City of New York v. Bronx Cnty. Trust Co.

• Decision Date: 17 January 1933
• Citation: 261 N.Y. 64,184 N.E. 495
• Parties: CITY OF NEW YORK v. BRONX COUNTY TRUST CO. et al.
• Court: New York Court of Appeals Court of Appeals

261 N.Y. 64

184 N.E. 495

CITY OF NEW YORK

v.BRONX COUNTY TRUST CO. et al.

Court of Appeals of New York.

Jan. 17, 1933.

Action by the City of New York against the Bronx County Trust Company, which impleaded the Central Hanover Bank & Trust Company and others. From a judgment (234 App. Div. 244, 254 N. Y. S. 741), reversing on law and facts a judgment of Trial Term entered on a verdict directed by the court in favor of the impeaded defendants, such defendants appeal.

Affirmed.

LEHMAN and KELLOGG, JJ., dissenting.Appeal from Supreme Court, Appellate Division, First department.

Oscar R. Houston, Donald A. Gray, Felix A. Fishman, and T. R. Iserman, all of New York City, for appellants Central Honover Bank & Trust Co. et al.

Wolfgang S. Schwabacher and Hyman N. Glickstein, both of New York City, for appellant Interstate Trust Co.

Charles L. Woody and Joshua D. Jones, both of New York City, for respondent.

CROUCH, J.

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 pay rolls of the Cromwell Avenue Garage, operated by the department of street cleaning of the city of New York. The weekly pay rolls 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 of the amount payable. The pay rolls thus prepared were certified as correct by the garage manager, and also by the superintendent of the district in which the garage was located, and were then forwarded to the department of finance. There the pay checks were made out and the pay roll returned to the garage with a pay check for each name shown on the pay roll, including the checks payable to the fictitious names. Each check upon its face was drawn upon the Bronx County Trust Company, followed by the words, ‘Payable Upon Identification at Other City Depositaries.’ At the lower left-hand corner was a blank line, above which were the printed words, ‘Signature of Payee-For Identification Only,’ and underneath the line were the printed words, ‘Not an Endorsement.’ It was the duty of the manager of the garage before delivering the checks to require the payee to sign for identification in his presence upon the face of the check, and to sign also a receipt on the pay roll. The checks payable to fictitious names were segregated by the manager and the clerk and receipted for on the pay roll by the one or the other. Then one or the other would sign the payee's name on the identification line on the face of the check, and at the same time indorse the payee's name on the back of the check, so that the fictitious name appeared in the same handwriting on the pay roll, on the face and on the back of the check. The checks in bunches were then either cashed or deposited at the defendant banks under an assumed name, or cashed by a confederate. In every case the check bore the further indorsement of the name or assumed name of the person presenting it for payment or deposit.

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, 27 N. E. 371, 12 L. R. A. 791, 22 Am. St. Rep. 821; National Surety Co. v. National City Bank of Brooklyn, 184 App. Div. 771, 172 N. Y. S. 413. The forgers, though city employees, were not acting within the scope of their duties, and their knowledge was not the knowledge of the city. Shipman v. Bank of State of New York, supra; Henry v. Allen, 151 N. Y. 1, 45 N. E. 355,36 L. R. A. 658;Critten v. Chemical Nat. Bank, 171 N. Y. 219, 230,63 N. E. 969,57 L. R. A. 529;Prudential Ins. Co. of America v. National Bank of Commerce in New York, 227 N. Y. 510, 125 N. E. 824, 15 N. L. R. 146. The checks, therefore, were not payable to bearer under Negotiable Instruments Law, section 28; nor could they pass by indorsement. Negotiable Instruments Law, Consol. Laws, c. 38, § 42. The plaintiff, by reason of the foregoing facts, was bound to reimburse the city for the moneys paid out by it, unless it could claim full protection upon some principle of estoppel or full or partial protection by way of set-off for some negligence chargeable to the city.

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. President, etc., of Manhattan Co., 252 N. Y. 247, 169 N. E. 372, 67 A. L. R. 1113, 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 setoff. National Surety Co. v. President, etc., of 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, 80,43 Am. Rep. 655;Critten v. Chemical Nat. Bank, 171 N. Y. 219, 229,63 N. E. 969,57 L. R. A. 529. The doctrine of privity, however, is not so conclusive as it once was. Whether there may be negligence under circumstances which would carry the tort liability of a depositor beyond his contract undertaking (Cf. Ultramares Corp. v. Touche, 255 N. Y. 170, 174 N. E. 441, 74 A. L. R. 1139), we do not stop to inquire, for the question is not here. The broad charges of negligence are not made out. While it is true that there had been similar forgeries for two years before the earliest one involved here, the forgeries were in the indorsements. So far as the evidence shows, no facts came to the city's knowledge as in Prudential Ins. Co. v. National Bank of Commerce, supra, to put it upon inquiry. Lacking such warning, it had a right to rely upon the vigilance of the banks in detecting forged indorsements. Nor can it be justly said that there was negligence in the issuance and delivery of the checks. No fault is or can be found with the system of payment used by the city. It provided for careful and detailed records of the work done by all employees at the garage, and it required the pay rolls made up from those records to be separately certified by two responsible officials. The old satiric query, Quis custodiet ipsos custodes, is no reply to this. True it is, perhaps, that, if there had been other officials to watch those whose duty it was to watch, discovery might sooner have been made. But the city was not bound to anticipate a criminal conspiracy among its trusted employees (People's Trust Co. v. Smith, 215 N. Y. 488, 109 N. E. 561, L. R. A. 1916B, 840, Ann. Cas. 1917A, 560); nor did it, as a depositor, owe the duty of such extraordinary vigilance even to the plaintiff drawee, much less to the defendants (Paton Co. v. Guaranty Trust Co. of New York, 227 App. Div. 545, 238 N. Y. S. 362, affirmed 254 N. Y. 621, 173 N. E. 893).

We come, then, to the one substantial question. This system of pay roll 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 New York ‘as good as currency;’ and stated, among other things, that the plan included ‘the use of a self-identifying check,’ and further that ‘the circular which I am enclosing describes the way employees make out checks so as to make the signature, in effect, certified by the city.’ There was inclosed a list of the banks which had assented to the plan. The circular to which reference was thus made was a copy of one which had been distributed to all city employees, describing the new pay check and giving directions for its use. Among other things, the employees were told that ‘the banks listed below have assured the comptroller that they will cash all checks presented by city employees when properly identified.’

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...