Stella Flour & Feed Corp. v. National City Bank

Bergan, J. Plaintiff was a depositor with the defendant bank and the question presented by this appeal is the extent to which a bank may incur a tort liability if it breaches its contract obligation to charge drafts against an account, only in accordance with a depositor’s directions. — 183 — The complaint alleges that plaintiff issued four checks drawn on the defendant bank in the total amount of $11,241.67; that each was drawn in favor of a specific payee; that an employee of plaintiff altered the checks by changing the named payee thereon; and that after alteration the defendant paid the said employee of plaintiff the amount of such checks and deducted the amounts from plaintiff’s account. The portions of the complaint resting on contract are not challenged here and follow the usual pattern in the statement of causes of action based on a balance due and on the general responsibility of the bank to its depositor for making payment on materially altered or forged checks drawn upon it. The third cause of action, which has been sustained at Special Term, sounding in tort, pleads a “ duty” arising from the depositor-banker relationship “ to use active vigilance ” in paying checks drawn by the plaintiff on the bank “ to protect plaintiff from larceny and forgery ” and to use “ sound and proper banking procedure ” in paying plaintiff’s checks drawn on it; and it is alleged that the defendant bank “ negligently and carelessly omitted and failed to use any vigilance, care or diligence ” in paying the checks specified and that payments were not made in accordance with sound banking practice. The acts of negligence as set forth may be summarized by saying that they consist of failing to “ properly examine ” the checks before paying them and failing to ‘1 discover ’ ’ the alterations and changes made on the checks. Other specifications of “ negligence ” seem to be stated in the form of breaches of contract, such as negligence “ in failing to pay said cheeks in accordance with the directions of plaintiff” and “in failing to pay the proceeds ” of the checks to the payees or their transferees. Besides the damage which would flow directly from the payment of the checks as a result of the forgeries and the debiting of plaintiff’s account in the sum of $11,241.67, it is alleged that as a result of the “negligence ” involved in the payments, plaintiff’s credit and business have been injured additionally by the resulting reduction of its bank balance in the account with defendant and that it has suffered loss in the sum of $30,000 beyond the amount of the checks themselves. We are of opinion no cause of action grounded on tort under the facts pleaded arises separately and beyond the obligations contract which governs the depositor-banker relations of the parties. If a man negligently breaches his contract he will usually be answerable on the contract and not in tort. The — 184 — theory of tort liability may be discovered to overrun into breaches of contract in a very limited area; but the payment charged to a depositor’s account by a bank on forged or altered drafts certainly does not come within that area. A high standard of contractual responsibility has been imposed on banks in paying money chargeable against their depositors’ accounts; and where there have been forgeries or alterations in drafts or checks it has been a long and consistent judicial policy in New York to require the bank to assume the loss. This has been so even in eases where the depositor’s own employee, as here, made the alterations and obtained the money. An early statement of this policy was announced a century ago in Weisser v. Denison (10 N. Y. 68 [1854]), where the depositor’s clerk committed the forgeries. But if to this old and well-settled rule of high contractual responsibility we were now to add a responsibility in tort for a bank’s failure to discover the forgeries of the depositor’s employee and require the bank to pay consequential damages besides making good the amounts paid out on the forged paper, we would push a banker’s responsibility to a point far beyond the area in which the banking and commercial community have been led to believe that responsibility ended. Since the term “ negligence ” does appear in judicial opinions addressed to the obligations of a depositor whose account has been charged by a bank with forged or altered drafts; and since it appears also in relation to the obligations of banks arising from payment of such drafts; and since plaintiff’s argument to sustain this pleading rests on quotations from opinions, it will be helpful to examine the context of this use, and the place “ negligence ” occupies in the depositor-banker relation. The basic obligation of the bank to its depositor is that of ‘ ‘ debtor and creditor ’ ’ and ‘ the law implies a contract ’ ’ by the bank to disburse the money standing to the depositor’s credit only upon his order. (Shipman v. Bank of State of N. Y., 126 N. Y. 318, 327.) “ Payments made upon forged indorsements are at the peril of the bank unless it can claim protection upon some principle of estoppel or by reason of some negligence chargeable to the depositor.” The general rule is that when payment has been made by a bank on forged paper “ it is considered that the bank has paid out its own funds rather than those of the drawer.” (9 O. J. S., Banks and Bankings, § 356, subd. c., par. [1].) As to the depositor it has been said that “ a forged check is not paid, for it is — 185 — paid upon a pretended order * * * and thus the debt of the bank to the depositor is unaffected. ’ ’ (Parker-Smith v. Prince Mfg. Co., 172 App. Div. 302, 305.) What is meant by “ negligence chargeable to the depositor ” is to be observed where conditions have been created or allowed by the depositor which greatly facilitate the deception imposed on the bank; or where a delay in examining the returned vouchers or accounts and communicating the wrongful use of the drafts to the bank has occurred which materially affects the bank’s ability to recoup the loss. In either event the term ‘1 negligence ’’ thus used largely rests on a theory of estoppel or preclusion against the depositor from asserting a right to have a contractual obligation performed. This, of course, must be seen in the background of the heavy contractual obligation that has been imposed on the bank. Where there has been a negligent omission by a depositor to examine the accounts of a bank sent him periodically and this results in a failure after the lapse of a reasonable time, and to the bank’s disadvantage, to call attention of the bank to an irregularity, the court may “ preclude the depositor from afterward questioning its correctness.” (Frank v. Chemical