Opinion
Opinion delivered November 3, 1930.
1. BILLS AND NOTES — INNOCENT PURCHASER. — One who takes a negotiable note payable to order by mere delivery is not an innocent purchaser and takes subject to all equities between the original parties. 2. BILLS AND NOTES — PURCHASER IN DUE COURSE. — Where an instrument is payable to the order of the payee, indorsement is necessary to constitute the holder a purchaser in the ordinary course of business. 3. BILLS AND NOTES — UNAUTHORIZED INDORSEMENT. — A bank cashing a check with the payee's name indorsed on it by an unauthorized person, takes it subject to all equities. 4. BILLS AND NOTES — FORGED CHECKS. — The mere fact that checks were issued on blank forms prepared by defendant construction company does not imply that any one filling them out makes a prima facie case of liability against defendant.
Appeal from Crawford Circuit Court; J. O. Kincannon, Judge; reversed.
Hardin Barton, for appellant.
C. M. Wofford and Partain Agee, for appellee.
STATEMENT OF FACTS
Crawford County Bank sued Shultz Construction Company, Barnsdall Refining Company, and Bill Spradley to recover $460.70, on a check dated October 3, 1929, purporting to have been given by the construction company to the refining company, and duly indorsed to the bank. The Barnsdall Refining Company filed an answer in which it denied that the Shultz Construction Company owed it any money and denied that the check was received by it or indorsed by it. Shultz Construction Company denied liability on the check, and denied that it was indebted to the plaintiff or to Bill Spradley, who, by way of cross-complaint, asked judgment against that firm.
The record shows that the Crawford County Bank was a corporation doing business at Van Buren, in Crawford County, Arkansas, that the Barnsdall Refining Company was engaged as agent in operating a gasoline and filling station in Fort Smith, Arkansas; that the Shultz Construction Company was a partnership engaged in constructing concrete roads with its principal office in Fort Smith, Arkansas, and that Bill Spradley operated a filling station on highway No. 71 between Van Buren and Alma in Crawford County, Arkansas, during the period of time in which the transactions involved in this lawsuit were had.
In the year 1928, the construction company had two contracts on highway No. 71 in Crawford County, Arkansas, and completed two sections of concrete road under their contracts in April, 1929. They employed truck haulers to haul their concrete materials which they called batch. The truck haulers were paid by the load, and the amounts vary with the distances hauled. An employee called a "checker" was stationed on the work on the road and issued a ticket to each hauler, stating the amount due on each load. The ticket was written on a blank form prepared by the company and was signed in print "Shultz Construction Company" and then the checker wrote his name after the word "by," which was also in printing. The hauler kept the ticket and presented it to the office of the construction company where it was paid. Sometimes the haulers exchanged these tickets to grocerymen and garages for supplies, and these tickets were cashed at the office of the company when presented by the dealers. Spradley had received some of these tickets and cashed them at the office of the company on the works on highway No. 71, which is in Crawford County, Arkansas.
After the road in Crawford County was completed in April, 1929, the construction company was given a contract in Franklin County near Charleston to construct a concrete road there. The company moved its equipment to Charleston and thereafter had no hauling done in Crawford County. In order to reach Charleston from Alma, it was necessary to drive over No. 71 to Fort Smith and then go over road 22 to Charleston, a distance of approximately forty miles. Beginning in June and continuing throughout July, the construction company was engaged on the road work near Charleston, and R. J. Mahoney was checker. He had not been checker on the road work in Crawford County. The checker was furnished a supply of books of blank tickets and used his own automobile in his work. Some of the employees on the road at Charleston exchanged their tickets to dealers in that district for gasoline, on and other supplies, but the great bulk of these tickets were cashed at the office of the company.
About the first of August, 1929, Mahoney quit the employment of the construction company. He had on hand a lot of books of blank tickets in his car and left without turning them in to the company as he had been instructed to do. Some one took the blank books of tickets from his car, and he does not know what became of them. The construction company had no other work going on in June and July, 1929, except at Charleston.
According to the testimony of Mahoney, he did not sign any of the tickets which are the basis of this lawsuit. Each book contains one hundred tickets. The tickets in question were signed with pen and ink, and witness never signed them that way. He always signed them with an indelible pencil. One of the tickets had a signature that looked like his, although it is written with pen and ink, Witness never used pen and ink in signing them, and none of the tickets in evidence were made out and signed by him.
