BASCH v. BANK OF AMERICA NAT TRUST SAVINGS ASS

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District Court of Appeal, First District, Division 1, California.

BASCH v. BANK OF AMERICA NAT. TRUST & SAVINGS ASS'N.

Civ. 11918.

Decided: October 01, 1942

Louis Ferrari, G. D. Schilling, and James S. De Martini, all of San Francisco, and Hugh L. Preston, of Ukiah, for appellant. Belli & Leahy and Marshall E. Leahy, all of San Francisco, for respondent.

The plaintiff, Carlo Basch, owned and operated Basch's Pharmacy in San Francisco, and for many years maintained a commercial account in the name of the pharmacy with the defendant bank at its main office at No. 1 Powell Street. In May, 1938, he hired Herbert C. Lahr as part–time bookkeeper and between November 3, 1938, and September 11, 1939, Lahr forged plaintiff's name to a series of 127 checks payable to himself, all but four of which called for the payment of $37.50 each. He cashed the checks in various places, and in due course the checks were presented to the main office of the bank and paid out of plaintiff's account. Plaintiff did not examine or check the bank's monthly statements or his cancelled checks; he delegated that duty to Lahr; consequently plaintiff did not discover that any of his checks were being forged until the early part of September, 1939. Prior thereto he realized his profits were decreasing, but he attributed the decrease to poor business. Upon discovery of the forgeries he notified the bank and demanded that it make good the total sum paid out on the forged checks; but after investigating the matter the bank refused so to do; thereupon plaintiff brought this action against the bank to recover said sum. The bank pleaded several special defenses, among them being negligence on the part of plaintiff in failing to examine or check the bank's monthly statements and his cancelled checks, and entrusting his banking affairs to Lahr without making any inquiries at the time he hired him as to his reputation for honesty and integrity. The cause was tried before a jury and a verdict rendered against the bank for $4,740, the total amount of the forgeries. From the judgment entered thereon the bank appeals. Insufficiency of the evidence to support the verdict and judgment and the giving and refusal to give certain instructions are urged as the grounds for reversal.

The law governing the relative rights, duties and responsibilities of bank depositors and banks in cases of forged checks is set forth in Glassell Development Co. v. Citizens' National Bank, 191 Cal. 375, 216 P. 1012, 1013, 28 A.L.R. 1427, as follows: “As between the bank and its depositors the payment of forged or altered checks by it is made at its peril and cannot be charged against the depositor's account unless some negligent act or conduct of his has contributed to induce such payment––the bank itself being free from negligence, or unless by his subsequent conduct in relation to the matter he is upon equitable principles estopped to deny the correctness of such payments. Otis Elevator Co. v. First Nat. Bank, 163 Cal. 31, 124 P. 704, 41 L.R.A., N.S., 529; 4 Cal.Jur. 215, 216, §§ 103, 104; 7 C.J. 683. And the weight of authority, and perhaps of reason, supports the view that when a depositor's passbook has been written up and returned to him with canceled checks which have been charged to his account, it is his duty to examine such checks within a reasonable time, and if they disclose forgeries or alterations to report them to the bank, failing in which he cannot, if his failure results in detriment to the bank, dispute the correctness of payments thereafter made by it on similar checks. 7 C.J. 687; California Vegetable Union v. Crocker Nat. Bank, 37 Cal.App. 743, 174 P. 920; Morgan v. United States Mortgage & Trust Co., 208 N.Y. 218, 101 N.E. 871, L.R.A.1915D, 741, Ann.Cas.1914D, 462. This rule, however, assumes that the bank itself has not been guilty of negligence in making the payment, for when by the exercise of proper care it could have discovered the alteration or forgery, it must bear the loss notwithstanding that the depositor failed in his duty to examine the accounts.” (Citing numerous authorities from other jurisdictions.) The court then goes on to quote approvingly the following from Ruling Case Law (vol. 3, pp. 537, 538): “The majority of the suits brought by depositors to recover payments made on forged or fraudulently altered checks, result from the crimes of some trusted employee of the depositor, and usually the court has to deal with a long series of successful forgeries. In such cases, after his pass–book has been balanced and returned to a depositor with any of the forged or fraudulently altered checks, the authorities practically agree that in the absence of negligence on the part of the bank the failure of the depositor to notify the bank within a reasonable time that such checks have been forged or fraudulently altered will, if the delay is caused by his negligence in not using due care and diligence in examining the pass–book and vouchers, or in giving notice, if he had discovered the forgeries, constitute a defense by the bank to the depositor's suit for the money subsequently paid out on similar checks. * * * A bank is under an obligation to its depositor to use care in scrutinizing checks paid, to discover forgeries and render its accounts to prevent the perpetration of frauds upon its depositor. And if the bank's officers, before paying forged or altered checks, could by proper care and skill have detected the forgeries, then it cannot receive a credit for the amount of these checks, even if the depositor omitted all examination of his account. In every case where suit is brought by a depositor to recover from a bank money deposited by him, which the bank has paid out otherwise than in conformity with his orders, and the bank sets up the defense that it is nevertheless entitled to charge the depositor with such payments, because of conduct of the depositor subsequent to such payment, the preliminary question to be determined is whether the bank was or was not guilty of negligence in making the payments. If it was negligent, if its officers are found to have failed to exercise due and reasonable care in detecting the forgery or fraud, then the subsequent negligence of the depositor, his failure to perform his duty in examining his pass–book and vouchers with reasonable care and report to the bank in a reasonable time any errors or mistakes, will constitute no defense, and it is generally a question for the jury whether the bank was negligent in paying a forged or fraudulently altered check.”

