Bank v. . Bank

CLARK, C. J., dissenting. It is the accepted position "that for the purpose of presenting the legal questions involved, a demurrer is construed as admitting relevant facts, well pleaded, and ordinarily relevant inferences of fact, readily deducible therefrom, but the principle does not extend to admitting conclusions or inferences of law," etc. Board of Health v. Comrs.,173 N.C. 250-253, citing Pritchard v. Comrs.,126 N.C. 908913; Hopper v. Covington, 118 U.S. 148-151;Equitable Assurance v. Brown, 213 U.S. 25, and other cases.

While there are general averments of negligence and proximate cause imputing liability to the defendant bank, a perusal of the complaint will disclose that in so far as they contain or purport to contain (468) allegations of the pertinent facts, the plaintiff rests and intends to rest his right to recover on the basic proposition that the defendant issued to one N. L. Massey, as payee, four New York checks for small amounts, $2, $6, $2, and $3, payable to one N. L. Massey, without using therefor the sensitized or safety paper, and without using the protectograph, an implement whereby the letters showing the amount of the checks are punctured into the paper and otherwise protected from alteration, and for lack of which the said checks, without the knowledge of plaintiff or defendant, were raised by said Massey, payee, respectively to $9,018.12, $14,084.70, $9,000, and $12,903, and negotiated with or through plaintiff bank, receiving therefor from plaintiff at or near the amount called for in the raised or altered condition, and the suit is instituted to recover the amounts so paid from defendant.

In this connection, and with other averments, the complaint alleges further that these checks for the smaller amounts were executed on the ordinary paper of the bank, with lithograph forms. The spaces are filled out by writing in ink, signed by the president of defendant bank, and delivered to the payee as completed instruments. And on these the controlling facts in the transaction, the great weight of well considered authority on the subject is against the liability which plaintiff now seeks to enforce. National Exchange Bank v. William Lester, 194 N.Y. 461;Greenfield Savings Bank v. Stowell, 123 Mass. 196; Burrows v. Klunk,70 Md. 451; Holmes v. Trumper, 22 Mich. 427; Knoxville Bank v. Clark,51 Iowa 264; Lanier v. Clark (Texas Civil Appeals), 133 Southwestern 1093;Bank v. Wangerin, 65 Kan. 423; Fordyce v. Kosminski, 49 Arkansas 40;Goodman v. Eastman, 4 N.H. 455; Bothell v. Schweitzer, 84 Nebraska 271;Walsh v. Hunt, 120 Cal. 46; Simmons v. Atkinson Lampton, 69 Miss. 862;Exchange Bank v. Bank of Little Rock, 58 F. 140; Commercial Bank v. Arden, 177 Ky. 520; 1st Randolph on Commercial Paper, sec. 187; 1 R.C.L., title Alteration of Instruments, secs. 69 and 70.

In the New York case just cited (Bank of Albany v. Lester), it was held: "Where negotiable paper has been executed with the amount blank, it is no defense against a bona fide holder for value for the maker to show that his authority has been exceeded in filling such blank, and a greater amount written than was intended. But if the instrument was complete without blanks at the time of its delivery, the fraudulent increase of the amount, by taking advantage of a space left without such intention, will constitute a material alteration. In the latter case, under section 205 of the Negotiable Instrument Law (C.S. 3106), payment thereof may be enforced according to its original tenor. Second, an indorser of a promissory note, the amount of which has been fraudulently raised after indorsement by means of a forgery, is not liable upon the instrument in the hands of a bona fide holder for (469) the increased amount, because of negligence in indorsing same when there were spaces thereon which rendered the forgery easy, though the note was complete in form. No liability on the part of the indorser for the amount of such a note as raised can be predicated simply upon the fact that such spaces existed thereon."

That was a case in which it was sought to hold the indorser liable, butJudge Willard Bartlett, delivering the opinion, refers with approval to a number of the leading cases in which it was sought to hold the maker liable and in which the proposition was rejected, and in closing the opinion makes comment on the general question of liability as follows: "On what theory is the indorser negligent because he places his name on paper without first seeing to it that these spaces are so occupied by cross lines or otherwise as to render forgery less feasible? It can only be on the theory that he is bound to assume that those to whom he delivers the paper or into whose hands it may come, will be likely to commit a crime if it is comparatively easy to do so. I deny that there is any such presumption in the law. It would be a stigma and a reflection upon the character of the mercantile community, and constitute an intolerable reproach of which they might well complain as without justification in practical experience or the conduct of business. That there are miscreants who will forge commercial paper by raising the amount originally stated in the instrument is too true, and is evidenced by the cases in the law reports to which we have had occasion to refer; but that such misconduct is the rule, or is so general as to justify the presumption that it is to be expected, and that business men must govern themselves accordingly, has never yet been asserted in this state, and I am not willing to sanction any such proposition, either directly or by implication. On the contrary, the presumption is that men will do right rather than wrong. As was said by Judge Cullen, in Critten v.Chemical National Bank (171 N.Y. 224), it is not the law that the drawer of a check is bound so to prepare it that nobody else can successfully tamper with it. Neither is it the law that the indorser of a promissory note, complete on its face, may be made liable for the consequences of a forgery thereof, simply because there were spaces thereon which rendered the forgery easier than would otherwise have been the case."

