#### SOUTHWEST NAT. BANK OF DALLAS v. UNDERWOOD et al.

No. 4918.

Supreme Court of Texas.

Feb. 18, 1931.

Touchstone, -Wight, Gormley & Price, of Dallas, for plaintiff in error.

Adams & Harrell, of Dallas, for defendants in error.

RYAN, C.

H. F. Underwood and W. L. Wood, a-partnership, instituted this suit in the district court of Dallas county, to recover from the Southwest National Bank of Dallas the sum of $3,149.83, with interest at the legal rate from April 1, 1924, deposited by then1 with the bank and by it paid out on forged checks.

The petition charges negligence on the part of the bank, its officers, agents, and employees, in failing to discover said forgeries ■before paying the forged cheeks, and that the losses to plaintiffs, because of the bank’s payment thereof, were due to and directly caused by such negligence.

The bank specially pleaded that the checks were forged by one Andre, plaintiff’s employee, who was in charge of their office, in possession of their books and passbooks, with authority to make deposits, receive' their passbook, monthly statements, and canceled checks from the bank and receipt for same in plaintiffs’ name; that said Andre as plaintiffs’ agent did so receive and, receipt for said statements and canceled checks with their knowledge and consent and by their express authority, all of which led the bank to believe that Andre was their duly authorized agent and representative.

It was further specially pleaded that, if certain sums of money were improperly paid out, it was plaintiffs’ duty to so report to the bank, and, because of their failure to do so, the bank was unable to protect itself against said forgeries, which it would have done had plaintiffs examined such statements within the reasonable time prescribed by the bank’s rules, wherefore plaintiffs are estop-ped to recover the amount of such checks.

The trial court sustained exceptions to that portion of the bank’s answer pleading-negligence and estoppel; the Court of Civil Appeals held that the pleading in question presented a valid defense, and that the trial court erred in sustaining such exceptions, but concluded that, in view of certain facts found by the jury, in their opinion, decisive of the controversy, fhe error was harmless, and this without regard to the issues sought to be presented in the pleading.

The evidence shows that every month, beginning with the statement dated December 31, 1923, and ending with that dated March 31, 1924, Andre called for and obtained the bank’s monthly statement of account and canceled checks, and signed receipts therefor in the name of “H. F. Underwood & Company, by L. C. Andre”; he then withdrew *142Hie forged checks and placed the others in a letter file in their office; ■ a bank statement accompanied each group of checks.

The jury found, in answer to special issues submitted, that during the period from December 1, 1923, to and including March 31, 1924, the bank paid out $3,149.83 upon checks not authorized by the plaintiffs, Underwood *&*Co.; that the bank, its officers, agents, and employees, were negligent in failing to discover that said cheeks were unauthorized by the plaintiffs, and that plaintiffs first learned during April, 1924, that the bank had made such unauthorized charges.

The jury further found that the plaintiffs were negligent in failing to discover, prior to the time that they did so discover, that the bank had charged said unauthorized checks to their account; also that it was a rule or custom of the banks in Dallas, including the defendant bank, to deliver statements of their depositors’ accounts to certain employees of said depositors as might call for such statements, but plaintiffs had no actual knowledge of such rule or custom, and had no knowledge of such facts and circumstances as would put men' of reasonable business prudence on inquiry or notice as to the existence of such rule or custom.

The jury further found that the bank’s statements of December, 1923, January and February, 1924, delivered to Andre by the bank, were placed in the files of plaintiffs in their office immediately after they were so delivered, and the failure of plaintiffs to examine said statements directly contributed to the payment by the bank of the checks in controversy.'

The trial court, on such findings, rendered judgment for the plaintiffs Underwood & Co., which was affirmed on appeal by the Court of Civil Appeal^ for the Fifth Supreme Judicial District. 295 S. W. 253.

The bank concedes its liability to the amount of forged checks paid by it until December 31, 1923, but denies liability for any forged checks drawn in the depositors’ name and paid by it after that date, on the ground that it was the duty of Underwood & Co. to examine the returned checks and statements rendered on December 31, 1923, and monthly thereafter, within a reasonable time, and notify the bank, if they questioned the signature, or the authority of Andre to have drawn the checks in question, or the correctness of the account, failure to do which caused the bank to conclude that such checks were authorized, were properly drawn, and had &e depositors’ approval, and such failure was negligence and the proximate and direct cause of the bank having paid such cheeks. The bank therefore contends that (he depositors are estopped from now questioning such payments made after December 31, 1923!