The subject is treated more fully and additional and later authorities are cited in 7 American Jurisprudence, pages 364–371, and many of the legal principles above stated are to be found in Union Tool Co. v. Farmers', etc., National Bank, 192 Cal. 40, 218 P. 424, 28 A.L.R. 1417; also in the earlier case of California Vegetable Union v. Crocker National Bank, 37 Cal.App. 743, 174 P. 920, 923, wherein it is pointed out that what is said concerning the duty of a depositor to examine his balanced pass–book applies with equal force to the modern statements furnished by a bank to its depositors from time to time on balancing their accounts and returning the canceled checks to them.

The application of the foregoing legal principles to the undisputed facts here presented demonstrates beyond question that plaintiff was guilty of negligence not only in failing to exercise ordinary care and common prudence in entrusting Lahr with his banking affairs, but in failing to perform the duty imposed upon him by law to examine his canceled checks and the bank's monthly statements or to check the same with his own books of account. In this regard the record shows the following: Lahr was a stranger to plaintiff when he hired him, and plaintiff asked him nothing about his antecedents or previous employments. He hired him, at a salary of $25 a month on the recommendation of his, plaintiff's nephew by whom Lahr had been employed for a short time. But immediately upon the discovery of the forgeries plaintiff learned that Lahr had a previous criminal record as a forger and embezzler; that he had served several jail terms therefor, and that at the very time plaintiff hired him he was posted in police headquarters as wanted by the state division of criminal identification as a parole violator after having been convicted of forgery in El Dorado County. Furthermore it was revealed that prior to obtaining employment with plaintiff Lahr had been dismissed from other clerical jobs in San Francisco for reasons showing want of confidence in him. In fact soon after he entered plaintiff's employ he cashed a fictitious check with plaintiff drawn on an Indiana bank, which plaintiff compelled him to make good; nevertheless plaintiff continued him in his service. Among the duties plaintiff assigned to Lahr when he hired him were to prepare the bank checks for plaintiff's signature, to keep certain books of account in connection with the bank account, and upon receipt of the monthly bank statements and canceled checks to check and reconcile the same with plaintiff's books of account. The leaves of the checkbooks used by plaintiff consisted of three checks attached to stubs, the checks and stubs bearing corresponding printed consecutive numbers. The name and address of the pharmacy was printed in the upper left hand corner of the checks, the name and address of the bank in the lower left hand corner, and in the lower right hand corner was printed “Basch's Pharmacy,” with a printed line for plaintiff's signature. One of the books of account plaintiff required Lahr to keep was a “combination cash journal and bank account.” Each leaf thereof was divided into columns; and in one of the double columns entitled “Bank” Lahr was supposed to enter the dates and amounts of the bank deposits, and the dates, amounts and numbers of the checks drawn against the deposits; and to enter the total amounts of the deposits and withdrawals at the bottom of each column. Being thus entrusted by plaintiff with his banking business, Lahr was able to carry on his criminal enterprise without detection in the following manner: He would extract a whole page of blank checks from the checkbook and destroy the stubs; he would then place a piece of carbon paper and a canceled check bearing plaintiff's genuine signature over the blank check and trace the genuine signature with a pencil; then trace the carbon impression of Basch's signature with pen