UNITED STATES v. NATIONAL BANK OF COMMERCE OF SEATTLE, WASH, 205 F. 433

GILBERT, Circuit Judge (after stating the facts as above). [1] We are unable to sustain the judgment of nonsuit on the ground that a tender of the checks to the defendant was a necessary preliminary to the commencement of the action, or to assent to the proposition that the possession of those checks by the defendant was necessary in order to enable it to maintain actions against the banks through which it received the same. The defendant made no demand for the checks, and made no offer to pay the money due the government 011 condition that the checks be returned to it.

Its refusal to pay was absolute and unconditional. Its cause of action against the banks through which it received the checks with’ the forged indorsements arose immediately upon its payment thereof. Said the court in Leather Manf. Bank v. Merchants’ Bank, 128 U. S. 26-35, 9 Sup. Ct. 3, 4 (32 L.

Ed. 342): “One who by presenting forged paper to a bank procures the payment of the amount thereof to him, even if he makes no express warranty, in law represents that the paper is genuine, and, if the payment is made in ignorance of the forgery, is liable to an action by the bank to recover back the money which in equity and good conscience has never ceased to be its property. * * * There is no consideration for the payment, and the money remains, in equity and good conscience, the property of the payer, and may be reco«ered back by him, without any previous demand, as money had and received to his use.

His right of action accrues, and the statute of limitations begins to run immediately upon the payment.” The language so quoted was approved in United States v. Nat. Exchange Bank, 214 U. S. 302, 29 Sup. Ct. 665, 53 L. Ed. 1006, 16 Ann. Cas. 1184. In United States v. National Park Bank of N. Y. (D.

C.) 6 Fed. 852, a case in which the defendant had collected from the United States the amount of a draft which it had received from another bank for collection, and upon which draft the payee’s name had' been forged, the court said: “I think there was no obligation on the part of the plaintiff to surrender or tender to the defendant upon the trial this draft. The possession of it was not necessary to a recovery over.” In a similar case, United States v. Onondaga County Sav. Bank (D. C.) 39 Fed. 259, in an opinion by Judge Coxe, which was commended by the Supreme Court in United States v. Nat.

Exchange Bank, 214 U. S. 319, 29 Sup. Ct. 665, 53 L. Ed. 1006, 16 Ann. Cas. 1184, it was said: “The refusal to surrender the drafts after the defendants had agreed to repay the money was perhaps ill advised and discourteous, but the defendants lost no advantage by reason thereof. There was no legal obligation to return the drafts. The defendants had a right of action against the conspirators independent of the drafts.” The decision in that case was affirmed by the Circuit Court of Appeals in Onondaga County Sav. Bank v. United States, 64 Fed. 703, 12 C. C.

A. 407, in which the court said: “The refusal of the defendant in error to return the drafts has in no way prejudiced the plaintiff in error, or deprived it of any remedy against those who defrauded it.” It remains to be considered whether the judgment of nonsuit was sustainable upon any other ground. The defendant contends that it may be sustained on the ground of the plaintiff’s negligence in not discovering the frauds of McCoy sooner than it did.

But the defendant having been negligent, and the negligence of the banks through which it received the checks being imputable to it, it is in no position to urge the negligence of the government as a defense to the action. In the absence of knowledge to the contrary, the government had the right to rely upon the assumption that-the defendant as the depositary of public money would do its duty, and there was nothing in the case to indicate that its reliance was misplaced until it discovered McCoy’s frauds.

Where a bank holds money of a depositor subject to check, it can be required to pay any valid check of the depositor, but it cannot charge against the depositor’s account money paid upon a forged check, or upon a check to which the bank has obtained title by way of a forgery. Of course, the government was not chargeable with knowledge of the signatures of the payees of the checks of its disbursing agent. In Leather Manf. Bank v. Morgan, 117 U. S. 96, 6 Sup. Ct. 657, 29 L. Ed. 811, Mr.

Justice Harlan said: “If the defendant’s officers, before paying the altered checks, could by proper care and skill have detected the forgeries, then it cannot receive a credit for the amount of those checks, even if the depositor omitted all examination of his account.” In New York Produce Exchange Bank v. Houston, 169 Fed. 785, 95 C. C. A. 251, the court held that, where a bank was negligent in naying certain forged checks, the depositor would not be estopped by his own negligence from claiming the amount so paid unless such negligence was directly connected with the forgeries. In United States v. Nat.

Exchange Bank, 214 U. S. 302, 29 Sup. Ct. 665, 53 L. Ed. 1006, 16 Ann. Cas. 1184, the court said: “The exceptional rule as to certain classes of commercial paper proceeds upon an assumption of knowledge or duty to know, naturally arising from the situation of the parties, entirely consonant with their capabilities, and in accord with the 'common sense view of their relation.

