Herbel v. Peoples State Bank of Ellinwood

• Decision Date: 10 March 1951
• Docket Number: No. 38151,38151
• Citation: 170 Kan. 620,228 P.2d 929
• Court: Kansas Supreme Court
• Parties: HERBEL v. PEOPLES STATE BANK OF ELLINWOOD.

Page 929

228 P.2d 929

170 Kan. 620

HERBEL v. PEOPLES STATE BANK OF ELLINWOOD.

No. 38151.

Supreme Court of Kansas.

March 10, 1951.

Syllabus by the Court.

1. Under the provisions of G.S.1935, 9-171 which remained in force and effect until June 30, 1947, and G.S.1949, 9-1209 which became effective on that date, a bank was not and is not now liable to a depositor under any circumstances for the payment of a forged check unless the depositor had notified, or now notifies, the bank within six months after the return to the depositor of the voucher or cancelled check that the check so paid was forged.

2. Whether the bank is liable for forged checks paid within the period of six months prior to the notification of the bank by the depositor that a check paid is a forgery must be determined upon the basis of the legal relationship between bank and depositor and rules governing their respective rights and duties.

3. The relationship between a bank and depositor is that of debtor and creditor.

4. A bank is charged with knowledge of the depositor's signature and pays a forged check at its own peril. Absent a special agreement there is an implied contract the bank will pay nothing out of a depositor's account except on his valid order.

5. In legal contemplation a bank pays forged checks out of its own funds and not out of the account of a depositor.

6. Although no degree of care on the part of a bank will excuse it from liability, it may, under certain circumstances, justify the payment of a forged check by reason of what the depositor does or fails to do.

7. Under the old rigid rule it was held a depositor owed a bank no duty to examine his bank statements and vouchers to detect forgeries although the means of detection were thus afforded but that is no longer the rule. The object of requiring such an examination is to afford seasonable notice to the bank of any unauthorized payment in order that it may have an opportunity to retrieve against losses and to prevent later forgeries.

8. The weight of authority, and perhaps of reason, requires a depositor to examine returned checks within a reasonable time, absent a special contract, 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 payment thereafter made by it on similar checks.

9. The rule stated in the last preceding paragraph is not controlling under all circumstances. It does not preclude recovery by the depositor if the bank itself has been first negligent and continues to be negligent at all times thereafter. Every depositor has a duty to help protect the bank against losses resulting from forgeries but a depositor is not duty bound to protect the bank against its own negligence.

10. A bank starts with the burden of strict liability and is then virtually an insurer of the validity of a depositor's signature. That strict liability is modified if the depositor breaches his duty to the bank. Thereafter the bank's duty is only to exercise reasonable care in the detection of forgeries but failing in that it is not relieved of liability merely because the depositor is also negligent.

11. A bank has no right to invoke the equitable doctrine of estoppel against a depositor as a defense when the evidence discloses the bank itself has been derelict in the performance of its duty, first, by violating its primary contractual duty not to pay forged checks and, second, in failing at all times thereafter to exercise at least reasonable care, which negligence would have caused the loss irrespective of the depositor's negligence and which, in any event, clearly contributed thereto.

L. E. Quinlan, of Lyons, argued the cause and was on the briefs for appellant.

La Rue Royce, of Salina, argued the cause, and E. S. Hampton, R. H. Dunham, Jr., John Q. Royce, and H. G. Engleman, all of Salina, were with him on the briefs for appellee.

WEDELL, Justice.

This was an action by a depositor against a bank to recover the sum of $5,000 paid out of his account on a series of checks forged by his bookkeeper and office assistant. A jury was waived and the action was tried by the court. It rendered judgment for plaintiff on the first of five forged checks in the total sum of $500.00 and denied recovery on the remaining checks. The plaintiff appeals from the latter portion of the judgment and the defendant cross appeals from the former portion thereof.

The plaintiff was the owner and operator of an oil field, supply and welding business at Chase. He lived at Chase but was frequently away from home. The checks were drawn on the defendant bank at Ellinwood but were paid originally by a bank located at Chase. The court made voluminous findings of fact covering numerous details and conclusions of law. We do not deem it necessary to set forth all the detailed findings of fact. Certain findings of fact were challenged by both parties. An examination of the record discloses the material findings are supported by substantial testimony. It, therefore, follows the findings of fact cannot be disturbed on appellate review.