and ink and afterwards erase the carbon marks from the spurious checks and any pencil marks from the canceled check used for the tracing. Thereupon he filled in the body of the check, making it payable to himself. But he made no entry of the forged checks in the cash journal and bank account; and upon receipt of the bank's monthly statements and the accompanying canceled checks he immediately sorted out and removed from the package of canceled checks all of those that were forged, some of which he destroyed, and after reconciling the genuine checks with the stubs and the entries in the cash journal and bank account in which he had listed only the genuine checks, he entered false totals at the bottom of the column and in the checkbook to correspond with the balances appearing on the bank's statements, placed the genuine checks back in the envelope and marked it “O. K.”

In September, 1939, Lahr gave one of the forged checks for $37.50 to an airline company in payment of his fare to Los Angeles, telling the company it was his salary check. After the plane took off the company phoned to Basch's pharmacy to verify the genuineness of the check and was informed by plaintiff that the check was a forgery and would not be honored. Upon the arrival of the plane in Los Angeles Lahr was told he had passed a bad check and he made good the amount to the company and was allowed to depart. Immediately upon receiving the phone message from the airline company plaintiff, with the assistance of the police and an accountant, investigated his bank statements, canceled checks and books of account, and the investigation at once revealed the other forgeries. In the meantime he notified the bank thereof. Lahr was subsequently arrested and sentenced to imprisonment in the penitentiary. He gave his testimony at the present trial by way of deposition.

Lahr cashed four of the forged checks in November, 1938, the first for $40, the second for $35, the third for $37.50, and the fourth for $27.50; and another in January, 1939, for $25. All of the rest of them called for the payment of $37.50 each, four being cashed in December, 1938, six in January, 1939, nine in February, ten in March, ten in April, fifteen in May, eighteen in June, twenty–two in July, twenty–three in August, and six in September; and each of them was listed on the bank's monthly statements sent to plaintiff and all were included in the packages of canceled checks returned to him with the statements. At the bottom of each statement was printed “Please examine this statement at once. If no error is reported in ten days the account will be considered correct. All items are credited subject to final payment.” But as stated plaintiff did not examine or check any of the bank's monthly statements or the canceled checks, nor did he attempt to reconcile the same with his books of account or the check stubs. He left that matter entirely to Lahr. Under the law as laid down in the authorities above cited, it was plaintiff's legal duty, as a depositor, so to do; and obviously if he had performed that duty he would have at once uncovered the forgeries, and the discovery of the first or any of them would have avoided a repetition. As said in California Vegetable Union v. Crocker National Bank, supra: “If depositors may regularly at frequent intervals receive their vouchers and be notified, as was the appellant here, of reduced balances of their accounts in banks consequent upon the unfaithfulness of trusted employés during a period of nearly a year, and by neglecting to exercise reasonable supervision over their own business fail to discover fraud which has been perpetrated upon them and the bank, and may thus leave the bank in ignorance of the frauds thus committed, and charge the bank with the losses thus occasioned, then banks and their paying tellers face hard conditions indeed. We do not feel justified in establishing any such rule in this state.”