The defendants in error contend that, as the bank’s defense or claim against them as depositors is based on their negligence, they may defeat that claim by showing that the bank was also guilty of negligence; that is,.by showing that the bank was negligent in honoring the questioned checks, in the first instance, and before, the depositors’ negligence in failing to examine the returned checks and statements occurred.

A bank is bound to know the signatures of its customers and cannot charge the amount of forged checks paid ,by it against the account of the depositor whose name was forged unless such payments are properly attributable to the negligence or other fault of the depositor which misled the bank into paying such forged checks. *7*O. J. pp. 683, 688.

Where the bank is negligent in payment of forged checks, it will not be excused merely by reason of the fact that negligence is also1 attributable to the depositor, unless the depositor’s negligence is shown to have been the proximate cause of the conduct of the bank in paying such checks and of the resultant injury to it by reason thereof.

The modern rule is thus stated by the author of. Morse on Banks and Banking (5th Ed.) § 466:

> “The point in issue has . sometimes been said to be that of negligence. The drawee who has paid upon the forged signature is held to bear the loss, because he has been negligent in failing to recognize that the hand writing is not that of his customer.

> “But it follows obviously that if the payee, holder, or presenter of the forged paper has himself been in default, if he has himself been guilty of a negligence prior to that of the banker,, or if, by any act of his own he has at all contributed to induce the banker’s negligence, then he may lose his right to east the loss upon the banker.”

The bank is liable in any event, for the forged checks paid by it prior to the statement (with canceled cheeks) of date December 31, 1923. The jury found that the plaintiffs below (Underwood & Co.) were negligent in failing to discover prior to April, 1924, that the bank had charged unauthorized checks to their account, that the statements of December, 1923, January and February, 1924, were placed in their files immediately after they were delivered to Andre, and that their failure to examine these statements directly contributed to the payment by the bank “of any or all of said checks in controversy” ; the jury also found that the bank, its officers, agents, and employees, were negligent in failing to discover that unauthorized checks had been paid by it, but this finding *143is not limited to the period of time after December 31, 1923, but includes all such unauthorized checks, including those paid prior to that date.

If the bank’s officers, before paying forged or altered checks, could by proper care and skill have detected the forgeries, then it cannot receive a credit for the amount of these cheeks, even if the depositor omitted -all examination of his account. Leather Manufacturers’ Nat. Bank v. Morgan, 117 U. S. 96, 6 S. Ct. 657, 29 L. Ed. 811; 3 R.C. L. p. 539.

The depositor’s negligence is immaterial unless it is of a kind that directly and proximately affects the conduct of the bank in the performance of its duties. Jordan Marsh Co. v. Nat. Shawmut Bank, 201 Mass. 397, 87 N. E. 740, 22 L. R. A. (N. S.) 250.

In Weinstein v. National Bank of Jefferson, 69 Tex. 38, 6 S. W. 171, 174, 5 Am. St. Rep. 23, the facts were -that appellant, a depositor in the bank, was absent during the period of the transactions involved in that suit, from December, 1885, to August, 1886, but his business was in charge of his brother, A. Weinstein, as his agent and attorney in fact. On February 27, 1886, and also on June 12, 1886, the cashier of the bank balanced Weinstein’s passbook, and returned all checks which had been paid by the bank up to those dates respectively. In August, 1886, A. Weinstein discovered or claimed to have discovered that a number of checks which had been paid by the bank and charged to his account had been forged. The checks were embraced in the accounts balanced in the passbook and were returned with the passbook when balanced on the dates above named. The bank pleaded a general denial and also, in substance, that plaintiff’s agent having at the dates named received the passbook and checks, and failed to use due diligence to detect and denounce the forgeries, plaintiff was estopped from questioning the correctness of the account. By trial amendment, the hank alleged that, by reason of the negligence and failure to examine and report any errors or forgeries therein, it was debarred the right and opportunity of protecting itself; and, further, that, if the first account had been examined and the forgeries reported, the bank would not have paid the other cheeks alleged to have been forged. A judgment for the bank was affirmed; the court held that a bank is not liable to a depositor for money paid out by it on forged checks if the depositor after receiving a statement of his account, by which he is enabled to ascertain the forgery, neglects to inform the bank thereof in a reasonable time, and thereby if loses the opportunity of recovering the money which it could have secured if promptly informed, it being the duty of a depositor to know whether his account with a bank is correct or not and promptly to report a forgery when detected,- and, should he negligently fail to make the examination and consequent discovery (when he could have discovered it), it is as if he had expressly admitted the genuineness of the checks, and he will not be permitted to deny the fact, provided the bank be prejudiced by his failure. It was further held that an estoppel may be created, not only when the party sought to be concluded knows the material facts he is charged with having represented or concealed, but also when he is in such position that he ought to have known them, so that knowledge will be imputed to him.

