First National Bank v. Federal Reserve Bank

The courts of other states have allowed recovery in these cases on two theories, viz.:

(a) Upon the theory of money paid by mistake, in that the forged indorsement breaks the chain of title to the check, and that therefore the maker has paid by mistake to one who had no title to the check; and (b) Upon the contract implied by law from the indorsement of a negotiable instrument in due course, to-wit, the implied warranty that the indorser has good title to the instrument. (Secs. 8472, 8473, Rev. Codes 1921.) So far as we know, this court has not passed on this question, and is free to adopt the rule which appeals to reason in the light of the character of contract with which we are dealing. We are dealing with checks, and checks while not in theory the medium of exchange, are in the practice of to-day's business nearly as fluent as coin of the realm. We concede that fluency is desirable and may be maintained best by applying the uniform negotiable instrument statute to the exclusion of common-law rules in all cases covered by the statute. Also there is no question that by its indorsement and negotiation of the check the appellant warranted that it had good title to the check. And it is further conceded that such warranty inured to the benefit of the respondent bank. (See sections above.)

On the other hand the Uniform Negotiable Instrument Law does not directly deal with the question of notice to an indorser in case of forged indorsement, and we are left to apply the common-law rules or the law of merchants. The whole trend of the law merchant and of the Uniform Negotiable Instrument Law as applied to checks, is that irregularities be promptly discovered and notice given to all parties affected. This is largely so, because from the very nature of the transaction little or no record is made or retained by the person handling a check and it is in the interest of business that the credits represented by checks be settled and closed from day to day. In this case the check was put through the clearings about the middle of November, 1927, and apparently the maker, Morrison, did not discover the forgery until May, 1928, and did not give notice until April, 1929.

In every instance where the law merchant or the Uniform Negotiable Instrument Law requires notice of irregularity, such notice must be given not later than the next business day following the irregularity. (See secs. 8509, 8510 and 8511, Rev. Codes 1921, as to notice of dishonor, and section 8562 as to protests.) Certainly this delay was negligent, if the maker was under any obligation whatever to give notice of the forged indorsement. No authority would seem necessary for this proposition, other than the very nature of negotiable instruments and their purpose.

We have next to consider whether the case shall be ruled (a) exclusively by the Uniform Negotiable Instrument Law, or (b) by that law in connection with the law merchant.

If (a) shall be adopted, then inasmuch as the Uniform Negotiable Instrument Law does not in terms require any notice as a condition to enforcing the warranty of title contained in secs. 8472, 8473, supra, plaintiff could recover at any time within the statute of limitations two years (sec. 9033) without having given any notice whatever.

The supreme court of the United States has adopted rule (a) (United States v. National Exchange Bank, 214 U.S. 302,303-320, 16 Ann. Cas. 1184, 53 L. Ed. 1006-1013,29 Sup. Ct. Rep. 665.) A line of state courts adopt the rule that failure to give notice within reasonable time after discovery of forged indorsement, is a defense if the prior indorser, defendant, can show that he has suffered loss by reason of the delay, and the trial court here adopted that rule. (Murphy v. MetropolitanNat. Bank, 191 Mass. 159, 114 Am. St. Rep. 595, 77 N.E. 693.) A third line of cases hold that unreasonable delay in giving notice after discovery of the forgery will defeat recovery without any showing on the part of the defendant that the delay has resulted in his loss of opportunity of recovering his loss. (McNeely Co. v. Bank of North America, 221 Pa. St. 588, 20 L.R.A. (n.s.) 79-83, 70 A. 891.)

We think the practical rule is either the first, or third set out above, because we are dealing with checks, and thedesideratum is to promptly get the credit settled and know who is or is not liable. This carries out the idea of a "courier without luggage," a phrase so often used to characterize commercial paper. It is this characteristic which gives to bills and notes their great value to commerce.

The holding of the trial court and of those courts adopting the second rule stated above piles "luggage" upon the check bearing a forged indorsement. The forgery is discovered and then nobody knows who is to take the loss, until after fact investigation and probably court proceedings to determine whether the defendant may have had opportunity of recovering the loss if notice had been given more promptly after discovery.

