Summary
In Bank v. Bank, 183 N.C. 463, it was alleged that the plaintiff had suffered loss through the defendant's negligent failure in issuing checks to use safety paper and certain protective devices and that the defendant's negligence was the proximate cause of the loss.
Summary of this case from Whitehead v. Telephone Co.Opinion
(Filed 10 May, 1922.)
1. Banks and Banking — Checks — Indorsement — Fraud — Indebitatus Assumpsit — Statutes.
Where the maker of a check, whether a bank or other corporation, or an individual, fills out the blank spaces by writing in ink and delivers it to the payee as a complete instrument, there is no question of implied agency of the payee to do anything further regarding the negotiation of the instrument as the agent for the maker, and where the payee has fraudulently raised the amount of the check, endorses to another, and receives the money thereon, the maker is not liable to the endorsee except in an action for the original or true amount of the check, upon equitable principles, and allowed by our negotiable instrument law. C.S. 3160.
2. Same — Equity — Innocent Persons — Principal and Agent — Trusts.
The equitable principle that where one of two 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, ordinarily arises in 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; and not to instances wherein the maker of a check has filled in the blank places with ink, has signed the same and delivered it to the payee as a completed instrument, and the payee has raised the check to a larger amount, without the assent of the maker, and has fraudulently obtained cash thereon from another, by endorsement.
3. Same — Negligence — Sensitized Paper — Erasures — Protectographs — Contracts — Tort.
Where completed checks issued by a bank upon its regular form of checks has been signed by its proper officer, raised by the payee, and endorsed to and cashed by another bank, which brings action against the maker bank for the full amount of the altered checks, the failure of the maker bank to use sensitized paper to prevent chemical erasures and a protectograph, with perforated figures, to prevent fraudulent alterations, is too remote to afford the basis of an action either in tort or contract, or to be considered the proximate cause of the injury, upon an issue of negligence; and the plaintiff is confined to his action for the true amount for which the checks were originally made. C.S. 3106.
4. Same.
The equitable principle upon which the indorsee of a check which has been raised by the payee without the maker's assent, is only permitted to recover from the maker upon an indebitatus assumpsit, extends to banking institutions, to individual makers, or general business concerns. C.S. 3106.
APPEAL by plaintiff from Cranmer, J., at August Term, 1921, of WAYNE.
Civil action, tried on demurrer to complaint. It appeared (464) from the complaint that one N. L. Massey, a man of business affairs, living in Richmond, Va., well known there and indebted to some of its banks, the plaintiff among others, on or about 18 June, 1918, was in Goldsboro, N.C. and that "after regular banking hours, when Massey and Norwood were alone in the office of defendant, the latter, at the request of said Massey, issued to him four New York Exchange checks for the sums respectively of $2, $6, $2, and $3, payable to said Massey, and signed by G. A. Norwood as president of defendant bank. That they were written out for said amounts in ink, on the lithograph form and paper ordinarily used by the bank with its customers, all the blanks being filled, same were taken by said Massey, and later the ink was erased by chemicals and fraudulently filled out by him for increased amounts aggregating over $40,000, and negotiated with the plaintiff bank for value, or near it, some of the money procured being credited on plaintiff's indebtedness against Massey, and plaintiff sues to recover the amount paid out by them on account of the alleged negligence of defendant, in that its president, Norwood, in drawing said checks failed to use sensitized paper and protectograph devices for making alterations of said checks more difficult, whereby the payee using protectograph himself was enabled to impose said checks upon plaintiff for the larger amount. That the said allegations of negligence on which plaintiff seeks to establish liability of dependent are more especially set forth in the complaint as follows:
"11. That it is a matter of common and general knowledge, which was known, or should reasonably have been known, by defendant's officers and employees at the time of the issuance of said checks, that there had been discovered and developed certain simple chemical preparations which were easily procurable at retail stationery stores at small cost by the public generally, and were in general use for legitimate purposes, and some of which had been widely advertised in this and other states, by means of which a person of ordinary skill and learning, such as said Massey, could easily remove from an ordinary good grade of white bond or ledger paper, such as said chicks were written upon, all traces of writing placed thereon with ordinary pen and ink, such as were used in filling in and signing said checks by said Norwood, defendant's president, leaving no visible sign or trace upon the paper of either the original writing or the removal thereof by the chemicals used in the process of such removal, and without injury to the surface or fiber of the paper; and that by the use of such generally known preparations and processes the figures and words denoting the amounts of said four checks, as and in the form originally issued by defendant, could be easily and readily removed and new words and figures written therein in such a way as to escape detection by a reasonably prudent and careful person in the ordinary course of (465) business, and in the manner in which said checks were altered and raised subsequent to their original issue. That said four checks were actually altered as hereinbefore stated by the aforesaid process.
