Chase, J.
The Federal National Bank was a depositor with the plaintiff. The relation existing between a bank and a depositor being that of debtor and creditor the bank can justify a payment on the depositor’s account only upon the actual direction of the depositor.
(Critten
v.
Chemical National
Bank, 171 N. Y. 219.)
It is provided by the Negotiable Instruments Law that “ Where a signature is forged or made without authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party, against whom it is sought to enforce such right, is precluded from setting up the forgery or want of authority.” (L. 1897, ch. 612, sec. 42.)
If it was necessary for Carroll Bros, to indorse the draft before it could be paid by the plaintiff to the account of the Federal National Bank, then it was never so indorsed because Pennock’s act was a forgery and wholly inoperative. The
defendant cannot retain the money paid to it by the plaintiff upon such unindorsed draft for the very excellent reason that it had no title to the instrument upon which the money was paid.
It is further provided by the Negotiable Instruments Law as follows:
“ The instrument is payable to bearer:
“ 1. When it is expressed to be so payable; or
“2.
When it is payable to a person named therein or bearer; or
“ 3. 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; or
“ 4. When the name of the payee does not purport to be the name of any person; or
“ 5. When the only or last indorsement is an indorsement in blank.” (Section 28.)
It is claimed by the defendant that the draft was payable to a fictitious or non-existing person, and consequently writing the signature of Carroll Bros, on the back of the draft was not in legal effect a forgery, and not necessary to protect the plaintiff in its payment. The defendant also claims that the Federal National Bank was negligent in not discovering that the check of E. Y. Babcock & Co. presented to it by Fennock was forged, and that such negligence should prevent the plaintiff from recovering against the defendant in this action.
The draft was obtained from the Federal National Bank by fraud. It was a fraud perpetrated by the same person who within a short time after perpetrating it fraudulently obtained the money upon the draft from the Mellon National Bank, but the fraudulent acts so far as they concerned persons other than Pennock were wholly unrelated.' The Federal National Bank was the only one concerned in the consideration accepted by it in issuing the draft. The question in this action, therefore, is not dependent in any way upon the facts relating to the consideration for the draft or as to whether
the consideration for the draft was real or fictitious, but whether upon all the facts disclosed the draft was legally collected from the plaintiff by one other than its payee, or as ordered by it. The transaction between the plaintiff and the defendant had no legal connection with the fraud by which Pennock obtained the draft from the Federal National Bank.
We are of the opinion that the alleged negligence on the part of the Federal National Bank is immaterial in this action because no act of the Mellon National Bank or of the defendant was induced by the acts, representations or admissions of the Federal National Bank. We also think that the defendant is wrong in its contention that the draft was payable to bearer as defined in the Negotiable Instruments Law. It is only when a person making an instrument knows that he is making it payable to a fictitious or non-existing person that it can be treated as payable to bearer. '
The appellant asserts that a person to whom a draft made payable to a third person is issued, can, while he remains the owner thereof, divert it from the purpose for which it was intended, and that for the purpose of such diversion, or of returning the amount of the draft to his account in the bank, he can indorse the payee’s name thereon without being liable for the crime of forgery.
Assuming that in cases where the draft has never been delivered to the payee, or the payee has not in some way obtained a vested interest therein, the appellant is right in its claim, the assumed authority to so indorse the payee’s name thereon does not arise because the draft is payable in legal effect to bearer, but because of the fact that such an act of the owner is harmless. Such means of recalling a proposed transaction or of changing the use to be made of a draft, is sustained upon the right that a person has to do as he pleases with his own and for that reason until the rights of others in the draft have become vested the acts of the owner therewith are innocent and colorless. An irregular form of indorsement of commercial paper is frequently observed and approved when such paper is indorsed only for deposit to the credit of
the payee. Actual ownership of commercial paper and use thereof by the owner are essential to sustain irregular indorsements.
