Court Opinion

ID: 6555807
Source: CourtListenerOpinion
Date Created: 2022-07-20 18:57:55.097397+00
Date Added: 2024-06-11T15:56:18.431146
License: Public Domain

Spruance, J.,
in his dissenting opinion quotes upon this point the language of Justice Harlan, who delivered the opinion in Leather Manufacturers’ Bank vs. Morgan, cited above, as follows:
“Of course, if the defendant’s officers, before paying the altered checks, could by proper care and skill have detected the forgeries, then it cannot receive a credit for the amount of these checks, even if the depositor omitted all examination of his account.”
If this is a correct statement of the law, such subsequent negligence on the part of the depositor is not a bar to recovery, unless it be also determined that there was no negligence on the part of the officers of the bank in paying the fraudulently altered checks, and, therefore, Judge Spruance is correct when he states elsewhere in his opinion, “The first and important question is whether there is any evidence that would warrant the jury in inferring and finding that the bank did not use due and reasonable care and diligence to discover that these checks or some of them had been fraudulently altered.”
In every case where suit is brought by a depositor to recover from a bank money deposited by him, which the bank has paid out otherwise than in conformity with his orders, and the bank sets up the defense that it is nevertheless entitled to charge the depositor with such payments, because of conduct of the depositor subsequent to such payment, the preliminary question to be determined is whether the bank was or was not guilty of negligence in making the payments. If it were negligent, if its officers be found to have failed to exercise due and reasonable *592care in detecting the forgery or fraud, then the subsequent negligence, of the depositor, his failure to perform his duty in examining his pass-book and vouchers with reasonable care and report to the bank in a reasonable time any errors or mistakes, would constitute no defense.
It is needless to cite cases in which this doctrine is explicitly stated, because they are all in accord upon this point, and the doctrine is assumed in every case where it is not stated. It is not disputed by counsel for the defendant, and, in fact, is indisputable, being recognized in all the authorities, however much they may differ otherwise in the doctrines they apply to the questions arising in consequence of subsequent negligence on the part of depositors.
Most of the cases cited, in fact 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 long series of successful forgeries, as in the present case.
After his pass-book 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 be caused by his negligence in not using due care and diligence in examining the pass-book and vouchers, or in giving notice, if he had discovered the forgeriers, constitute a defense by the bank to the depositor’s suit for the money subsequently paid out on similar checks.
With respect to the payments made before such settlement, however, the authorities differ, and although in the greater number of cases no distinction is made, in others, a different principle is held to apply and the distinction is insisted upon with force and earnestness in the case of Critten vs. Chemical *593National Bank, 171 N. Y. 219, 229. The Court in that case concludes its consideration of this point, as follows:—
“This question is well discussed by the Supreme Court of Alabama in the case of National Bank vs. Allen, supra, and we concur in the view expressed by that Court, that the liability of the depositor for neglect of his duty to examine and verify his account with the bank is limited to damages sustained by the bank in consequence of such neglect.”
In the Alabama case referred to, the pleas of the bank state facts showing that it acted with due care in the payment of the forged checks, and averred subsequent negligence on the part of the plaintiff in the examination and comparison of its pass-book, check stubs and returned checks. A demurrer to these pleas was overruled and the case tried by the Court below without the intervention of a jury. It appeared that the forgeries were so skilfully executed as to deceive even the plaintiff himself, and it was assumed throughout the opinion of the Court that there had been no want of due care, caution and diligence on the part of the officers of the bank in their scrutiny and consideration of the forged checks before paying them.
The Alabama Court discusses the principles applicable to payments made before settlement, as follows:—
“Some of the Courts have held that if injury results to the bank by the negligence of the depositor, he will be held to have adopted and ratified the payment of the forged checks.
