the defendant, and as between the plaintiffs and the defendant these drafts are to be treated as if drawn payable to bearer. The case will be remanded, with directions for the court below to render judgment upon the findings of fact for plaintiffs upon the drafts payable to Greer and Cobb, and judgment for the defendant upon the draft payable to Becker.

All the Justices concurring.