Oregon Advisory Opinions January 01, 1941: OP 1

Advisory Opinion Text

A bank which cashes checks issued by the highway department to a fictitious payee on the basis of information fraudu­lently furnished by an employee of the commission, from which it appeared that the payee was an employee of the com­mission, is liable to the highway commis­sion for fund-: so expended, and the high­way commission is authorized to bring action to recover from the bank for such expenditures.

January 2, 1941. Oregon State Highway Commission.

Gentlemen: From your letter of Oc­tober 4, 1940, it appears that one of the state highway employees by a series of forgeries, extending from April 23, 1927, to October 6, 1937, defrauded the state in the amount of $8,017.76, in the follow­ing manner:

As a part of the duties of the mainten­ance superintendent of the highway de­partment he is required to prepare a pay roll disclosing the name of every em­ployee in his jurisdiction, the kind of work performed, the wage applicable and the amount of time worked, which pay roll, when prepared, is signed by the maintenance superintendent and for­warded to the Salem office. The super­intendent likewise had authority to pre­pare what was called a "time statement", which was an individual report and carried the name of the employee, the kind of work he was doing, his wage scale, the amount of time he had worked and the amount of money he had earned. This statement, when signed by the superintendent, was forwarded to the Salem office. The Salem office then pre­pared the pay roll which went to the secretary of state and for which he is­sued a warrant in favor of the highway engineer. This warrant was deposited in the bank for the payment of the indi­vidual employee.

The employee involved had a position in the auditing department of the state highway commission, in the Salem of­fice, which gave him opportunity to be­come familiar with the signatures of the various maintenance superintendents. He was likewise familiar with all of the mechanics of the pay roll and with indi­vidual payments. Using his access to records, and employing his familiarity with the signatures of the superintend­ents, he inaugurated a system of prepar­ing fictitious time statements to which he forged the name of one of the several maintenance superintendents. That forged instrument was then placed in the mail and utimately reached the Salem office where it was used by the person who made up the pay roll for the signa­ture of the engineer of the highway de­partment in the preparation of a check to the fictitious payee. The signature was sufficient to accomplish the issu­ance of a check to such payee.

On the forged time statement there was information given directing that the check be mailed to the payee at a certain address, or sometimes sent general de­livery, where the employee who forged the signature of the maintenance super­intendent would call, get the check, take it to the bank, endorse the name thereon of the fictitious payee, and thereby cash the check.

You request me to advise you whether or not the bank which cashed such checks is liable to the state highway com­mission for loss sustained by it by reason thereof.

It further appears that $6,001.29 of the money of which the state was defrauded was recovered from the surety company, but that the recovery of the balance amounting to $2,016.47 from the surety company was barred by lapse of time. You request my opinion whether the commission has legal authority to bring proceedings against the bank which paid the said checks to recover the said bal­ance of $2,016.47, and, second, whether or not it is the commission's official duty and obligation to attempt such recovery.

Section 57-109, Oregon Code 1930, pro­vides:

"The instrument is payable to bearer (1) when it is expressed to be so pay­able; or, (2) when it is payable to a person named therein or bearer; or, (3) when it is payable to the order of a fictitious or nonexisting person, and such fact was known to the person making it so payable; or, (4) when the name of the payee does not purport to be the name of any person; or, (5) when the only or last indorsement is an indorsement in blank."

Section 57-123, Oregon Code 1930, pro­vides:

"Where a signature is forged, 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 therefor, or to enforce pay­ment thereof 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."

Section 22-1413, Oregon Code 1930, provides:

"No bank or trust company which has paid and charged to the account of a depositor a forged or raised check issued in the name of such depositor, shall be liable to such depositor for the amount paid thereon, unless within thirty days after the return to said de­positor of the voucher representing such payment, said depositor shall no­tify the bank or trust company that the check so paid is forged or raised; provided, however, that if the de­positor fails to call at the bank for the purpose of securing the return of said voucher within three months from the date on which such check is paid, then the bank shall be under no further lia­bility on account of such payment. Where a check or other instrument payable on demand at any bank or trust company doing business in this state is presented for payment more than six months from its date, such bank or trust company may, unless ex­pressly instructed by the drawer or maker to pay the same, refuse payment thereof and no liability shall thereby be incurred to the drawer or maker for dishonoring the instrument by non­payment."