“By others under like circumstances the doctrine of estoppel has been applied, and the depositor held to be estopped from asserting a claim to the money paid on the forged checks. We do not think that either the doctrine of ratification or estoppel can be applied as a just and equitable principle in all cases. Ratification refers to a past act or transaction, and as now being considered, refers to the unauthorized act of an agent, or the adoption of a past act or transaction as his own act, made or executed by another who was not an agent. It would strain the doctrine of ratification to hold that a person had *594ratified or adopted as his own the unauthorized act of another, of which he had no information, or which was promptly repudiated as soon as brought to his knowledge. So where a bank pays a forged check drawn in the name of one of the depositors, and the depositor is wholly free from neglect or fault, the bank owes the amount to the depositor. There was no act, omission to act, or silence in such a case on the part of the depositor which induced the bank to pay the forged check, or influenced the action of the bank in the payment of the check. No principle of the law or of estoppel can be invoked by the bank against the depositor under such circumstances. The depositor owed the bank a duty which was to examine the pass-book and vouchers with reasonable care and diligence. If the depositor failed in his duty in this respect, and the bank was injured in consequence of such omission of duty, the depositor became liable to the bank for all damage. The extent of the liability of the depositor is commensurate with the loss sustained in consequence of his neglect of duty, no more, no less. It would be unjust, unfair to the depositor, not sanctioned by an;r correct principle of law, to permit the bank to invoke the doctrine of ratification or estoppel which would exempt the bank from all liability incurred by its own neglect in the payment of the forged check, and in many cases inflict upon the depositor greater loss than that caused to the bank by his neglect of duty. The damages sustained by the bank as the result of neglect of duty by the depositor, are susceptible of proof and measurement, as arise in any other case of breach of duty imposed by contract. The pleadings may be framed to present the issue in a proper manner.” First National Bank of Birmingham vs. Allen, 100 Ala. 476, 484.
With respect to payments made after the settlement, the true reason of the generally adopted rule is admirably stated, as-follows' (it being assumed, of course, that there was no negligence on the part of the bank):
“The evidence shows that several checks were forged by Tomlin and paid by the bank subsequent to the time that Allen
*595the plaintiff was chargeable with notice that his clerk was making such unauthorized use of his name. As to all such subsequent payments of forged checks the bank is entitled to invoke the equitable doctrine of estoppel. As to these it may be fairly said the bank was induced to pay and did pay in consequence of the silence of the plaintiff when it was his duty to speak. The bank was misled to its injury, by the fault of the depositor. A very interesting and instructive collection of leading cases on the questions under consideration may be found in the 26th Volume of Amsrican Law Review for March and April, 1892, page 274.”

First National Bank of Birmingham vs. Allen, supra.

Both the reasoning and conclusions of the Alabama Court meet with our unqualified approval, and we do not deem it necessary to give further consideration to the doctrine of ratification and estoppel in this connection. We do not consider that they apply to the payment of forged checks prior to the settlement,and our views in respect to such payments are in accord with those of the New York and Alabama Courts.
The Leather Manufacturers’ Bank vs. Morgan, supra, is the most notable case in opposition to these views. It was decided in 1885, about eight years before the Alabama case we have cited, and about seventeen years before the New York case. The opinion delivered by Justice Harlan, from which we have already quoted, is long, elaborate and painstaking, reviewing nearly all the leading authorities up to that time bearing upon all the leading questions at issue in this cause.
Upon the particular point we are now considering, however, the reasoning upon which he rests, is contained in the following paragraph:—
“If he had discovered that altered checks were embraced in the account, and failed to give due notice thereof to the bank, it could not be doubted that he would have been estopped to dispute the genuineness of the checks in the form in which they *596were paid; upon the principle stated by Lord Campbell in Cairncross v. Lorimer, 3 Macq. 827, 830, that ‘if a party having an interest to prevent an act being done, has full notice of its having been done, and acquiesces in it, so as to induce a reasonable belief that he consents to it, and the position of others is altered by their giving credit to his sincerity, he has no more right to challenge the act to their prejudice than he would have had if it had been done by his previous license.’ This, however, could not be, if, as claimed, the depositor was under no obligation whatever to the bank to examine the account rendered at his instance, and notify it of errors therein in order that it might correct them, and, if necessary, take steps for its protection by compelling restitution by the forger. But if the evidence showed that the depositor intentionally remained silent, after discovering the forgeries in question, would the law conclusively presume that he had acquiesced in the account as rendered, and infer previous authority in the clerk to make the checks, and yet forbid the application of the same principle where the depositor was guilty of neglect of duty in failing to do that, in reference to the account, which he admits would have readily disclosed the same fraud? It seems to the Court that the simple statement of this proposition suggests a negative answer to it.”

Leather Mfrs’. Bank vs. Morgan, supra.

In other words, no difference in legal effect is recognized between the concealment of a forgery on the part of the depositor with deliberate intention and actual, knowledge of the fact, on the one hand, and, on the other, his neglect to use the due and reasonable care and diligence in the examination of his pass-book and vouchers, which might have enabled him to discover it.
