When the decedent, Samuel C. Thomson, retired in 1930, he delivered all of his securities to the defendant Trust Company under a custodial agreement providing for payment of stipulated fees by him. In his checking account with the Trust Company he kept all of his cash. From 1922 until 1940 the decedent employed as part-time secretary one Mary B. Roberts who was also employed by one of his former associates and by a mining corporation in whose office he had rented a room. Mrs. Roberts kept his books except his check book which he always retained in his possession.
Beginning on May 9, 1930, Mrs. Roberts systematically appropriated Mr. Thomson's cash and securities. The larcenies continued until his death in 1940 and at that time totaled $140,902.04 of the cash and $519,069.42 of the securities. The thefts were accomplished under two powers of attorney, dated May 13, 1930 and October 23, 1931. During the entire period from *Page 70 1930 to 1940 Mr. Thomson never asked either Mrs. Roberts or the Trust Company to enter into any transaction which involved or necessitated delivery of any securities to Mrs. Roberts. The first power of attorney authorized the Trust Company to follow the instructions of Mrs. Roberts for the sale, purchase and delivery of Mr. Thomson's securities, including delivery to herself. The second power of attorney gave Mrs. Roberts a signing power on Mr. Thomson's checking account but contained no provision expressly authorizing her to draw checks to her own order and Mr. Thomson never requested her to draw any checks under that power of attorney.
Under the first power seventy-two separate lots of securities were delivered directly to Mrs. Roberts by the Trust Company at her request and against her receipt and were stolen by her. Other unauthorized transactions resulted from Mrs. Roberts' effort to conceal her theft. Such transactions consisted of the Trust Company's use of funds in Mr. Thomson's checking account at the direction of Mrs. Roberts to purchase securities when it became necessary for her to replace them in Mr. Thomson's account in order to conceal the prior thefts. Still other unauthorized transactions consisted of the Trust Company's sale of Mr. Thomson's securities at Mrs. Roberts' direction to obtain cash to replenish the checking account and thus conceal prior thefts from that account. In addition, Mrs. Roberts forged Mr. Thomson's name to a note and a loan agreement in the face amount of $75,000 and the Trust Company, accepting the signatures as those of Mr. Thomson, deposited that sum in his account and thus enabled Mrs. Roberts to conceal the fact that she had taken approximately an equivalent amount from the checking account.
During the greater part of the ten-year period preceding his death, Mr. Thomson practically never came to his office or transacted any business there. Consequently he never saw or inquired about the statements rendered by the Trust Company of his checking and securities accounts. They were sent by the Trust Company to his office. Mrs. Roberts kept a fictitious system of accounts referred to in the prevailing opinion as "white sheets" and "blue sheets". Those "blue" and "white" sheets were forwarded thereafter by Mrs. Roberts *Page 71 to the decedent. That practice continued until the death of Mr. Thomson when the thefts were discovered and Mrs. Roberts sentenced to a State prison upon her confession of guilt.
The question presented for determination is whether the Trust Company had notice that Mrs. Roberts was dealing with the cash and securities without authority and if so, as of what date. If the Trust Company was chargeable with such notice then it could not rely upon the powers of attorney as a defense after the date on which it was found that the Trust Company had such notice.
To put it in another way, the Trust Company had contracts with the decedent as to his money on deposit and as to his securities on deposit. Mrs. Roberts had no authority in fact to draw either cash or securities for the purpose of appropriating them. The Trust Company did not perform its contracts in paying out the cash and delivering the securities unless it had a right to rely at the time of so doing on some apparent authority of Mrs. Roberts to receive them.
The Appellate Division found as a matter of law that there was no evidence from which a jury could have found that the Trust Company was chargeable with notice that Mrs. Roberts was acting without authority. It also found that Mr. Thomson's failure to examine the statements of his accounts which the Trust Company sent periodically to his office was negligence as a matter oflaw and that such negligence prevented the plaintiff from recovering. The Appellate Division also held as a matter of law that the Trust Company was not negligent.
