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SAVINGS BANK OF RICHMOND V

NATL BANK OF GOLDSBORO

FACTSDrawer: AC NorwoodDrawee: First National Bank of NYPayee: NL Maisie (forged the draft) sold to Savings Bank of Richmond

-A.C. Norwood (DRAWER), President of the National Bank of Goldsboro issued a certain draft dated March 29, 1918 for thesum of $6, drawn against the FIRST NATIONAL BANK OF NEW YORK (the DRAWEE) payable to the order of N.L. Massie.-The said draft was thereafter unlawfully and without the knowledge or consent of A.C. Norwood or the Goldsboro Bank,fraudulently forged and altered in material respects. The date was changed from March 29, 1918 to June 21, 1918, and theamount thereof from $6 to $8,470.-Massie sold the altered draft to the SAVINGS BANK OF RICHMOND, with whom he had been transacting with for two years.Trusting Massies moral and financial strength, the SAVINGS BANK OF RICHMOND purchased the draft for $8,470 givinghim in exchange a cashiers check for the same amount. When the Savings Bank attempted to collect it, only then did itfind out that the draft was forged.-In this suit, the Savings Bank insists that the National Bank of Goldsboro (THE DRAWER) should be liable on the theorythat it was negligent or amiss in its duty to ensure that the draft is safe from every reasonable chance of alteration.Ordinary paper was used and that there was no protectograph or other safety device to prevent alteration. Daniel, acommentator on the negotiable instruments law is cited as authority for the liability of the drawer of a bill or the maker of anote who by careless execution of the instrument left room for any alteration, insertion or erasure, which would prejudicethe bona fide holders rights.-The Goldsboro Bank counters that with a completed draft, losses arising from its subsequent alteration and forgery do notfall upon it but rather upon those who have chosen to accept the same as changed. Assuming that the argument of SavingsBank to be valid, it will not be liable because it is not the proximate cause of the loss.

ISSUES1. WON Savings Bank can recover from point of view of tort or negligence.2. WON Bank can recover from the draft as a contract btwn the parties.3. WON Savings Bank can recover from the negotiable instrument.

HELD

1. NO. The issuing of the note could in no sense be considered as proximate cause of the loss. Where a negotiable note wasdelivered in completed form, the possibility that it might be altered by the willful fraud or forgery of another was tooremote to afford basis of an action either in tort or in contract.

2. NO. The note in its forged and altered state is not a contract of the maker of the instrument. Thus, a suit based oncontract can neither prosper.

3. YES, but only as to the original face value of the draft. Section 3106 of the Negotiable Instruments Law of North Carolinaprovides:

Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided except asagainst the party who has himself made, authorized or assented to the alteration and subsequent indorsers. But when theinstrument has been materially altered and is in the hands of a holder in due course, not a party to the alteration, he mayenforce payment thereof according to the original tenor.

CRITTEN V CHEMICAL NATL BANK (1902)

FACTS-Plaintiff kept a large and active account with the defendant. The plaintiffs employed a clerk named Davis. It was the dutyof Davis to fill up the checks which it might be necessary for the plaintiffs to give in the course of business, top make

corresponding entries in the stubs of the check book, and present the checks so prepared to Mr. Critten, one of theplaintiffs, for signaturem together with the bills in payment of which they were drawn. After signing a check Critten wouldplace it and the bill in an envelope addressed to the proper party, seal the envelope and put it in the mailing drawer.-in 24 separate instances, Davis abstracted one of the envelopes from the mailing drawer, opened it, obliterated by acidsthe name of the payee and the account specified in the checks, then made the check payable to cash and raised itsamount, in the majority of cases, by the sum of $100. he would draw the money on the checks so altered from thedefendant bank, pay the bill for which the check was drawn in cash, and appropriate the excess. On one occasion David didnot collect the altered check from the defendant, but deposited it to his own credit in another bank. When a check waspresented to Critten for signature the number of dollars for which it was drawn would be cut in the check by a punchinginstrument. When Davis altered a check he would punch a new figure in front of those already appearing in the check. Thiswork has been entrusted to another person in Davis absence, hence the forgeries were discovered and Davis was arrested

