#### FIRST NATIONAL BANK OF PUKWANA, Respondent, v. BRULE NATIONAL BANK OF CHAMBERLAIN, Appellant.

(168 N. W. 1054).

(File No. 3905.

Opinion filed September 3, 1918.)

1. Banks and Banking — Payee’s Endorsement “Paid” on Check, Whether “Qualified” Endorsement — Statute—Former. Opinion Modified.

Where payee bank, without paying it, endorsed its name on a check, followed hy the word “Paid,” and passed the cheek on to drawee bank, held, payee bank did not thereby warrant genuineness of the check, under Laws 1913, ¡Ch. 279, Sec. 65; since such payee was not a “qualified” indorser within meaning of said section; the check, moreover, not being payable to bearer. Former opinion (38 S. D. 396), modified.

3.Banks and. Banking — Genuineness of Check, Warranty, Endorsement, Delivery, as, Transfer of Title as Basis — Drawee, Whether “Holder,” or Transferee — Statute—Check as Voucher.

The warranty of genuineness of an instrument, by delivery or by qualified endorsement, under Laws 1913, Ch. 279, Sec. 65, is based upon transfer of title, and therefore extends only to “holders;” and a drawee of a bank check is not a transferee of title; nor does last holder’s endorsement transfer the check, but merely converts what was a check into a voucher.

3. Courts — Opinion, Words in, How Construed, re Pacts.

The words of a court, in deciding a point, must be construed in the light of the facts before it.

4. Negotiable Instruments — Check, Genuineness, Payment by Holder Without Acceptance or Certification, Endorsers, Drawer, as Basis of Credit — Holder’s Negligence, Due Care, Effect, re Estoppel — Rule.

The true rule recognizes that, in case of payment of a negotiable instrument without prior acceptance or certification, holder takes it on credit of prior endorsers, or of drawer, and not on credit of drawee; that when holder uses due care in taking a bill or check, and drawee thereafter .pays same, he may not recover from holder, when latter was without fault, or when there has been some change of position calling for equitable relief; while on the other hand, no absolute estoppel arises against drawee in holder’s favor, regardless of latter’s negligence.

5. Negotiable Instruments — Genuineness—Drawee, Payment by, Reliable on Payee’s Diligence as Warranty — Rule—Statute.

The drawee of a hill or check, in making payment, may rely upon assumption that payee used due diligence concerning genuineness of drawer’s or maker’s signature, especially where payee negotiated to a holder, thus representing that 'he had so *88■ fully satisfied himself as to identity and signature of maker ■ that he was willing to warrant in those respects, to all subsequent holders (construing Laws 1913, Ch. 279, Secs. 65, 66, known as Uniform Act.)

6. Banks and Banking — Check, Genuineness — Payee’s Endorsement as “Paid”, Without Payment — Identification, of Drawer Stranger by Stranger, Whether Reasonable Business Prudence — Rights of Drawee Payor.

Where payee hank took the check, from a stranger, without other identification than that given by another stranger; its cashier witnessing such stranger’s mark, thus .vouching for signature of maker, then endorsed the check, followed by word “Paid,” held, such payee did not use reasonable business prudence; that drawee hank, in paying the check, might rely upon those facts as thus presented by .payee.

7. Banks and Banking — Forged Check, Vouched by Payee’s Identification — Payee’s Defense of Nort-payment Till After Drawee’s Payment, Tenability — “Equity and Good Conscience.”

Where payee hank took a forged check from a stranger whose sole identification came from another stranger, held, that its defense against suit by drawee bank who had paid it, that defendant did not .pay the money to maker until after drawee had paid the check, was untenable as a ground why, in “equity and good conscience,” plaintiff should not recover.

Appeal from Circuit Court, Brule County. Hon. Frank; B. Smith, Judge.

On rehearing. Former opinion affirmed.

For former opinion; see 38 S. D. 396, 161 N. W. 616.

*Brown & Brown,*for Appellant.

*Herbert E. Hitchcock,*for Respondent.

(1) To point one of the opinion, Appellent cited:

First National Bank of Cottage Grove v. Bank of Cottage Grove, (Ore.)' 117 Pac. 293; National' Bank of Commerce v. Fanners & Merchants Bank, (Neb.) 128 N. W. 5224 State Bank of Chicago v. First National Bank of Omaha, (Neb.) 127 N. W. 244; National Bank of Commerce v. First National Bank of Coweta, (Okla.) 152 Pac. 596, E. R. A. 1916 E. 537; State Bank 'v. Cumberland1 Savings & Trust Company, 168 (N. C.) 605, E. R. *A:*1915 D. 11384 Cherokee National Bank v. Union Trust Company, (Okla.).. 125 Pac. 464; 'State National Bank of Albuquerque v. Bank of Magdalena, 157 Pac. 498; Bergstrom v, Ritz-Carlton Restaurant & Hotel 'Company, 15 'N. Y. 959, 171 Apip. Div. 776.

