Jackson, Gordon

Keegan, Robert

English

University of New Brunswick: Centre for Digital Scholarship Journals

36 U .N .B . LA W  JOURNALwho will h a \c  th e benefit of his efforts, if successful, should  beat the risk of his exceeding his authority in m ailers in cid ­ental to the doing of the acts, the p erform ance of which has heen delegated to hiin .ilFor these reasons, it would appear that the bank was entitled to debit the company’s account for the amount of the cheque. Southern Cotton Company should, therefore, not rccover the amount.Robert W ebster III Law, U.N.B.Southern Methodist University Law School Case Note:The question raised by this set of facts involves interpretation of section 9(3) of the Uniform Negotiable Intruments Law, which has been adopted in all American jurisdictions. Being a codifica­tion of the common law, many involved problems of construc­tion must be left to the courts for decision.The American courts hold that an order instrument paid on a forged indorsement cannot be chargcd against the account of the drawer,1 unless the drawec-bank can prove cither that the instrument was a “bearer” instrument anci payable on present­ment,- or that the drawer is estopped to deny its validity.W hen checks are bearer instruments and transferable by delivery, indorsement of the name of a designated payee, whether forged or not, is superfluous, and may be disregarded as immater­ial.- The admission of the drawer of the “cxistcncc of the payee and his then capacity to indorse”3 docs not estop the drawer from charging the bank with paying on a forged indorsement of the named payee, unless the drawer had knowledge that the payee was fictitious and was in cffect estopped as a party to the fraud.'The drawec-bank therefore must prove that the instrument is a bearer instrument. The applicable section of the N IL is scction 9(3), which says that “the instrument is payable to bear­er, when it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so pay­able”.II. Craig v. Sam ir [1940] I D .L .R . 72, a t pp. 72-7.1, citin g Collins, M. R. inH am lyn  i>. /oliti H ouston  n  C o . [1908] I k . IV 81, at pp. 85-fi.1. U niform  N egotiable Instrum ents I.aw s. 23 ; Allan W are P ontiac v. FirstX a t’l. Hank (1941) 2 So2d 7i>; Toltnan i>. A m erica n  X a t’l. Hank (1901)22 R .I. 462. 18 A 480, .'>2 L R  A 877. 84 Am . St. R ep. 850 ; ( .r a n d  L o d geA .O .U .W . v. Slate liank.2. U n iform  N egotiable Instrum ents Law s. 30 (5U L A  457 , note 15); (1941)92 H o n . 8th . 142 p. 974. l .R \  191.') B . 815; Pittali, et al r». I.itnrood(1951 Me».). 241 SW 2d 83.3. U niform  N egotiable Instrum ents Law  s. Gl.4. 146 A L R  81(1. and casts cited.U .N .B . LA W  JOURNAL 37This section states two questions. First, was the payee fictiti­ous? Second, was this fact known to the person making it so pav- able? B y the weight of authority, an instrument drawn to the order o (  a named payee will be considered drawn to the order of a fictitious payee if the payee is cither a person unknown to the “person making it so payable” and not intended to reccivc or bene­fit from the instrument, or a person known to the “person mak­ing it so payable” to be a real person, but not intended to benefit therefrom.’In this case, the payee named in the instrument falls within the first class named above, and is clearly a “fictitious payee” within the meaning of section 9(3) of the N IL. The question remaining therefore is whether the fictitious character of the payee was known to “the person making it so payable” .On this point there is a great array of decisions, expounding various “doctrines”; reaching, for the most part, similar results. Generally, the doctrines fail into one of tnrec rationales— the “Actual Maker” test,'1 the “Nominal Maker” test,7 and a class of cases applying 110 “doctrine” but rather basing their decision on the principles of agency.8 It will reasonably appear, on close examination of the reasoning of the various approaches, that lia­bility is finally determined on agency principles.Under the “Actual Maker” rule, known as the Kentucky Rule, the words “person making it so payable” are held to refer to the person who actually drew the instrument, whether he was the nominal maker or not. The intent of this person, as to the fictitious character of the payee, determines whether the instru­ment is “bearer” in nature. In the parent case setting forth this doctrine,6 the person who actually drew the instrument was the official signing officer of the drawer. As such, his acts were the acts of the drawer, and, within the apparent scopc of his authority, binding 011 the drawer. This doctrine has been followed in a minority of American jurisdictions.Under the “Nominal Maker” doctrine, known as the Miss­ouri Rule, “the person making it so payable” refers to the “legal or ultimate maker” of the instrument. The intent of the drawer is controlling. W hile the intent of agents of the drawer, acting within the apparent scopc of their authority, is binding as the.'>. X  oil on  ¡ ’. Cit y liimk & Trust Co. (1923) 294 F . 839; St-idman v. X nrt It C a m den  T rust Co. (1939) 122 N JL  580 . 7 A2d 40«; C om . x>. ( .lo b e  In d em n ity  Co. (193«) 323 !‘a. 261 , 185 A 79«. 118 AI R 115, and rases cited .