Case Name: NORTH BRITISH & MERCANTILE INS. CO. v. MERCHANTS' NAT. BANK
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1914-03-20
Citations: 146 N.Y.S. 720
Docket Number: 
Parties: NORTH BRITISH & MERCANTILE INS. CO. v. MERCHANTS’ NAT. BANK.
Judges: 
Reporter: West's New York Supplement
Volume: 146
Pages: 720–734

Head Matter:
(161 App. Div. 341)
NORTH BRITISH & MERCANTILE INS. CO. v. MERCHANTS’ NAT. BANK.
(Supreme Court, Appellate Division, First Department.
March 20, 1914.)
1. Banks and Banking (§ 154 )—Deposits—Payment oe Forged Checks— Sufficiency of Evidence—Contributory Negligence.
In an action by a bank depositor to recover the proceeds of checks fraudulently drawn by plaintiffs employés against plaintiff’s account, evidence held to make it a jury question whether plaintiff by reason of its negligence in not examining its books should recover.
[Ed. Note.—For other cases, see Banks and Banking, Cent. Dig. §§ 502-512, 515, 516, 518-533; Dec. Dig. § 154. ]
2. Banks and Banking (§ 119 )—Deposits—Relation.
The relation, between a depositor and a bank is that of debtor and creditor.
[Ed. Note.—For other cases, see Banks and Banking, Cent. Dig. §§ 289-292; Dec. Dig. § 119. ]
3. Banks and Banking (§ 148 )—Deposits—Duty of Bank.
A bank must know the signatures of its depositors and is primarily liable if it pays out money on forged checks unless the depositor’s negligence contributed to the payment without any negligence upon the part of the bank.
[Ed. Note.—For other cases, see Banks and Banking, Cent. Dig. §§ 438-446, 451, 452; Dec. Dig. § 148. ] '
4. Banks and Banking (§ 148 )—Payment of Forged Paper—Estoppel of Depositor.
Defendant bank submitted to a depositor for execution an instrument by which defendant was authorized to deliver to the person named the depositor’s passbook and take such person’s receipt for the same in the form printed on the reverse side, and the depositor’s cashier signed the instrument, which provided that, unless written notice to" the contrary was given within 10 days from the date of. the receipt, it was to be considered as accepted by the depositor as correct, and the agreement was acted upon by both parties until the fraudulent act of the depositor’s employés in forging checks on the depositor’s account was discovered.. Held, that the depositor could not repudiate transactions “under the agreement on the ground that its cashier had no authority to sign-the agreement and the messenger to whom the passbook was delivered had no authority- to sign the receipt, especially where the depositor was guilty of. neglect in taking ordinary precautions to prevent the bank from being defrauded by the use of canceled vouchers called for by the* passbook. -
[Ed. Note.—For other cases, see Banks and Banking, Cent. Dig. §§ 438-446, 451, 452; Dec. Dig. § 148. ]
5. Banks and Banking (§ 148 )—Deposits.
The fact that a bank, which paid cheeks fraudulently drawn on a depositor’s account by the depositor’s employes, received the checks for payment from other solvent banks, so that if required to again pay their amount to the depositor it could seek reimbursement'from the other banks, would not be ground for requiring it to again pay checks.
[Ed. Note.—For other cases, see Banks and-Banking, Cent. Dig. §§ 438- . 446, 451, 452; • Dec. Dig. § 148. ] ...
Hotchkiss and Dowling, JJ\, dissenting.
Appeal from Trial Term, New York County.
Action by the North British & Mercantile .Insurance Company against the Merchants’ National Bank. From a judgment for plaintiff, defendant appeals.
Reversed, and new trial ordered.' •
Argued before INGRAHAM, P. J., and McLAUGHLIN, LAUGHLIN, DOWLING, and HOTCHKISS, JJ.
George A. Strong, of New York City, for appellant.
William H. Van Benschoten, of New York City, for respondent.
For other cases see same topic & § number in Dec. & Am. Digs. 1907 to date. & Rep’r Indexes
For other cases see same topic & § number in Dec. & Am. Digs. 1907 to date; & Rep’r Indexes

Opinion:
McLAUGHLIN, J.