*89Respondent cited:

National Bank of 'Commerce vs. First National Bank of Coweta, 152 Eac. 596.

(7) To -point seven; Appellant -cited:

State Bank v. Cumberland- Savings- & Trust Company, (N. C.) 85 Southeastern 5; L-. R. A. 1915-D, page 1138-; Cherokee National Bank v. Union Trust-Company, (Okl-a.) 125 Pac. 464; Farmers & Merchants Bank v. Rutherford Bank, 115 Tenn. 64.

Respondent cited:

Farmers and Merchants Bank vs. Bank of -Rutherford, (Tenn.) 112 A. S-. R..817; Danvers B:ank vs. -Salem Bank, 151 Mass. 280, 283, 24. 24 N. E. 44, 45, 21 Am-. 'St. Rep. 450; 'Canadian Bank of Commerce vs. Bingham-, 71 Pacific 43; National-Bank of Commerce vs. Mechanics Bank, (Mo.) 127 S. W. 429.

WH'ITI-NG, P. J.

This case is before us upon rehearing; our former opinion being found in First National Bank v. Brule National Bank, 38 S. D. 396, 161 N. W. 616. Reference is made to such opinion for a statement of the material facts. We would, however, call attention to the further facts not noted' in such opinion: The -defendant indorsed the check, “Brule National Bank Paid — Sept. 9, 1913, Chamberlain, S-. D.”; while, -as a matter-of fact, it did not make payment to the drawer of said check until after plaintiff bad paid the -check.

[1, 2] This court was in error in its former -opinion in holding that sect-ion 65, c. 279, Laws 1913, was- controlling in -this -case. Such -section could have no- application, because -defendant was not a “-qualified” indors-er, nor was t-he -check -payable to bearer. The warranty, -under section 65, is based upon- the transfer of title, and -can therefore extend only to “holders,” 'and -a drawee is not a transferee of title; the 1-ast holder’s indorsement -does -not transfer the check, but -converts- -what -was a check into a voucher.

What are the 'questions in this -case? They are few and simple. (1) Does the Uniform Act (chapter 279, Laws 1913) declare the rule governing where a drawee has paid- -a forged bill o-r check? (2) -If the Uniform- Act -does not 1-ay down the rale, then should we' ado'p-t -either the absolute estoppel rule, -which some courts claim was announced in Price v. Neal, 3 Burr. 1354, -or the modified estop-pel rule actually announced in Price v. Neal, or 'shall we repudiate entirely the idea of estoppel -and adopt the- rule -an*90nounced in First Nat. Bk. v. Bk. of Wyndmere, 15 N. D. 299, 108 N. W. 546, 10 L. R. A. (N. S.) 49, 125 Am. St. Rep. 588.

There is no section of the Uniform Act that 'directly and expressly declares the effect of payment by the drawee of a forged bill or check; but there is a line of decisions (Nat. Bk. of Commerce v. Mechanics’ Am. Nat. Bk., 148 Mo. App. 1, 127 S. W. 429; Cherokee Nat. Bk. v. Union Trust Co., 33 Okl. 342, 125 Pac. 464; First Nat. Bk. v. Bk. of Cottage Grove, 59 Or. 388, 117 Pac. 293; other cases in note L. R. A. 1915A, 78, 79; and Daniel1 on Neg. Inst. § 1657, at page 1868) holding that, inasmuch as payment is greater than acceptance or certification, the greater must be held to include the lesser, and that therefore sections 62 and 185 of our Uniform Act are applicable, and estop the drawee of a check, who has paid same, exactly and1 under the same circumstances as they would estop a drawee from1 disputing a check after he had certified same. These sections read:

“Sec. 185. Where a check is certified' by the .bank on which it is drawn, the certification is equivalent to an acceptance.”

“Sec. 62. The acceptor by accepting the instrument engages that he will pay it according to the tenor of his acceptance anid admits: :

“1. The existence of the drawer, the genuineness of his signature, and his> capacity and authority to draw the instrument; and

“2. The existence of the payee and his then capacity to indorse.”

That all the incidents pertaining to acceptance or certification also pertain to payment is not true. This was recognized in Price v. Neal. In that case the drawee, Price, was seeking to recover of Neal the amount he had paid Neil on two (bills. Neal became the holder of one bill after it had been accepted iby Price, while the other bill was paid without prior acceptance. Lord Mansfield very properly said:

“But the plaintiff’s case is much stronger upon the other bill, which was not acceipted. It is not stated ‘that that bill was accepted before it Was negotiated; on' the contrary, the consideration for it was paid! by the defendant, before the plaintiff had seen it. So that the defendant took it upon 'the credit of the indorsers, not upon the credit of the plaintiff.”

*91So in the case at -bar the 'defendant b)r indorsing the check “Paid,” represented to plaintiff that it had paid .the 'check relying upon the credit it gave to the drawer of the check; while, if it had indorsed the check as for “collection,” it would have advised the drawee that i-t was giving no credit to the drawer, but relying solely upon the drawee’s acceptance. Payment, as a Ibasis for estoppel, is not greater than acceptance or certification, and the -decision in the above cases- are based on a false promise.

