City of New York v. Bronx County Trust Co.

The action was originally commenced by the city of New York against the Bronx County Trust Company, one of the city depositaries, to recover the aggregate amount paid out by the trust company and charged to the city on 652 checks upon which the indorsements were forged. The checks had been cashed or deposited by the forgers at other banks, and when received by the trust company all bore the indorsement of the banks presenting them, under the legend “ Prior indorsements guaranteed.” After the commencement of the action the trust company paid the city the sum sued for, impleaded the indorsing banks on their indorsement and guaranty, and served each of them with a supplemental summons and answer. The Bronx County Trust Company may, therefore, be referred to as the plaintiff and the impleaded banks as the defendants. The trial court dismissed the plaintiff’s cause of action. The judgment was reversed on facts and law by the Appellate Division, and judgment given pro tanto against the defendants.

The checks had been drawn to the order of fictitious city employees whose names had been fraudulently placed upon the records and payrolls of the Cromwell Avenue Garage, operated by the Department of Street Cleaning of the City of New York. The weekly payrolls were made up from the garage records under the direction of the garage manager by a clerk, and included the names of the men actually employed, as well as the fictitious names which had been added. Opposite the name of each employee was a statement of the hours worked and

Except for the identification feature of these checks they differed not at all from the usual and customary form of check. The indorsement of the fictitious names was, therefore, a forgery. (Shipman v. Bank of State of New York, 126 N. Y. 318 ; National Surety Co. v. National City Bank, 184 App. Div. 771 .) The forgers,

The plaintiff paid the city without contesting the claim. It says it did so because there was no defense available to it since (a) it had a remedy against the indorsing banks and, therefore, suffered no damage; and (b) it did not rely upon the forged signatures, but upon the indorsement and guaranty by the indorsing banks. It is not necessary to consider the validity of the assigned reasons further than to say that National Surety Co. v. Manhattan Co. ( 252 N. Y. 247 ) is not, upon the facts here, an authority for proposition (a).

The only defenses theoretically open to the plaintiff against the claim of the city were estoppel and negligence by way of set-off. (National Surety Co. v. Manhattan Co., supra.) Under the peculiar facts of this case, the defense of estoppel is equally available to the defendants and will be considered below. The defense of negligence in cases of this sort is ordinarily, available only to the drawee bank, to which alone, it has been said, the depositor owes a duty of care. (Corn Exchange Bank v. Nassau Bank, 91 N. Y. 74 , 80; Critten v. Chemical Nat. Bank, 171 N. Y. 219 , 229.) The doctrine of privity, however, is not so conclusive as it once was. Whether there may

We come, then, to the one substantial question. This system of payroll payment was first put in use by the city of New York in 1915. There were at that time 135 depositary banks with which the city had accounts. To each of those banks, including all the parties to this action, was sent a letter which referred to the pay plan as having been devised for making pay checks of the city of

The contention of the defendants is that out of that arrangement and the subsequent course of dealing thereunder there arose between the city and its 135 depositary banks a contractual relationship, or at least an understanding, by virtue of which, either contractually or by estoppel, any bank taking one of the city’s pay checks would acquire good title thereto, if the indorsement of the payee on the back corresponded with the identification signature on the face

Contract there was not. There is no indication that the banks’ “ assurance ” that they would cash all checks presented by city employees when properly identified was anything more than an assurance. The letter with its accompanying circular merely described the new plan of payment with expressions of expectation as to how it would operate. So far as the evidence shows there was nothing to prevent the defendants from refusing to cash a check even when the payee was properly identified.

It seems equally clear that the doctrine of estoppel has no application. It is matter of common knowledge that a bank in cashing a check or in accepting it for deposit ordinarily relies only upon the responsibility of the party, usually its own customer, with whom it deals. It pays no attention to indorsements. other than his.