Judge Gaines, who wrote the opinion in that case, cited Leather Manufacturers’ Bank v. Morgan, 117 U. S. 96, 6 S. Ct. 657, 29 L. Ed. 811, as sustaining the above views, but does not go to the length of holding that the law would presume that the bank was prejudiced merely by the negligence of the depositor in failing to detect and discover the forgery. Said he: “We are not prepared to say whether such a deduction may be legitimately drawn from it [the opinion in that case] or not; hut, if so, we do not wish to be understood as assenting to that doctrine. We think that is a matter for the jury under appropriate instructions from the court.”

In Eifth National Bank of San Antonio v. Iron City National Bank of Llano, 92 Tex. 436, 49 S. W. 368, the facts were that one Richardson, cashier of the Llano Bank, directed the San Antonio bank to charge the former bank with the amount of two notes owing ■ by Richardson to the latter bank, which was done. At the end of the month, as was shown to be customary among banks, the San Antonio -bank sent the Llano bank a detailed statement of the account between them for the month, as it had done at the end of the previous month, among the items of which appeared the said charge as having been made in payment of Richard-, son’s notes. This statement showed a balance due the Llano bank, which it drew out-a few days afterwards. Subsequently, .the Llano bank brought suit against the San An-; tonio bank to recover such amount, on the ground that Richardson had no authority to direct the application thereof to the payment of his individual notes. The San Antonio bank pleaded that the Llano bank was estopped from denying such authority of its cashier.

' The statement sent as aforesaid was found months afterwards in the vaults of the Llano bank where such papers were usually kept by it, and it had thereon the “O. K.” of its bookkeeper and certain figures by him showing the balance in the San Antonio • bank, which was drawn out as aforesaid.

*144Judge Denman said in the opinion in that ease: “From these facts the jury might have found that the statement was received by the Llano bank a few days after it was sent. The rule of law is well settled that it became its .duty to examine same within a reasonable time, and notify the San Antonio bank if it questioned the authority of Richardson to have said notes charged to its account, as It appeared from the face of said statement had been done; and that its failure so to do will estop it from denying such authority if such failure has operated to the prejudice of the San Antonio Bank.”

It was conceded that no notice was given until the suit was filed after Richardson had been indicted and became a fugitive from justice, but the opinion, continuing, says that, had the notice been promptly given when the statement was received, the San Antonio bank might have been able (1) 1⁄80 show by Richardson that he had the proper authority, or (2) to have by legal proceedings or moral suasion in some measure protected itself against loss.

So here, had the depositor within a reasonable time examined the returned statements and as a result of such examination discovered the forgeries and notified the bank, it could have protected itself, at least to the extent of the future forgeries. Calvin Coal Co. v. Bank (Tex. Civ. App.) 286 S. W. 901.