To apply the rule, however, to the government and its duty in paying out the millions of pension claims, which are yearly discharged by means of checks, would require it. to be assumed that that was known, or ought to have been known, which on the face of the situation was impossible to be known, would besides wholly disregard the relation between the parties and would also require that to be assumed which the obvious dictates of common sense make clear could not bo truthfully assumed.” And the court held that the United States was not chargeable with the knowledge of the signatures of the persons entitled to receive pensions.

If that be true as to the signature of checks made to pension claimants, by the stronger reason it is true in regard to payments made to unknown persons whose signatures are not on file in any department of the government, as was the case of the payments made by McCoy to persons who worked in his employment. It is not shown that the defendant has suffered any prejudice, or has been in any way injured by the delay of the government in commencing the action.

When the demand was made'upon it for repayment, the statute of limitations had not run against the defendant’s right of action against the banks upon which it had the right of recourse, and the allegation in the amended answer that by reason of the failure of the government to notify the hank of McCoy’s fraud within a reasonable time it had lost its right against the various banks through which the checks had been forwarded for payment is not sustained.

The defendant bank is in no better attitude to defend against the government’s demand than would have been the banks which advanced the money to McCoy upon his forged indorsements. Those banks had the opportunity to discover the facts and it .was their duty to- do so. Had they investigated, they would have discovered that the holder of those checks had no legal title to them, and was not an authorized payee. It wag their duty to ascertain whether there was such a person as the payee named in the checks, and to know that the person who presented the checks was entitled to receive the payment thereof.

They made no investigation, required no identification, axrd took no precaution. They paid the money negligently, and at their own risk, and the defendant bank in choosing to rely upon the identification of the payee by the banks which cashed the checks did so at its own risk. The defendant bank, as a national depositary, was chargeable with notice "of the limitations of McCoy’s authority to check out the public money deposited with it.

Section 5153 of the Revised Statutes (U. S. Comp.

St. 1901, p. 3465), provides: “All national banking associations, designated for that purpose by the Secretary of the Treasury, shall be depositaries of public money * * =5 under such regulations as may be prescribed by the Secretary.” One of the regulations promulgated by. the Secretary of the Treasury on April 16, 1903 (Department Circular No. 49, § 6), provides: “If the object or purpose for which any check of a public disbursing officer is drawn is not stated thereon, as required by departmental regulations, or if any reason exists for suspecting fraud, the office or bank on which such check is drawn will refuse its payment.” Department Circular No. 102, issued on December 7, 1906, contained the following: “Any cheek drawn by a disbursing officer upon moneys thus deposited, must be in favor of the party, by name, to whom the payment is to be made, and payable to 'order,’ with these exceptions.” The exceptions are not material to the present case.

In The Floyd Acceptances, 7 Wall. 666, 19 L. Ed. 169, it was said: “Whenever negotiable paper is found in the market purporting to bind the government, it must necessarily be by the signature of an officer of the government, and the purchaser of such paper, whether the first holder or another, must, at his peril, see that the officer had authority to bind the government.” These citations are applicable to the 'contention'’ of the defendant that the checks were payable to a fictitious payee, with the knowledge of the drawer, and that, therefore, it must be held that they were checks payable to bearer.

It is true that they were made payable to a fictitious payee with the knowledge of the drawer, if McCoy is to be deemed the dx'awer. But we are inclined to the view that the United States is the drawer of the checks, and that the knowledge of McCoy is not to be imputed to the government. He was the government's agent, it is true, but he was not its agent to draw checks to fictitious payees. In drawing such checks he was not only acting without authority, but in violation of his instructions, and in fraud of his principal.

That the knowledge of the agent is not in such.a case the knowledge of the-principal is held in the following cases: Harmon v. Old Detroit Nat. Bank, 153 Mich. 73, 116 N. W. 617, 17 L. R. A. (N. S.) 514, 126 Am. St. Rep. 467; Shipman v. Bank, 126 N. Y. 318, 27 N. E. 371, 12 L. R. A. 791, 22 Am. St. Rep. 821; Armstrong v. Nat. Bank, 46 Ohio St. 512, 22 N. E. 866, 6 L. R. A. 625, 15 Am. St. Rep. 655; Chism v. First National Bank, 96 Tenn. 649, 36 S. W. 387, 32 L. R. A. 778, 54 Am. St. Rep. 863.

It follows that the judgment must be reversed, and the cause remanded to the court below for a new trial, with instructions to sustain the demurrer to the defendant’s second affirmative defense.