[3] A careful reading of the opinion in Price v. Neal clearly discloses that it gives no- support whatever to any rule of absolute estoppel flowing from *payment*of a forged bill or check by a drawee. The words of a court must be -construed' in- the light of the facts before it. There was no -claim that Neal had (been negligent. If the facts had shown him negligent, and then the court had refused recovery of the -money that had been paid; him on thqunaccepted draft, we would have in that case -support for the absolute estoppel rule. That -case simply -decided -that Neal “acted innocently and bona fide,” and that whatever “neglect there was, was on his (Price’s) side,” and that it was for that reason that Price could not recover.

[4, 5] What, then, should- be the rule? The drawee ¡asks to recover for -money had and received. If his claim -did. not rest upon a transaction relating to a negotiable instrument plaintiff could recover as for money paid under mistake, unless defendant -could show some equitable reason, such as changed condition since, and relying u-pon, payment by plaintiff. In- the Wyndtaere Case, the North Dakota court bolds that this- rule giving righ-t to recover money paid under mistake should extend to negotiable paper, and it rejects in its entirety the theory of estoppel and puts a -case -of this kind on exactly -the same basis as the ordinary case of payment under mistake. But the great weight -o-f authority, and that based on the better reasoning, hokta that the exigencies of ¡business demand a different rule in relation to negotiable -paper. What is that rule? Is it an absolute estoppel against the- drawee 'in favor of a holder, no matter 'h-o-w negligent such holder has1 been? It surely is not. The correct ru-le recognizes the -fact that, in case of payment without a prior acceptance- or certification, the holder fakes the paper upon the -credit of the prior indorsers and the -credit of the drawer, and not upon the credit of the -drawee; that the -drawee, *92in making payment, has a right to rely upon the assumption that the payee -used due diligence especially where such- payee negotiated the bill or check to a holder, thus representing that it 'had so fully satisfied itself as to the identity and signature of the maker that it was willing to. warrant as relates thereto to all' subsequent holders (sections 65 and" 66, Uniform Act). 'Such correct rule denies the drawee the right to recover when the holder was- without fault or 'when there has been some change of position Calling for equitable relief. When a holder' of a bill of exchange uses all due care in the talcing of bill or check and the d'raJwee 'thereafter pays- same, the transaction is absolutely closed — modern business could not be done on any other basis. While the correct rule -promotes the fluidity of two recognized -mediums of exchange, those mediums by which the great bulk of ‘business ’is carried on, -checks and drafts, upon the other hand it encourages and 'demands prudent business methods upon the part of those receiving such mediums of exchange. Pennington County Bk. v. First St. Bk. of Moorhead, 110 Minn. 263, 125 N. W. 119, 26 L. R. A. (N. S.) 849, 136 Am. St. Rep. 496; First Nat. Bk. v. State Bk., 22 Neb. 769, 36 N. W. 289, 3 Am. St. Rep. 294; Bk. of Williamson v. McDowell County Bk., 66 W. Va. 545, 66 S. E. 761, 36 L. R. A. (N. S.) 605; Germania Bk. v. Boutell, 60 Minn. 189, 62 N. W. 327, 27 L. R. A. 635, 51 Am. St. Rep. 519; Am. Exp. Co. v. State Nat. Bk., 27 Old. 824, 113 Pac. 711, 33 L. R. A. (N. S.) 188; Farmers’ Nat. Bk. v. Farmers, etc., 159 Ky. 141; 166 S. W. 986, L. R. A. 1915A, 77, and note.

[6] That the defendant bank did n-o-t use reasonable business prudence is clear. It took this check from a stranger without other identification than that given by another stranger; its cashier witnessed the mark of such' stranger thus- vouching for the identity and signature of the maker; and -it indorsed- the check a's “Paid,” thus further 'throwing -plaintiff- off guard. Defendant -could not but have known, when negotiating such check and' putting -it into- the •channel through which it would finally be presented to plaintiff for pajunent, that plaintiff, if it paid such check, as defendant was asking it to do, would have to rely solely upon the apparent faith and credit that defendant had placed in the drawer. From: the very circumstances of this -case -plaintiff had- to act on the facts as presented to it by defendant, and upon such facts only.

*93[7] But appellant argues 'that it so changed its 'position, after payment by plaintiff, that in “equity and1 -good ‘conscience” plaintiff should not recover — it says it did1 not pay over -any money to the forger until after plaintiff had paid the check. ‘ There would ¡be merit in such contention if defendant had indorsed the check for “collection-,” thus advising -plaintiff that it was relying on plaintiff and not -on the drawer. It stands- in court where it would have been if it had done as it represented.

For the reasons above stated, the result reached in our former opinion is affirmed.

SMÍTH 'and MdCOY, JJ., concur in results.