National Bank v. Drovers & Mechanics National Bank

Boyd, C. J., delivered the opinion of the Court. The appellee sued the appellant to recover the sum of $2,500 with interest, paid in error by the appellee to the appellant, on account of a cheek appearing to have been drawn by John B. Hammond to the order of Chester1 Page, on the Drovers and Mechanics Rational Bank of Baltimore, dated February 24, 1922, for that amount, and bearing the forged certification of the teller of that bank. The check was cashed by the Bank of Baltimore on Saturday, February 25, 1922, paying Chester Page, a depositor in that hank, who presented the cheek about eleven o’clock, the amount in currency. It was sent to the clearing; house on Monday, February 27, and the items presented by the defendant against the plaintiff were delivered to the agent of the plaintiff and taken to its hanking house.

The Baltimore Clearing House is an association of some of the banks in Baltimore-, including the plaintiff and defendant, and “for the purpose of effecting settlement of the daily balances between them, and for the promotion of their interests.” By article 6 of its constitution, it is provided that “such banks -as desire a preliminary exchange of sealed packages between themselves, each bank giving to the other its receipt for the amount indicated on the outside of the sealed package, on printed forms to be provided therefor, shall meet for this purpose at 8.15 A. M. at the Clearing House each morning, such receipts, to be charged against the respective banks at the regular^ clearing, which shall be at 9.45 A. M. precisely; checks, and items represented by these receipts to be governed by the same regulations which govern items cleared through the regular clearing at 9.45 A. M.” Settlements of daily balances are made by transfer of funds of the respective members on deposit with the Baltimore Branch of the Federal Reserve Bank of Richmond. There is an afternoon clearing at 1 P. M., except on Saturdays, when the hour is 12 noon. In article 8 of the constitution there is this provision: ¹⁷⁰ “In the case of errors in the exchanges and claims arising from mis-sent items, notice must be given by 12 o’clock noon and adjustment made directly, between the banks which are parties thereto and not through the Clearing House. In the case of claims arising from checks that are ‘not good’ or irregular, or from other causes, notice must likewise be given before 12 o’clock noon, and the adjustment may be made directly between the banks parties thereto, or at the clearing of returned items held in the afternoon of the same day, as next hereinafter provided.

Upon request made before 12 o’clock noon, any bank shall extend until 1 o’clock P. M. the time for returning items on it as ‘not good.’ ” According' to the custom of the plaintiff, the bundle of items received from another bank is first handed to the clerks, who verify the amounts and then turn over the items to the receiving’ and paying tellers, or their assistants, who- examine them with reference to the signatures. They are then given to clerks, who examine them to see if the endorsements are regular, and, if they arey they are assorted according to the initial letters of the persons against whom they are to he charged. Certified checks are charged against the drawers at the time of the certification, and hence they are not given to the bookkeepers when they are returned, but are set aside for tbe paying teller'to1 compare them with his certified check blotter, and the memorandum of such outstanding checks so returned to' be cancelled. Some other items go to the paying teller besides certified checks.

Several of the clerks of the bank were sick on that day, and the paying teller did not examine the certified cheeks until about 2.15 P. AI. There was a. valid certification of a check for $2,500 dated February 24-th, 1922, signed by “John B. Hammond” and endorsed by “Chester P’age,” and on the 25th of February the teller of the Drovers and Medianics Bank paid that-check to Hammond and took it zip. Upon looking, about 2.15 P. AC., at the certified checks sent from the clearing house ¹⁷¹ on the moaning of the 27th, the teller saw two similar certified. cheeks to the one that he paid on the previous Saturday, one of which had been cashed by the Bank of Baltimore. Seeing that they were forgeries of the certification he had made on the 24th, the teller at once told the vice-president of the plaintiff of his discovery.

Upon further examination, they found that there were seven forged certifications (including the one paid by the defendant) presented to different banks on the 25th, all of which had been paid and sent to the clearing house. The banks, including; the defendant, were at once notified. Whether or not “John B. Hammond” and “Chester Page” were one and the same person, or Page was. a confederate of Hammond, is not definitely known, but on February 4th, 1922, “John B. Hammond” opened an account with the Drovers and Mechanics Bank, made deposits and cheeked on them, and on the 24th of February he had a little over $2,500 to his credit. “Chester Page” opened, in the Bank of Baltimore', a “commercial account” in which he deposited $500, and a “savings account” in which he deposited $50. Between the two men, or the one man of two names, as the case may be, they got $20,000 out of eight hanks in Baltimore on a deposit of $2,500 in one, plus some little balances they left.

