AMERICAN BUILDING MAIN. CO. OF CAL. v. FEDERATION B. & T. CO.

• Decision Date: 11 January 1963
• Citation: 213 F. Supp. 412
• Parties: AMERICAN BUILDING MAINTENANCE COMPANY OF CALIFORNIA INCORPORATED, Plaintiff, v. FEDERATION BANK & TRUST COMPANY, Defendant.
• Court: U.S. District Court — Southern District of New York

213 F. Supp. 412

AMERICAN BUILDING MAINTENANCE COMPANY OF CALIFORNIA INCORPORATED, Plaintiff, v. FEDERATION BANK & TRUST COMPANY, Defendant.

United States District Court S. D. New York.

January 11, 1963.

Rogers, Hoge & Hills, New York City, for plaintiff; Alfred P. O'Hara, Kenneth L. Everett, New York City, of counsel.

Maurice, McNamee & White, New York City, for defendant; Stewart Maurice, Thomas E. White, William P. Sullivan, Jr., New York City, of counsel.

DIMOCK, District Judge.

This is an action by American Building Maintenance Company of California Incorporated, a depositor in defendant Federation Bank & Trust Company, to recover amounts paid out by the bank on checks drawn by plaintiff but bearing forged indorsements.

ESTOPPEL

The duty of a bank to refrain from honoring a depositor's checks presented with forged indorsements is contractual. The depositor may, however, estop himself from enforcing this contractual duty by conduct which induces its breach. Such conduct is sometimes referred to as negligence and, if the bank is negligent in acting upon the conduct of the depositor, the bank's negligence deprives it of the defense that the depositor induced the improper payment. Stella Flour & Feed Corp. v. National City Bank, 1st Dept., 285 App. Div. 182, 136 N.Y.S.2d 139.

Defendant here contends that the depositor's conduct was such as to estop the depositor from insisting that amounts deducted from its account in payment of checks with forged indorsements should be restored. It is said that the depositor had actual notice that indorsements on its checks were being forged, or had reason to believe that indorsements were being forged so compelling as to amount to actual notice, and that, in failing to pass this information on to the bank, it caused the bank to continue paying on forged indorsements. Fidelity & Deposit Co. v. Queens Co. Trust Co., 226 N.Y. 225, 123 N.E. 370, is cited for the proposition that actual knowledge is not required for actual notice.

On this branch of the case it must be borne in mind that the burden is upon the bank to establish its affirmative defense of estoppel, Paton Co., Inc. v. Guaranty Trust Co., 1st Dept., 227 App.Div. 545, 549, 238 N.Y.S. 362, and that the depositor is under no duty to examine the returned checks to detect forgery in the indorsements. National Surety Co. v. President, etc., of Manhattan Co., 252 N.Y. 247, 254, 169 N.E. 372, 67 A.L.R. 1113. The burden is upon the bank to show that the depositor, for a period before it advised the bank that checks were being paid on forged indorsements, had actual notice that that was the case.

The facts are not in dispute. Three employees of the depositor, Brettholz, who was New York branch manager, Moscowitz and Fogelman, pursuant to a conspiracy, padded payrolls by crediting fictitious or actual employees with amounts to which they were not entitled. As a result of the padding of the payroll, checks were automatically issued under the office routine made out to the named employees. One of the three conspirators, almost always Moscowitz, would then take these checks, forge the employees' names thereon and get them cashed in batches at defendant bank's 45th Street branch. In the vast majority of occasions, defendant bank did not even require a second indorsement by the conspirator who was presenting the checks for payment. The thievery began in 1954. It continued until the conspirators had stolen more than $200,000, the proceeds of more than 3,000 checks.

In August 1958, the operating manager of the company in San Francisco sent one Mr. Franklin to New York as a subordinate to Brettholz but with the title of office manager. He was sent as a trouble shooter to find out why the company was sending a lot more capital into this operation than "what P & L statements showed we were losing". He was directed to find out about the situation from the office end of it and not in operations; "for instance" as he said, "to delve into our accounts with our suppliers, to audit our invoices that we had paid, as against the books." That took him several months off and on. He testified that, in March 1959, he had occasion to go through the cancelled checks to start a bank reconciliation. He noticed certain handwriting on some of the checks that appeared vaguely similiar to handwriting on others. He compared the signatures with those on the W-4 forms required to be completed for withholding tax and social security purposes and, in making this comparison, found nothing wrong. This was not unnatural since the same hand that forged the indorsements on the checks had forged the ostensible signatures of the fictitious employees on the W-4 forms.

