Opinion
No. 4408.
Argued June 7, 1955.
Decided June 22, 1955.
As between the drawer bank which delivered a check to an impostor upon presentation of a forged withdrawal order and the bank which paid the check upon the impostor's endorsement in the name by which the payee is described, the loss was held allocable to the drawer in the absence of negligence on the part of the second bank.
The policy favoring free circulation of commercial paper precludes the drawer from asserting the defense of forgery (R. L., c. 366, s. 23) as the basis for recovery from the defendant bank paying the check.
Where the defendant bank cashing the check followed the normal banking practice of not checking endorsements on checks presented by depositors known to it such conduct could not be made the basis for shifting the loss from the drawer to the defendant.
ASSUMPSIT, by the plaintiff, drawee, against the defendant, who endorsed and cashed a check drawn by the Dartmouth Savings Bank payable to its depositor Lillian S. Johnson, to recover its loss in the amount of $4,422 plus interest caused by the forgery of the payee's endorsement by one Fish. Trial by the Court which rendered a verdict for the plaintiff for $4,422 plus interest. Defendant's exceptions to the Court's findings, rulings and verdict were reserved and transferred by Wescott, J.
On or about August 5, 1947, the Dartmouth Savings Bank drew a check for $4,500 on the plaintiff bank payable to its depositor Lillian S. Johnson, after receiving a withdrawal order purportedly signed by her but actually forged by one Fish. On August 8, 1947, Fish forged the payee's signature as endorser and had the check paid and credited to his account by the defendant bank where he was a depositor. The defendant bank guaranteed prior endorsements and forwarded the check to the Federal Reserve Bank of Boston for clearance to the plaintiff. Fish died in 1948 and in 1949 it was first discovered by all the banks that the withdrawal order and the endorsement of the check were forgeries. In 1952, the depositor Lillian S. Johnson recovered judgment against the Dartmouth Savings Bank for the amount of the check and thereafter judgment was entered for the depositor in the sum of $4,422 plus interest. The plaintiff upon demand of the Dartmouth Savings Bank reimbursed it in the sum of $4,422 plus interest. Thereafter the present action was instituted by the plaintiff bank against the defendant bank.
The Court made the following ruling: "In the case at bar the Dartmouth National Bank is estopped from asserting any claims against The Keene National Bank which could not be asserted against it by the Dartmouth Savings Bank, and stands in the same position as the Dartmouth Savings Bank, as the result of having voluntarily paid the sum of $4,422.00 to the Savings Bank on April 18, 1952."
In the prior action of the depositor Lillian S. Johnson against the Dartmouth Savings Bank the Court found as a fact that the signature of Lillian S. Johnson on the withdrawal order, although not her true signature, was so similar to her true signature that it could not be detected as a forgery by a reasonably prudent employee or officer of a bank. The Court also ruled as a matter of law that the Dartmouth Savings Bank did not exercise ordinary care in honoring the withdrawal order and issuing its check in the sum of $4,500. The record does not disclose whether the dealings between the Dartmouth Savings Bank and Fish were face to face, or by mail, or both. Other facts appear in the opinion.
Cotton, Tesreau Stebbins (Mr. Stebbins orally), for the plaintiff.
Faulkner, Plaut Hanna (Mr. Plaut orally), for the defendant.
The ultimate issue in this case is who must bear the loss as between the drawer who delivered the check to an impostor and the defendant who cashed the check upon the impostor's endorsement. Since it frequently happens that an impostor is absent, dead or insolvent, the problem arises of assigning the loss to one of two banks which are both relatively innocent parties and free from fault. The issue has not heretofore been decided in this state.
The plaintiff relies on Star Fire Insurance Co. v. New Hampshire Nat. Bank, 60 N.H. 442. That case is distinguishable on its facts. The Uniform Negotiable Instruments Act which is applicable in this case provides: "Where a signature is forced or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge thereof, or to enforce payment therefor against any party thereto, can be acquired through or under such signature, unless the party, against whom it is sought to enforce such right, is precluded from setting up the forgery or want of authority." R. L., c. 366, s. 23. In passing it may be noted that typographical errors in this section as enacted, such as the word "forced" for forged, have not been considered as changing the intent of section 23 of the Uniform Act. The plaintiff contends that under this section the defendant had no title to the check because of the forgery and therefore is under a duty to reimburse the plaintiff. Restatement, Restitution, s. 35. While there is minority support for the plaintiff's position (Tolman v. American Nat. Bank, 22 R. I. 462), the weight of authority is to the contrary. Britton, Bills and Notes, s. 151; McHenry v. Old Citizens Nat. Bank, 85 Ohio St. 203; Russell v. Second Nat. Bank of Paterson, 136 N.J.L. 270; note, 34 Harv. L. Rev. 76; Kessler, Forged Indorsements, 47 Yale L. J. 863. According to the majority view the impostor's endorsement in the name by which the payee is described passes title to the holder in due course and the loss falls on the drawer. Anno. 112 A.L.R. 1435.
"The usual reason assigned for the result reached in the majority of cases, i.e., that the impostor got title to the instrument whether he dealt in person or by mail with the maker or the drawer, is that the defrauded party intends to deliver the instrument to the impostor although he is led by mistake to do so. The courts disregard the drawer's coexisting but conflicting intention to deliver to the person with whom he thinks he is dealing, just as they would disregard it if he handed currency to the impostor . . . ." Britton, Bills and Notes, p. 724. We consider the majority result to be correct but the rationale of a single controlling intent in support of that result is arbitrary, unrealistic and unconvincing. Better to say, as Williston implies, that the fundamental policy of negotiability, rather than a fictitious intention, is the real reason for placing the loss on the drawer. 5 Williston, Contracts, (Rev. ed.) s. 1517B. In the supplement to this section the decision in Cohen v. Lincoln Sav. Bank, 275 N.Y. 399, is criticized on the ground that it "contravenes the fundamental policy of protection for negotiable instruments." See note, 86 U. of Pa. L. Rev. 526, 531; 23 Cornell L. Rev. 307.
It is doubtful that the weight of authority can be said to be opposed to the law merchant and the customary banking and commercial practices throughout the country. While some of the reasons given in support of the rule based on intent and estoppel may be criticized, the policy in favor of the free circulation of commercial paper is sufficient basis in the ordinary case for placing the loss on the drawer as the first victim of the impostor's swindle rather than on the second victim who is induced by the impostor to cash the check. For this reason the plaintiff is precluded under the statute (R. L., c. 366, s. 23) from setting up the forgery as the basis for recovery. In the absence of any contrary decision in this state we therefore adopt the majority rule here without subscribing to all of the reasons that have been advanced in its favor.
Unlike the present case there may be circumstances where the first bank has exercised care and the second bank has exercised none so that the loss can properly be allocated to the latter. There was evidence in this case that it was not required banking practice for the defendant to check endorsements on checks when presented by a depositor known to it and consequently this was not done when Fish negotiated the check at the defendant bank. So far as appears this was a normal banking practice and cannot be made the basis for shifting the loss from the plaintiff to the defendant. See Santa Maria v. Industrial City Bank Banking Co., 326 Mass. 440, 446. The defendant's exceptions are sustained and the order is
Judgment for the defendant.
All concurred.