This argument does not carry conviction to our minds, for the former instance necessarily imports a deliberate ratification by the depositor of the forgeries, which, as in any other case of deliberate ratification, would be conclusive against him; whereas in the latter instance, for reasons already quoted from the Al*597abama case, ratification cannot be implied, and an analysis of the proposition quoted from Lord Campbell shows that it is not applicable to facts and conduct so essentially different.
The New York Court in Critten vs. Chemical National Bank refers to the Courts taking the opposite view of this point, as follows:—
“In the cases cited from the Supreme Court of the United States, from that of Massachusetts and that of Pennsylvania, it is conceded that, if the bank has been guilty of negligence in paying the forged checks, then the doctrine of ratification and estoppel does not apply. It seems to us that the exception is somewhat inconsistent with the principle on which the doctrine rests. Moreover, we see no reason why the bank should be entitled to anything more than indemnity for the loss the depositor’s negligence has caused it.”
This question may not be of great importance in this case, so far as practical results are concerned, but it is none the less necessary for us to pass upon it, and we have, therefore, given to it most careful consideration, and we have deemed it proper to elaborate the general principles governing the relation of bankers and their depositors in view of the fact that this is the first case which has arisen in this State involving those principles.
We are now brought to the consideration of the important question whether there was any evidence that would have warranted the jury in inferring and finding that the bank did not use due and reasonable care and diligence to discover that the checks in controversy, or some of them, had been fraudulently altered.
The alterations of the checks, making them payable to bearer, were not claimed by the defendant to be other than patent, and there was evidence that in most of the checks after the name of the payees, room was not left in which to write the words “or bearer” without deflecting or crowding them, and that those words were evidently written in different ink than the balance of the check and at a different angle of writing, thus tending to *598raise the inference, although not conclusively, that the alterations were made after the signature, at the very least, it was sufficient to excite in the minds of the bank officers the suspicion that such was the case.
It also appeared from the evidence that the money was not paid on such altered checks to the payee, but to Churchman, who presented the checks, and got the money, and that the alteration in every instance was made in his hand-writing.
There was also evidence that the suspicion or curiosity of the bank officers was sufficiently aroused to cause them to ask of Churchman an explanation, and that the only explanation given by him was that “the people for whom these checks were drawn, in whose favor these checks were drawn, wanted the currency.”
It also appeared by the by-laws of the company that no one but the treasurer had the authority to sign checks; and that sometime prior to the payment of the checks in controversy Mr. Barker, the treasurer, had shown to Mr. Robinson, an officer of the bank, the following by-law:—
“Article 11. The Treasurer of the company shall have charge of the funds of the company; shall deposit them in such bank to the credit of the company, as the directors may designate, and shall make payment only by checks, the stub of which shall state for what purpose the check is drawn.”
The occasion being, that the bank had paid a check signed by Mr. Coulton.at that time the president of the plaintiff company and after being shown the by-law the bank officers ‘ ‘promised not to do it any more.”
All the checks altered in this way, that were paid to Churchman prior to the first balancing of the company’s pass-book that contained any of the altered checks, were made to H. H. Ferguson, and there is evidence tending to show that he was • known by the bank officers to be an employee of the company, and had been receiving checks payable to his order shortly before the date of such altered checks, at Mobile, Alabama.
*599It also appears that up to and inclusive of May 3, 1899, checks made payable to his order were the only ones altered.
Can it be contended that the inference might not be properly drawn by a jury from- this evidence considered by itself, that the bank officers did not use due and reasonable care and diligence in paying the checks, thus patently altered, to the secretary of the company, living in Wilmington and in whose handwriting the alterations were made? It seems also apparent that if such inference should be drawn by a jury, it would follow that Churchman’s success in successfully continuing a series of such forgeries would be as fairly attributable to the folly of the bank in paying those checks without making inquiry as to the authority for the alteration, as to any carlessnesS of the plaintiffs in failing to detect the alteration when the checks were returned to it from the bank; and upon the established principles which we have already laid down, such subsequent negligence on the part of the plaintiff could not release the bank from its responsiblity for any of the payments made on such altered checks. On the other hand, there is evidence tending to show, although not conclusively, that the method in which the business of the plaintiff company was conducted was calculated to mislead the bank and justify its officers in believing that Churchman, its secretary, was authorized to make the alterations and receive the money instead of the payees. This is the thifd contention made by the defendant’s counsel, which we have quoted above, to wit: -• >.!