By either rule first or third set out above the "luggage" is disposed of, for by rule one, no notice is necessary and the prior indorser is held on his warranty by application of the Uniform Negotiable Instrument Law without the intervention of the law merchant; and by rule three, the prior indorser is held liable if prompt notice is given, and released if notice be not given promptly. In each instance the liability is simply and quickly determined and the credit settled, whereas by rule two, adopted by the trial court, the "courier" has so much "luggage" that in most cases, as here, the value of the check is consumed five times over with cost of fact investigation, delays and court proceedings. The fact that the value represented by the average check in the bank clearings would not pay for the cost of determining the fact required by rule two to be determined to fix liability should, we think, exclude rule two from the consideration.

The fact that fair dealing and custom would require that notice of the forgery be given the prior indorser, and promptly, should, we think, commend rule three above to this court. Rule three squares with the business of handling checks. To hold an indorser on a dishonored check prompt notice of dishonor must be given. (Sec. 8496, Rev. Codes.) And people handling checks know from the nature of the transaction that notice should be given all prior parties of any irregularity interrupting the due course of the check. It is custom to give prompt notice, not a hardship to be required to give it. The real cause of action stated in the complaint is the right of plaintiff to recover back money paid by mistake. In such an action the defense of equitable estoppel as set forth in defendant's answer does not apply. (McCornack v. Central StateBank, 203 Iowa, 833, 52 A.L.R. 1297, 211 N.W. 542; LeatherManufacturers' Nat. Bank v. Merchants' Nat. Bank,128 U.S. 26-39, 32 L. Ed. 342, 9 Sup. Ct. Rep. 3; American Exch. Nat. Bank v. Yorkville Bank, 12 Misc. Rep. 616,204 N Y Supp. 621; United States v. National Exchange Bank ofProvidence, 314 U.S. 302-320, 16 Ann. Cas. 1184, 53 L. Ed. 1006,29 Sup. Ct. Rep. 665.)

The general rule is that a bank upon which a check is drawn and which has paid the same upon a forgery of the payee's indorsement is entitled to recover the money paid, not being estopped because of mistaking the genuineness of the signature of the payee, which it is not bound to know. (Wellington Nat. Bank v. Robbins, 71 Kan. 748, 114 Am. St. Rep. 523, 81 P. 487;Corn Exchange Bank v. Nassau Bank, 91 N.Y. 74, 43 Am. Rep. 655; First Nat. Bank v. City Nat. Bank, 182 Mass. 130, 94 Am. St. Rep. 637 and note, 65 N.E. 24; Muller v. National Bank ofCortland, 96 A.D. 71, 89 N.Y. Supp. 62; Second NationalBank v. Guarantee Trust S.D. Co., 206 Pa. 616, 56 A. 72;White v. Continental Nat. Bank, 64 N.Y. 316, 21 Am. Rep. 612;Levy v. First Nat. Bank, 27 Neb. 557, 43 N.W. 354; NationalBank of Commerce v. First Nat. Bank of Cowita, 51 Okla. 787, L.R.A. 1916E, 537, and note, 152 P. 596; Guaranty State Bank Trust Co. v. Lively, (Tex.) 149 S.W. 211; LeatherManufacturers' Nat. Bank v. Merchants' Nat. Bank,128 U.S. 26-39, 32 L. Ed. 342, 9 Sup. Ct. Rep. 342.)