Joseph Milling Co. v. First Bank of Joseph, 109 Or. 1, 15:

"The relation between banker and depositor is one of debtor and creditor; and the implied agreement between them is that the banker will pay only in conformity with the orders of the depositor. The obligation of the bank is not merely to use reasonable care to pay in accordance with the order of the depositor, but the undertaking of the bank is, stated broadly, absolute. A bank must pay a check only to the payee named, or to his order. The obligation of the bank is to pay a check only upon a genuine indorsement. The drawer is not presumed to know the signature of the payee; but the bank must at its peril determine the identity of the payee and the genuineness of his signature. A bank cannot charge against the account of its depositor any sums as payments unless those sums have been paid to such persons as the depositor has directed; and pay­ments made upon forged indorsements are at the peril of the bank unless it can claim protection upon the ground of estoppel or negligence chargeable to the depositor: Los Angeles Invest­ment Co. v. Home Savings Bank, 180 Cal. 601 (182 Pac. 293, 5 A. L. R. 1193); City of St. Paul v. Merchants' National Bank, 151 Minn. 485 (187 N. W. 516, 22 A. L. R. 1121); Shipman v. Bank of the State of New York, 126 N. Y. 318 (27 N. E. 371, 22 Am. St. Rep. 821, 12 L. R. A. 791); Murphy v. Metropolitan Nat. Bank, 191 Mass. 159 (77 N. E. 693, 114 Am. St. Rep. 595); 7 C. J. 686; 3 R. C. L. 540, 542."

See, also:

United States Cold Storage Co. v.

Central Manufacturing District

Bank, 343 111. 503; 175 N. E. 825; 74 A. L. R. 811. McCornack v. Central State Bank, 203 Iowa, 833; 52 A. L. R. 1297. C. E. Erickson Co. v. Iowa National Bank, 211 Iowa, 495, 505. National Surety Co. v. National City Bank, 172 N. Y. S. 413; 184 App.

771.

Detroit Piston Ring Co. v. Wayne County Home & Savings Bank, 252 Mich. 163, 175.

Annotation 52 A. L. R. 1326; 17 L. R. A. (N. S.) 514; 22 A. L. R. 1229.

In Seaboard National Bank v. Bank of America, 193 N. Y. 26, 85 N. E. 826, 22 L. R. A. (N. S.) 499, 506, the court said: "It is only when a person making an instrument knows that he is making it payable to a fictitious or nonexisting person that it can be treated as payable to bearer."

Statutes identical with section 22-1413, Oregon Code 1930, have been held not to be applicable in cases where the forgery was made by an endorser, or the maker had no knowledge that the payee was fictitious.

American Sash & Door Co. v. Com­merce Trust Co. 332 Mo. 98, 122; 56 S. W. (2nd) 1034. Shipman v. Bank of the State of New York, 126 N. Y. 318; 27 N. E. 371; 12 L. R. A. 791. Jordan-Marsh Co. v. Shawmut Bank, 201 Mass. 397; 87 N. E. 740; 22 L. R. A. (N. S.) 250, 255.

McCornack v. Central State Bank, 203 Iowa, 833; 52 A. L. R. 1297, 1304.

Detroit Piston Ring Co. v. Wayne

County Home & Savings Bank, 252

Mich. 163, 172. Defiance Lumber Co. v. Bank of California, (Wash.) 41 Pac. (2)

135; 99 A. L. R. 426, 431.

The question of contributory negli­gence on the part of the maker is one of fact, the burden of establishing which is upon the payee.