Nor does the fact that plaintiff delegated the duty thus imposed upon him by law to a dishonest employee serve as legal excuse for not performing that duty himself, for when the agent to whom the duty of examination is entrusted is a dishonest employee who by forgery has obtained from the bank funds of his employer, and who does not disclose to his employer the circumstances which would naturally have been disclosed by a proper examination, the principal is chargeable with such information as an honest employee, unaware of the fraud, would have acquired from the pass–book and vouchers. (7 Am.Jur. p. 368; see also 15 A.L.R. 162; 67 A.L.R. 1124; 103 A.L.R. 1148.) “In such instances,” says the court in First National Bank of Philadelphia v. Farrell, 3 Cir., 272 F. 371, 376, “the cases hold that knowledge of a dishonest agent of fraudulent entries and incorrect balance is equally the knowledge of his principal, with the qualification, however, that the principal is chargeable, not with the knowledge of wrongdoing the agent possessed from the fact that he himself was dishonest, but with knowledge of such facts as an honest agent, unaware of the wrongdoing, would acquire when examining the statements within the scope of his employment. The dishonesty of the agent does not change his relationship to his principal, and accordingly does not change the rule charging his principal with knowledge of such facts.” (Citing numerous authorities.) In other words, in such cases the mere designation of an agent to discharge the duty resting primarily upon the depositor cannot be deemed the equivalent of performance by the latter. Leather Manufacturers' Nat. Bank v. Morgan, 117 U.S. 96, 6 S.Ct. 657, 29 L.Ed. 811.

But as set forth in the authorities above cited, in cases such as this negligence on the part of the depositor is available as a defense to the bank only where it appears that the bank itself is free from negligence in failing to exercise reasonable care in detecting the forgeries; and in Sommer v. Bank of Italy, etc., Ass'n, 109 Cal.App. 370, 293 P. 98, it is held that the burden of so proving is on the bank. It is plaintiff's contention that the evidence shows the bank was negligent in the following respects: that its “system was wrong” in that it gave no instructions to its employees “relative to detecting forgeries, or in handwriting”; that it assigned duties to employees who were not competent “to discharge the system set up” by the bank; and that its employees were negligent in the performance of the duties assigned to them.

There is no merit in plaintiff's first two points. The uncontradicted testimony shows that the bank's system of scrutinizing checks and training its employees to that end is substantially the same as that carried on in all San Francisco banks, and is considered to be the established modern system. Briefly outlined, it is as follows: All depositors' accounts are divided into alphabetical divisions and three employees, consisting of two bookkeepers and a teller, are assigned to each division; each of whom has been given previous training by instruction and experience in detecting altered or forged checks, and who have made a thorough study of the genuine signatures of the depositors whose checks pass through that particular division to which such employees are assigned. When the checks are received at the bank they are sorted into alphabetical divisions and each check is scrutinized by those employees in rotation; first by one bookkeeper, then by the teller, and the next day by the second bookkeeper. If the check receives the approval of all three it is then charged against the depositor's account by the second bookkeeper. In scrutinizing the checks each employee is required to examine the signature, the numerical and the written amounts, and the date; and his instructions are that if he has any reason to doubt the genuineness of the maker's signature he shall at once compare the signature on the check with the specimen signature of the maker as contained on the original signature card which is kept in a swivel file drawer within reach of the teller and the bookkeeper; and if he then has reason to doubt the genuineness of the signature he must refer the check for final action to an officer of the bank. The teller who was assigned to the division handling plaintiff's checks had twelve years' experience in that kind of work and for the last four or five years had been assigned to that particular division; and the bookkeepers serving in that division during the period these forgeries were being committed by Lahr were young men of previous experience ranging from twenty months to several years in the kind of work they were assigned to perform.

