Story Case

With a check drawn by Jonathan Latimer, for $92, Arthur Underwood went to the drawee bank, the Central Trust, and received the cash on it. The next day he received a notice from the Central Trust to the effect that the payment had been made under mistake, that Latimer had not, in fact, funds on hand at the time, and that he, Underwood, would be expected to return the money. He disregarded this notice, and suit was brought by the bank. Is Underwood liable?

Ruling Court Case. First National Bank Vs. Devenish, Volume 15 Colorado Reports, Page 229; Volume 22 American State Reports, Page 394

The First National Bank of Denver became the holder of checks, amounting to $400, drawn by one Caldwell upon Devenish, a private banker. The First National Bank sent these checks to Devenish, who lived in a distant town, Tin Cup, for collection. Devenish received the checks and forwarded to the First National Bank, a draft upon the. German National Bank of Denver. Devenish then discovered that Caldwell's account had been closed at his bank. He immediately stopped payment upon the draft drawn upon the German National Bank in favor of the First National Bank. The First National Bank now brings this action to recover the amount from Devenish.

Devenish contended that he was not liable, because the draft was sent to the First National Bank under the mistaken belief that Caldwell had money on deposit in his bank.

Mr. Reed, Chief Justice, said: "Banks are required, and for their own safety are compelled to know at all times the balance to the credit of each individual customer, and they accept and pay checks at their own risk and peril. If, from negligence or inattention to their own affairs, banks improvidently pay when the account of the customer is not in condition to warrant it, and if, by mistake, a check is paid when the drawer has no funds, the bank must look to the customer for rectification, not to the party to whom the check was paid." Judgment was given the First National Bank, for the amount of the draft.

Ruling Law. Story Case Answer

When a bank pays a check, drawn by a customer upon it, under the mistaken belief that the customer has sufficient funds on deposit to cover, or that he is solvent and will make good the overdraft, the bank has no remedy against the person to whom the money was paid. The bank is supposed, for its own safety, to know the true state of each customer's account when it cashes a check for him. If the bank does pay a check under such circumstances, its remedy is to proceed against the depositor, and not against the person to whom payment was made. In New York and Massachusetts, in such a case, the bank may recover money paid out under such circumstances, provided the person, to whom it was paid, has not changed his position. According to the general rule, the Central Trust cannot recover from Underwood, and he is entitled to keep the money. Judgment should be given for the defendant.