By reason of the voluminous and detailed findings of fact pertaining to some forty-eight checks covering the period from August 16, 1946, to August 16, 1947, inclusive, and numerous bank statements, material portions thereof will be stated in substance only. A few preliminary findings, however, will be stated as made. They are:

'1. The plaintiff is the sole owner and operator of a business in Chase, Kansas, operated under the name of 'The Chase Company'. He had been in business in Chase, Kansas, since 1936 and doing business as 'The Chase Company' since 1942. In the fall of 1944, he opened a banking account in the Chase State Bank at Chase, Kansas, and gave it his signature card. He maintained this account at all times until November, 1947. During this time he made deposits in said bank, drew checks on his account there, cashed checks there and bought drafts and took up drafts there. He was personally acquainted with all of the officers and employees of said bank and they were well acquainted with him. The officers and employees of said bank were familiar with the plaintiff's signature.

'2. The defendant, The Peoples State Bank of Ellinwood, Kansas, is a banking corporation, organized and existing under the laws of the State of Kansas. It has as its principal place of business, Ellinwood, Kansas, approximately 20 miles west of Chase, Kansas.

'3. In July, 1945, the plaintiff opened a general checking account in the defendant bank in the name of 'The Chase Company'. He gave the defendant a signature card which he alone signed. This account was the principal bank account used by him in the conduct of his business. It was a very active account. He had his own checks printed for use in making withdrawals from this account. The Blank checks were printed on pads, without stubs. The blank checks were numbered serially. At the top of each check was printed the name 'The Chase Company' and the number of the check. Below the space left for the name of the payee and the amount of said check and in the lower left corner of said check the name of the defendant bank appeared, and on the lower right corner the name 'The Chase Company' appeared, below which was a blank line for the signature of the person executing said check. These pads of checks were so constructed that whenever a check was written a carbon copy of the check with the same serial number was made. These carbon copies of checks so made were filed as a part of the permanent records of 'The Chase Company'.

'4. All checks, with their serial numbers, the name of the payee and the amount, were entered upon the books of 'The Chase Company', under different headings, indicating whether they were credited to the individual drawing account of H. L. Herbel, expenses, accounts payable, etc.

'5. Substantially all deposits in the defendant bank to the account of 'The Chase Company' were made up at Chase, Kansas, and mailed to the defendant bank.

'6. Substantially all checks drawn on said account were received by the defendant in cash letters from The Federal Reserve Bank of Kansas City, Missouri. Approximately from 3 to 10 checks of 'The Chase Company' were received in each such cash letter. When these checks were received by the defendant bank the signature on said check was examined by the officers and employees of said bank, who were familiar with the signature of plaintiff, and when they were satisfied with the genuineness of said signature said check was charged to the account of 'The Chase Company'.'

Other material facts found by the court, in substance, are: The defendant mailed and the plaintiff received monthly, at times bi-monthly, bank statements disclosing amounts deposited and withdrawn each day, together with all cancelled checks evidencing the withdrawals; a carbon copy of all checks written in plaintiff's office was kept and plaintiff's books disclosed the purpose of each check; each bank statement sent to plaintiff had printed thereon the following: 'Please examine at once. If no error is reported in ten days the account will be considered correct.'

The checks ranged in amounts from $48.00 to $200.00; the name of the plaintiff, 'H. L. Herbel', as maker, was forged on each check by Billie Mills; the only difference in the checks was that she made the plaintiff the payee in some of them and herself the payee in others; as to the former she forged the name of the plaintiff as indorser and on the latter she obtained the cash by presentation of the check for payment the first four forged checks in the total sum of $400.00, cashed between August 16 and September 14, 1946, inclusive, resulted in overdrawing plaintiff's account in the sum of $142.26; on September 25, 1946, the defendant bank mailed notice of overdraft to plaintiff which he received; the notice stated: 'Our books show...