The evidence does establish, however, that by the exercise of proper care and skill the bank's employees could and should have detected some of the forgeries. In this respect the record shows that eighty–three of the forged checks were produced by plaintiff at the trial and were received in evidence; that a dozen or more of those so produced were shown to the teller of the division handling plaintiff's checks, and after examining the same he admitted that several of them bore evidence of forgery, and should not have been honored. Three of those so designated by him were of the series of four forged and cashed during the first month, November, 1938; and two of them were previously honored as genuine by said teller himself. Moreover, one or two of the others which he stated bore evidence of forgery were previously honored by him. It is true, other witnesses gave testimony to the effect that they would have passed these same checks; but on appeal such conflicts must be resolved against the appellant. The evidence shows also that it was the standard practice of the bank that tellers should not honor checks which were post–dated or without date, or which showed evidence of erasures; that all such checks were to be referred to an officer of the bank; and here it appears that one of the forged checks produced at the trial was not dated, another was post–dated, and some of them showed evidence of erasures. As to the remaining forged checks produced at the trial, certain witnesses called by the bank testified that the signatures attached thereto were “excellent facsimiles” of the genuine signature. But in the final analysis that was a question of fact for the jury to determine, and apparently it was not convinced that the bank employees were free from negligence in failing to detect that they were forgeries. Therefore, since the burden was upon the bank so to establish, and it had the full opportunity of doing so, the conclusion arrived at by the jury on that issue as to the eighty–three checks produced before the jury is binding on appeal, and the bank should be held responsible for the payment thereof.

But as to the remaining forty-four checks which were not produced at the trial a different situation is presented. They consisted of all the forged checks cashed during the months of December, 1938, and January, February, March and May, 1939, and the total amount thereof was $1,637.50. All of them had been theretofore delivered to plaintiff by the bank with his monthly statements; and their loss was due to plaintiff's negligence in failing to exercise reasonable supervision over his banking affairs. It is apparent that the negligent loss of the checks by plaintiff operated to the manifest prejudice of the bank for this reason: Under the law, in order to absolve itself from liability for the payment of said checks upon the ground of plaintiff's negligence, it was necessary for the bank to establish that it was free from negligence in honoring them; and this could be done by showing by the checks themselves that there was no want of exercise of proper care and skill on the part of its employees in failing to detect that the signatures thereon were forgeries. But obviously the loss of the checks by plaintiff deprived the bank of any opportunity to make such showing. Stated another way, it appears that plaintiff seeks to invoke against the bank the disputable presumption of negligence created by judicial decision, when by his own negligence he has made it impossible for the bank to meet the burden of overcoming that presumption. In those circumstances the bank in our opinion is entitled to the application against plaintiff, insofar as the missing checks are concerned, of the equitable estoppel provided for in the second exception to the general rule as set forth in the Glassell case, supra. As there stated, the payment by a bank of forged checks is made at the bank's peril “unless some negligent act or conduct of his [the depositor's] has contributed to induce such payment––the bank itself being free from negligence, or unless by his subsequent conduct in relation to the matter he is upon equitable principles estopped to deny the correctness of such payments.” (Italics ours.)

The inability of a depositor to produce forged checks at the trial does not, of course, in all such cases justify the application of the doctrine of equitable estoppel, because no absolute rule can or should be laid down to govern all such cases, any more than it can or should be in other classes of cases involving the doctrine of equitable estoppel. The application of such doctrine depends entirely upon the facts of the particular case, and admittedly cases are to be found wherein judgments in favor of depositors have been sustained notwithstanding that the forged checks were not produced at the trial. But in those cases to which plaintiff has called attention, particularly First Nat. Bank of Weslaco v. Patty, Tex.Civ.App., 62 S.W.2d 629, the precise point here presented as to the effect of the negligent loss by the depositor of the forged checks upon which he sought to recover apparently was not urged; at least it was not discussed or determined in the decisions. In the California case, Sommer v. Bank of Italy, etc., Ass'n, supra, cited by plaintiff, a nonsuit was granted and on appeal it was held merely that the question of whether the bank was free from negligence was one of fact and that in view of the evidence there produced should have been submitted to the determination of the jury. It seems to be plaintiff's contention that since the evidence shows that the bank's employees failed to exercise proper care and skill in scrutinizing the checks that were produced, especially those cashed during the first month, the inference may be drawn therefrom that they were likewise negligent in scrutinizing the checks not produced. Assuming that such an inference could be drawn, the answer to the contention is that as to the checks that were produced the bank was afforded an opportunity of overcoming the inference; whereas as to the missing checks it was deprived of so doing by the plaintiff's negligence. For the reasons stated, that portion of the judgment based on the missing checks cannot be sustained.