The bank in issuing the draft in question dealt with Pennock, but with Pennock as the representative of E. Y. Babcock
&
Co. and not with him individually. Pennock did not purport to act individually or to exercise' individual intention. The draft issued was the obligation of the Federal National Bank. It was payable to a real partnership. The conceded transaction, so far as it was expressed in acts or words, including the delivery of the check charging the amount thereof to E. Y. Babcock
&
Co., and the receipt of the draft in return for the check, was not with Pennock individually and he did not become the owner of the draft with any rights therein as owner.
The secret intention of a criminal contrary to his express intention and the avowed purpose for which he obtains possession of a draft does not give the criminal ownership of the draft or a legal right to change a draft payable to a real payee to one payable to bearer. There is no presumption arising from the facts proven that the name Carroll Bros, was intended as a fictitious or non-existing payee. .Such intention to be effective must necessarily arise from knowledge and exist as an affirmative fact in the mind of the drawer of a draft at the time of its delivery.
There is nothing in this case to estop the plaintiff from controverting the genuineness of the indorsement of the draft in controversy as in
Coggill
v.
American Exchange Bank
(1 N. Y. 113), where one of the members of a partnership, the makers of a draft, put it into circulation .with the forged indorsement of the payee upon it, or as in
Phillips
v.
Mercantile National Bank
(140 N. Y. 556), where the person who forged the name of the payee was the cashier of the defendant empowered to bind the bank by his checks.
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Chase, J.
The Federal National Bank was a depositor with the plaintiff. The relation existing between a bank and a depositor being that of debtor and creditor the bank can justify a payment on the depositor’s account only upon the actual direction of the depositor.
(Critten
v.
Chemical National
Bank, 171 N. Y. 219.)
It is provided by the Negotiable Instruments Law that “ Where a signature is forged or made without authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party, against whom it is sought to enforce such right, is precluded from setting up the forgery or want of authority.” (L. 1897, ch. 612, sec. 42.)
If it was necessary for Carroll Bros, to indorse the draft before it could be paid by the plaintiff to the account of the Federal National Bank, then it was never so indorsed because Pennock’s act was a forgery and wholly inoperative. The
defendant cannot retain the money paid to it by the plaintiff upon such unindorsed draft for the very excellent reason that it had no title to the instrument upon which the money was paid.
It is further provided by the Negotiable Instruments Law as follows:
“ The instrument is payable to bearer:
“ 1. When it is expressed to be so payable; or
“2.
When it is payable to a person named therein or bearer; or
“ 3. 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; or
“ 4. When the name of the payee does not purport to be the name of any person; or
“ 5. When the only or last indorsement is an indorsement in blank.” (Section 28.)
It is claimed by the defendant that the draft was payable to a fictitious or non-existing person, and consequently writing the signature of Carroll Bros, on the back of the draft was not in legal effect a forgery, and not necessary to protect the plaintiff in its payment. The defendant also claims that the Federal National Bank was negligent in not discovering that the check of E. Y. Babcock & Co. presented to it by Fennock was forged, and that such negligence should prevent the plaintiff from recovering against the defendant in this action.
The draft was obtained from the Federal National Bank by fraud. It was a fraud perpetrated by the same person who within a short time after perpetrating it fraudulently obtained the money upon the draft from the Mellon National Bank, but the fraudulent acts so far as they concerned persons other than Pennock were wholly unrelated.' The Federal National Bank was the only one concerned in the consideration accepted by it in issuing the draft. The question in this action, therefore, is not dependent in any way upon the facts relating to the consideration for the draft or as to whether
the consideration for the draft was real or fictitious, but whether upon all the facts disclosed the draft was legally collected from the plaintiff by one other than its payee, or as ordered by it. The transaction between the plaintiff and the defendant had no legal connection with the fraud by which Pennock obtained the draft from the Federal National Bank.