In Savings Bank v. Stowell, supra, the question as to the liability of one of the makers of a negotiable instrument fraudulently altered without his knowledge and after the delivery in complete form, was examined and dealt with in an elaborate opinion by Chief Justice Gray, and the conclusion reached, "That the alteration of a promissory note by one of several makers, not assented to by the others, and by which the amount is increased by inserting words or figures in a blank (470) space left in the printed form on which it is written, avoids the note as to the other makers, even in the hands of a bona fide holder for value."

The same position was sustained by the Supreme Court of Michigan inHolmes v. Trumper, 22 Mich. 427, and in the able opinion of AssociateJustice Christancy it is said, among other things: "The negligence, if such it can be called, is of the same kind as might be claimed if any man, in signing a contract, were to place his name far enough below the instrument to permit another line to be written above his name in apparent harmony with the rest of the instrument. . . . Whenever a party in good faith signs a complete promissory note, however awkwardly drawn, he should, we think, be equally protected from its alteration by forgery in whatever mode it may be accomplished; and unless, perhaps, when it has been committed by some one in whom he has authorized others to place confidence as acting for him, he has quite as good a right to rest upon the presumption that it will not be criminally altered, as any person has to take the paper on the presumption that it has not been; and the parties taking such paper must be considered as taking it upon their own risk, so far as the question of forgery is concerned, and as trusting to the character and credit of those from whom they receive it, and of the intermediate holders."

In Bank v. Wangerin, 65 Kan. 423, supra, the correct position, in our view, is stated as follows: "Where a negotiable instrument is delivered to a payee, complete in all of its parts, the maker thereof is not liable thereon even to an innocent holder, after same has been fraudulently altered so as to express a larger amount than was written therein at the time of its execution. Second, such maker is not bound at his peril to guard against the commission of forgery by one into whose hands such instrument may come."

And in Randolph on Commercial Paper the author states the position resulting from his examination of the authorities on the subject, as follows: "Where negotiable paper has been executed with the amount blank, it is no defense against a bona fide holder for value for the maker to show that his authority has been exceeded in filling such blank, and a greater amount written than was intended. This was also once held to be the rule where no blank had been actually left, but the maker had negligently left a space either before or after the written amount which made it easier for a holder fraudulently to enlarge the sum first written. It has now, however, become the established rule that, if the instrument was complete without blanks at the time of its delivery, the fraudulent increase of the amount by taking advantage of a space left without such intention, although it may be negligently, will constitute a material alteration, and operate to discharge the maker."

In citation to R.C.L., supra, the author says, in effect, that the cases holding that negligence on the part of the maker will (471) preclude the defense suggested and set up in the demurrer, was based upon an old English case (Young v. Grote, 4 Bing. 253), which had been criticised and distinctly disapproved in principle by subsequent and authoritative English decisions, and that the weight of authority is now in accord with the latter position.

The rule of liability approved by these able and learned courts has been in effect adopted or approved in our Negotiable Instrument Act (C.S. 3106), which provides: "That where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided except as to a party who has himself made, authorized, or assented to the alteration, and subsequent indorsers. But where an instrument has been materially altered, and is in the hands of a holder in due course, not a party to the alteration, he may enforce payment according to the original tenor." It will be noted that the closing paragraph of this section extends to the holder in due course the right to recover the amount received by the maker on the instrument as originally drawn, and enlarging the holder's rights to that extent on the equitable principles which prevail, and sustain the action of indebitatus assumpsit. But the former portions of the section are in clear recognition of the principle that a completed instrument fraudulently altered after delivery or materially altered without his assent, will not sustain a recovery against the maker. The significance of this legislation is well brought out in the Kentucky case, above cited, of Commercial Bank v. Arden,177 Ky. 520. In that case the Court held that the maker of a completed negotiable instrument could not be held liable for the raised value of the paper altered after delivery, without his consent or knowledge. And in referring to some of the previous decisions of the Kentucky Court, apparently to the contrary, Hurt, J., delivering the opinion, after an intimation that some of those cases might be distinguished on the ground of an implied authority to make the alteration, said that the question was now controlled by the Negotiable Instrument Act, avoiding a completed instrument by material alteration after delivery.

It is earnestly urged for the appellant that this claim should be upheld in proper application of the equitable principles that where one of two equally innocent persons must suffer, the law will cast the loss upon him who has put it in the power of another to do the injury. But the cases calling for the application of the principle, so far as examined, were instances of fraud or breaches of trust involved in the contract of agency, where one clothed with the real or apparent authority to act for another in the premises has in excess or breach of the authority given acted to another's injury. These were the instances cited, and much relied upon by appellant, from our own Court, R. R. v. Kitchin, (472) 91 N.C. 29; Humphreys v. Finch, 97 N.C. 303; Rollins v. Ebbs, 138 N.C. 140; Bank v. Dew, 175 N.C. 79.