«. M u eller  k  M aitin  v. L iberty  Ins. liank (1920) 187 ky. 14, 218 SV\ 465.38 U .N .B . LAW  JOURNALintent of the drawer,1' the drawer is not bound by the acts of an employee acting outside the apparent scope of his authority. This was the holding, and the only nolding, of the Supreme Court of Missouri, in American Sash & Door Co. r. Commerce Trust Co., where the “defrauding employee had nothing to do with the execution of the checks or the delivery of them” to the payees.7W hile some courts have treated these two rules as contrary to each other, they are in fact complementary. They reduce to one rule, and its corrolary: when the agent has authority to draw an instrument on the principal, then if the agent docs draw an instru­ment to a fictitious payee, such instrument is, as to the principal, bearer paper, and a Dank paying 011 indorsement of sucn payee’s name is protected (Kentucky Rule); when the agent does not nave such autnoritv, real or apparent, and obtains the principal’s sign­ature 011 such paper through fraud, the principal being ignorant of the fictitious nature of the payee, the instrument is not payable to bearer and a bank taking such paper gets 110 title thereby (Missouri Rule).10In the third class of cases noted, reference is often made to one or both of these “doctrines”; however, the essential decision of the court turns on the principles of agency. Perhaps the clear­est example of this is the case or Goodyear Tire and Rubber Co. v. Wells Fargo Bank* In this ease the defrauding employeewas the drawer’s general manager of a branch office, who caused chccks to be issued bv the drawer’s home office on the basis of information supplied by the employee. The employee was auth­orized to, and did, sign the instruments as co-signer. After point­ing out that “the authorities establish the proposition that the drawer or maker of the check and the ‘person making it so pay­able’ can be . . . different, and that it is the knowledge of the person making it so payable that is controlling”, the California court, quoting the ease of Los Angeles lnv. Co. v. Home Savings Bank of Los A ngelesH says “it is elementary that a principal will not be charged with knowledge of an agent under such circum- stanccs (perpetration of an independent fraud on the principal); . . . .  This, of course, is very different from an agent binding his principal bv acts done within the scope of (his apparent) author­7. A m erica n  Sash a n d  D oor Co. v. C o m m erce  T ru s i Co. (1982) 332 M o. 98, 56 S\\'2<l 1031; lu ju ita h le  l .ife  A ssurance Society v. X a t ’l. Hank of C o m ­m erce  (1910) 181 S\V 1170; (i lo b e  In d em n ity  Co. j'. First X a t’l. Hank in SI. L ouis  (1939) 133 S\V2d loOO.8. (ioodxeai l ire a n d  Itlib ber  Co. i1. W ells I'atgo Hank  (1934) 1 C.al. A pp.2«! 094. 37 l’2d 183; I.os A ngeles I in'. Co. x1. H o m e  Savings Hank of LosA n geles  ( 1 9 1 9 )  180  C a l. 6 0 1 , 182 P 2 9 3 .9. R estatem en t. Agency, ss. 159, 173. 177.10. 71 M .R  822.U .N .B . LA W  JOURNAL 39ity.” Thus the California court, in holding the drawer liable on the instrument did not impute knowledge to the principal, but rather i:eld the drawer liable for the acts of its agent.There are, of course, anomalous cases following no clear application of any of these rules. Perhaps two citations from our own jurisdiction will clearly point out the confusion which has surrounded the issue. In the case of Liberty Mutual Ins. Co. v. First National Bank of Dallas,11 2nd Republic National Bank of Dallas v. Maryland Casualty Co. et al ,1“ on similar facts, the court reached a decision that the checks in question were not bear­er instruments. Each case involved false claims submitted to the home office of an insurance company by branch claims personnel, on the strength of which the company issued checks, wnich were to be delivered by the employee to the “claimants” . In the first ease the court ruled that since only the employee had knowledge of the fictitious character of the payee, the drawer was not liable on the instrument. In the second case, the same result was reach­ed on the ground that the fraudulent employee did not have authority to approve payment, only authority to deliver the checks.Both of these Texas cases would have been decided with opposite results under cither the Missouri Rule7 or under the authority of the Goodyear Tire and Rubber case. Under the bare statement of the Kentucky Rule, these two decisions seem correct. However, in both cases, the act which caused the instruments to be executed, and the act which put them into circulation, payable to fictitious payees, was one committed by the agent of the draw­er, acting within the apparent scope of his authority. Therefore, the drawers in each case should nave been held liable to the drawee banks on the instrument.®Professor Britton, in his work on Bills and Notes, has sug­gested that the American courts have led themselves into confus­ion, as to the proper understanding of the meaning of “the per­son making it so payable”, by failure to recognize the nature of the two problems raised in section 9(3) of the N IL. The first problem is to determine whether the named payee is in fact fictitious. The intent of the “person making it so payable” is properly raised in the solution of this problem. The second is whether the drawee may chargc the account of the drawer for payment on the instru­ment. The drawee may charge the account, when the person who caused the check to be issued against the drawer was an agent of the drawer, acting within the apparent scope of his authority.1311. (1951) 245 S\V 2d 237.12. (1946) 1X4 S\V 2d 49f».13. B ritto n , Bills and Notes, I 19 1943).40 IT. N .B . LA W  JOURNALAnalysis