Rohde, H. Q.

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Banks and Banking - Functions and Dealings - Whether Bank\u27s Liability for Paying a Forged Check is Absolutely Limited by Statutory Duty of Depositor to Notify Bank of Forgery within One Year after Return of Voucher

Chicago-Kent College of Law

Chicago-Kent Law Review Volume 36 Issue 1 Article 3 April 1959 Banks and Banking - Functions and Dealings - Whether Bank's Liability for Paying a Forged Check is Absolutely Limited by Statutory Duty of Depositor to Notify Bank of Forgery within One Year after Return of Voucher H. Q. Rohde Follow this and additional works at: https://scholarship.kentlaw.iit.edu/cklawreview  Part of the Law Commons Recommended Citation H. Q. Rohde, Banks and Banking - Functions and Dealings - Whether Bank's Liability for Paying a Forged Check is Absolutely Limited by Statutory Duty of Depositor to Notify Bank of Forgery within One Year after Return of Voucher, 36 Chi.-Kent L. Rev. 60 (1959). Available at: https://scholarship.kentlaw.iit.edu/cklawreview/vol36/iss1/3 This Notes is brought to you for free and open access by Scholarly Commons @ IIT Chicago-Kent College of Law. It has been accepted for inclusion in Chicago-Kent Law Review by an authorized editor of Scholarly Commons @ IIT Chicago-Kent College of Law. For more information, please contact jwenger@kentlaw.iit.edu, ebarney@kentlaw.iit.edu. CHICAGO-KENT LAW REVIEWPuBuisiHED APRIL AND OCTOBER BY THE STUDENTS OFCHICAGo-KENT COLLEGE OF LAW, 10 N. FRANKIN ST., CHICAGO, ILLINOISSubscription price, $3.00 per year Single copies, $2.00 Foreign subscription, $3.50EDITORIAL BOARDEditor-in-ChiefP. M. TRicouManaging EditorH. Q. ROeDENote EditorH. A. STRICKLANDAssociate EditorsMIss G. LnPKE R. K. O'R:ILLY J. F. QuETsciiCase EditorsMRS. R. CRANDELL H. B. MADSEN H. Q. ROHDEAis. M. HEINDL D. J. NOVOTNY J. H. SINGERBOARD OF MANAGERSNEVILLE RoSS, Chairman and Faculty AdviserKATHERINE D. AGAR JAMES R. HEMINGWAY JAMES K. MARSHALL WXr. F. ZACHARIASThe College assumes no responsibility for any statementappearing in the columns of the ReviewVOLUME 36 APIL, 1959 NUMBER 1DISCUSSION OF RECENT DECISIONSBANKS AND BANKING-FUNCTIONS AND DEALINGS--WHETHER BANK'sLIABILITY FOR PAYING A FORGED CHECK IS ABSOLUTELY LImiTED BY STATU-TORY DUTY OF DEPOSITOR TO NOTIFY BANK OF FORGERY WITHIN ONE YEARAFTER RETURN OF VOUCHER-Banks paying out under forged checks havebeen offered greater protection as a result of the decision in Gerber v.Continental Illinois National Bank & Trust Company of Chicago.1 Therein,the defendant bank paid a check signed by unauthorized persons in con-1 16 Ill. App. (2d) 379, 148 N. E. (2d) 597 (1958).DISCUSSION OF RECENT DECISIONStravention of signature cards in its files and then returned the voucherto those same persons who had, in the interim, become officers of the plain-tiff depositor. The plaintiff sued to recover the amount of the forgedcheck 2 which had been charged to its account. The defense was that theplaintiff had failed to notify the defendant of the forgery within one yearafter the return of the voucher as required by the so-called Liability forForged and Raised Checks Act.3 On appeal, the Appellate Court for theFirst District of Illinois affirmed the judgment for defendant. In sodoing it held that receipt of the voucher by an officer of the plaintiff wassufficient to impose an absolute duty to notify the defendant of the forgerywithin one year so that it could proceed to enforce restitution from theforger.The plaintiff's action was predicated on its contract of deposit withthe defendant, which permitted the defendant to charge the plaintiff'saccount only on its authentic order. According to the terms of the con-tract, the bank was absolutely liable if it charged a forged check to thedepositor's account.4  The common law, however, attached a duty uponthe depositor to use reasonable care in detecting any mistake made by thebank.5 And, if the depositor failed to perform that duty, the commonlaw absolved the bank from liability. 