The plaintiff was entitled to a jury trial and it seems to us that whether the decedent was negligent and whether the Trust Company did or did not have notice were both questions of fact.
We shall first consider the facts which came to the attention of the Trust Company from which we think a jury could determine, as indeed it did, that the Trust Company was charged with notice that Mrs. Roberts was acting without authority.
In 1932 and 1933 Mrs. Roberts drew eighteen checks without the knowledge of Mr. Thomson and of which he never learned. Two of them were paid in cash over the counter by the paying teller. The other sixteen were deposited in her own account with the Trust Company to cover overdrafts existing in her *Page 72 account at the time. The two checks which were cashed totaled $700. The others varied in amount from $200 to $1,500. Each of the eighteen checks was drawn to the order of Mrs. Roberts. Each of the sixteen checks was credited by the Trust Company to Mrs. Roberts' account at a time when it was in overdraft as shown by the red figures and the letters "O.D." appearing on the ledger of the Trust Company.
That conduct was not only calculated to put the Trust Company on notice that Mrs. Roberts was acting without authority, but the evidence discloses that the Trust Company became conscious of the situation. Late in November, 1933, Mr. Hovey, the assistant vice-president, advised Mrs. Roberts that she was drawing too many checks to her own order on Mr. Thomson's account; that such a practice was unusual and would have to cease and that in the future Mr. Thomson, himself, would have to sign all checks so drawn. Thereupon, Mrs. Roberts abruptly ceased drawing checks to her own order on Mr. Thomson's account.
The assistant vice-president who took up this matter had formerly been the treasurer of defendant and the credit file shows that Mr. Thomson's account had been "assigned" to him. He was in charge both of Mr. Thomson's account and Mrs. Roberts' account. That assistant vice-president had written into the credit file ten months before, the following:
"1933 February 8th: —
Memo from Mr. Hovey: — I called at the office of S.C. Thomson and found that he is now in Florida and will not return to the city until April. He is not in good health and spends practically all of his time away from the city, coming here for a short time in the spring and in the fall."
The notification by the assistant vice-president was in the latter part of November, 1933. It could be inferred that the notification was the result of two transactions by Mrs. Roberts. The first on October 26, 1933, when she deposited a check on Mr. Thomson's account for $1,000 to cover an overdraft in her account. That deposit slip bears Mr. Hovey's initials so that it is evident that someone was suspicious and insisted that an officer of defendant approve the transaction before he *Page 73 put it through. The overdraft in that instance was $10.95. On November 21, 1933, Mrs. Roberts deposited another check drawn on Mr. Thomson's account for $1,500, to cover an overdraft of $1,400.39 in her account. It was then that Mr. Hovey notified Mrs. Roberts that thereafter checks drawn to her order on Mr. Thomson's account had to be signed by him personally. It is well to bear in mind at this point three facts: One, Mrs. Roberts' was an account of small balances — frequently less than one hundred dollars. Two, she had never deposited with the bank any collateral as security for any indebtedness by her to the bank. Three, that the overdrafts were "numerous". (See Grace v. CornExchange Bank Trust Co., 287 N.Y. 94, 107.)
The defendant's credit file also, under date of February 8, 1933, carried the following note:
"* * * I asked Mrs. Roberts if Mr. Thomson was still Vice-President of the Noranda Mines and also what chances we had of obtaining a portion at least of this business, reminding her that at one time we had their only account in New York. She said that Mr. Thomson continues as Vice-President and that she would be very glad to ask him to use his influence to reinstate this account with us. * * *
"This is our only contact and I shall follow the matter up in April."
The defendant's records show that the account of Mrs. Roberts was assigned to the same Mr. Hovey and that on those records there is the following notation: — "Sec to S.C. Thomson Do not disturb."