In the latter part of June 1959, Franklin reported to Mr. Schutt, the depositor's regional manager, that the indorsements on certain checks were suspicious. He gave to Schutt the names of three persons presumably employed in one of the buildings serviced by the depositor. Schutt inquired of the foreman of the building if the three persons worked there and, upon being informed that they did not, he reported the matter to the depositor's vice president, Mr. Strauss, whose office was located in San Francisco. A large number of the depositor's records, including cancelled checks, were then shipped out of New York to plaintiff's offices where an attorney was retained to investigate the matter. Near the end of July 1959, Detroit counsel engaged private investigators in New York who, under the guise of a security check, ascertained that persons carried on plaintiff's payroll as working in certain buildings served by plaintiff were not in fact working. The investigator checked the addresses of a number of the persons appearing on plaintiff's records and found that some of them were non-existent or that the names were unknown at the addresses given.

On August 17, 1959, it was determined that enough evidence had been obtained to warrant the charge of forgery and to identify those responsible. At that time the evidence was submitted to the bank and its cooperation in apprehending the guilty parties was secured. When the conspirator Moscowitz presented checks for cashing on August 21, 1959, marked money was delivered and he was apprehended by a detective as he left the bank.

Defendant points to two additional circumstances as being persuasive that the depositor had such compelling reason to suspect the forging of indorsements as to amount to actual notice. Many of the copies of W-2 income tax report forms which were sent to names and addresses on the payrolls were returned undelivered. In addition, the conspirators, in order to add versimilitude to their fictitious entries, were forced to make deposits in plaintiff's account ostensibly resulting from compensation for work done on a particular building which had not been done and these deposits were made at the main office rather than at the 45th Street branch where plaintiff had its account.

The return of tax forms was not unusual since plaintiff's employees were mostly itinerants and, therefore, it did not excite suspicion. Indeed, of 150 such returns in 1958, only 30 were returns of forms addressed to fictitious persons. The deposits made would not excite suspicion since they were ostensibly for work at a location where work had been done before.

There is no substance to any argument that the transparency of the whole scheme was from the start not only so clear as to generate suspicion but even to give actual notice of which plaintiff was under a duty to inform the bank. The repeated success of this padded payroll method of theft is proof enough that it is not transparent.

The claim that, immediately after Franklin noticed what he thought was similarity in the indorsement of the checks or at some time thereafter before August 17 when the bank was advised, the depositor had received so much information as to amount to actual notice that indorsements were being forged, has a little more substance than that the scheme was transparent at the beginning. The question, however, is not whether the depositor had actual notice that it was losing money or that checks were being presented in batches with indorsements so suspiciously similar as to prompt comparison with W-4 forms or that three employees supposed to be working at a certain building were not working there. The question is whether the bank has sustained its burden of showing that at some time before August 17 the depositor had actual notice that indorsements were being forged.

We must bear in mind that such investigation as was being made was being made solely for the benefit of the depositor. It was under no duty to the bank to examine the vouchers to detect forgery in the indorsements. Only upon discovery or what amounted to discovery, whenever and however it should take place, would the duty arise to notify the bank so that the bank might avoid the liability involved in paying out on similarly forged indorsements. National Surety Co. v. President, etc., of Manhattan Co., 252 N.Y. 247, 254, 169 N.E. 372, supra.

The bank suggests that surely, when, on top of the peculiarities of the indorsements on the returned checks, the defendant was informed that three persons presumably employed in one of the buildings serviced by the depositor did not work there, there was the requisite actual notice that the indorsements were forged. That information was not received until the latter part of June 1959 and we know no more than that three unnamed employees were not where they were supposed to be. The depositor had as many as 500 employees servicing many buildings. It might well have concluded that the three employees were assigned to the wrong buildings on the books. Instead of reaching some such conclusion the depositor, upon discovery that three employees were missing, instituted a thorough-going investigation beginning with a shipment of the records to a home office and followed by the engagement...