Honorable R. S. Qche
County Auditor
Gregg County
Longview, Texas

iiearMr. Wyche:                           Opinion No. O-6007

                                         Re:   Liability of'a depository bank
                                               for paying out the public funds
                                               upon duly dram checks bearing
                                               forged endorsements of payee,
                                               under the facts stated.

          Your   requeSt   for 8 legal opinion upon the above subject n?atter
is as follows:

          "In 1943 and 1944 the payrolls of Gregg County were padded.
   Checks were dram in favor of aertein individuals who actually
   did no work and who never received the check. The payrolls were
   also padded with regard to rental of trucks. The perscm to whom
   the checks mre written never received them and never endorsed
   them, nor authorized anyone to endorse them in both oases. Two
   persons were indicted by the Grand Jury for forgery, One has
   hem convicted and some 26 cases are pending against these
   persotsJ The total amount of the forgeries exceeds $ll,OOO.OO.

         "These warrants were dram in favor of these persons and
  were to be paid by the Depository Bank. A bank at Gladewater
  accepted most of these forged checks and, in turn, collected the
  money from the Depository Sank. May B Depository Bank and the
  other bank be sued for recovery of these various sums of money?

          *Please give me your opinion as to whether or not a
   Depository Rank is wholly responsible, or both banks."

          Undoubtedly, the depository bank is liable to the county for
any loss sustained by it through the payamt of a oheok bearing a forged
endorsement of the name of the payee*

          There is a contraat relation existing between the oounty and
its depository bank, the essence of which relation, so far as the
depository's liability is concerned, is that it will safely keep the funds
of the county and disburse them only upon the order of the county author-
ities duly drawn. Any disposition of the funds, otherwise then to the
Honorable R. S. Wyche - page 2               O-6007



properly-drawn order of the county, wcul* be a violation of its duty
as a bank, and any payment, therefore, to one other than ,thepayee in
the oounty's order, would render the bank liable for any loss therefrom.
In other words, in making such unauthorized payment, the bank would be
paying cut its own money and not the county"5 money, and would have no
right to charge the county's aocount.

          The general rule throughout the country is thus expressed in
Corpus Juri.sSecundum, Vol. 9, p. 734, 0 356:

         "Since, under the contract between a bank and its
  depositor, the bank is bound to pay checks only to persons
  designated by the depositor, supra, 0 340, it becomes the
  duty of the bank to its depositor, at its peril, to determine
  the genuineness of the indorsements on his checks and pay
  only where they are genuixs. Where a bank actually pays a
  check bearing a forged indorsement, such payment, of course,
  does not discharge the bank's obligstlons to the drawer:
  in legal contemplation it is considered that the bank has
  paid out its own funds rather than those of the drawer.
  Accordingly, the bank has no right to charge the depositor's
  account with the amount of such a payment; and if ,thebank
  does so, regardless of its good faith, or freedom from negli-
  gence, it will be liable to the drawer, ***.n

          As to the intermediary bank mentioned by you it is also liable,
and may be sued by the county at the oounty’s election.

          In Fjdelity 6:E&posit Co, of Maryland v1 Fort Worth National
Rank, 65 S-W. (2) 276, the Supreme Court adopted an opinion by the then
Commission of Appeals in whioh the very question was presented; saying:

          "Though there is some suthority to the contrary, the
   great weight is on the side which holds that 8 collecting
   bank which accepts a check on another bank on a forged in-
   dorsement aaquires no title thereto, and holds the proceeds
   thereof, when collected from the drawee bank, for the rightful
   owner, who may recover from the collecting bank as for money
   had and received. even though suoh hank has fully paid over
   and accounted for the same to the forger without knowledge
   or suspicion of the forgery. Michie on Banks and Ranking, ppO
   522, 523, and 524. See, also, annotations under note 79, p0
   524, same authority. Of course, the right of the payee or
   rightful owner to recover on this class of cheeks from the
   collecting bank is conditioned on the ai~enae     of any fault or
   laches on hjs part, and on  the absence of    B ratification
   of the forgad.or unauthorized indorsement by him. l**“(
Honorable R. S. Wyche - page 3                  O-6007



          The case of Home Indemnity m. vn %ate %blk of Fort “ovd~,e,
!Iowa) 6 N, W., (2) 757, has a very thorough and oxhnustiw, disfiouss;o~.
of the question citi!zgand quotifignumerous CSS% ,throughout. the ~~)~:~~?;py,
and holds to the same effect as to the ~liehi1it.yof thn in.te~medlrir~
banko

          The liability of such intermediary bank is not prediwted
upon any theory of relation of depositor and bank, but on the contrary,
is predicated upon the theory of conversion, or as for money had and
received,

          We call your attention, however, to the possible danger ,that
the county by a suit against the intermediary bank might waive its rj~ght
to sue the depository drawee bank, We do not dRci.dethis quest-;aa,how-
ever.

          fn the event the county should elect to *iuethe depository bank,
undoubtedly that bank would vouoh in the intermediary bank upon its
guarantee of prior endorsements, under the unifwm wstom of hanks
guaranteeing the genuineness of all prior endoPsema:,t:r,

          There could be a possible sjhwtion     where neither bkn?i:      w:lu!d
be liable, We refer to a case where the cheek or chnoks In~o~lvndware
knowingly drawn, payable to a fictitious ;7er6on%nd not tn a Sni‘iCCs:y -
contemplated person as payee. 2he endorsement of suoh check by sno*zhnr
in the name of the fictitj.ousperson would not make the dopos?wry bank
liable, neither would it make the intermediary bsnk liahlQ9         fnr thq
simple reason that a cheak thus mdo,   p8y~ble   ,to a flctj~t~ious    pe’won is
in law a "bearap" check, which the depository bank, or any o':hw batik
may with impunity pay to any one prnsen,tingit, Tn suoh a 01;s"ti‘.il         bani:,
whether depository or intermediary, woul~lbe entirely wi.tfi;~r       P!.sright
to pay the cheek, and would not be ,liab'Le  to the county for avy .!rss
sustained by reason of euch payman% out of the aoun~ty""3       fvnd*:.,SRR
Zollman, Eanks and Hankjng, 1701~ 6, 0 ZR6:i.

          It is hardly necessary to add that in any even,tthe intiSv;dual
or individuals forging such endorsements would be personally I-;n.tUe
                                                                    for
any loss sustained by the oounty,,

            We trust that what we have said satisfactorily SP.SWCPEyolu
inquiry,