There is a further contention that a ratification of the payment of the checks by the banks arose from the act of the police authorities in taking certain moneys found in the possession of the forgers. This, it is said, amounted to the election of an inconsistent remedy. Even if the police can be said to have been acting as agents of the city, there seems to be no good reason why the city was not at liberty to pursue both the forgers and the banks

The judgment should be affirmed, with costs.

The city of New York pays its employees by checks made out to their order. The checks have some unusual features. Though drawn on a particular depositary, they state upon their face: Payable upon identification at other city depositaries.” Printed upon their face are also the words: “ Signature of Payee — For Identification Only.” Below these words is a blank space for the signature of the payee and below the blank the words: “ Not ‘ an endorsement.” Six hundred fifty-two checks, signed by a duly authorized officer of the city, purporting to be payable to the order of a named payee and to be indorsed by that payee, were received from other depositary banks by the defendant Bronx County Trust Company, upon which these checks had been drawn. The checks so received were paid by the Bronx County Trust Company and charged to the deposit account of the city. The blank left for the identification signature, on the face of the checks, had been filled in and the indorsements were in the same handwriting as the identification signature. The Bronx County Trust Company, in paying these checks, probably did not examine the identification signature in order to discover whether the indorsements were in fact made by the payees. All prior indorsements were guaranteed by the banks which presented the checks and the evi

Ordinarily, a bank upon which a check is drawn to the order of a named payee, can charge such payment against the drawer of the check only if the check is, in fact, indorsed by the payee. Otherwise the check is not paid in accordance with its tenor. The bank usually does not know the payee or his signature. Nevertheless, it is bound, at its peril, to identify the payee and his signature before payment. Here, however, the drawee has himself provided the means for such identification by the use of a check bearing a blank for an identification signature. Without other explanation for the use of such a form of check, the inference would be clear that the check itself contained an invitation, to the bank on which it was drawn, or to third parties dealing with the apparent holder of the check, to rely on the identification signature for the identification of the payee and the validity of the indorsement of the payee. True, no person would, in the absence of a promise to the drawer, be bound to accept such invitation. Though a depositary bank is usually bound, by contract with its depositors, to pay, according to their tenor, checks drawn by a depositor on his account, a payee has no right of action against the bank for failure to make such payment. Before such checks are paid, a careful bank will usually, for its own protection, require identification of the payee or the guaranty of his indorsement by another bank or responsible party. In the same way even if a depositary bank has assumed a contractual obligation to a depositor to pay checks when presented to it indorsed by a payee whose indorsement is identified by an “ identification signature,” it might still, for its own protection, require the indorsement to be made in its presence in order to avoid the risk of deception through a forgery made possible by tracing the identification signature or other

I have said that the form of the check alone might well justify an inference that the drawer of the check invites both the depositary bank and third parties to accept the “ identification signature ” as an identification of the payee’s indorsement. In this case, however, the invitation, at least as to the defendant banks, to act upon the “ identification signature ” is not a matter of inference from the form of the check. It is expressed in letters and circulars, sent to the defendant banks, and its extent is defined by the same letters and circulars. When the city devised this form of check it prepared a circular to be distributed to each employee with his check. In a letter addressed to all its depositary banks, including all the defendant banks in - this case, the city enclosed a copy of this circular and stated: “ The Comptroller has received from the President of your institution his assent to a plan recently devised by this department for making pay checks of the City of New York as good as currency. The plan includes the use of a self-identifying check which does away entirely with the necessity for a certificate of identification as submitted to you last month * * *. The circular which I am enclosing describes the way employees make out checks so as to make the signatures, in effect, certified by the city.” The circular, enclosed in the letter, stated, amongst other things: “ Pay checks of the City of New York should be good for their face value anywhere. City employees ought not to be obliged to pay discounts to storekeepers or others for having checks cashed, nor should they have