6 But an exception to this rule ofthe common law was that the bank would retain its liability if it hadbeen negligent in charging the forged check to the depositor's account.7In this case, the defendant was negligent in charging the forged checkto the plaintiff's account because it had prior constructive notice of theforgery through the resolutions and signature cards on file with it. There-fore, at common law, the exception would have applied and the defendant2 In an earlier appeal, the Appellate Court for the First District of Illinois heldthat signing a check without authority amounted to forgery, but reversed thedecision of the trial court for the defendant and remanded the case to enable theplaintiff to file a reply to the defendant's answer and special defenses. Barrett v.Continental Illinois National Bank and Trust Company of Chicago, 2 Ill. App. (2d)70, 118 N. E. (2d) 631 (1954). In both appeals, the plaintiff was the Director ofInsurance of the State of Illinois, acting in his capacity as liquidator of the UnitedStates Mutual Insurance Company. The change in personnel in the office ofDirector of Insurance explains the change in the name of the plaintiff in thesecond appeal.3 Ill. Rev. Stat. 1957, Vol. 1, Ch. 16 , § 24, provides that a depositor can hold itsbank liable for paying a forged check only if it notifies the bank that the checkso paid is forged within one year after the return of the voucher.4 People v. Dunham, 344 Ill. 268, 176 N. E. 325 (1931): Dalmatinsko, etc. v.First Union T. & S. Bank, 268 Ill. App. 314 (1932) ; Chicago Savings Bank v. Block,126 Ill. App. 128 (1906).5 Cosmopolitan Bank v. Lake Shore Bank, 343 Ill. 34-7, 175 N. E. 583 (1931):Moore & Co. v. Champaign Nat. Bank. 13 Ill. App. (2d) 97 (1957); Phillip v.First Nat. Bank, 297 Ill. App. 498, 15 N. E. (2d) 57 (1939).6 Folsom v. Northern Trust Co., 237 Ill. App. 419 (1925): Osborn v. Corn Ex-change Nat. Bank of Chicago, 218 Ill. App. -8 (1920) ; Findlay v. Corn Ex. Nat'l.B'k., 166 111. App. 57 (1911).7 Illinois Tuberculosis Ass'n. v. Springfield Marine Bank. 282 Ill. App. 14 (1935).CHICAGO-KE.NT LAW REVIEWwould have been liable even though the plaintiff failed to use reasonablecare.However, the problem is further complicated by the statutory provi-sion which imposes a duty on the depositor to give notice to the bank withinone year after the return of the voucher as a condition subsequent to holdingthe bank liable. The notice requirement may be regarded as a conditionsubsequent because its effect is to adjust the common law liability by dis-charging the bank upon the depositor's failure to give notice. It cannotbe viewed as a condition precedent because the cause of action existedat common law and was not created by the statute. Nor can it be treatedas a statute of limitation because the action can be brought after one yearif notice is given. Although the precise point has not been previouslydecided, the condition imposed would seem to require actual notice. Thelegislature appears to have expressed this intent by placing a duty onthe depositor to take positive action by requiring him to give noticewithin one year after the return of the voucher. The provision requiringnotice after the return of the voucher seems consistent with the purposesof the statute except insofar as it does not provide for the situation whereactual notice was given after the check was paid but prior to the returnof the voucher. In that situation, the bank would get even greater protec-tion because it would be able to proceed against the forger more quickly.But it would seem that the requirement of the provision under discussionis not fulfilled by prior constructive notice because such notice could notresult in the bank's discovering its mistake and it could not proceedagainst the forger until it discovered its mistakeSThe plaintiff contended that the statute was not applicable where ithad given all the notice it could be reasonably expected to give under thecircumstances. The plaintiff's position rests upon the general principleof agency law that where the agent's interest is adverse to that of theprincipal, notice to the agent will not be imputed to the principal.9 And,in the present case, it appears that the