In the first three of these cases defendant had clothed another with apparent authority to do the act by which the injury was wrought, and the last, defendant Dew, by gross negligence, had been allowed to procure and hold certificates of stock made out in his name and unpaid for, and by which he was enabled to hypothecate the stock to plaintiff, and in this case there was also strong evidence tending to show that the stock had been actually delivered to defendant, who had procured value from plaintiff by hypothecating the same. Speaking to the principles relied upon in this position of appellant in Lanier v. Clark, supra, Speers, J., delivering the opinion, said: "But we believe that better reasoning and the weight of authority is otherwise. It is not fair to apply the maxim, ``Where one of two innocent parties must suffer loss by the fraud of a third, he who had made the loss possible by his negligence must bear the burden of loss,' or, ``He who trusts most should suffer most,' for in such case it cannot be said that the maker who delivers a perfect and completed note or bill into the hands of another, trusts more than he who purchases the same from that other on his guaranty of its genuineness. Strictly speaking, the doctrine of estoppel ought not to apply except in those cases where the person making the alteration is in some way clothed with agency, as by an apparent authority to make the change. Any material alteration in an instrument evidencing a pecuniary liability is ``forgery,' and it cannot be said that the maker of a negotiable or nonnegotiable note ought to anticipate that any one would commit a forgery, and, therefore, be required to so execute his instrument that such a forgery would be difficult, if not impossible. The law attaches great importance to that quality of commercial paper known as negotiability, and has gone very far in protecting innocent holders of such paper against all manner of defenses when interposed by the maker; but it should never go to the extent of holding such maker liable upon a contract different from what it appeared to be when it left the maker's hand."

It is further insisted for appellant that though recovery may not be had on the instrument, an action lies for the negligence of defendant in issuing the paper without the use of the devices referred to. This suggestion was met and directly disapproved in Bank of Albany v. Lester,supra, and this with the other authorities sustaining defendant's position all proceed upon the principle that where the instrument has been delivered in completed form, the possibility that it might be raised or altered by willful fraud or forgery of another is too remote to afford the basis of an action either in tort or contract. In such case the issuing could in no sense be considered the proximate cause of the injury. And in this connection it may be noted also that the fact (473) that a recovery according to the original tenor of the instrument against the maker or prior parties is provided for by the statute on the equitable principles of indebitatus assumpsit, in itself shows that this is all the recovery contemplated or permitted by the law.

In some of the authorities cited and relied upon by appellant, there were blank spaces capable of being filled with such ease that the cases might be reconciled and recovery sustained by reason of authority implied from the defective condition of the instrument. But I find none that would sustain a recovery in this case, where, as stated, there is no claim or suggestion of agency, but the parties were dealing at arms length in a business transaction and the checks were drawn on the lithographed paper in ordinary use by the bank and its customers, with every space properly filled by writing in ink and the paper delivered in proper form as a completed instrument.

On these facts, if there were no authoritative decisions or statutory regulation in denial of plaintiff's right to recover, the acceptance of its position would be attended with such inconvenience and would introduce such uncertainties in this branch of the Law Merchant that it would be necessary to establish some rule protecting a defendant from liability. These negotiable instruments are among the most important features of our business life. There is no well grounded distinction in principle which imputes liability to a bank in a case of this sort from that which would equally affect an individual. And it would well-nigh withdraw these instruments from ordinary use if any and every one who issued them without these precautionary devices would incur the risk of liability insisted on by plaintiff in this case.

Evidently recognizing this as a drawback of some seriousness, plaintiff seeks to restrict the application of the principle it involves to banks and large business houses, but what would be the size or character of business houses coming under such a rule of liability or how would this matter be determined?

Again, a bank is not supposed to carry a large quantity of these implements on hand, and if their devices go wrong, is their business to be halted till they can have their implements repaired, or until they can procure others? Or if, in the case suggested, they are called on to make a prompt remittance to New York or some large business center, where time is not infrequently of the first importance, can a bank only write its checks at the peril of having the check raised by some skillful forger to an amount that means disaster? And what would be the standard of excellence required in the procurement and use of these protective devices?

It is admitted that the kind now in use do not afford complete (474) protection, and it is well known that day by day the agents of these patent devices, enterprising and insistent, offer their wares, claiming that they have the very latest and only efficient protection. Doubtless, a bank should use these things when it has been shown that they lessen the risk of forgery. As a rule they do use them, but that is very far from the position that a failure to use them imports an actionable wrong.

On the record, the Court is of opinion that the essential and pertinent facts alleged in the complaint neither require nor permit an inference of liability, and defendant's demurrer has been properly sustained.

Affirmed.