The majority of the suits brought by depositors to recover payments made on forged or fraudulently altered checks result from the crimes of some trusted employee of the depositor, and usually the court has to deal with a series of successful forgeries. In such eases, after his passbook has been balanced and returned to a depositor with any of the forged or fraudulently altered checks, the authorities practically agree that, in the absence of negligence on the part of the bank, the failure of the depositor to notify the bank within a reasonable time that such checks have been forged or fraudulently altered will, if the delay is caused by his negligence in not using due care and diligence in examining the passbook or statement and vouchers, or in giving notice, if he had discovered the forgeries, and such negligence caused injury to the bank and the latter was thus prejudiced by such failure of the depositor, constitute a defense by the bank to the depositor’s suit for the money subsequently paid out on similar checks. 3 R. C. L., §§ 167 and 168; First Nat. Bank of Richmond v. Electric Co., 106 Va. 347, 56 S. E. 152, 7 L. R. A. (N. S.) 744, 117 Am. St. Rep. 1014; Brown v. Bank, 109 Va. 530, 64 S. E. 950, 17 Ann. Cas. 119. And these are matters for the jury to pass .on under appropriate instructions. Weinstein v. Nat. Bank of Jefferson, 69 Tex. 38, 6 S. W. 171, 5 Am. St. Rep. 23; 3 R. C. L. § 168.

In Critten v. Chemical Nat. Bank, 171 N. Y. 219, 63 N. E. 969, 57 L. R. A. 529, the New York Court of Appeals, while holding that the duty of examining the returned statements and checks and notifying the bank of any forgeries in the drawing of such checks rests upon the depositor, does not accept the doctrine asserted in some of the cases that, by negligence in its discharge or by failure to discover and notify the bank, the depositor either adopts the checks as genuine or ratifies their payment or estops himself from asserting they are forgeries, but does, hold that, if the depositor by his negligence in failing to detect forgeries in his checks and give notice thereof caused loss to the bank, either by enabling the forger to repeat his fraud or by depriving the bank of an opportunity to obtain restitution, he should be responsible for the damage caused by his default, but beyond that, his liability should not extend; that the question was not one of ratification or estoppel but of liability of the depositor to the bank based solely on the loss to the bank caused by the depositor’s negligence.

 So that, under either rule, it becomes a question of negligence, whether of the bank or of the depositor, and whose negligence was the proximate cause of the loss. If the depositor was negligent in failing to examine the returned checks and statements and in discovering the forgeries and so reporting to the bank, and such negligence was the proximate cause of the bank’s paying the subsequently drawn checks, and this resulted in injury to the bank, then the depositor must suffer the loss; conversely, if the bank was negligent because it could by proper care and skill have detected the forgeries before paying the' forged checks, and such negligence was the proximate cause of the. loss, then the bank must suffer the loss.

If the bank were negligent, the plaintiffs (depositors) would be estopped from claiming against it, only because their own negligence was directly connected with the forgeries and was the proximate and not remote cause of the bank’s negligence. New York Produce Exchange Bank v. Houston (C. C. A.) 169 F. 785.

Defendants in error cite Coleman Drilling Co. v. Bank (Tex. Civ. App.) 252 8. W. 215, in support of their contention that the bank was negligent in, and therefore liable for, the payment of the forged checks in question and could have discovered the forgeries before payment by the exercise of ordinary care and skill, notwithstanding the depositors’ negligence in failing to examine the monthly statements and discover the forgeries therein.

That case is not authority here. There it was found that, although the plaintiff Coleman was guilty of subsequent negligence *145in failing to call for and secure his monthly-statements, examine the same and discover the forgeries .among the canceled cheeks, the bank’s employees were primarily negligent in failing to discover the forgeries before payment of the checks. Under such a finding, of course, the depositor’s subsequent negligence was not the proximate cause of the bank’s prior negligence.

It follows, therefore, that the bank’s answer presented a valid defense and the trial court erred in sustaining exceptions thereto. The Court of Civil Appeals erred in holding that such action of the trial court was harmless, in view of the jury’s findings, without regard to the issues sought to be presented in such answer.

There can' be no harmless error where the affirmative defenses of a defendant, acknowledged to be valid, are thus stricken and he is denied the opportunity to present evidence in support of such defenses and to have same affirmatively submitted *to*the jury.

The judgments below are reversed, and the cause remanded for another trial, in accordance with this opinion.

CURETON, C. J.

The foregoing is adopted as the opinion of the Supreme Court, and the judgments of the district court and Court of Civil Appeals are reversed, and the cause remanded.