Just who was not to be disturbed is not entirely clear. A jury could certainly find it was Mrs. Roberts. If Mr. Thomson had been disturbed in late November, 1933, however, subsequent losses of over $450,000 would have been prevented.
On October 31, 1936, the actual balance in Mr. Thomson's checking account was about $9,000. Five days later Mrs. Roberts sent to Mr. Thomson a statement on the "white sheets" showing that his October 31st balance had been approximately $81,000. There was thus a shortage of $72,000. Thereupon Mrs. Roberts forged Mr. Thomson's signature on a $75,000 promissory note to the Trust Company and also on a special *Page 74 loan agreement with the Trust Company. Both were dated November 18, 1936. The forgeries were committed by tracing over a genuine signature of Mr. Thomson through a piece of carbon paper and by then going over the carbon tracing with ink and then rubbing off the carbon. We think it is fair to say that a comparison of the signatures on that promissory note and special loan agreement with the signatures on checks signed by Mr. Thomson at about that time would have disclosed even to the eye of inexperience that this was palpably a clumsy forgery. The handwriting expert, Mr. Osborn, characterized it as "a very poor reproduction". It was the duty of the defendant to know Mr. Thomson's signature. And it was obligated to know that the signature so presented was spurious.
The note was presented to the same assistant vice-president and was discussed with him. This was the same Mr. Hovey who had been so concerned with Mrs. Roberts' overdrafts in her own account and the covering of those overdrafts by checks drawn by her upon Mr. Thomson's account that he told her to stop them and obtain instead checks signed by Mr. Thomson personally. No such checks signed by Mr. Thomson had ever thereafter been presented drawn to the order of Mrs. Roberts. Now there were presented two clumsily forged papers. True, Mrs. Roberts had the right to sign those papers as attorney under her power of attorney. That authorized signature was as shown on the signature card of the bank "S.C. Thomson by M.B. Roberts, attorney." That signature card referred to the power of attorney and expressly stated what the authorized form of signature was to be. The assistant vice-president was concerned over the transaction. He asked Mrs. Roberts what Mr. Thomson wished to do with the money and Mrs. Roberts replied that the loan was for the purpose of purchasing securities. To that the assistant vice-president said that that was too bad because of the amount of collateral that would be required and which was then taken from the custodial account.
The evidence is uncontradicted that the loan was unauthorized and that it was obtained by Mrs. Roberts to conceal her thefts and to make it possible for her to continue them. The one presenting the note in this instance had been stopped in practices which the bank felt were not proper ones by the same *Page 75 man to whom she was now presenting the forged signature of her principal. Can we say that no jury could rationally find that the forgery was so clumsy as to put a banker on notice that something wrong was being done by Mrs. Roberts when the same individual officer had already forbidden previous questionable practices by her? In this instance there can be no claim that there was reliance upon the agent's apparent authority. The defendant acted in discounting the note upon the fact that it was the act of the principal and not that of the agent. The defendant affirmatively established that fact. That ends any question of apparent authority. (Wen Kroy R. Co. v. Public Nat. Bank T. Co.,260 N.Y. 84, 91, 92; Ward v. City Trust Co., 192 N.Y. 61.)
The presentation of a forged signature of the decedent by Mrs. Roberts in this instance should have been doubly suspicious to this defendant's officer. First, because having two powers of attorney under which she had acted for five and six years respectively, why was she resorting to clumsy forgeries? Second, since the proceeds of the loan were going into Mr. Thomson's account, why should she attempt to conceal the fact that she had signed the note as she had a right to do?
The case of Oquendo v. Federal Reserve Bank of New York (98 F.2d 708) is clearly distinguishable. There the plaintiff had given her attorney a broad power to receive the amount of her recovery and to indorse any check in payment thereof. The attorney received the check and deposited it in his own name as attorney. It bore an indorsement both of the plaintiff's name and his own name as attorney. In other words, the one presenting the check purported to act as agent. In addition the defendant bank was not one which should have known the genuine signature of the principal and therefore could not have been put on notice by any clumsy forgery of the principal's signature.