With respect to the matter of the instructions, we find nothing in the points urged by the bank which call for a reversal of the judgment. The first objection is directed against the latter portion of an instruction wherein the jury was instructed that if it found that the bank was negligent in failing to detect the November, 1938, forgeries, then the bank would be responsible for all loss to the plaintiff proximately caused by its negligence, and that the jury “may consider, under such a finding of negligence” the question of whether that negligence “was the proximate cause of the forger being enabled to continue his wrongdoing on any or all future checks and as well, in determining whether or not the bank was negligent in its examination and payment of subsequent forged checks. * * *” The term “proximate cause” was fully and correctly defined in the next instruction. The bank contends that even though it was negligent in the payment of the first month's checks, such fact in no event could be legally considered by the jury as the proximate cause of the forger continuing his wrongdoing; furthermore that the instruction was misleading in that it erroneously assumed that evidence was introduced so showing. An examination of the entire instruction discloses, however, that it does not embody such assumption. It states merely that if the jury found as a fact that the bank was negligent in cashing the November checks the jury “may consider” such fact in determining whether it was the proximate cause of the forger continuing his wrongdoing; and the first portion of the bank's contention is answered by the case of Critten v. Chemical National Bank, 171 N.Y. 219, 63 N.E. 969, 57 L.R.A. 529, (cited and emphasized by the bank herein on another point) wherein the court stated in substance that it may well be found that if the bank had not been negligent in failing to detect the first forgeries, the forger would not have been able to continue his criminal enterprise in forging the subsequent checks. See, also, Deer Island Fish & Oyster Co. v. First National Bank, 166 Miss. 162, 146 So. 116. The third objection made to this same instruction is that it erroneously failed to give recognition to the legal effect of the plaintiff's imputed knowledge as to the existence of the forgeries; but a reading of the entire instruction shows that the objection is not well taken. Moreover, in several other instructions proposed by the bank, and which the court gave, the jury was amply and correctly instructed on that subject.

The second instruction assailed was to the effect that if the jury found that the bank was negligent in failing to detect “the forgery of Basch's checks” then the subsequent negligence of Basch in failing to perform the duty imposed upon him by law to examine his monthly statements and canceled checks constituted no defense to the bank. As applied to the forged checks which were produced at the trial, the instruction clearly stated the law as laid down in all of the authorities hereinabove mentioned; and in view of the conclusion we have reached as to the non–liability of the bank for the payment of the missing checks, the instruction cannot be said to have operated in any manner to the prejudice of the bank.

Defendant's proposed instruction quoted on pages 41-42 of its opening brief was properly refused because of the erroneous statement of law embodied in the opening sentence thereof which read: “In determining whether or not the bank failed to exercise ordinary care and prudence in the payment of the forgeries in this case, you are instructed not to take into consideration the forged checks charged to the statement of account delivered to plaintiff by defendant on or about December 1, 1938.” The succeeding instruction quoted on page 42 of said brief was properly rejected for the reason that it omitted entirely any reference to the legal proviso that in order to invoke the defense of the depositor's negligence the bank must show that it was free from negligence.