The “ assent ” by the depositary banks to this plan might well, I think, be regarded as establishing a contract between all such banks and the city of New York that in consideration of such assent the city would, on its part, agree that as a condition of the delivery to an employee of any check, the employee must sign his name in the space left for a specimen signature “ so as to make the signatures, in effect, certified by the city.” We need not, however, decide such question for, at least, the circular shows a representation by the city that the “ specimen signatures ” will be, in fact, the signatures of the payees and it shows, further, an intent that not only the depositary banks, but “ hundreds of merchants ” should rely on that representation and accept the checks at their full value without requiring any discount. By reason of the failure of the city’s employees to carry out the city’s promissory representation, the city has made it possible for a dishonest employee to appropriate to his own use pay checks to which he was not entitled and to obtain payment of such pay checks. The loss must

As I have pointed out, any party, including a depositary bank under a contractual obligation to the depositor to pay a check when indorsed by the party who has inserted the identification signature in the blank left for that purpose, might still, for his own protection, require that the indorsement be made in its presence. To give that provision a construction that made exercise of this right obligatory on any person relying on the specimen signature, we must, I think, distort the plain meaning of the circular and letter. The obligation referred to is evidently the obligation of a payee who demands payment at a depositary bank and, by the terms of the circular itself, may be waived even by such bank. It could have no application to the “ hundreds of merchants ” who were expected to accept the checks in reliance on the “ specimen signatures ” at their full value. To them the city had extended an unqualified invitation to rely on the specimen signature. It could have no application to a bank which

Nor do I find more substance in the contention that there can be no estoppel as against any party who did not compare the indorsement with the specimen signature and, therefore, did not rely upon the specimen signature. Certainly no such contention could be validly made if after the indorsement by the payee, any intermediate indorser did make such comparison and did rely upon it. By such reliance such an intermediate indorser would obtain title by estoppel to the check. He would be a holder in due course and any subsequent holder who “ derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter.” (Neg. Inst. Law, § 97.) An intermediate indorser, when sued upon his indorsement, could defend on that ground. Otherwise, again the purpose of the plan would be, in part, defeated. True, in this case there were no intermediate indorsers who were themselves holders in due course. The paying bank relied on the indorsement of the other banks and those banks, in turn, relied upon indorsements of parties to the forgery. None of the defendants, however, had knowledge or notice of the forgery. They were imposed upon by the wrongdoers.' If the city had carried out its representation or assurance that the employee to whose order the check was made would place his signature in the blank left for a specimen signature, then the forgers could not have perpetrated their crime and no one would have suffered a loss. Thus, the failure of the city to do the very thing which it had said it would do was the direct cause of the loss which Some party must bear.

We have said that “ if the negligence of the depositor is the cause of the payment by the bank of a forged check he may not set up the invalidity of the paper which he has induced the bank to act on as genuine. This principle rests primarily on the doctrine of estoppel.” (Gutfreund v. East River Nat. Bank, 251 N. Y. 58 , 63; Cf. National Surety Co. v. Manhattan Co., 252 N. Y. 247 .) In such case, too, the bank almost invariably has acted in reliance primarily upon a prior indorsement, but where the negligence of the depositor gave appearance of validity it has never been suggested that the bank paying the forged check has not been induced by the negligence of the depositor to act on the check as genuine. The bank relies upon the prior indorsement but only upon the assumption that such indorser has good title to the instrument and all the rights conferred upon a holder by the instrument itself and it acquires those rights — neither more nor less.

Though the defendants relied upon the representation or guaranty of their intermediate indorsers that prior indorsements were valid, it was the fault of the city that made the representation or guaranty of the prior indorsers possible. If the city had, in terms, certified the specimen signature of the payee, it could not have escaped the

The judgment of the Appellate Division and that of the Special Term should be reversed so far as appealed from and judgment entered in favor of the defendant-appellants.

Pound, Ch. J., Crane, O’Brien and Hubbs, JJ., concur with Crouch, J.; Lehman, J., dissents in opinion in which Kellogg, J., concurs.

Judgment affirmed. (See 261 N. Y. 622 .)