McCornack v. Central State Bank, 203 Iowa, 833; 52 A. L. R. 1297, 1308.

Defiance Lumber Co. v. Bank of California, 41 Pac. (2) 135; 99 A. L. R. 426.

Detroit Piston Ring Co. v. Wayne County Home & Savings Bank, 252 Mich. 163; 233 N. W. 185.

Raszab v. Greenebaum Sons Bank & Trust Co., 252 111. App. 107.

In Defiance Lumber Co. v. Bank of California, supra, the court said:

"Manifestly, as stated in the text cited (Brady on Bank Checks), no specific rule can be laid down as to just what conduct on the part of the drawer of a check will constitute negli­gence sufficient to preclude him from holding the drawee bank liable for paying his check upon a forged in­dorsement; each case depending upon its own circumstances."

It is the rule that negligence of the maker in not detecting forgery is not a defense, unless knowledge can be shown and negligence was the proximate cause of payment by the bank.

Los Angeles Investment Co. v. Home Savings Bank, 182 Cal. 601; 182 Pac. 293; 5 A. L. R. 1193.

Jordan-Marsh Co. v. Shawmut Bank, 201 Mass. 397; 87 N. E. 740; 22 L. R. A. (N. S.) 250.

In United States Cold Storage Co. v. Central Manufacturing District Bank, 343 111. 503, 175 N. E. 825, 74 A. L. R. 811, the court said (page 818 of A. L. R.):

"The negligence of the drawer of a check is immaterial, unless it is such as directly and proximately affects the conduct of the bank in the perform­ance of its duties. Jordan-Marsh Co. v. National Shawmut Bank, supra; Shepard & Morse Lumber Co. v. Eld-ridge, 171 Mass. 516, 51 N. E. 9, 41 L. R. A. 617, 68 Am. St. Rep. 446; Welsh v. German-American Bank, supra; Shipman v. Bank of the State of New York, 126 N. Y. 318, 27 N. E. 371, 12 L. R. A. 791, 22 Am. St. Rep. 821; Los

Angeles Investment Co. v. Home Sav­ings Bank, 180 Cal. 601, 182 P. 293, 295, 5 A. L. R. 1193. A bank can justify a payment on a depositor's account only upon the actual direction of the de­positor. The questions arising upon checks between the drawee and the drawer 'always relate to what the one has authorized the other to do. They are not questions of negligence or of liability of parties upon commercial paper, but are those of authority solely . The question of negligence cannot arise unless the depositor has, in drawing his check, left blanks un­filled, or by some affirmative act of negligence has facilitated the commis­sion of a fraud by those into whose hands the check may come.' Crawford v. West Side Bank, 100 N. Y. 50, 2 N. E. 881, 882, 53 Am. Rep. 152. The pay­ment of a check on a forged indorse­ment appearing, it becomes incumbent on the bank making the payment to establish affirmatively the drawer's negligence, and it is not the law that the drawer is bound to prepare his check so that nobody can successfully tamper with it. Critten v. Chemical Nat. Bank, supra. Nor does he owe the duty to his banker to employ none but honest clerks who will not steal his checks and commit forgeries by means of them. When he has drawn his check payable to the order of the payee named, he owes the drawee no other duty, and the risk of the authenticity of the indorsement on which the drawee pays the check is that of the drawee."

In Harlem Cooperative Building & Loan Ass'n v. Mercantile Trust Co., 10 Misc. 680, 31 N. Y. S. 790, the court held that delay in notifying the bank of forgery was not a defense in absence of proof that the bank was damaged by such delay.

Knowledge of an employe who caused such check to be made is not imputed to his employer.

Los Angeles Investment Co. v. Home Savings Bank, 182 Cal. 601; 182 Pac. 293; 5 A. L. R. 1193. United States Cold Storage Co. v. Central Manufacturing District Bank, 343 111. 503; 175 N. E. 825; 74 A. L. R. 811, 814. Detroit Piston Ring Co. v. Wayne County Home & Savings Bank, 252 Mich. 163, 173.

