McCormick v. Rapid City Nat. Bank

• Citation: 293 N.W. 819,67 S.D. 444
• Decision Date: 13 September 1940
• Docket Number: 8348.
• Parties: McCORMICK v. RAPID CITY NAT. BANK.
• Court: Supreme Court of South Dakota

293 N.W. 819

67 S.D. 444

McCORMICK v. RAPID CITY NAT. BANK.

No. 8348.

Supreme Court of South Dakota

September 13, 1940

Appeal from Circuit Court, Pennington County; A. R. Denu, Judge.

Action by J. E. McCormick against the Rapid City National Bank, to recover sums paid by the defendant on checks on which plaintiff's name as drawer was forged, which checks were charged to plaintiff's deposit account. From a judgment for the defendant, plaintiff appeals.

Reversed.

Atwater & Helm, of Sturgis, for appellant.

H. F Fellows, of Rapid City, for respondent.

SMITH Presiding Judge.

The plaintiff, an optometrist, has been a depositor in defendant Bank since April, 1934. In October, 1937, he employed Marian DeGarlais as a part time office helper and clerk. During the period from December of that year until June, 1938, Mrs DeGarlais forged plaintiff's name as drawer on eleven checks all payable to herself and drawn on the defendant bank. These checks were paid by defendant and charged to plaintiff's deposit account. This action was brought to test the propriety of those charges. The trial court directed a verdict for the bank. The plaintiff has appealed and assigns the direction of the verdict as error.

A deposit in a bank creates the relation of debtor and creditor between the bank and its depositor. Calmenson Clothing Company v. First National Bank & Trust Co., 63 S.D. 338 258 N.W. 555. When the bank honors a check purporting to have been drawn by the depositor, it is elementary that it may charge the item to the deposit account if the check is genuine, and that such a charge is not warranted if it turns out that the signature of the depositor is forged. Nevertheless, in case of payment of a forged check the bank may gain a defense against an action by the depositor seeking to recover the balance on his account if it has acted without negligence in paying the check, and the depositor has failed in the performance of certain duties to the bank. The law implies a duty on the part of the depositor to diligently examine the periodical statement of account and cancelled checks delivered to him by the bank, and to promptly notify the bank if his name has been forged on any of the checks returned. Good faith delegation of this work to a dishonest clerk does not relieve the depositor of this responsibility to the bank to see that the statement and checks are diligently examined and prompt notice given of anything an honest employee would have discovered through the exercise of ordinary care. If negligence in the performance of this implied duty results in detriment to the bank, and that damage has not been contributed to by the negligence of the bank in paying forged items involved, it may offset its damage in an action by the depositor. The damage to the bank may include the amount of like forgeries subsequently paid, which payments would have been prevented by diligent examination and timely notice. As indicated, to establish such a defense the bank must assume the burden of convincing the tryor of the fact that it was not negligent in making payment of the forged paper. These principles are not questioned on this appeal and find support in the authorities. 7 Am.Jur. 413; 9 C.J.S., Banks and Banking, § 356, 730 and 743; Michie on Banks and Banking, Vol. 5, Chapter 9, Section 284. The cases are collected in 15 A.L.R. 159, 67 A.L.R. 1121, and 103 A.L.R. 1147. Cf. 31 Yale Law Journal 598, 24 Col.L.Rev. 469, 64 U.S.L. Rev. 566, 18 Va.L.Rev. 774, and 33 Mich.L. Rev. 759.

Before these accepted principles may be applied herein, we are required to determine whether the implied duty of the depositor to the bank has been modified by S.D.C. 6.0422. That section provides that: "No bank shall be liable to a depositor for the payment by it of a forged or raised check unless within three months after the return to the depositor of such check such depositor shall notify the bank that the check so paid was forged or raised." By its explicit provisions this section supplies the bank with a defense against a depositor. The pertinent inquiry is, does it impliedly indicate an intention to substitute a statutory duty to examine the bank's statement of account and cancelled checks and notify the bank within three months of the date of delivery of the bank's statement for the duty implied by the courts to examine such statement and checks within a reasonable time and promptly notify the bank of forgeries? The principles of contract as applied to the relation of debtor and creditor, and the strict rule requiring a bank to evidence its freedom from negligence before it can defend on the ground of the depositor's negligence, have operated to supply the depositor with adequate protection. It has been suggested that this protection is over-adequate. Cf. 31 Yale Law Journal 598 supra. Therefore reason does not suggest that this legislation was prompted by a desire to improve the position of the depositor. The express words of the act indicate an underlying purpose to strengthen the defenses of the bank. That purpose must...