Counsel for respondent concede that the general rule is as above stated, but insist that nevertheless the right of recovery is affected by two other circumstances, (1) delay in discovering the forgery, and (2) unreasonable delay after discovery in giving notice thereof. These matters are presented by defendant's answer in the first and second defense as therein alleged, the sufficiency of which was challenged by plaintiff's demurrer. Some support can be found in the authorities that these matters constitute a defense although the weight of authority and the better considered cases are arrayed against this proposition. The following cases particularly support the proposition: YatesvilleBanking Co. v. Fourth Nat. Bank, 10 Ga. App. 1, 72 S.E. 528;Houseman-Spitzley Corp. v. American State Bank, 205 Mich. 268,171 N.W. 543; Merchants' Nat. Bank v. Federal State Bank, 206 Mich. 8, 172 N.W. 390. The last two cases cited, however, hold that the delay in giving notice of the forgery does not work an estoppel unless such delay has caused actual damage. The lower court, in its ruling on plaintiff's demurrer to defendant's answer, held that in this case the defense of estoppel might be interposed, but also held that the party claiming such a defense must be able to prove that the delay in giving notice of the discovered forgery resulted in a loss, and this is the rule upon which the case was decided. This rule has been adopted by the courts of all of the states (with but one exception) which have held that estoppel as a defense is available at all. (Murphy v. Metropolitan Nat.Bank, 191 Mass. 159, 114 Am. St. Rep. 595, 77 N.E. 693; Brixen v. Desert Nat. Bank, 5 Utah, 504, 18 P. 43; White v.Continental Nat. Bank, supra; Weinstein v. National Bank,69 Tex. 38, 5 Am. St. Rep. 23, 6 S.W. 171; Third Nat. Bank v.Merchants' Nat. Bank, 76 Hun, 475, 27 N.Y. Supp. 1070; Janin v. London S.F. Bank, 92 Cal. 14, 27 Am. St. Rep. 82, 14 L.R.A. 320, 27 P. 1100; Houseman-Spitzley Corp. v. AmericanState Bank, supra; Hardy v. Chesapeake Bank, 51 Md. 562, 34 Am. Rep. 325; National Surety Co. v. President and Directorsof Manhattan Co., 252 N.Y. 247, 169 N.E. 372; Bank of BlackRock v. B. Johnson Son Tie Co., 148 Ark. 11, 229 S.W. 1;Boone v. Citizens' Bank Trust Co., 154 Tenn. 241, 50 A.L.R. 1369, 290 S.W. 39.)

The exceptional case to which we have referred is McNeelyCo. v. Bank of North America, 221 Pa. St. 588, 20 L.R.A. (n.s.) 79, 70 A. 891, which is the only case which we have been able to find which holds that the failure to give notice of the forgery within a reasonable time after the discovery of it does estop the plaintiff, and that it is not necessary that the defendant should be able to show specifically wherein it could have recovered its loss from the forger in order to work an estoppel. This case apparently stands alone and without any supporting authority. H.G. Morrison drew his check on plaintiff to the order of Herbert Smith. The check, dated Miles City, October 31, 1927, was mailed by the maker to the payee, which in some manner came into the hands of one Sidney Smith, who forged the indorsement of the payee and then indorsed the check and cashed it at the mercantile establishment of Jean McIntire, in Polson. McIntire indorsed the check to his local bank at Polson, and in the usual course of check clearing it reached the defendant on November 12, 1927, was presented to the plaintiff at Miles City in the regular course of business and was paid by plaintiff and charged to the account of Morrison.

On May 25, 1928, or thereabouts, Morrison discovered that the indorsement of Herbert Smith was a forgery. Such action was thereafter taken by Morrison that Sidney Smith was convicted and sentenced to the state prison. Morrison did not notify plaintiff or defendant of the forgery until after Smith's conviction, approximately eleven months after discovery of the forgery. Upon receipt of notice of the forgery plaintiff promptly notified defendant.

The record discloses that at all times after the discovery of the forgery by Morrison, on May 25, 1928, the forger, Sidney Smith, was not the owner of any property whatsoever and was insolvent and unable to pay his debts or obligations. The merchant and the several banks through which the check passed are solvent. The indorsement of the check by McIntire is neither restrictive, qualified nor conditional, and the indorsements of the several banks are in the usual form of bank indorsements for check clearing purposes.

Plaintiff commenced this action in June, 1929, and, as a defense defendant pleaded, first, estoppel based solely on the delay in giving notice of the forgery after discovery, and, second, estoppel based on the negligent delay in giving notice of the forgery after discovery, coupled with the allegation that the delay had resulted in loss of opportunity to recover damages from the forger. To these defenses plaintiff demurred and the court sustained the demurrer as to the first defense, and overruled it as to the second defense. The cause was tried to the court sitting without a jury. The court found that from the time the forgery was discovered, the forger had been wholly insolvent, and concluded as a matter of law "that the maker of said check did not, and therefore plaintiff bank did not, owe any duty to defendant to discover the forged indorsement of the payee's name. That defendant is not relieved from its obligation arising from the indorsement to the plaintiff of the check * * * by the mere delay of the maker, or the plaintiff bank in not giving the defendant notice of the forged indorsement after discovery," and that defendant having failed to establish that it had suffered any loss or disadvantage by reason of the delay in giving notice of the forged indorsement after discovery, is bound, by reason of its indorsement of the check to plaintiff, to make good the amount of the check. Judgment was accordingly entered in favor of plaintiff, from which defendant appeals.