We are of the opinion that the alleged negligence on the part of the Federal National Bank is immaterial in this action because no act of the Mellon National Bank or of the defendant was induced by the acts, representations or admissions of the Federal National Bank. We also think that the defendant is wrong in its contention that the draft was payable to bearer as defined in the Negotiable Instruments Law. It is only when a person making an instrument knows that he is making it payable to a fictitious or non-existing person that it can be treated as payable to bearer. '
The appellant asserts that a person to whom a draft made payable to a third person is issued, can, while he remains the owner thereof, divert it from the purpose for which it was intended, and that for the purpose of such diversion, or of returning the amount of the draft to his account in the bank, he can indorse the payee’s name thereon without being liable for the crime of forgery.
Assuming that in cases where the draft has never been delivered to the payee, or the payee has not in some way obtained a vested interest therein, the appellant is right in its claim, the assumed authority to so indorse the payee’s name thereon does not arise because the draft is payable in legal effect to bearer, but because of the fact that such an act of the owner is harmless. Such means of recalling a proposed transaction or of changing the use to be made of a draft, is sustained upon the right that a person has to do as he pleases with his own and for that reason until the rights of others in the draft have become vested the acts of the owner therewith are innocent and colorless. An irregular form of indorsement of commercial paper is frequently observed and approved when such paper is indorsed only for deposit to the credit of
the payee. Actual ownership of commercial paper and use thereof by the owner are essential to sustain irregular indorsements.
The bank in issuing the draft in question dealt with Pennock, but with Pennock as the representative of E. Y. Babcock
&
Co. and not with him individually. Pennock did not purport to act individually or to exercise' individual intention. The draft issued was the obligation of the Federal National Bank. It was payable to a real partnership. The conceded transaction, so far as it was expressed in acts or words, including the delivery of the check charging the amount thereof to E. Y. Babcock
&
Co., and the receipt of the draft in return for the check, was not with Pennock individually and he did not become the owner of the draft with any rights therein as owner.
The secret intention of a criminal contrary to his express intention and the avowed purpose for which he obtains possession of a draft does not give the criminal ownership of the draft or a legal right to change a draft payable to a real payee to one payable to bearer. There is no presumption arising from the facts proven that the name Carroll Bros, was intended as a fictitious or non-existing payee. .Such intention to be effective must necessarily arise from knowledge and exist as an affirmative fact in the mind of the drawer of a draft at the time of its delivery.
There is nothing in this case to estop the plaintiff from controverting the genuineness of the indorsement of the draft in controversy as in
Coggill
v.
American Exchange Bank
(1 N. Y. 113), where one of the members of a partnership, the makers of a draft, put it into circulation .with the forged indorsement of the payee upon it, or as in
Phillips
v.
Mercantile National Bank
(140 N. Y. 556), where the person who forged the name of the payee was the cashier of the defendant empowered to bind the bank by his checks.
The legal effect of making a note or bill payable to a fictitious person was stated in the Be vised Statutes, part 2, chapter 4, title 2, section '5, as follows : “ Such notes, made
payable to the order of the maker thereof, or to the order of a fictitious person, shall, if negotiated by the maker, have the same effect, and be of the same validity, as against the maker and all persons having knowledge of the facts, as if payable to bearer.”
Prior to the enactment of the Negotiable Instruments Law the language of which makes it clear that if an instrument is to be deemed payable to bearer, although in form payable to a named person, that the intention to make the instrument payable to a fictitious or non-existing person must exist with the maker thereof, this court in
Shipman
v.
Bank of the State of New York (126
N.
Y.
318), referring to the rule stated in the Revised Statutes, said : “ We are of the opinion upon examination of the authorities cited by counsel on both sides that this rule applies only to paper put into circulation by the maker with knowledge that the name of the payee does not represent a real person. The maker’s intention is the controlling consideration which determines the character of such paper. It cannot be treated- as payable to bearer unless the maker knows the payee to be fictitious and actually intends to make the paper payable to a fictitious person.”
