The majority opinion holds that the appellant was negligent, as a matter of fact, in the operation of its business, and that such negligence was the proximate cause of the loss. I do not assent to either of these conclusions.
If the appellant was guilty of negligence in the operation of its business, it must have been either because it reposed confidence in Foster, or else because it permitted him to exercise too wide a range of authority.
In my opinion, it can not be regarded as negligence for an employer to repose confidence in a trusted employee. Foster first became connected with the mill in 1924, and because of his ability and apparent integrity, was promoted successively until he became foreman in 1926. Until the discovery of his forgeries, he had never been suspected of any disloyalty or wrongdoing. In every business, no matter how large or how small it may be, confidence commensurate with the duties involved must necessarily be reposed in some one. No business could continue if it operated on the theory that every employee must be distrusted. *Page 550
I rather assume, however, that the position of the majority is that the appellant permitted Foster to exercise too wide a range of authority. In this connection, the opinion states that
"Appellant permitted its employee Foster to pad its payroll for over two years, during which period appellant regularly issued its payroll checks, payable to fictitious persons, and permitted Foster to obtain possession of these checks and procure from respondent payment thereof."
I do not suppose that, by this language, it is meant to be inferred that appellant had knowledge that Foster was doing those things, or that appellant gave its consent thereto. There is nothing in the record to justify any such inference.
Now, it is true that Foster employed many of the men, allocated them to their work, oversaw them in their work, extended their time upon the cards and saw that the cards were placed in proper position in the racks. Is there anything unusual about that? It seems to me that those duties are the very duties which one in Foster's position would be expected to perform. It is said that he was permitted to be about the card racks, thus enabling him to abstract the checks. But it is conceded that originally the superintendent and the yard foreman were in the same office and could easily observe those going to the racks, and that later, upon the consolidation of the two offices, the whole office force could likewise observe those approaching the racks. It is conceded that there was a strict rule that no employee should punch the time clock for any one other than himself. Was it negligence for the company not to have some one to spy upon each and every occupant of the office whenever he approached the time clock and racks, even though his duties compelled him to go there? I do not think that, simply because a *Page 551 trusted employee ultimately went wrong, it can be said posthumously that it was negligence for the company to allow him to do it.
But I do not wish to draw too fine a distinction upon the facts or the inferences that may be drawn therefrom. Assuming that the company's system was weak and that its weakness led Foster to take advantage of it, I still think that, upon the law applicable to the facts, the appellant is entitled to recover.
The majority appear to rest the decision largely upon the difference between forged checks and forged endorsements. There is a difference between the two, it is true. But the difference is simply a matter of time. The forgery of a check is as of the time of the issuance of the check. The forgery of an endorsement usually occurs later. In either event, of course, if a payment by the bank is the proximate result of the drawer's own negligence, the latter can not recover unless the bank, by its own negligence, has rendered itself liable despite the drawer's negligence. The majority admit this to be true with respect to forged endorsements.
The question then simply comes down to this: What is the bank's duty when a check is presented to it for payment? The answer has been definitely determined by practically a uniform current of authority. The relation between a bank and its depositor is that of debtor and creditor, out of which relation arises the duty of the bank to disburse the money standing to the depositor's credit only upon his order and in accordance with his directions. When, therefore, a check drawn by a depositor, payable to order, is presented to a bank by one claiming under an ostensible endorsement by the payee, the bank must, at its own peril, ascertain the genuineness of the endorsement; the depositor has a right to assume that the bank will ascertain that the endorsement is genuine. A forged endorsement *Page 552 passes no title to the check. Only when the bank is misled by some negligence or other fault of the drawer can it escape liability. Michie on Banks and Banking (5th Ed.), §§ 276, 277a, pp. 506-512; Brady on Bank Checks (2d Ed.), p. 246, §§ 160 etseq.
In Goodfellow v. First National Bank, 71 Wash. 554 (559),129 P. 90, 44 L.R.A. (N.S.) 580, it is said:
"The law imposes upon the bank on which a check is drawn payable to a certain person or order the duty of ascertaining the identity of the person therein named as payee; and it is only when the bank has been misled by some act of negligence or other fault of the drawer, that it will be justified in making payment of the check to any other than the person named therein as payee. We know of no authority against this proposition. In support of it, see: [list of cases cited]."