The rule is well established by a long line of authorities[1-3] that a bank upon which a check is drawn and which has paid the same upon a forgery of the payee's indorsement, is entitled to recover from the collecting bank the money paid thereon, and is not estopped because of mistaking the genuineness of the signature of the payee, which it is not bound to know. (7 C.J. 692-694; Leather Manufacturers' Nat. Bank v. Merchants'Nat. Bank, 128 U.S. 26, 32 L. Ed. 342, 9 Sup. Ct. Rep. 3;Houseman-Spitzley Corp. v. American State Bank, 205 Mich. 268,171 N.W. 543; Citizens Bank v. Commercial Sav. Bank,209 Ala. 280, 96 So. 324; Wellington Nat. Bank v. Robbins,71 Kan. 748, 114 Am. St. Rep. 523, 81 P. 487; Corn Exchange Bank v. Nassau Bank, 91 N.Y. 74, 43 Am. Rep. 655; First Nat. Bank v. City Nat. Bank, 182 Mass. 130, 94 Am. St. Rep. 637,65 N.E. 24.) That this is the general rule is conceded by defendant, but it insists that plaintiff's right of recovery is affected by (1) estoppel based solely on the delay in giving notice of the forgery after discovery, and (2) estoppel based on negligent delay in giving notice of the forgery after discovery, coupled with the allegation that the delay resulted in loss of opportunity to recover damages from the forger.

When defendant presented the check with the forged indorsement to plaintiff and procured payment of the amount thereof, even if it made no express warranty, in law it represented that the indorsement was genuine and, plaintiff being in ignorance of the forgery, defendant is liable for the money thus received; there was no consideration for this payment. Plaintiff's right of action does not depend upon any express promise or warranty, but rather upon the implied warranty that all preceding indorsements are genuine and that it had good title to the check (secs. 8472, 8473, Rev. Codes 1921). The indorsement of the payee having been forged, the warranties were broken, defendant had no title whatever to the check and, consequently, no right to collect any money thereon, and plaintiff is entitled to recover the amount paid and its right to recover was not affected by delay in giving notice of the forgery after discovery. (Leather Manufacturers'Nat. Bank v. Merchants' Nat. Bank, supra; United States v.National Exchange Bank, 214 U.S. 302, 16 Ann. Cas. 1184,53 L. Ed. 1006, 29 Sup. Ct. Rep. 665; American Exchange Nat. Bank v. Yorkville Bank, 122 Misc. Rep. 616, 204 N.Y. Supp. 621;Yatesville Banking Co. v. Fourth Nat. Bank, 10 Ga. App. 1,72 S.E. 528.)

Whether plaintiff's right to recover would be affected in the event defendant had suffered loss or injury by reason of the delay in giving notice of the forgery after discovery need not be determined. While this question is raised by defendant's answer, it was stipulated by counsel that at all times after the discovery by the said H.D. McIntire, on May 25, 1928, and thereafter, the said Sidney Smith, the forger, was not the owner of any property whatsoever and was wholly insolvent and unable to pay his debts and obligations, and that all indorsers subsequent to the signature of the forger are solvent. So that defendant does not bring itself within the exception announced by many courts, i.e., that though the right of action is not affected by a delay in notice to a collecting bank, because of money or property obtained on a forged bill, note or other instrument, yet such bank may defend on the ground that delay in notice after discovery resulted in actual prejudice. (Ladd Tilton Bank v. United States, 30 F.2d 334;United States v. National Park Bank, 6 Fed. 852; MarylandCasualty Co. v. Dickinson, 213 Ky. 305, 280 S.W. 1106; FirstNat. Bank v. Wolfe, 140 Mo. 479, 25 A.L.R. 172, and note,117 A. 898; 8 C.J. 609; see, also, Hogan v. Thrasher, 72 Mont. 318,233 P. 607.)

For the reasons given the judgment is affirmed.

MR. CHIEF JUSTICE CALLAWAY and ASSOCIATE JUSTICES MATTHEWS, GALEN and ANGSTMAN concur.