Case Name: North British and Mercantile Insurance Company, Respondent, v. Merchants' National Bank, Appellant
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1914-03-20
Citations: 161 A.D. 341
Docket Number: 
Parties: North British and Mercantile Insurance Company, Respondent, v. Merchants' National Bank, Appellant.
Judges: 
Reporter: Appellate Division Reports
Volume: 161
Pages: 341–360

Head Matter:
North British and Mercantile Insurance Company, Respondent, v. Merchants' National Bank, Appellant.
First Department,
March 20, 1914.
Banks and banking — liability of bank to depositor for payment of forged or fictitious checks — when bank may escape liability — forgery of indorsements of checks by employees of drawer — failure of depositor to examine pass books and vouchers—negligence — acceptance of bank’s statement of balance of account—one responsible for loss liable instead of innocent party.
Although a bank and not a depositor is primarily liable for amounts paid on forged, raised or fictitious checks, the bank may escape liability for repayment 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 then* omission.
In an action by a depositor to recover the balance of his account which depended upon certain checks claimed to have been improperly paid by the defendant, it appeared that two agents of the plaintiff, an insurance company, by means of fictitious vouchers, procured the plaintiff’s signature to checks supposed to be for the payment of return premiums. In some instances the names of the payees were those of existing persons, some of whom were customers of the plaintiff, but to whom it owed nothing, and some were personal creditors of one of the agents. The remaining payees represented persons having no existence. Of the cheeks payable to the order of existing payees, some were in fact indorsed by them, but on the others the indorsements were forged by the agents. Although the bank delivered monthly statements to the plaintiff, with returned checks and pass book, the latter failed to discover the forgeries for nearly three years, during which time 363 checks had been fraudulently placed in circulation by the agents and paid by the defendant in good faith.
Held, on all the evidence, that the question as to the negligence of the plaintiff in failing to discover the dishonesty of its agents should have been presented to the jury.
An agreement acted upon by the plaintiff and defendant, under which receipts for the pass book and returned vouchers, stating plaintiff’s balance, were to be considered as accepted by the plaintiff as correct, unless written notice to the contrary be given within ten days from the date thereof, cannot be repudiated by the former on the ground that its cashier had no authority to sign it, and that the messenger to whom the pass book and vouchers were delivered had no authority to sign such receipts.
The rule that one who, by his own neglect, is responsible for or the cause of a loss should bear it instead of an innocent party applies, and the fact- that the defendant received the checks for payment from other banks which are solvent is immaterial.
Hotchkiss and Dowling, JJ., dissented, with opinions.
Appeal by the defendant, Merchants’ National Bank, from a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of New York on the 31st day of May, 1912, upon the verdict of a jury rendered by direction of the court.
George A. Strong, for the appellant.
William H. Van Benschoten, for the respondent.

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 first day of each month made a detailed statement of all deposits and payments during the preceding month and delivered it, with the checks and pass book, 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 check, returned to the plaintiff about the first 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, but 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 twenty-three. 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 N. B. Wood. A further investigation followed, which showed that Bauman's indorsement appeared on 41 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 bore 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 same is true of the bogus checks-returned each time when the pass book 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 Ü done would have prevented the wrongdoing which resulted from their omission." (Morgan v. U. S. Mortgage & Trust Co., 208 N. Y. 218.) The facts here presented demonstrate veiy 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 which would thereafter have prevented similar transactions either by him or Walker. The purpose of having the pass book written up was to ascertain what checks had been paid 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 pass book 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 pass book 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 pass book 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 pass book, 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 pass book. 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 pass book they did not exercise reasonable methods. On the other hand, it seems to me, that when, having obtained from the bank a list of vouch-' ers and balanced pass book 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 pass book 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 pass book, and unless written notice to the contrary were given within ten days from the date thereof, it was to be considered as accepted by the plaintiff as correct. Thereafter, on receipt of the pass book 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 pass book 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 ques tion for the jury to determine whether or not the plaintiff was not bound by an implied ratification of the statments rendered. (Dana v. National 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; Myers v. Southwestern Nat. Bank, 193 Penn. St. 1.)
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 someone 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 Exchange Nat. Bank, 49 App. Div. 349; affd., 170 N. Y. 88.)
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., concurred; Dowling and Hotchkiss, JJ., dissented.