A. W. Sprinkle was bookkeeper and office manager for the construction company. He identified a package of tickets involved in this suit as received from a man representing himself to be from the Barnsdall Refining Company. He signed a check for $460.70, payable to the order of the Barnsdall Refining Company for these tickets. Shortly after this, another big batch of tickets came in, purporting to be from the Barnsdall Refining Company, and the suspicion of the witness in the matter was aroused. He gave a receipt for these tickets and then went to Fort Smith to see the Barnsdall Refining Company about it. They informed him that they had not sent any one with tickets to him, and did not claim to have any tickets purporting to have been issued by the construction company. The construction company then telegraphed the bank at Oklahoma City to stop payment on the check which had been drawn against it on the first batch of tickets.
A. W. Hall was agent for the Barnsdall Refining Company in Fort Smith at the time and had charge of sales and collections. When he would sell gasoline or make a collection, he would turn the money over to the warehouseman. Every one turned their money over to the warehouseman, and the latter alone could indorse checks or make remittances. The warehouseman would only deposit checks for collection. Spradley came by the office and asked him to indorse the $460.70 check in question. Hall told Spradley that he would have to deposit it to the credit of the Barnsdall Refining Company, and that was the only way he could handle it. He knew that Spradley owed his company some money, but did not know the amount. Spradley wanted Hall to indorse the check, so that he could get the money. Hall refused to do so, and did not give Spradley any authority to indorse the name of the company. He told Spradley that he had no authority to indorse the check and would not do so. Witness is not now with the Barnsdall Refining Company, but is working for another company in the State of Kansas.
According to the testimony of Roy Schultz, his firm did no paving in Crawford County after it finished the work on Highway No. 71 in April, 1929. Mahoney quit the services of the firm about the first of August and has not worked for it since. He has examined the tickets involved in this lawsuit, and the signature purporting to be the signature of Mahoney on them is not his signature. He is familiar with the signature of Mahoney and knew that he did not sign a single one of the tickets. Witness was on the work all the time and in a general way knew that the tickets issued to the haulers on the work were paid at the office of the company. Most of the haulers were introduced as witnesses and testified that they were paid at the office on the tickets issued to them.
R. E. Covey, cashier of the Crawford County Bank, testified that he cashed the check for $460.70 which was presented by Bill Spradley. Spradley indorsed his own name in his own handwriting on the back of it. The name "Barnsdall Refining Company" was also indorsed on it. He sent the check to the drawee bank in Oklahoma City for collection, and it was returned not paid. He did not see Spradley write the indorsement of the Barnsdall Refining Company on the check.
According to the testimony of W. P. (Bill) Spradley, he obtained the check from Frank Jack, who was working for him, and presented it to the bank himself. He sent Jack with some tickets which he had and which the Barnsdall Refining Company had received from him in payment of gasoline to the construction company at Charleston. Jack obtained the check for the tickets and gave it to him. Mr. Hall, agent of the Barnsdall Company, asked witness to take the check and cash it and pay that company what he owed it. Witness had first asked Hall, of the Barnsdall Company to take the check and cash it, and Hall replied "No," that the check would have to go to head quarters, that he had no authority to indorse it.
According to the testimony of Frank Jack, he did not tell Sprinkle that he was representing the Barnsdall Company at the time he received the check. Spradley asked him to see to cashing the check.
Other evidence will be stated or referred to in the opinion.
The jury returned a verdict for the plaintiff bank in the sum of $197.15 against the Shultz Construction Company and a verdict in favor of the cross-claimant, Bill Spradley, in the sum of $437 against the Shultz Construction Company. The Shultz Construction Company has appealed.
(after stating the facts). The first contention of appellants, Shultz Construction Company, is that the court erred in not directing a verdict in their favor. In this contention, we think they are correct. It is settled in this State, as well as elsewhere, that one who takes a negotiable note, payable to order, by delivery merely and without written assignment, is not an innocent purchaser and takes subject to all equities between the original parties. Webster v. Carter, 99 Ark. 458, 138 S.W. 1006; and Harrison v. Morgan-Curry Co., 115 Ark. 54, 170 S.W. 578.
When the instrument is payable to the order of the payee, indorsement is necessary to constitute the holder of commercial paper a purchaser in the ordinary course of business, and where he receives the paper by assignment or sale instead of indorsement, he takes it subject to all equities. In the application of this principle of commercial law in O. J. Lewis Mercantile Co. v. Harris, 101 Ark. 4, 140 S.W. 981, 37 L.R.A. (N.S.) 544, it was held that the drawee of a draft, payable to order, who takes upon a forged or unauthorized indorsement does so at his peril. The court said that it is well settled that the holder of commercial paper, payable to order, must trace his title through a genuine indorsement, and that the drawee of a draft, payable to order who takes upon a forged or unauthorized indorsement does so at his peril. Again, in the application of the principle in Schaap v. First National Bank, 137 Ark. 251, 208 S.W. 309, it was held that a bank collecting checks payable to plaintiff, which were without authority indorsed by plaintiff's collecting agent, is liable therefor to plaintiff if he was innocent of fraud or negligence, irrespective of the bank's good faith in paying the check to another than plaintiff.