“That the acts and conduct of plaintiff company, warranted defendant bank in believing that William H. Churchman was authorized to make the alterations appearing on the checks in controversy.”
The evidence which is claimed by the bank defendant to have proved this, is that Churchman was not a mere clerk of the company, but its secretary, and in the absence of the president and vice-president, its acting president; that the sole office of the plaintiff company in the City of Wilmington was manage d *600by him f that with rare exceptions he alone dealt with defendant in relation to its bank account, endorsing all its checks for deposit, with the exception of government checks, which were endorsed by the treasurer and sent to Churchman for deposit; that Barker, the treasurer, is shown to have been in the city of Wilmington but two or three times in a year, and his duty to the company required him to be in remote parts of the country, now on the New England coast, now on the Alabama, Florida, or Texas coast, so that if they desired to notify him of the alterations it might have taken days to have located him in order to send a description of the checks. This had been the case for some years prior to the date of the first altered check in controversy, and it is argued that all these circumstances were calculated to give the bank the assurance that it would be justified in making the payments to Churchman on such altered checks, especially in view of the fact that by delaying payment in order to make inquiry of Barker they might have shaken plaintiff’s credit, causing great damage and subjecting itself to an action of damages, besides gaining the hostility of both Churchman and Barker and losing this valuable account, in case the suspicion proved to be unfounded.
It is also contended by the defendant’s counsel that Barker’s conduct, as appears from the evidence, in signing the checks sent him by Churchman upon Churchman’s statement that they were for bona fide bills, without verifying his statement by demanding the 0. IC’d. bills for payment of which Churchman stated the checks were drawn, or asking for the receipted bills, afterwards furnished facilities for Churchman to successfully perpetrate the frauds, which renders this case analogous to the famous Vagliano case, finally decided against the plaintiff by the House of Lords. Bank of England, Appellant, vs. Vagliano Bros., 1891 App. Cas. 171, 172.
It was heard in the House of Lords on appeal from the judgment of the Court of Appeals, reported 23 Q. B. D. 243; 58 L. J. Q. B. (357), in which the judgment of Charles, J., reported *60122 Q. B. D. 103; 58 L. J. Q. B. 27; was affirmed by Cotton, L. J., Bindley, L. J., Bowen, L. J., Fry, L. J., and Lopes, L. J.; dissentiente, Lord Esher, M. R. The facts are briefly stated in the report, as follows:—
“The plaintiff in the action claimed to be entitled to be credited by the defendant bank with a sum of £71,500 with which the bank had debited him in respect of certain bills, which bore the genuine signature, as acceptors, of the plaintiff’s firm. The bills purported to be drawn by one Vucina, who was a correspondent of the plaintiff’s firm, but they were in fact wholly fictitious bills fabricated by a clerk in the employ of the plaintiffs, who by placing them before Mr. Vagliano along with forged letters of advice obtained the acceptance of the firm. The payee named in the bills was ‘Petridi’. There was a person of this name who had some business with the firm, but this person had no concern with the transaction. After obtaining the acceptance of the firm, the clerk forged the signature of the payee and obtained payment of the bills at the counter of the bank. Both the Courts below had decided in favour of the plaintiff’s claim against the bank.”
Each of the eight Lords participating in the decision delivered an opinion, Lords Bramwell and Field dissenting, and the others held partly that the payee was fictitious or non-existent within the meaning of the English Bill of Exchange Act, 1882, Sec. 7, sub. sec. 3, which made bills of exchange payable to bearer, which were drawn payable to a fictitious or non-existing person; and partly that there was a want of due care and diligence on the part of the plaintiffs in the conduct of their business and the scrutiny of their accounts with Vucina &c.,. which constituted the proximate cause of the payment of the. forged checks.
All the Judges, however, took occasion to cite with approval the leading case of Robarts vs. Tucker, 16 Q. B. 560, and the only question of law decided by them was the meaning and effect of the words “fictitious or non-existing|persons”|as|used *602in the English Bill of Exchange Act; their opinions, so far as they dealt otherwise with the question of plaintiff’s negligence as the proximate cause of the loss, being concerned merely with the application of an undisputed principle to the particular state of facts before them.