On December 6, 1937, the bank sent to Mr. Thomson's office a statement regarding the loan and the collateral and requested verification. No reply was received. On December 27, 1937, the defendant sent a duplicate statement. Again no reply was received. On March 28, 1938, the defendant wrote demanding the return of a statement "at once" regarding the $75,000 *Page 76 loan and the collateral pledged. No reply was received. A further request for verification of the loan dated April 6, 1940, was ignored.
Certainly a jury could find that at sometime between 1930 and 1940, these cumulating events put the defendant bank upon notice that Mrs. Roberts was acting without authority. (Fidelity Deposit Co. v. Queens Co. Trust Co., 226 N.Y. 225, 233;Grace v. Corn Exchange Bank Trust Co., 287 N.Y. 94, 106,107.)
The jury found that by November 18, 1936, sufficient facts had accumulated so that on that date the defendant was put upon notice that Mrs. Roberts was acting without authority and was embezzling the funds of her employer. We think that the jury could so find when all the important facts detailed supra were "combined in the consciousness of a single officer of the bank." (Grace v. Corn Exchange Bank Trust Co., 287 N.Y. 94, 104.) While the defendant was asking Mr. Thomson to confirm its statement as to the $75,000 loan and the collateral therefor which had been taken from his custodial account and receiving no reply, Mrs. Roberts had so depleted Mr. Thomson's account that when he drew checks he would overdraw his account. Thus in March of 1939 Mr. Thomson's account showed an overdraft from March 3rd to March 6th in the sum of $9,094.49 and in May of 1939 an overdraft of $7,969.76. On such occasions the defendant wouldnotify Mrs. Roberts by telephone who would then order the sale of securities from the custodial account and thus cover the overdraft and avoid the danger of her exposure.
This action is in contract. There were two contracts, the ordinary contract which every depositor has with a bank and a written contract under which the bank accepted Mr. Thomson's securities for safekeeping. Under those contracts Mr. Thomson's cash was to be paid out and his securities to be delivered only on his own order or that of his authorized agent. If one knows or is put upon notice that the agent is acting without actual authority, no reliance may be placed on any apparent authority.
The rule is stated in the Restatement of the Law of Agency:
"§ 166. Third Persons Having Notice of Limitation of Authority. *Page 77
"If a third person has notice of the limitation of an agent's authority, he cannot subject the principal to liability upon a transaction with the agent in violation of such limitation.
"Comment: a. If a third person has such information as would lead a reasonable man to believe that the agent is violating the orders of the principal or that the principal would not wish the agent to act under the conditions known to him, he cannot subject the principal to liability. Any substantial departure by an agent from the usual methods of conducting business is ordinarily a sufficient warning of lack of authorization." Again, in Mechem, Law of Agency, section 752, at page 534, it is stated: "Persons dealing with agent must exercise reasonable prudence. — The person dealing with the agent must also act with ordinary prudence and reasonable diligence. Obviously, if he knows or has good reason to believe that the agent is exceeding his authority, he can not claim protection. So if the suggestions of probable limitations be of such a clear and reasonable quality, or if the character assumed by the agent is of such a suspicious or unreasonable nature, or if the authority which he seeks to exercise is of such an unusual or improbable character, as would suffice to put an ordinarily prudent man upon his guard, the party dealing with him may not shut his eyes to the real state of the case, but should either refuse to deal with the agent at all, or should ascertain from the principal the true condition of affairs."
This is particularly true when we consider the forged indorsement of Mr. Thomson. The language in Wen Kroy R. Co. v.Public Nat. Bank T. Co. (LEHMAN, J., 260 N.Y. 84, at pp. 91, 92) seems particularly applicable.
