United States v. National Exchange Bank of Providence

Background

The federal government sued a private bank called the Exchange Bank to recover money paid on pension checks that bore forged endorsements. The Exchange Bank cashed the checks and then sent them to a national bank in Boston for collection. A trial court originally found for the government, but the Circuit Court of Appeals reversed, relying on a narrow commercial rule that can bar recovery when notice of forgery is unreasonably delayed.

Reasoning

The Court addressed whether those pension checks fell under that exceptional commercial rule. The Justices explained the rule only applies when the payer is charged with knowing a genuine signature, which was not true here because the forgery was of the payee’s name and the Government could not reasonably be expected to know the signatures of millions of pensioners. Congress had required identity checks and supporting vouchers before pension checks issue, so the law did not treat the Government as having actual knowledge of pensioners’ signatures. The Court also held that a bank that presents a check for payment impliedly warrants the check’s genuineness, so the Government’s right to recover arose when it paid. For these reasons, the Court reversed the Court of Appeals and affirmed the trial court’s judgment for the Government.

Real world impact

Banks that collect pension checks with forged endorsements can be held liable and should inspect endorsements carefully. The federal government may recover mistaken payments on forged pension checks. The decision narrows the exceptional rule so it will not block recovery in similar pension-payment cases.