Story Case

Mrs. Henry Peck paid her grocery bill with a check for $12.50. It was indorsed by the grocer, Richard Franklin, and sent with his day's collections to his bank, the Traders State Bank, for deposit. The messenger, a young clerk, noticed while on the way that there was a small space between the dollar sign and the figure 12, and that the word twelve was written at the very right end of the blank line. He inserted the figure 5 and the words "five hundred" in these spaces. He then withheld the check from the deposit, but brought it in later in the day, representing to the bank that his employer had endorsed it in blank and sent it down by him to have it cashed, as he needed some currency in a hurry. The cashier believed the story and, relying upon his acquaintance with the young clerk and with Franklin, approved the check for payment. The clerk disappeared with the money, and Franklin soon noticed the deficiency in his deposit. After the check had been sent through the clearing house and paid by the drawee bank, it was returned by Mrs. Peck, who refused to allow it to be charged against her account, on the ground that it had been altered. It was then returned to the Traders State Bank, upon its indorsement, and it was obliged to return the payment it had received from the drawee bank. Franklin refused to recognize that he was to any extent liable for the money which he had never received, but on the other hand demanded that the bank give him credit for the $12.50 which the check had originally represented. The Traders State Bank brought suit against Mrs. Peck, as maker, and Franklin, as indorser, of the check. Both these parties claimed that the alteration of the check wholly destroyed it and that they were thereby relieved and discharged from all liability. What should be the judgment of the court?

Ruling Court Case. Benedict Vs. Cowden, Volume 49 New York Reports, Page 396

Cowden entered into a contract with Brown to become an agent for the latter in selling certain machines. Brown at the same time advanced him $200 for which Cowden gave his note. At the bottom of the note was a provision that the note was to be paid out of the proceeds from his commissions arising from the sale of machines. There was no space in which to sign below this provision, and Cowden signed just above it. Afterwards, Brown, without the knowledge or consent of Cowden, detached that part of the note containing the provision concerning payment, and sold it to Benedict, who suspected nothing. Benedict now brings this action against Cowden upon this note.

Cowden contends that the alteration is a real defense which is good against a bona fide purchaser without notice.

Mr. Justice Allen said: "It follows, then, that the memorandum at the foot of the note in suit was an essential part of the note, and the severance of it from the note, without the consent of the defendant, was the alteration of the note in a material point, and destroyed the note even in the hands of an innocent indorsee." Judgment was given for Cowden.

Ruling Law. Story Case Answer

At Common Law, when a negotiable instrument was materially altered, it was void, even in the hands of a bona fide purchaser for value, without notice of the alteration; and even though the alteration was made by a person not a party to the bill. The Negotiable Instruments Law provides: "Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alterations and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course, not a party to the alteration, he may enforce payment thereof according to the original tenor."

At the Common Law, the defense of Mrs. Peck and Franklin would have been sustained. Alteration operated as extinguishment. But by the rule of the statute, the effect of the alteration is limited. The bank can recover the original amount, $12.50, as upon a check which had been accidentally destroyed. If Mrs. Peck does not pay the amount, Franklin is liable for it. Whether or not he can then require the bank to credit him with the $12.50 as a deposit is a question of whether the clerk was his agent to take the money for the check. If so, the bank does not take the risk of his misappropriation of the money after it is in his hands. But since the general custom is to send checks in for deposit and to draw new checks for cash, there is not much to support the action of the bank in giving out the money. It will, therefore, have to credit Franklin with the amount collected from Mrs. Peck, and lose $512.50 as the result of having paid the check in cash to the clerk.