The situation was aptly described in Franhan Distributors v.New York World's Fair 1939 (CHASE, J., 124 F.2d 82, 85.) "The unperformed duty of inquiry may, and often does, make it impossible to rely upon any so-called apparent authority of an agent."
The lack of authority of Mrs. Roberts would have been disclosed by inquiry in connection with her conduct in 1933 which was improper enough to require affirmative action by the defendant. Inquiry in 1936 again would have disclosed her lack of authority. *Page 78
It does not seem to us that it is an answer that the defendant was under no duty to determine whether the note bearing the traced signature of Mr. Thomson was signed by Mrs. Roberts or Mr. Thomson. Viewed academically, and apart from the circumstances of this case, that may be true. But in this case the defendant hadundertaken the duty of determining whether instruments signed under the powers were signed by Mrs. Roberts or Mr. Thomson. The defendant had instructed Mrs. Roberts that checks drawn to her order by her under the powers of attorney would not be honoredby the bank but that such checks must be signed by Mr. Thomsonpersonally. That was the reason Mrs. Roberts forged Mr. Thomson'sname. It does not seem to us that the defendant bank can now say that it was under no duty to determine whether the note was signed by the principal or by the attorney. Not only the signature card in the bank but the power of attorney itself and the forgery of the principal's name make applicable the language just referred to in the Wen Kroy case. It seems clear that a reasonably prudent banker would have been put upon inquiry either in 1933 or at sometime during the cumulative occurrences so that he would have made inquiry as to the authority of this secretary — and it was only as such that she was described on the records of the bank. This case is much stronger than the Bischoff andGrace cases where the liability sought to be imposed was a tortious one to a third person because the bank became a knowing participant with its depositor in a transaction that defrauded that third party. There knowledge approximating consciousness of guilt may well be required. This is not such a case. This is a case where the defendant is pleading that it performed contracts with its customer when it delivered securities and paid out money to the depositor's agent. The defendant had an affirmative duty to exercise vigilance and to exercise reasonable prudence and it could not avoid making inquiry when the conduct of the agent was such as to arouse the suspicion of a responsible officer and cause him to forbid the continuance of such conduct. It is true that the jury did not fix that occurrence in 1933 as the one which finally put the defendant on notice that the authority of Mrs. Roberts was being exceeded but instead fixed the date of November 18, 1936, when the forged signature of Mr. Thomson was presented to the bank. The jury could *Page 79 have fixed either date but apparently fixed the later date as one upon which sufficient facts and occurrences had accumulated to make it certain that the bank was put upon notice. The jury could on the facts presented have picked either date. The fact that the plaintiff accepted the jury's finding as to the date and did not cross appeal is of no moment. That does not remove from the case nor from the jury's consideration the occurrences of 1932 and 1933.
The learned Appellate Division held as a matter of law that it was Mr. Thomson's duty to examine the statements sent to his office by the bank and that his failure to do so barred recovery. We think that that cannot be said here to be so as a matter of law. That was clearly a question of fact. Mrs. Roberts was committing suspicious acts in 1932 and in 1933 and was told by a responsible bank officer to stop them. In 1936 she presented a patently forged signature of her principal which was not in accord with the power of attorney given to her. At those times the credit file memorandum made by Mr. Hovey showed that Mr. Thomson was "not in good health and spends practically all of his time away from the city". The same memorandum described Mrs. Roberts as the person "who takes care of both Mr. and Mrs. Thomson's affairs". The bank knew that Mrs. Roberts was in charge of Mr. Thomson's office and that he rarely attended there. Therefore the bank knew that it was sending to Mrs. Roberts, who was committing the suspicious acts, the periodical statements and putting it within her power if she were doing wrong to conceal those statements from her principal. One would hardly expect that recovery would be denied to a depositor as a matter of law because the bank put periodical statements into the hands of an agent acting suspiciously who would have every motive to suppress them. Certainly no one would contend that that was the law if the bank actually knew that the agent in charge of the office was concealing the statements from her principal. If there came a time when the defendant was put on inquiry as to whether this agent was acting within her authority the same rule of law obtains.