See, also, Los Angeles Investment Co. v. Home Savings Bank,180 Cal. 601, 182 P. 293, 5 A.L.R. 1193.
It is said that the bank was misled by appellant's own negligence, as found by the trial court. By the great weight of authority, the rule is that the negligence of the depositor which will relieve a drawee who cashes a check on a forged endorsement must be such negligence as relates to the forgery itself, or its detection, and not merely to a mistaken or inadvertent issuance of the check. Stated in another way, the negligence of the drawer must be the proximate cause of the forgery, and not merely the circumstance under, or the means by, which the check comes into the possession of the forger. The negligence of the drawer is immaterial unless it proximately affects the conduct of the bank in the performance of its duties. American Sash Door Co. v.Commerce Trust Co., 332 Mo. 98, 56 S.W.2d 1034; Wussow v.Badger State Bank, 204 Wis. 467, 234 N.W. 720, 236 N.W. 687;McCornack v. Central State Bank, 203 Iowa 833, 211 N.W. 542, 52 A.L.R. 1297; St. Paul v. Merchants National Bank, *Page 553 151 Minn. 485, 187 N.W. 516, 22 A.L.R. 1221; Shipman v. Bank ofState of New York, 126 N.Y. 318, 27 N.E. 371, 22 Am. St. 821, 12 L.R.A. 791; U.S. Cold Storage Co. v. Central Mfg. Dist. Bank,343 Ill. 503, 175 N.E. 825, 74 A.L.R. 811.
The case of American Sash Door Co. v. Commerce Trust Co.,supra, decided in December, 1932, is almost a parallel case to the one at bar. The facts there were strikingly similar to those here. After a very thorough review of many cases upon the subject, it announces and affirms the rule which I have just adverted to. That case has since been reviewed with favorable comment in Brannan's Negotiable Instruments Law (5th Ed. Beutel), p. 188.
In this case, it was not the negligence of the appellant in the issuance of its checks that was the direct and proximate cause of the loss. It was the negligence of the respondent in failing to ascertain the genuineness of the endorsement that caused it. Foster had no authority from the appellant to present its checks for payment, much less to sign the names of the payees therein. Some of the checks were cashed at the bank of one of the defendants in which Foster had a personal account. That bank evidently relied on Foster when it cashed those checks. To him, therefore, that bank should be required to look. As to those checks, therefore, it is now a matter entirely between the two banks.
On the other hand, the greater number of checks were cashed at respondent's bank, where Foster was not known at all. It was respondent's duty, then, to find out who he was, or at least to find out whether he was the payee named in the check or the person whose signature was endorsed thereon. Had respondent taken the precaution which the law requires a bank to take, it would have learned that Foster was not the *Page 554 payee or endorser at all, and hence, it would not have been called upon to cash the checks. It was the duty of the bank, at its peril, to ascertain whether the endorsement was genuine. Had the actual payees named in the checks presented them to respondent, and been paid on their endorsement, an entirely different question would here arise.
The rules already announced apply with equal force in a case where the check is payable to a fictitious payee, and the drawer in good faith believes that the payee is a real person.
"The rule that a bank paying a depositor's check on a forged indorsement is liable to him, unless the payment was the proximate result of his conduct or negligence, applies to a check drawn in favor of a fictitious payee, whom the drawer in good faith and without fault believes to be a real person. The payment of such check cannot operate as payment of any part of the bank's debt to the depositor. The bank is not excused by paying it to the fraudulent holder, unless it takes precautions to determine whether the indorsement is genuine, which involves the ascertainment of identity, and the genuineness of the signature. The duty of a bank to use due diligence in identifying the payee of a check is not changed by the forgery of a check so as to make it payable to a fictitious payee. But if the drawer knows that the payee is a fictitious person the check is considered as payable to bearer, in which case payment to any holder is authorized and the bank is under no duty to ascertain the genuineness of the indorsement." 5 Michie on Banks and Banking, § 277d, p. 516.
See, also, cases above cited.
The evidence in this case is conclusive to the effect that appellant believed that it was issuing its checks to existing persons in its employ.
I think that the appellant should be permitted to recover, except upon so much of its claim as represents *Page 555 the checks paid prior to November, 1928. I therefore dissent.
MILLARD, C.J., MITCHELL, and TOLMAN, JJ., concur with STEINERT, J.