In addition to the facts- set forth in the opinion of Mr.'Justice HOTCHKISS, it'should be stated that for some time prior to August 1, 1907, and during all of the time covered by the transactions here involved, the defendant, by- the course of- dealings between the parties, kept an account of all moneys received and paid out on checks, and on or about the 1st day of each month made a detailed statement of all deposits and payments during the preceding month and delivered it, with the checks and passbook, to the plaintiff. The checks in question here were paid between the 1st of September, 1907, and the 15th of September, 1910. The first bogus check, for $44.99, was dated the 24th of August, 1907. It was paid by the defendant about that time, the amount charged to plaintiff's account, and a statement to that effect, together with the checks returned to the plaintiff about the 1st of September. The next one was in September, for $55.01; two in October, aggregating $41.77; two in November, aggregating $60.05'; two in December, amounting to $34.03; and all amounting to $235.85. These checks were all negotiated by Bradford, as were all of those during the following months up to July, 1908, when Walker commenced operations. At first both Bradford and Walker purloined but few checks each month. Apparently, having ascertained how easy it was to defraud the plaintiff, they increased the number so that one month, acting either separately or together, they negotiated 23. Between August 1, 1907, and the 15th of September, 1910, the plaintiff deposited with the defendant $7,377,-903.78, and during the same time defendant paid out on checks drawn by plaintiff $7,367,151.56, and in addition it paid the checks here involved, which it is conceded bore the genuine signature of the plaintiff, amounting to $13,176.74.
Plaintiff's counsel conceded at the trial that there were returned by the defendant to it each month an average of over 600 check vouchers of an average aggregate amount of $200,000. No objection was made to the' statements returned by the defendant to plaintiff, or to the payment of the checks here in question, until the 20th of September, 1910. The fraud was discovered by a check being presented to the plaintiff's cashier for signature, payable to the order of one Bauman." The cashier's assistant called his attention to the fact that they had only a few days before drawn a check for some thirty-odd dollars, payable to the order of a man named Bauman. On looking at that .check they found Walker's name indorsed on it. This resulted in an examination, and Walker's confession also disclosed the frauds committed by Bradford. Many of the checks negotiated by him bore the indorsement of E. B. Wood. A further investigation followed, which showed that Bauman's indorsement appeared on forty-one checks, some of which had been returned to plaintiff by the defendant "each month during 1909 and 1910, save January and March of the former year, and 87 checks which bore the indorsement of Walker, extending over the period of two years beginning July, 1908, and ending with August, 1910; that 218 checks bore the indorsement of Wood, which involved Bradford's fraud; and that the first fraudulent check boré Bradford's own indorsement. Had the slightest examination been made by the plaintiff of its books and the evidence in its" possession, the fraudulent acts of Bradford would have been discovered when the bank returned the first bogus check with the other vouchers. And the sarpe is true of the bogus checks returned each time when the passbook was written up. The plaintiff, however, did nothing for upwards of three years, and the result was that these two dishonest clerks purloined 362 checks, put them into circulation, and the same were paid by the. defendant, concededly acting in good faith.
Under such circumstances, I am of the opinion that a question was presented which should have been submitted to the jury, whether the plaintiff ought to recover upon any of the checks. The relation between a depositor and a bank is well understood. It is that of debtor and creditor. By reason of this relation a reciprocal duty is imposed. A bank is bound to. know the signature of its depositors and pay out the money only on their orders. If it does otherwise, the bank, primarily, and not the depositor, must stand the loss. A bank, however, is permitted to escape liability for repayment of amounts paid out on forged, raised, or fictitious checks, by establishing that it made the payment in good faith, without negligence upon its part, and that the payment was brought about or contributed to by the negligence of the depositor; in other words, that the payment was made by reason of the neglect of the depositor to do "those things dictated by ordinary business customs and prudence and fair dealing toward the bank, which if done would have prevented the wrongdoing which resulted from their omission." Morgan v. U. S. Mortgage & Trust Co., 208 N. Y. 218, 101 N. E. 871. The facts here presented demonstrate very clearly the reasonableness of this rule. Commercial transactions are now carried on largely by means of checks. The plaintiff, as indicated, used in its business at least 600 each month, aggregating in amount something like $200,000. It therefore owed a duty not only to the defendant, but, I think, to the public generally, to exercise at least reasonable care that the checks which it signed were genuine and not fictitious transactions. If it failed to do this, then it ought not to be permitted to assert their invalidity against either the bank upon which they were drawn or any one else taking them in good faith and for value. When the first fictitious check was returned, and it is not here sought to recover on that one, if an examination had been made such as ordinary prudence would have seemed to dictate, Bradford's dishonesty would have been disclosed, and measures could have been taken would thereafter have prevented similar transactions either by him or Walker. The purpose of having the passbook written up was to ascertain what checks had been paid out and what the defendant claimed as to the plaintiff's account.