The court further say :
“
Bedell (the employee who signed the names of the payees) of course knew that the payees were fictitious, but he was not acting within the scope of his employment but in carrying out a scheme of fraud upon the plaintiffs, and under such circumstances his knowledge cannot be imputed to his principals.”
Selover in his work on Negotiable Instruments Law (page 70) says : 16 The doctrine that a check or bill made payable to a fictitious person is payable to bearer and negotiable without indorsement if the fictitious character of the payee was known to the parties, originated in England, and in each of the cases holding the doctrine the decision was based on the fact that the acceptor knew at the time of his acceptance that the instrument was payable to a fictitious person. If the drawer o.r maker of an instrument did not know that the payee was a fictitious.or non-existent person, and did not intend to make
the paper payable to such person, paper payable to the order of such person cannot be treated as payable to bearer, for the intention of the maker or drawer is the test.”
Bunker on Negotiable Instruments in his note to a section of the Negotiable Instruments Law of Michigan (section 11), corresponding to and the same as section 28 of the Negotiable Instruments Law in this state, compares the Bills of Exchange Act of England (section I) with the statute of Michigan, and says: “The difference between the two statutes is important. The element of knowledge is the distinguishing feature. Under the English statute the paper is payable to bearer if the payee be a fictitious or non-existing person. Under the American statute paper payable to a fictitious or non-existing person is not payable to bearer unless the maker or drawer knew that the payee was a fictitious or non-existing person. Under the English statute the fact governs; under the American statute the fact coupled with knowledge governs. Thus there has been carried into the two statutes the differences heretofore existing in the authorities.”
In Crawford’s Annotated Negotiable Instruments Law it is said in a note to section 28, referring to the case of
Shipman
v.
Bank of the State of New York (supra),
and quoting from the opinion: “ Hence if the maker or drawer supposes the payee to be an actually existing person (as for instance, where he is induced by fraud to draw the instrument to the order of a fictitious person whom he supposes to exist) the instrument will not be payable to bearer, and no person can acquire the title thereto by delivery. And where the instrument is drawn payable at a bank the bank cannot charge the same to the account of its customer, since the instrument is not in such case payable to bearer and the indorsement is a forgery.”
In Eaton and Gilbert on Commercial Paper it is said: “Under the common law a bill payable to a fictitious person or his order was neither in effect payable to the order of the drawer nor to the bearer unless it was shown that the circumstance of the payee being a fictitious person was known to
the acceptor. To show that the acceptor was aware that the payee was a fictitious person, evidence is admissible of the circumstances under which he accepted other bills payable to fictitious persons.
“The fictitiousness of the maker’s direction to pay does not depend upon identification of the name of the payee with some existing person, but upon. the intention underlying the act of the maker in inserting the name. The rule as to an instrument payable to the order of a fictitious or non-existing person applies only to paper put in circulation by the maker with knowledge that the name of the payee does not represent a real person. The maker’s intention is the controlling consideration. It cannot be treated as payable to bearer unless the maker knows the payee to be fictitious and actually intends to make the paper payable to the fictitious person.”
Daniel on negotiable Instruments, in a note to a section (section 139), in which he says that lack of knowledge of the maker of the fictitious character of the payee is not a defense against a
bona fide
holder, refers to a different rule in this state, and after calling attention to our Revised Statutes, says : “ The Court of Appeals, construing this statute, held that such paper cannot be treated as payable to bearer unless it was put in circulation by the maker with knowledge that the name of the payee does not represent a real person.”
And further, in a note to the same section, he says : “ But in Hew York by statute the maker is not bound to an indorsee even, unless he, the maker, knew of the fiction at the time of signing.”
It does not appear that the Federal Hational Bank knew Carroll Bros, was a fictitious or non-existing person, or intended that the instrument should be payable to bearer.
The judgment should be affirmed, with costs.
Cullen, Oh. J., Gray, Haight, Yann, Werner and Willard Bartlett, JJ., concur.
Judgment affirmed.