The third instruction proposed by defendant and refused by the court also embodied an erroneous statement of the law. It was to the effect that if the plaintiff was negligent in failing to examine the bank's monthly statements and canceled checks, the jury must find in favor of the bank as to all forged checks cashed by the bank during the time plaintiff “continued to be negligent,” provided the bank was free from negligence “subsequent to the lapse of a reasonable time after December 1, 1938.” Under the authorities above cited and in the absence of facts justifying the application of the doctrine of estoppel, the bank was not entitled to invoke the defense of negligence on the part of plaintiff unless it proved that it was free from negligence in cashing the checks during the first month, November, 1938.

In accordance with the views herein expressed, it is ordered that the judgment be and it is hereby modified by reducing the amount thereof $1,637.50, representing the total amount of the missing checks; and as so modified it is affirmed, the plaintiff to recover his costs of appeal.

I concur in the majority opinion insofar and it affirms the judgment based upon the eighty–three checks introduced in evidence; I dissent from the opinion insofar as it reverses that portion of the judgment based on the forty–four missing checks.

The facts are correctly set forth in the majority opinion. So far as the fundamental law applicable to the liability of banks for paying forged checks is concerned, the majority opinion correctly sets forth the applicable legal principles. The difficulty with the majority opinion is that it disregards reasonable inferences from the evidence, and fails to apply the appropriate legal principles to the admitted facts.

The fundamental legal principle applicable to the liability of banks for paying forged checks is that the bank is absolutely liable to the depositor––it pays such checks at its peril. Glassell Dev. Co. v. Citizens' Nat. Bank, 191 Cal. 375, 216 P. 1012, 28 A.L.R. 1427. To that rule there are two limited exceptions. First, if the depositor has been negligent, and if the bank has not been negligent, the depositor cannot recover. Glassell Dev. Co. v. Citizens' Nat. Bank, supra. The negligence referred to in this rule that will bar the depositor is negligence prior to the forgeries such as the hiring of a dishonest employee without the exercise of reasonable care. But even if the depositor is negligent in this respect the bank is still liable if it too was negligent.

The second exception is a corollary of the first. It is that the depositor will be barred if, after the forgeries, he is guilty of conduct constituting an estoppel. An obvious example of such conduct exists where the depositor negligently fails to examine his statements and report back to the bank. But just as in the case of the first exception, a condition precedent to the application of the rule is that the bank itself must be free from negligence. If it is negligent in cashing the forged checks no estoppel can or should be applied against the depositor. Glassell Dev. Co. v. Citizens' Nat. Bank, supra; Union Tool Co. v. Farmers', etc., Nat. Bank, 192 Cal. 40, 218 P. 424, 28 A.L.R. 1417; Leather Manufacturers' Nat. Bank v. Morgan, 117 U.S. 96, 6 S.Ct. 657, 29 L.Ed. 811; First National Bank v. Farrell, 3 Cir., 272 F. 371; National Dredging Co. v. President, etc., Farmers' Bank, 6 Pennewill, Del., 580, 69 A. 607, 16 L.R.A.,N.S., 593, 130 Am.St.Rep. 158.

The majority opinion holds that negligence on the part of the bank bars the bank from relying on negligence of the depositor as a defense, but holds, in effect, that negligence on the part of the bank does not bar the defense of estoppel. Stated another way, the majority opinion holds that, although the bank was negligent, as a matter of fact, in cashing the missing forty–four forged checks, the depositor, as a matter of law, is estopped because of his negligence in failing to discover the forgeries. What possible basis can exist for such a distinction between the two defenses? No authority is or can be cited for such a distinction, while the authorities above cited hold to the contrary.

The distinction made by the majority opinion between the defenses of negligence and estoppel is artificial and not based upon reason. The two exceptions, although frequently stated separately, are simply different statements of the same fundamental rule. The law imposes an absolute liability on banks for paying forged checks. It cannot be excused from that liability no matter how careful it may have been, or how skillful the forgeries. But if the bank is free from negligence, and the depositor was negligent, either before the forgeries, by carelessly hiring a dishonest employee or otherwise, or afterwards, by failing to examine his statements, he, in equity and fairness, should bear the loss. But the fundamental basis of that rule is that the bank must be free from negligence. If it is negligent, in fairness and equity, it should not be relieved from its absolute liability on forged instruments.