The opinions delivered in all three courts are extremely interesting, and we have read them with great care. Counsel for the defendant in this cause have displayed great ingenuity in the effort to make the doctrine applied by the House of Lords to the bogus bills of exchange in that case, about which everything was forged and fictitious except Vagliano’s acceptance, to checks signed by Barker for bills which had already been paid by other checks to the same payees, or for sums of money which were not at the time due and owing to the payee, in every instance being'persons with whom the company had had habitual' dealings. The analogy fails, however, not only because of the radical difference in the facts and circumstances of the Vagliano case, but also because that case was concerned with bills of exchange, which differ in some essential feature from checks, being a distinct species of the same genus of commercial paper.
The case of Scholfield vs. Earl of Londesborough, 1896 App-Cas. 514, 550, which also discusses Robarts vs. Tucker and Young vs. Grote, as well as the Vagliano case, is much more instructive in its theoretical discussion of the general principles of law governing bills of exchange.
Out of the great number of cases cited and reviewed by counsel, we have only referred to those which formulate or illustrate the principles of law involved. The greater number are only concerned with the application of' admitted principles to the facts or circumstances before the Court at the time which are necessarily set out at length. These we have deemed it unnecessary for the most part to cite.
We have already discussed the questions arising from the subsequent negligence of depositors, and stated the principles which determine its effect upon the responsibility of the bank *603for money paid out on forged or altered checks, both before and after a settlement of the depositor’s account containing any of such checks.
For the purpose of that discussion we assumed that a majority of the Court below were correct in assuming that such negligence had been proved in the pending cause, and it still remains for us to consider whether in our judgment such an assumption was warranted by the evidence.
The general principle is that “where forged checks have been paid and charged in the account and returned to the depositor, he is under no duty to the bank so to conduct the examination that it will necessarily lead to the discovery of the fraud. If he examines the vouchers personally and is himself deceived by the skillful character of the forgery, his omission to discover it will not shift upon him the loss which in the first instance is the loss of the bank.”
In the cause before us, however, no such difficulty is presented : no question arises as to the amount of diligence required, for one of the exceptional features of this case is the baldness and plainness of the fraudulent alterations and the absence of any apparent effort on the part of the perpetrator of the frauds to conceal the evidence of them. It is obvious and conceded that if Barker had at any time looked over the returned checks the alterations to “or bearer” would have stared him in the face and disclosed the fraud at once. This he did not do himself,- and the employee or officer to whom this duty was assigned was Churchman, the perpetrator of the fraud. There is, therefore, no question of fact involved. Any, even a cursory • examination by an honest clerk would have resulted in the discovery of the plain alterations, and therefore the only question is whether the plaintiff is relieved from responsibility by the fact that the person charged by Barker, the treasurer, with-the duty of making the examination was himself the forger, and, therefore, bound to conceal the alteration.
Upon this point we entirely agree with the following state*604ment of the rule and the reasons upon which it is based contained in Critten vs. Chemical National Bank, supra:—
“Of course, the knowledge of the forgeries that Davis pas-, sessed, from the fact that he himself was the forger, was in no respect to be attributed to the plaintiffs. But we see no reason why they were not chargeable with such information as a comparison of the checks with the check book would have imparted to an innocent party previously unaware of the forgeries. The plaintiffs’ position may be no worse because they intrusted the examination to Davis instead of to a third person; but they can be no better off on that account. If they would have been chargeable with the negligence or failure of another clerk in the verification of the accounts, they must be equally so for the default of Davis, so far as the examination itself would have disclosed the facts.”
It only remains to determine the one remaining question, which is also the first and most important one, but tins can now be done in a very few words.
It is not for this Court to say in the pending cause whether the evidence bearing upon the question of the negligence or want of due and reasonable care on the part of the bank in the payment of the altered checks was strong or weak when taken in connection with the evidence tending to show that the method • in which the business of the plaintiff company was conducted was calculated to mislead the bank, was such as to constitute the proximate cause of the loss. We are only called upon to say whether there was any legal evidence sufficient to be submitted to the -jury for their consideration, and we are unhesitatingly of the opinion that the evidence should go to the jury under careful instruction from the Court.
It results, therefore, that the Court erred in the peremptory instruction to the jury to find for the defendant as a result of the evidence.
The judgment is therefore reversed, and|the case remanded to the Court below.