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and punished. Hence this action to recover the amount of these forged checks, over and above the sums for which theywere originally drawn

ISSUES1. WON plaintiff is guilty of negligence2. WON by negligence in its discharge or by the failure to discover and notify the bank, the depositor (plaintiff) is estoppedfrom asserting that they are forgeries3. WON defendant bank can claim relief from plaintiffs negligence

HELD1. YES In this case, Davis falsified the additions or total sat the foor of the pages in the check book. But with a fewexceptions he did not alter the amounts expressed in the stubs. In no case did he change in the stubs the name of thepayee of the check. It is clear therefore that at all times a comparison of the returned checks with the stubs in thecheckbooks would have exposed the alterations made in the checks. Of course the knowledge of the forgeries that davispossessed from the fact that he himself was the forger, was in no respect to be attributed to the plaintiffs. the Court seesno reason why they were not chargeable with such information as a comparison of the checks with the check book wouldhave imparted to an innocent party previously unaware of the forgeries. As regards the failure to discover the forgeriesafter the return of the checks and the balancing of the account in the passbook. As held in Weissers admrs vs Denison,

the rule is settled that the depositor owes his bank the duty of a reasonable verification of the returned checks. . If thedepositor has by his negligence in failing to detect forgeries in his checks and give notice thereof caused loss to his bank,either by enabling the forger to repeat his fraud or by depriving the bank of an opportunity to obtain restitution, he shouldbe responsible for the damage caused by his default but beyond this his liability should not extend. Moreover, the courtsees no reason why the bank should be entitled to anything more than indemnity for the loss the depositors negligence hascaused it *The Court also made a finding that the ordinary rule of principal and agent or master and servant that theprincipal or master is liable for the fault of his servant or agent in the masters business apply in this case.

2. NO .While the Court hold that this duty rests upon the depositor, it does not accept the doctrine asserted in some of thecases that, by negligence in its discharge or by the failure to discover and notify the bank, the depositor either adopts thechecks as genuine and ratifies their payment or estops himself from asserting that they are forgeries. In the present case,a check altered by Davis from the sum of $22 to $622 was paid by the defendant to the Colonial Bank in which Davis haddeposited it. Against the bank the defendant has ample recourse. If it were to be held that the plaintiffs are estopped fromdenying the genuineness of that check as against the defendant, the latter could have no claim against the Colonial Bank,nor is it clear that the plaintiffs would have any direct right of action against that Bank. The Colonial bank took the checksolely on the responsibility of Davis. To it the plaintiffs owed no duty. A rule which might operate to relieve the bank fromthe liability it assumed when it collected an altered check, merely because the plaintiffs failed in their duty, not ti it, but toa third party should not be upheld. Nor would it operate justly in a case in which the bank had paid a single forgery unlessby the depositors default and delay the bank had lost its opportunity to secure restitution.

3. NO. It was held that the defendant was also guilty of negligence in paying the check. The sixth in sequence of these

forgeries was a check with the name of the payee erased and cash written in the place thereof. The teller of thedefendant who paid the check and was a witness on its behalf testified that the check showed on its face that the word

cash had been written in the place for the payees name over an erasure; that it was in such mutilated condition when itwas presented to him that, before paying it he required Davis to indorse upon the check a receipt for its amount. Had Davisbeen required to obtain the indorsement or guaranty of the plaintiffs as to its correctness, the forgeries of Davis wouldhave been exposed, and their repetition would not have occurred.The action brought by plaintiffs was brought on contract,not on tort for the allegation of negligence on the part of the defendant is used only to defeat its claim for relief on accountof the plaintiffs negligence.

Disposition The judgment should be reversed, and a new trial granted.

DISSENTING OPINION Since plaintiffs entrusted the work to a competent agent and, as established by evidence, took otherprecautions, there was evidence to support the finding in their favor. The rule which imputes to a principal knowledgeacquired by his agent rest upon the presumption that the latter has disclosed all the material facts to the former. Thispresumption does not extend to a fact which, if disclosed would subject the agent to a prosecution for crime or defeat ascheme in which he was engaged to defraud his employer.