Nat. Bank of N. Y., 84 N. Y. 209, 213.) The time limit within which a report of a payment on forged paper must be made by the depositor to the bank is now codified (Negotiable Instruments Law, § 326), after which time the bank is no longer to be liable to the depositor. (See discussion by Conway, J. in Maryland Cas. Co. v. Central Trust Co., 297 N. Y. 294, 302, 303.) The theory of negligence of the depositor in this situation is that he may have “ lulled the drawee bank into relaxing the vigilance it should have exercised in guarding against forged endorsements.” (Fitzgibbons Boiler Co. v. National City Bank, 287 N. Y. 326, 331.) Through all this it is to be seen that the use of “ negligence ” and “ estoppel ” attributed to a depositor is directed toward describing the conditions under which a bank may be allowed to escape the full weight of its contractual undertaking to pay out the money on deposit with it only in accordance with the depositor’s order. A phrase in the opinion of Chase, J., in Prudential Ins. Co. v. National Bank of Commerce (227 N. Y. 510, 523), illustrates rather pointedly that in underlying theory we are certainly not here dealing with tort. “It is permitted to a bank to escape liability for repayment of amount paid out on forged checks by establishing that the depositor has been — 186 — guilty of negligence which contributed to such payment and that it has been free from any negligence.” The liability thus escaped, of course, is a contractual liability. We are thus led back to what, in turn, is meant by “ negligence ” of the bank in paying upon a forged check. It becomes quite apparent that this “ negligence ” is not an independent tort arising separately from the contract obligation to pay only in accordance with the depositor’s order. The bank is permitted “ to escape liability ” in contract. This would mean that a recovery in contract follows as a matter of course unless the careless acts of the depositor are so effective in the contractual situation as to prevent the depositor from insisting on exact and full performance of the contract; but, even then, he can recover from the bank upon his contract if the bank, too, was careless so that the effect of the depositor’s carelessness was offset. The negligence of the bank is thus treated as a counterweight against the avoidance of a contract, and not the basis for a new and a separate liability resting on tort beyond the contract. (Welsh v. German Amer. Bank, 73 N. Y. 424, 429; Weisser v. Denison, 10 N. Y. 68, supra, concurring opinion, Johnson, J., p. 83.) The rule gathered from many cases was drawn together into close-knit cohesion by Pound, J., in 1929 in Gutfreund v. East Riv. Nat. Bank (251 N. Y. 58). There the depositor issued checks carelessly with the names of the payees so written as easily to facilitate forgery. The action was by the depositor against his bank which had paid forged checks thus facilitated. The court was of opinion that the checks were drawn, or it might be found as a fact that they were drawn “ in a negligent and unbusinesslike manner ” (p. 64). But the bank also was “ negligent ” in not questioning the right of the person to whom the payments were made under the circumstances in which these checks were presented. The bank is bound “ by contractual obligation to the exercise of due care in the payment of checks ’ ’ bearing the signatures of its depositors. ‘ ‘ Its negligence defeats the defense of negligence on the part of the depositor ” (p. 64). It is thus to be seen in the context of the decisional law in New York what Chief Judge Huger meant in Crawford v. West Side Bank (100 N. Y. 50, 54), in referring to the liability of the bank “ for any want of vigilance ” in. detecting an alteration of a draft after its issue, upon which so largely rests the third cause of action here pleaded and the argument of the plaintiff. He was referring, as the opinion clearly shows, to a liability in contract; for the judgment was, merely, that the bank could — 187 — not charge the disputed check to the depositor’s account (p. 58). There are, however, objections to the third cause of action which go deeper into the substructure of tort liability than mere incidents of the depositor-banker relationship. Torts have been defined generally as “ wrongs independent of contract ” and “ wholly irrespective of contract ”. (62 C. J., Torts [§ 3] b.) “ To constitute a tort, the act or commission must be entirely independent of contract right.” (Clark v. Gates, 84 Minn. 381, 383.) There is a discussion of the problem by Judge Finch in Rich v. New York Central & Hudson Riv. R. R. Co. (87 N. Y. 382), who observed that the violation of duty involved in tort is a “ thing different from the mere contract obligation ” (p. 390). It was conceded there, however, that the complaint properly states a cause of action in tort (p. 391). A tort usually arises “ independent of contract ” although it may have relation to obligations growing out of contract. (Busch v. Interborough R. T. Co., 187 N. Y. 388, 391; cf. Lynch v. Syracuse R. T. Ry. Co., 66 Misc. 573, affd. 139 App. Div. 925.) Where, as in the case before us, the contractual relationship occupies fully the rights and responsibilities of the parties to the account on deposit, there exists a completely enforcible and well-understood contractual undertaking. The breach of such contract, long recognized and enforced at' law according to a consistent policy of the court, and in consonance with the accepted custom of the business community, should not be treated as some other kind of “ wrong ” separately actionable. Residually there appears in the third cause of action an attempt to plead that the reduction of the balance in the plaintiff’s account with defendant due to the charging of the forged checks led the defendant to terminate plaintiff’s credit with it and hence injured plaintiff’s business position. But no right to have such a credit continued in the event the balance was maintained is pleaded. The pleading states that defendant was ‘ ‘ under a duty ’ ’ to advance moneys and credit to plaintiff and which it had “ agreed ” it “ would extend ” as “ long as plaintiff maintained its account with defendant ” at a stated level. This is merely an agreement to extend credit terminable at will, but if it were more, the cause of action suggested would be based on breach of that contract and not on defendant’s alleged negligence leading to its breach of contract. Appellant’s attack on paragraph 13 of the complaint must be deemed disposed of on the earlier appeal here (283 App. Div. 709) and was properly decided at Special Term. — 188 — The order should be modified by striking out as insufficient the third cause of action and as thus modified affirmed, with $20 costs.