In Error to the Circuit Court of the United States for the Western Division of the Western District of Washington.

Action by the Tacoma Mill Company against the National Bank of Commerce of Tacoma, Washington. Judgment for plaintiff, and defendant brings error.

The plaintiff in error was the defendant below, and the Tacoma Mill Company the plaintiff. The action was instituted to recover moneys alleged to have been wrongfully paid to one F. Pinkham upon certain cheeks and drafts of which the mill company was the owner. The mill company had for a long time deposited its moneys, checks, and drafts with the bank, and had kept a deposit account with it. The complaint, among other things, sets out:. That, for the purpose of authorizing the payment of money to plaintiff, the Ijank required plaintiff to file and deposit with it plaintiff’s authorized signature, which was, when filed, in form as follows: “Tacoma Mill Company. By Chas. E.- Hill, Resident Manager, F. Pinkham, Accountant.” That said signature was at all times on file with the bank, but that, upon each occasion of the temporary absence from the city of Tacoma of either the said Charles E. Hill or F. Pinkham, a letter was written by plaintiff to the defendant bank notifying the bank of such contemplated absence, and giving the name and signature of the person who would be substituted for such absentee. That plaintiff’s customers in different states and countries were accustomed to send their checks drawn upon the banks with which they did business, payable to the order of plaintiff, which cheeks plaintiff deposited with the bank. That, for the purpose of indorsing such checks for deposit, plaintiff and the bank adopted a stamp bearing the legend, “Pay to the order of Nat’l Bank of 'Commerce, Tacoma Mill Company, By -, Cashier,” and this legend was stamped upon the back of said cheeks and signed in the blank space provided therefor “F. Pinkham.” That thereupon the cheeks would be delivered to the bank, and the bank would credit deposit account of plaintiff and proceed to collect the checks; but if any of them were-not honored the amount thereof would be charged back to such account. That plaintiff, in the course of its business, received a large number of checks, among others certain cheeks which are particularly specified. That said checks, on or about the date of their receipt by plaintiff, were duly indorsed for the purpose of deposit, in the customary manner, by said F. Pinkham, and were presented to the bank, but that the bank, instead of placing the amount of such checks to the credit of plaintiff in its deposit account, did, without the authority of plaintiff, deliver and turn over to Pinkham the amount thereof in coin or currency. That thereafter, to wit, about September 1, 1908, Pinkham' absconded without having paid to plaintiff the moneys thus received from the bank. And that the defendant bank has collected the amount of such checks, and has failed to account to plaintiff therefor.

The answer sets up that those certain cheeks described in the complaint were presented by Pinkham to the bank, in the usual course of business, stamped with the specified legend and signed by the said F. Pinkham, that the defendant did pay the amounts of said checks in cash to Pinkham, and that said Pinkham was fully authorized, and held out by plaintiff as authorized, to cash said checks and receive the money therefor, and defendant, denies that such checks were duly indorsed for the purpose of deposit, or that they were paid without authority of plaintiff. For a further defense, it is alleged, in effect, that all deposits made by Pinkham as cashier of plaintiff were entered in a passbook furnished by defendant to plaintiff; that said passbook was balanced monthly, and settlements of said account were made during the time that said checks were cashed; that, had Pinkham dealt with said funds or checks in an unauthorized manner; plaintiff, by the exercise of ordinary care in its business and in the examination ,of said monthly settlements, could and would have discovered the same; that had plaintiff exercised ordinary care in keeping its accounts with its customers, in the monthly settlements with defendant, or in the examination of said passbook, it would have discovered any and all alleged unauthorized acts of Pinkham; and that it was grossly negligent in omitting and failing to notify the defendant bank of Pinkham’s peculations, and defendant was wholly without fault or negligence in paying such cheeks and drafts.

These checks forming the basis of the action are 14 in number. Two of them bear date March '6 and March 26, 1907, respectively. The remaining 12 bear date running from March 4, 1908, to August 12th of the same year. The first 2 checks were eventually withdrawn from the consideration of the jury, and verdict and judgment rendered for the amount of the 12 remaining.

There is little, if any, controversy as to the manner in which these checks were received by Pinkham, and by him presented to the bank, and by the bank paid to him. They were all indorsed in the usual and customary way; the indorsements bearing the signature “Tacoma Mill Company, by F. Pinkham, Cashier.” Pinkham became cashier in 1899, and had so continued up to the time of his defalcation. As cashier he had charge of the cash drawer, and as head of the office kept the time book, and had general direction of the office. It was his duty to make up the bank statements for deposit, and this he generally did. The statements were made up daily, as a rule, in the afternoon about 2 o’clock, and Pinkham would either take them to the bank with the passbook in person, or send them by the assistant cashier. All the checks on hand each day were tabulated in this statement, and were taken to the bank and deposited. The bank rendered monthly statements, of account to the mill company, and returned all checks drawn on the bank during the time covered by the statements. When these statements were rendered, the mill company, through Mr. Phillips, the bookkeeper, would check them over with its books to verify their accuracy. In this relation Mr. Phillips says: “When the bank’s statement corresponded with the cashbook and checkbook, and no irregularities occurred in the bank’s statement, it is not customary for business houses to go to the ledger account and check back for the purposes of verification.”