There is another reason why the failure to examine the bank's statements could not defeat the plaintiff as a matter of law. A depositor's failure to examine the statements only gives the *Page 80 bank a set-off for damages caused by the depositor'snegligence. If the bank itself was negligent, the set-off is lost and we return to the contract which was breached. (Critten v. Chemical Nat. Bank, 171 N.Y. 219; Irving Trust Co. v.National City Bank of New York, 78 F.2d 665.) The facts which put the bank on notice that Mrs. Roberts was exceeding her authority established its subsequent negligence in not acting upon that notice. It is difficult to see how it can be said as amatter of law that the bank was not negligent in failing to make inquiry when the assistant vice-president in charge of the accounts both of the principal and the agent became so concerned with the agent's conduct that he warned her to stop the conduct but took no steps to warn the principal nor even to make inquiry himself as to her authority. Before that warning to Mrs. Roberts she had drawn checks on her own account resulting in overdrafts at the rate of one hundred times in two and a half years and had replenished her account from that of her principal so often that she was told to stop it. It makes no difference since we are discussing this as a matter of law and not as one of fact, that it is claimed that Mrs. Roberts paid some bills of Mr. Thomson from her own account. That may be matter of defense. The fact is that whether or not she had paid such bills defendant's officer was so aroused by the acts of the agent that even though the credit file told him that she was not to be disturbed (if that is what the credit file means) he told her to cease her practices. That could only have been because he feared that since there was no express authority in the power of attorney to Mrs. Roberts giving her the right to draw checks on her principal's account to her own order, there might be some liability upon the defendant bank if she continued to do so. That a jury could not say that that officer was guilty of negligence when that was his state of mind and he made no inquiry as to whether she was acting without authority is difficult to see. If it was negligent, it offsets the negligence of Mr. Thomson in not examining his periodical statements and entitled the plaintiff to recover for breach of contract. The additional negligence in sending the periodical statements to an office where the defendant knew they would come into the hands of Mrs. Roberts whose every effort might be to suppress them makes this case stronger than Critten v.Chemical Nat. Bank *Page 81 (171 N.Y. 219). See, also, Gutfreund v. East River Nat. Bank (251 N.Y. 58); Basch v. Bank of America Nat. Trust Savings Ass'n (139 P.2d 1, 12); Irving Trust Co. v. National City Bank ofNew York (78 F.2d 665), where Critten v. Chemical Nat. Bank and the rule therein laid down was referred to. See, also,Fidelity Cas. Co. v. Farmers Nat. Bank (275 N.Y. 194).
The case of Potts Co. v. Lafayette Nat. Bank (269 N.Y. 181) is clearly distinguishable. There was no evidence that the bank was negligent. The conversions and the failure of the bank to discover them were due to the acts of a dishonest officer. For those acts and that knowledge the bank could not be held responsible. Here, however, the knowledge of the assistant vice-president and other officers of the defendant as to the conduct of Mrs. Roberts was knowledge gained while acting within the scope of their employment and so was imputable to the defendant. To say that the bank was not negligent as a matter oflaw and therefore did not lose its right of set-off was clearly error. That was a jury question. A bank may not be negligent and escape liability therefor as a matter of law by throwing the burden of checking its conduct upon its depositor and be absolved as a matter of law if the depositor fails to examine his periodical statement. On the contrary, the rule of the Critten case is that a bank shall not be excused by the depositor's negligence if it was also negligent. Questions of negligence are questions of fact.
Finally, as the dissenting judge below pointed out, the question of whether the failure to examine bank statements under the circumstances disclosed here constitutes negligence is one of fact and for jury determination. (Frank et al. v. ChemicalNat'l Bank of N.Y., 84 N.Y. 209.)
The judgment should be reversed and a new trial ordered, with costs to abide the event.