of the foregoing eases, in light of Professor Britton’s comments, will show two results. First, that the apparent conflict between jurisdictions as to the proper interpretation of section 9(3) of the N IL will be reconciled. Second, that the results readi­ed b\ the California courts’“ are based on this analysis.Sixteen states, including Missouri, have, bv legislative action, changed the wording of section 9(3) of the N fL to read: “W hen it is pavable to the order of a fictitious or non-existing person or to a living person not intended to have any interest in it and such fact was known to the person making it so payable or was known to his employee or otlier agent who supplies or causes to be inserted the name of such payee”, thereby clarifying the intent and construction of the statute, and eliminating the necessity of applying any doctrine of interpretation.14Thus as a result either of statutory change or of application to the construction of this section of the N IL of the principles of agency, the overwhelming majority of American jurisdictions have resolved the correct rule to be, that whenever an agent of the drawer is intrumental in causing a check to be issued payable to a fictitious payee, and in so doing the faithless employee was acting within tlie apparent scope of his authority, the instrument is a bearer instrument, and a bank paying on it may cliargc the account of the drawer therefor.Those states which have modified the N IL, as indicated above, have gone bcvond Britton, and beyond the California courts. If an employee, acting entirely outside the scope of his authority, real or apparent, causes a check to be issued by his em­ployer, with intent that the payee named therein shall not reccivc anv benefit therefrom, the drawer will be liable on the instrument to the drawee paving on the instrument, under the amended statute. T he drawer would not be liable to the drawee bank under the California decisions, sincc the faithless employee was not act­ing within the apparent scopc of his authority.T his modification of the N IL  is the one recommended by the American Banking Association. The effect of it is that a check, payable to a fictitious person, is payable to bearer if it is issued in the normal coursc of the drawer’s business.14. li iifo rm  N cgotialile Instrum ents l.aw s. il (.*{); !» l ’niform  I.aws Annoiateci 128; \ i i /o n a .  1 il."» I ; A labam a. 1 Ór» I ; Arkansas. I9.'>3; C alifornia. 194.'»; F lorid a. 19"»"»: G eorgia. 194"»; low a, I9."».H; M in ne­sota. I9">.H; M issouri, I94">: New M exico, 191."»; N otili C arolin a. 1949; O regon. 1949; I tali. 19-Vl; V irginia, I9">(»; West V irginia, I9."»l; W xom in g. I9"»l.U .N .B . LAW  JOURNAL. 41Under the facts of the instant case, application of any rule of interpretation or statutory modification would result in a dec­ision that the drawer cannot recover from the drawee the amount charged against the account of the drawer. Since the employee was the signing officer of the drawer, the Kentucky and Missouri rules are satisfied, as is the modified statute. And, since the act was committed within the apparent scope of the agent’s authority, the agency analysis, as set forth by Professor Britton and the California court, is satisfied. Indeed, even the anomalous jurisdic­tions, such as Texas, would concur on these facts, since the acts of a corporation’s executive officers, though a fraud on it, are binding 011 the corporation, as to third parties, if done within the scope of their apparent authority.Robert Keegan and Gordon Jackson S.M .U. Law.Comment:Although it would appear from the wording of the Bills of Exchange Act that only one problem need be resolved, that the payee be fictitious or non-existent, while the Negotiable Instru­ments Law has the further requirement that such fact be the intention of the person making the instrument so payable, this apparent difference disappears upon an application of the two statutes to a particular set of facts. In Canada, in order to ascer­tain whether a payee is fictitious, a determination must first be made of the intent of the party causing such person to be named as payee, for there is 110 other method to determine whether the payee was intended to have an interest in the instrument. I11 the United States, the existence of such intent is an express require­ment of Section 9(3) of the Negotiable Instruments Law. It would appear that in both Canada and the United States upon proof of intention that the payee be fictitious, then the instru­ment is payable to bearer.C O N ST R U C T IO N  W O R K  — N E G L IG E N C E  — LIA BIL­IT Y  O E C O N TR A C TO R S — D U T Y  O F C O N TR A C TO R  — PL A IN T IFF  A W A RE O F DANGER.'The result of the recent House of Lords decision in A. C. Billings &  Sons Ltd. v. R iden1 is that contractors interfering with the acccss to a building must use reasonable care to ensure that persons lawfully2 entering will not be injured because of the inter­ference. 'The appellant contractors while reconstructing the1. [19571 3 All K .R .I; see the com m ents by R. K. M egairy, (1957) 73 l.aw  ( ) .R c \ . 294 and 433 and T . L . M ontrose (1958) 21 M od. L . Rev. 7(>.2. T h e  lespondent was lawfully 011 the prem ises; the question of trespass­ers did not arise.

Southern Methodist University Law School case note

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Southern Methodist University Law School case note

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