Hammond and Page, or Hammond alias Page, whichever it was', forged, or had forged by some one, the certification on the cheek cashed by the Bank of Baltimore, and, as we understand, six others. The protectograph used on the valid certification was not on the forged certification, and the valid one was written in green ink, while that on the forged ones was in black ink. The name of the drawer was not forged, nor was that of the payee. It was agreed that on February 27th, 1922, the plaintiff hank was, charged, through the clearing House, with $34,-437.30 in favor of the defendant hank, and was credited with $23,690.49 against it.

Included in the amount charged against the plaintiff was the cheek of $2,500, upon which ¹⁷² was the forged certification. That balance was settled in the usual manner at 12 o’clock on that day. The case was tried before Judge Steiet, sitting as a jury, in the Court of Common Pleas of Baltimore City. There are six bills of exception, presenting rulings on evidence, and the seventh, which includes the action of the court on the prayers.

The plaintiff offered four prayers, all of which were rejected excepting the second, and the defendant offered two, both of which were rejected. The defendant excepted to the granting of the plaintiff’s second prayer and the rejection of its two prayers. The principal question, to be determined is whether the failure to give the defendant notice of the forgery by the time named in article 8 of the constitution of the clearing house, quoted above, defeats a recovery, and as the plaintiff’s second and the defendant’s second prayer present the positions of the respective parties, we will first consider them. The theory of the plaintiff is that, as the defendant did not take any action to1 its detriment which was induced by failure of the plaintiff to give notice of the forgery within the time prescribed by the rules of the clearing house, its failure to do so does not prevent a recovery, while that of the defendant is that, as the notice was not given as fixed by the mile, payment of the check had become final and the plaintiff was not entitled to recover.

It does not seem to us to be material that the check in controversy was actually signed by the drawer and endorsed by the payee. It is not contended that the appellant’s paying teller would have cashed the check, if he had not believed it to be certified as good by the teller of the appellee. Indeed, in the cross-examination of Mr. Fisher, the paying teller of the appellant, who paid out the money, he was asked: “If the certification had not been on it, you would not have cashed that check, would you?” and he replied: “I would not.” It is, therefore, not the ease of a bank paying an ordinary cheek drawn on it by one of its depositors, or so acting as to induce another bank to believe it to be good, but, ¹⁷³ in point of fact, the plaintiff did not know that such a cheek as. this was in existence until after it. came from the. clearing house, and purporting to. bei a. certified check, the officer whose duty it was to examine it, did not know it until some time after two o’clock on Monday, February 27th. By section 207 of article 13 of the Code, in the Negotiable Instruments Act, it is provided: “When the holder of a, chock procures it to be accepted or certified, the drawer and all endorsers are discharged from liability thereon.” It was said in Scheffenacker v. Hoopes, 113 Md. 111 : “The legal effect of such a certification is that the funds, of the drawer are appropriated to the amount of the check and he is released, while the check is converted into a certificate' of deposit, upon which the bank became the debtor of the holder.” The argument of appellant, under the first head in his. brief — “the check was a genuine cheek of a depositor and was paid, though his funds on deposit were insufficient” — is therefore not easy to understand, especially when it is said, “the forged certification is immaterial.” In 3 R. C. L. 653, it is said: “The right of a member of a clearing house to return items not properly chargeable against it, secured by the rules of the clearing house, is a special provision in compensation for payment without inspection.

Instead thereof, the rules give opportunity for subsequent inspection. When that has been had, the special rules cease to govern, and the rights of the paying bank rest upon the general principles of law.” In the note there are cited Commercial and Farmers Nat. Bank v. First Nat. Bank, 30 Md. 11 ; Merchants Nat.