"12. That several years prior to 1918 the danger of innocent parties being damaged and defrauded by application of the processes described in the foregoing paragraph, became a matter of common and general knowledge and grave concern to all business men, and especially to bankers, and in step with the orderly march of progress wherein science and advance learning are continually devising ways and means to combat the dangers arising from the use in modern times and conditions of archaic and inefficient methods, certain simple protective processes and devices were evolved and adopted, and were, in June, 1918, and had been for some years prior thereto, commonly known and approved and in common and general use by banking institutions and business houses in this and all other states, as plaintiff is informed and believes, by the use of which simple processes and devices checks could be so drawn that they could not, by the use of the processes set forth in paragraph eleven above, or any other process, be altered or raised so as to escape detection by a reasonably careful and prudent person in the ordinary course of business by any person save a very few especially trained and highly expert and experienced chemists and document experts, and especially could not have been so altered or raised by said Massey or any person of ordinary skill and knowledge, such protective processes and devices being as follows:
"(a) The drawing of checks upon a specially prepared type of paper, known as 'safety paper,' with specially treated and tinted surface, the properties of which are such that no erasure or alteration of the writing thereon can be made, by either chemical or mechanical processes, without leaving upon the surface and fibre of paper itself certain visible and ineradicable tell-tale traces and evidences of such erasures or alterations, except possibly by a very few especially trained and highly expert and experienced chemists and document experts.
"(b) The use of a device or machine of the general kind and type of those known as the 'protectograph' or the 'protecto check writer,' or some mechanical device, whereby the letters forming the words denoting the amount of the check are punched, cut or perforated into the paper, as described in paragraphs three and nine above, and which write the check in such form as to render impossible its alteration by a person of ordinary skill and knowledge, such as Massey, and in such a way as to escape detection by an ordinary careful and prudent person in the ordinary course of business, and as to render highly improbable its alteration in such a way even by a chemist or document expert (466) of especial training and long experience. That the use of such devices and machines by banks had, in June, 1918, and for several years prior thereto, become so common and general, and the safety from alteration of checks prepared thereon had, during all said years, become so generally recognized by bankers and business men in this State and country that checks so drawn were at said times, and are now, everywhere accepted and taken without question as having been originally so issued and as being free from alteration, as plaintiff is informed and believes.
"13. That by its known, common, uniform and habitual use of a machine or device of the general type and kind described above in paragraphs three, nine, and twelve, in drawing and issuing checks upon its New York depositories, commonly known as New York Exchange checks, defendant, as plaintiff is informed and believes and alleges, led and persuaded the public and other banks in general, and this plaintiff in particular, to reasonably depend and rely upon the fact, and expect that all such checks drawn and issued by defendant would be drawn and filled in, as to the amount thereof, upon such machine or device, and to reasonably rely upon the apparent genuineness of such checks so drawn and bearing the genuine signature of defendant's duly authorized officer, and with no visible traces or evidence of alterations apparent thereon; that in accepting and negotiating said four checks issued by defendant, plaintiff did reasonably rely, and was led by defendant's said actions to rely, upon their apparent genuineness.
"14. That it is, and was at said times, a matter of common and general knowledge, well known to defendant, its agent and officers, that New York Exchange checks issued by banks in good standing and repute, such as defendant, to the order of known payee, and drawn with the use of the aforesaid safety devices, enjoyed a high degree of negotiability and were accepted and freely negotiated at their face value by banks and business men generally in the ordinary course of business, without particularly investigation or question; that defendant well knew, and plaintiff alleges, that such checks drawn without the use of said protective devices and processes, but with ordinary pen and ink, in the manner in which said four checks in question were originally drawn and issued by defendant, and capable of being easily and readily altered and raised by persons of ordinary skill and knowledge, such as said Massey, in such a way as to escape detection, were a grave menace to banks and business men generally, and constituted dangerous instrumentalities capable of vicarious damage and injury; that it was defendant's duty to the general public and this plaintiff in particular, in issuing such checks, and particularly the said four checks, to use all means, devices, and processes generally known and approved, and in common and general use in banking institutions, and especially the means, devices, and processes which defendant (467) habitually used, to the knowledge of plaintiff, to render such checks incapable of being so altered and raised without such alteration, being capable of detection by the exercise of ordinary care; and although defendant knew, or should reasonably have known and foreseen, that plaintiff or some other banking institution was liable to be injured and damaged thereby, it nevertheless carelessly, negligently, and in breach of its legal duty issued said four checks in the manner and form aforesaid, with no protective safeguards whatever against their alteration in the manner and way in which they were subsequently altered.
"15. That defendant and its officers and employees were negligent in that they drew and issued said four checks to N. L. Massey without the use of safety paper and the other protective devices above described, and in that they issued said checks in such form that they could be easily and readily altered and raised by a person of ordinary skill and knowledge, such as said Massey, in such a way as to escape detection, as stated above in detail; that such negligent acts and omissions were the proximate cause of plaintiff's acceptance and purchase of said checks for the amounts as altered and of plaintiff's loss, damage, and injury as hereinbefore and hereinafter alleged, and all of which loss, damage, and injury should reasonably have been foreseen by a reasonably prudent person in the banking business, and especially by defendant as the probable result of its negligent acts and omissions."
Defendant demurred on the ground chiefly "that it appears from the complaint that each of the paper-writings in controversy was a negotiable instrument, and the same was materially altered without the assent of the defendant, and plaintiff is not seeking to enforce payment thereof according to its original tenor."
There was judgment sustaining the demurrer, and plaintiff excepted and appealed.
A. D. Christian and Clarkson, Taliaferro Clarkson for plaintiff. Teague Dees and R. N. Simms for defendant.
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, but Judge 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 in Holmes v. Trumper, 22 Mich. 427, and in the able opinion of Associate Justice 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.