United States v. Guaranty Trust Co. of New York

Background

The United States sued a New York bank to recover $160 that had been paid on a Treasury check made out to a man in Yugoslavia. The Government had mailed the check to the payee’s Yugoslav address. The check was later forged and passed through two Yugoslav banks to the Guaranty Trust Company in New York, which presented it for payment through the Federal Reserve Bank and received credit. The Government learned of the forgery years later and asked for the money back.

Reasoning

The Court focused on where the check was meant to be negotiated and where the forgery and transfers actually occurred. Because the Government sent the check to Yugoslavia and it was negotiated there, the Court said Yugoslav law controls whether the transfers were valid. Under that law, a transferee who pays value and takes the check without notice of a forgery acquires a good title and the right to keep the proceeds. The Court therefore held the banks got a valid title and could retain the payment. The Court declined to decide other arguments raised by the Government about guaranties, Treasury rules, or recovery for mistake because the foreign-law ruling made those questions unnecessary.

Real world impact

A payment mailed abroad and negotiated under foreign rules can be governed by that country’s law. Here, that outcome prevented the United States from recovering the paid sum. The decision turns on where an instrument is negotiated and on the foreign law applied, so similar government payments mailed overseas may be affected in the same way.