This is in recognition of the general rule that a bank or other corporation, or an individual, who has obtained possession of a check upon an unauthorized or forged indorsement of the payee's signature and who collects the amount of the check from the drawee or holder of the check is liable for the proceeds thereof to the payee or other owner, notwithstanding they have been paid to the principal, from whom the check was obtained. Allen v. Mendelsohn Son, 207 Ala. 527, 93 So. 416, 31 A.L.R. 1063; Merchants' Bank v. National Capital Press, 53 App. D.C. 59, 288 F. 265, 31 A.L.R. 1066 and case note at 1068; and California Stucco Co. v. Marine National Bank, 148 Wn. 341, 268 P. 891, 67 A.L.R. 1531.
This rule of commercial law has not been changed by our Negotiable Instruments Act. Section 7796 of Crawford Moses' Digest, provides that an instrument is negotiated when it is transferred from one person to an other in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder completed by delivery. Section 7797 provides that the indorsement must be written on the instrument itself. Section 7825 provides that every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument is defective, the burden is on the holder to prove that he or some other person under whom he claims acquired the title is holder in due course. Section 49 provides that when the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferrer had therein, etc.
In the present case, the undisputed evidence shows that the check was cashed by the plaintiff and was not indorsed by the Barnsdall Refining Company to the order of which it was drawn by the Shultz Construction Company. Hall testified in positive terms that he did not indorse it and had no authority to do so. Spradley testified that Hall did not indorse it for the Barnsdall Company, and that he indorsed it for that company. He admitted that Hall told him that he had no authority to indorse it. If Hall did not indorse it and had no authority to do so, he could not confer such authority upon Spradley. The cashier of the bank says that Spradley indorsed it in his presence before he cashed it. He also said that it was purported to be indorsed by the Barnsdall Refining Company, and if the cashier had made a close inspection of that indorsement, he would have seen that it was in the same handwriting as the indorsement of his own name by Spradley. Therefore the undisputed evidence shows that the bank cashed the check with the indorsement of the payee on it by a person who was not authorized to indorse it. In this view of the case, the bank took the check without the indorsement of the payee on it, and thereby took it subject to all equities. The undisputed evidence shows that the Barnsdall Refining Company does not claim that the Shultz Construction Company owes it anything or that it authorized the check to be drawn in its favor. The Barnsdall Refining Company does not claim that the construction company owes it the amount of the check or that it is entitled to it. Hence there is no liability on the part of the defendant construction company to an action on the check.
This brings us to a consideration of whether there would be any liability on the tickets which are purported to have been given haulers to haul batch on the road work near Charleston in Franklin County, Arkansas. We are of the opinion that the undisputed evidence shows that these checks were not issued by the Shultz Construction Company or by any one for it. Mahoney testified positively that he did not issue any of the checks. He examined them all and said that the signature which purported to be his own was not signed by him nor was any one else authorized to sign them for him. Roy Shultz, one of the defendants, testified that he was on the work at all times and knew in a general way that most of the tickets which had been issued to haulers on the work had been cashed at the branch office of the company at Charleston. Most of the haulers were witnesses in the case and testified that they cashed their tickets at the office of the company. Roy Shultz also testified that he was familiar with the signature of Mahoney and that the signature in question was not that of Mahoney. Mahoney said that he signed the tickets with an indelible pencil, and that the tickets examined by him had been signed in pen and ink. Thus it will be seen that the undisputed evidence shows that the tickets in question were not issued by the defendants.
The mere fact that the tickets were issued on the blank forms prepared by the defendants does not show that they were issued by authority of the defendants. All banks prepare printed forms to be used in their business, but these blanks are to be filled out and used by the customer. The mere fact that a company has blank forms for use in its business does not imply that any one who fills them out makes a prima facie case of his right to do so. The undisputed evidence shows that the tickets in question were signed by some one who was not authorized to do so, and it is immaterial, for the purposes of this case, to discuss or consider who that person might have been. It is sufficient to say that the undisputed evidence shows that it was not done by an agent of the Shultz Construction Company or by any one authorized by them to issue them.
It follows that the .judgment must be reversed, and, inasmuch as the case seems to have been fully developed, the complaint will be dismissed here.