As it respects the mill company’s business, daily balance sheets were made up. Pinkham kept the cashbook, and once a month Hill, the manager, or Phillips, the bookkeeper, would check up the cashbook with the cash in the drawer; that is, they would count the money and check up the amount on deposit in the bank, and see that it balanced with the cashbook. The ledger appeared to be always in balance. When the shortage occurred, it was only ascertained by sending out statements to customers, who sent back canceled checks, and it was then ascertained that many of such customers had not received proper credit upon the mill company’s books. An experting of the books disclosed the method of Pinkham in his peculations to have been that he would use remittances without then giving the customers proper credit upon the mill company’s books. Hater he would use other remittances, without then giving credit to the customers from whom they were received. With the latter he would give credit on the books for former remittances used, and would appropriate the surplus, and thus he would “wash back,” to employ the expression of one of the witnesses, using the money from later remittances to pay those he had formerly abstracted, and so on from time to time, using more money all the while than he replaced. Thus he was brought to a point where it was necessary to obtain money upon the checks from the bank, to replace that which he had appropriated from remittances, which money was apparently used in that way. As to the checks, Mr. Hill describes what happened as follows:

“The checks were not placed to the credit of the account, and he would not enter them. We would not know whether they would come in or not. * * * We sent out statements on the first of every month, but apparently these never reached the customers * * * that had previously remitted. The statements would be passed on to Pinkham to be signed up. They would be made out by the bookkeeper and looked over by me and passed on to Mr. Pink-ham. * * The books of account do not show any credits in respect to the several accounts covered by the checks in evidence, except in respect to the Mandan Mercantile Company account. That account shows it was credited and closed. That cheek came in probably the 9th or 10th of March, but the money was not credited to the account until some time in April. If the check had been deposited, the credit, should have been given the day of the deposit or probably a day or two preceding. That was made up presumably from (the proceeds of) some other cheeks.”

It was shown that the largest part of this defalcation occurred in 1908. On August 22d Pinkham absconded, and later committed suicide without making reparation for his defalcations. For further elucidation, reference may be made to the testimony of Dan Phillips, one of the accountant experts called by plaintiff. After referring to the Mandan Mercantile Company check, dated March 26, 1907, which was evidently paid by the bank in March, but was not credited to the customer sending' it until April 5th following, the witness testified as follows:

“Q. Now, as an expert, when you reached that item in the cashbook, what conclusion did you reach as to the status of the account of the Mandan Mercantile Company? A. I tried to locate when this money had been deposited from the slips the bank furnished us. Q. But you could not? A. No. Q. Never was ‘deposited, was it? A. No. Q. Now, if you had taken the cashbook for the months of March and April and had taken the bank statements returned, showing the deposits made in the bank, and checked them, you could have ascertained the deposit account was shy just $310.22? A. We did discover it; yes, sir. Q. That was a simple matter? A. Since we could not locate it in the deposits, of course it was a simple matter. Q. That is, any ordinary bookkeeper, by checking the cash account for March and April with the deposit account as returned by the bank for those months, would have discovered the discrepancy for that amount? A. You have got to include your cash on hand to make a balance of it. Q. But it would have been discovered that check had not been deposited, wouldn’t it? A. Oertainly would. * * * An examination of the bank statement, at the end of March would show nothing. There is no entry on the books there that the amount had been paid at that time. At the end of April and first of May the bank statements show that this particular item had not been deposited, but it had been entered on the cashbook and credit given to the customer. Q. Suppose you had occasion to run over the statement and there was no discrepancy in your cashbook, would your attention be likely to be attracted to the fact that a particular check had not been deposited? A. It would — certainly would. You might not in every individual item there, but you can pick out any large item and see if that corresponds with the deposit as shown in your bank statement. Q. If you were to pick out a particular item — be suspicious and go through the bank statement to see if that particular item had been deposited — you would discover it? A. Yes, sir; I certainly would. Q. But what I am asking you is whether, on receiving the bank statement of this kind in the month of April — your books balanced regularly — there would be nothing to excite your suspicions and cause you to make a comparison of your cash items and of your items of account with these items ? A. Yes, there would. I would run across the item, for instance, of $310.22. I would look to see where it had been deposited, and cannot find a deposit for it. Q. I understand. But suppose this comes back to you at the end of the month and your cashbook is balanced, is there anything that excites your suspicion by that fact which would prompt you to go through your books and compare every item to see if there is a discrepancy? A. There might be. Q. But, I say, is there? A. No, not on the face of these bank statements. Q. And if your books balanced, on receiving this, as a bookkeeper, would there be anything to prompt you to go back and make a suspicion against a man you trusted and check over every item of his account and see whether every credit he had given on his account was identical with this statement? A. There would not. Q. Would there be anything suspicious to prompt you to investigate? A. There would not as long as we had all in balance. Q. In the ordinary course of bookkeeping, if, when you received your cash balance and it corresponds with your stub book and your cash balances, would you go into details and examine each item to see if the balance and items were correct? A, It is customary to do so; yes, sir. Q. That is, to run over every item? A. Go over an item and check it off. Q. On the statement? A. On the statement; yes, sir.”