Bank v. Nat. Eagle Bank, 101 Mass. 281 ; Nat. Bank of North America v. Bangs, 106 Mass. 441 . Judge Miller said, on page 16 of 30 Md., that, “by the custom and usage of all the hanks in the City of Baltimore, proved by all the witnesses, when a check is. sent through the clearing house to the bank on which it is drawn, and is not heard from before eleven o’clock on the day on which it is so sent, the bank sending it bas a ¹⁷⁴ right to assume it was good or had heen paid, and to act accordingly.” (Italics ours.) In 7 C. J. 899, it is stated: “A very common rule of clearing houses is one limiting the time within which an alleged error may be corrected; but in a proper case, a correction may be allowed even after the expiration of such time, as in case of a mistake of fact; and it has been held that the effect of such a limitation of time may be waived.” In a note, it is said: “Before the expiration of the period allowed for. examination and adjustment by payments between the banks, payment through the clearing house, 'if-indeed it can be termed payment, is regarded as provisional only,” citing Preston v. Canadian Bk. of Commerce, 23 Fed. 179 ; Atlas Natl.

Bank v. Nat. Exch. Bank, 176 Mass. 300 ; Merchants Nat. Bk. v. Commonwealth Nat.

Bank, 139 Mass. 513 ; Merchants’ Nat. Bank v. Nat. Eagle Bank, 101 Mass. 281 , 100 Am. Dec. 120 ; Nat.

Exch. Bank v. Nat. Bk. of North America, 132 Mass. 147 . Then it is said, “after the expiration of such time, payment is regarded as absolute,” citing the Preston case and 176 Mass., supra.

In reference to the statement that in a proper case a correction may be allowed, even after the expiration of such time, there are cited the case in 139 Mass. 513 ; Manufacturers’ Nat. Bank v. Thompson, 129 Mass. 438 , 37 Am. Rep. 376 ; Citizens’ Cent. Nat.

Bank v. New Amsterdam Nat. Bank, 128 App. Div. 554 , 112 N. Y. S. 973, affirmed in 198 N. Y. 520 , 92 N. E. 1080 . In the note to Nat. Exchange Bank v. Ginn & Co., 114 Md. 181 , to be found in Ann. Cas. 1914C, beginning on p. 512, there is a full discussion of the subject of clearing houses, and on p*. 522 there is a heading of “adjustment of accounts and return of repudiated items.” The annotator says there is a conflict as to the right of a bank to which a cheek has been charged in the clearing house, and which has not repudiated it within the time prescribed by the rules, to recover the sum paid thereon as money paid under mistake on discovering that the check was forged, or that the drawer’s ¹⁷⁵ funds were insufficient,” and a number of authorities are referred to.

There is some difference in the wording of the rules and regulations adopted by clearing houses in the different cities, but for the most part they are the same in effect in regard to fixing a time within which the paying bank shall give notice that a check is not good. The object in naming a time cannot be, certainly ought not to be, in doubt. It could not have been intended to make one bank pay for tbe loss ot money by another which loss the former was in no way responsible for as was said in Merchants’ Nat. Bank v. Nat.

Eagle Bank, 101 Mass. 281 : “The manifest purpose of the provision is to fix a time at which the creditor hank may he authorized to treat the check as paid, and he able to' regulate with safety its relations to other parties. We cannot adopt the theory that a failure to present a bad check, before the time named, to the bank sending it through the clearing house, works an absolute forfeiture and is in itself a perfect bar to any action to recover the amount of such cheek.” What we have quoted above from 30 Md., where it speaks of a, check not being heard from before the hour named and says, “The bank sending it has a right to assume it was good or had been paid, and to act accordingly,” undoubtedly meant that it had the right “to act accordingly” in its dealings with third parties. In that ease, the paying bank did not notify the presenting bank that the check was a forgery until eight days after1 the presenting hank had sent it to the clearinghouse, and the day after that the forger drew out the money, but J udge Miller did not, even in a case of that kind, where there1 was loss to the presenting bank, rest his opinion on the mere fact of the notice not being given, as required by tbe rules. Although the defendant in that case entered the check as cash when it was left with it, the cashier instructed its officers not to allow the amount to be drawn on until it was first ascertained that the check was good or had been paid, and J luge Miller said: “'Having done so, and having in fact paid to such party, after the check had heen paid by the ¹⁷⁶ plaintiff, it, is impossible to- say the defendant has not been placed in a worse position in consequence of such payment by the plaintiff,” the inference being that if it had not been so placed, the court might have reached a different conclusion.

In Second Nat. v. Western Nat. Bank, 51 Md. 128 , the Second National held, by the endorsement of the payees, a note of the makers, payable at the Western Bank, at which the makers kept a deposit account. On the day