It is my opinion that the bank which cashed the checks referred to by you is liable to the state of Oregon for loss sus­tained by it on account of such payments, and that the state highway commission, as the department of the state of Oregon, charged with the custody and expendi­ture of funds represented thereby, has legal authority to bring proceedings against the bank in the name of the state of Oregon.

It is also my opinion that it is the com­mission's official duty and obligation to attempt such recovery, unless there are facts and circumstances involved which, in the judgment of the commission, would prevent it from obtaining a judg­ment against the bank.

You will note from authorities herein referred to that negligence on the part of the maker of such checks may preclude it from recovering the amount paid thereon.

It is the rule that the state is not bound or estopped by the acts of its officers and agents when acting outside the scope of their authority.

Mulnix v. Mutual Benefit Life Ins. Co., 23 Colo. 71; 46 Pac. 123; 33 L. R. A. 827, 830. Carolina National Bank v. State of South Carolina, 60 S. C. 465, 38 S. E. 629.

Oregon v. Portland General Elec­tric Co., 52 Or. 502.

In Rohde v. State Industrial Accident Commission, 108 Or. 426, 438, the court said:

* * * Tne Well-settled rule is that in all governmental affairs as distinguished from mere proprietary matters, neither the state nor any of its officers acting in a governmental capacity is estopped by any act of any such officer. According to People v. Brown, 67 111. 435, quoted with ap­proval in Philadelphia Mortgage & Trust Co. v. Omaha, 63 Neb. 280 (88 N. W. 423, 93 Am. St. Rep. 442):

" 'Public policy, to prevent the loss to the state through the negligence of public officers, forbids the application of the doctrine of estoppel to the state, growing out of the conduct and repre­sentations of its officers. On the same ground that the government is excused from. the consequences of laches, it should not be affected by the negli­gence or even willfulness of any one of its officers.' See also Tyler v. Bailey, 71 111. 34; People v. Seward Highway Commrs., 27 Barb. (N. Y.) 94; Searcy v. Yarnell, 47 Ark. 269 (1 S. W. 319); Chicago v. Sexton, 113 111. 230 (2 N. E. 263); Rissing v. Ft. Wayne, 137 Ind. 427 (37 N. E. 328); State v. St. Louis Light Co., 246 Mo. 618 (152 S. W. 67); Douglas County v. Lawrence, 102 Kan. 656 (171 Pac. 610); Chicago etc. Ry. Co. v. Douglas County, 134 Wis. 197 (114 N. W. 511, 14 L. R. A. (N. S.) 1074); Alexander v. State, 56 Ga. 479;

Booth v. State, 131 Ga. 750 (63 S. E. 502)."

In People v. Brown, 67 111. 435, re­ferred to in the above excerpt, and upon which the conclusion therein announced appears to be based, the court said (page 438):

"It is a familiar doctrine, that the state is not embraced within the statute of limitations, unless specially named, and, by analogy, would not fall within the doctrine of estoppel. Its rights, revenues and property would be at fearful hazard, should this doctrine be applicable to a state. A great and over­shadowing public policy of preserving these rights, revenues and property from injury and loss by the negligence of public officers, forbids the applica­tion of the doctrine. If it can be applied in this case, where a comparatively small amount is involved, it must be applied where millions are involved, thus threatening the very existence of the government."

In the case of Philadelphia Mortgage & Trust Co. v. City of Omaha, 63 Neb. 280, the court referred to and adopted the reasoning advanced in the Illinois case, and further said:

"The authorities are, we think, quite uniform in support of the proposition that the doctrine cannot ordinarily be invoked to defeat a municipality in the prosecution of its public affairs be­cause of an error or mistake of one of its agents or officers, which has been relied upon by a third party to his detriment."

I. H. VAN WINKLE, Attorney-General, By Willis S. Moore, Assistant.

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