If I am right in these conclusions there can be no doubt but that the majority opinion is wrong in holding that, as to the missing checks, the depositor is estopped as a matter of law.

The law is clear, and is so stated in the majority opinion, that the depositor makes out a prima facie case by showing that the bank has made payment from his account on forged checks and has refused upon demand to pay to him the amount of the forged checks. Sommer v. Bank of Italy, etc., Ass'n, 109 Cal.App. 370, 293 P. 98. If the bank desires to rely upon negligence or estoppel of the depositor it must plead the same, and the burden is upon it to prove these defenses. Sommer v. Bank of Italy, etc., Ass'n, supra. As already pointed out, an integral part of such defense is allegation and proof that it was free from negligence. Whether it was free from negligence, and whether the depositor was guilty of negligence or is estopped, are questions of fact for the jury. Deer Island Fish & Oyster Co. v. First Nat. Bank, 166 Miss. 162, 146 So. 116; National Dredging Co. v. President, etc., Farmers' Bank, supra; Leather Manufacturers' Nat. Bank v. Morgan, supra.

Applying these fundamental principles to the facts of this case there can be no doubt that there is evidence and inferences therefrom that support the implied finding of the jury that the bank was negligent in paying the forty–four missing checks.

For the purposes of this discussion, it may be conceded that the evidence shows, as a matter of law, that the plaintiff was guilty of negligence. It may also be conceded, although the point is not beyond dispute, that the system set up by the bank to detect forgeries, as a matter of law, was consonant with its duty to exercise due care. The evidence clearly shows, however, that the bank's employees were negligent in enforcing that system. If the system set up was reasonably calculated to detect patent forgeries there can be no escape from the conclusion that the bank employees were negligent. One of the bank's own employees testified that although several of the checks had been passed by him they were so obviously forgeries that he would not pass them again. A post–dated and undated forged check were passed. As to the eighty–three checks introduced in evidence, the majority opinion holds, and holds correctly, that the jury was justified in finding negligence on the part of the bank. The evidence is recited in detail and need not be repeated here. The forger testified his modus operandi was the same with all of the forged checks, that is, he traced the signature from a good check onto the forged check. That raises a reasonable inference that the checks destroyed by the forger were substantially similar to those admitted in evidence. Moreover, the checks forged in the first month were in evidence. As to several of these, the bank's own employees conceded they were palpable forgeries and should not have been passed. Had the bank not then been negligent, the subsequent forgeries could not have occurred. That is an important factor in determining whether the doctrine of estoppel should be applied. Critten v. Chemical Nat. Bank, 171 N.Y. 219, 63 N.E. 969, 57 L.R.A. 529. All of the checks were payable to the same payee, and all but four of the one hundred and twenty–seven were in the same amount. That is a suspicious circumstance that should have put the bank on notice, and may support, under proper circumstances, a finding of negligence on the part of the bank. Frankini v. Bank of America, etc., Ass'n, 12 Cal.App.2d 298, 55 P.2d 232. The majority opinion concedes that it is a reasonable inference from this evidence that the bank was negligent in cashing the missing forged checks. This being so, the jury's implied finding is conclusive.

Stated in its simplest terms, we are here faced with a situation where we may assume that the depositor was negligent, and where the bank was likewise negligent. The majority opinion holds that, as a matter of law, the depositor is estopped as to the missing checks, but is not estopped as to the balance of the checks. That is not and should not be the law. If the bank is negligent it has no defense, and the rule of absolute liability applies. For that reason I believe the judgment in its entirety should be affirmed.

KNIGHT, Justice.

WARD, J., concurred.

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