As said in Morgan v. U. S. Mortgage & Trust Co., supra:
"When they submitted their passbook to be thus written up, they in effect called for a statement of their account as kept by the bank, and, when this was furnished to them, is it to be thought that they satisfied the requirements of common prudence and fairness to the bank by absolutely disregarding the passbook and check list which could not be easily falsified, and simply comparing a bundle of vouchers which might be much more easily manipulated by ready abstraction of vouchers? The passbook is the statement of the bank's version of the account and the fundamental basis for comparison with the depositor's own records. The paid checks which are returned are the vouchers of the bank for its account as written on the passbook, and, if they are to be made the medium of comparison of accounts, the depositor at least ought to endeavor to know that they tally with the passbook. Otherwise he has made no reliable comparison or verification. Therefore it seems to me that, when the appellants relied for verification merely on a comparison of vouchers without any effort to verify these by comparison with the check list or passbook, they did not exercise reasonable methods. On the other hand, it seems to me that when, having "obtained from the bank a list of vouchers and balanced passbook which were intended to give and did give them a correct basis for comparison and verification, they disregarded these, they were guilty of such obvious oblivion of their duties that no extended argument can make plainer their negligence than does the mere recital of the facts."
In connection with the duty imposed on the plaintiff to examine the returned canceled vouchers, so that any irregularity in their issue could be at once corrected, both for" the protection of the defendant and the banking community, in general, the defendant, in August, 1909, submitted to the plaintiff for execution by it an instrument by which the defendant was authorized to deliver to the person named the plaintiff's passbook and take his receipt for the same in the form printed on the reverse side thereof. The plaintiff, by its cashier, signed this instrument and delivered it to the defendant. This receipt was to show the balance at the close of business on the day specified, together with the list of canceled vouchers called for by the passbook, and, unless written notice to the contrary were given within 10 days from the date thereof, it was to be considered as accepted by the plaintiff as correct. Thereafter, on receipt of the passbook and vouchers, plaintiff's representatives signed such receipt. The plaintiff, however, seeks to repudiate this agreement on the ground that the cashier had no authority from the plaintiff to sign it and that the messenger to whom the passbook and vouchers were delivered had no authority to sign such receipt. But the agreement was acted upon by both of the parties from the time of its execution until the fraudulent acts of Bradford and Walker were discovered, and during such time it was not even suggested that the cashier did not have authority to make whatever arrangements were necessary with defendant as to its banking account. It was too late for the plaintiff, after thus receiving the canceled vouchers and statement of the account as shown by them, and the same had been acted upon by plaintiff, to thereafter repudiate the transactions, especially when it appeared that all of the checks were issued under circumstances which would justify a finding that the plaintiff had neglected to take even ordinary precautions to prevent the defendant or others from being defrauded by their use.
The plaintiff was resorting to the use of checks for the purpose of doing its business, and every one of those in question bore its genuine signature. The bank, of course, was bound to know that the maker's signature was genuine, and it is possible it was also bound to know that the indorsement on the first check was genuine; but, when no objection was made to it when returned, it had a right to treat other checks coming in as it had that one; in any event, after the statement and vouchers had been returned and no objection made within a reasonable time, then it seems to me it certainly was a question for the jury to determine whether or not the plaintiff was not bound by an implied ratification of the statements rendered. Dana v. Nat. Bank of the Republic, 132 Mass. 156.
If the plaintiff knew of the fraud, then it was bound to inform the defendant of it. It did, in legal effect, know of it, because its own records showed it, as the slightest examination of them disclosed. Fair dealings require, under such circumstances, that it should be held to the statements as rendered, on the ground that it adopted the payments made and impliedly ratified them. Leather Manufacturers' Bank v. Morgan, 117 U. S. 96, 6 Sup. Ct. 657, 29 L. Ed. 811; Myers v. S. W. Nat. Bank, 193 Pa. 1, 44 Atl. 280, 74 Am. St. Rep. 672.
But, it is said, the defendant ought not to escape liability because it received the checks for payment from other banks which are solvent, for which reason it will not be damaged. I do not think this conclusion follows. Defendant has paid the checks once, and, plaintiff having called upon it again to pay them, it has a right to resist the payment, irrespective of whether or not it may, in" case it does pay, be reimbursed by some one else. A loss has been sustained, which, if occasioned solely by plaintiff's negligence, should be borne by it, and the defendant is in position to assert such defense—this upon the theory that one who, by his own neglect, is responsible for or the cause of a loss, should bear it instead of an innocent party. First Nat. Bank v. American Exch. Nat. Bank, 49 App. Div. 349, 63 N. Y. Supp. 58, affirmed 170 N. Y. 88, 62 N. E. 1089.
I am of the opinion that there was at least a question for the jury as to the negligence of the plaintiff that would prevent a recovery. The judgment should therefore be reversed, and a new trial ordered, with costs to the appellant to abide the event.
INGRAHAM, P. J.,'and LAUGHLIN, J., concur.