agents' interests were opposed tothe interests of the plaintiff. The Illinois Supreme Court gave effect tothe principle here involved in the case of The Merchants' National Bank8 The courts of other states, construing similar statutes, have confirmed this con-clusion. The Supreme Court of Kansas decided that the bank is not liable underany circumstances unless it is notified within the statutory period by the depositor:Herbel v. Peoples State Bank of Ellinwood, 170 Kan. 620, 228 P. (2d) 929 (1951).Also, the Supreme Court of South Dakota found that, irrespective of its knowledgeof facts or of its negligence, the bank is not liable when the depositor fails to givenotice within the statutory period: Flaherty Bros. v. The Bank of Kimball, 7.5S. D. 468, 68 N. W. (2d) 105 (1955).9 Neagle v. McMullen, 334 Ill. 168, 165 N. E. 605 (1929) : Seaverns v. PresbyterianHospital. 173 Il. 414. 50 N. E. 1079 (1898) : In re Estate of Wedelius, 266 Il1. App.69 (1932).DISCUSSION OF RECENT DECISIONSof Peoria v. The Nichols & Shepard Company.10 However, in that case,the agent was a mere sales representative whereas, in the principal case,the agents were the officers of the plaintiff. The cases are distinguishablebecause officers are charged with the management of a corporation's dailyaffairs and are vested with more discretion than a mere sales representative.The analogy is further weakened because the forgers had since becomeauthorized signers, although that information had not yet been communi-cated to the bank. It would appear that the defendant was correct inreturning the voucher to the officers because the only other apparent al-ternative was to return it to the board of directors which met only inter-mittently and which was effectively incapable of receiving it."The statute, by imposing an absolute duty, placed an extreme limitupon the period during which the depositor could perfect its cause ofaction and thus offered the bank an opportunity to seek restitution sea-sonably. It, in effect, provided that the account between the depositorand the bank became an account stated no later than one year after thereturn of the voucher unless the depositor gave notice within that period.The statute enhances the equities between the parties because its effectwas to give the bank a definite advantage which it did not previouslypossess. On the other hand, it works no particular hardship on the de-positor by imposing the duty of giving notice within one year. While thisrequirement is inconsistent with the common law of Illinois, the onlyreal obstacle to its easy fulfillment is the carelessness of the depositor inmanaging its own affairs.H. Q. ROHDECONSTITUTIONAL LAW-DUE PROCESS-WHETHER THE DENIAL OFLOYALTY CLEARANCES MAY BE BASED ON FACELESS INFORMER EVIDENCE-Much recent controversy has centered on the problem of whether or not aperson working with classified government material can be denied a loyaltyclearance through an administrative proceeding in which he is not allowedto confront and cross-examine adverse witnesses. The "cold war" hastended to accentuate the issues presented, so that both sides of the con-troversy have now been fully represented by vigorous exponents. Typicallythis problem has embraced two classes of individuals who have been deniedloyalty clearances; those engaged in governmental projects who are pri-vately employed by firms working on government contracts, and thoseemployed directly by the government.10223 Il. 41, 79 N. E. 38 (1906).11 A case from another jurisdiction supports this conclusion. The Court of Ap-peals of New York held that when vouchers are returned to the president of thedepositor, they have been returned to the depositor within the meaning of theNew York statute: Shattuck v. Guardian Trust Co. of New York, 204 N. Y. 200,97 N. E. 517 (1912).

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Banks and Banking - Functions and Dealings - Whether Bank\u27s Liability for Paying a Forged Check is Absolutely Limited by Statutory Duty of Depositor to Notify Bank of Forgery within One Year after Return of Voucher

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