B-131762, JUN. 17, 1957

B-131762, JUN. 17, 1957

TO THE NATIONAL BANK OF COMMERCE:

THIS IS IN REPLY TO YOUR ATTORNEY'S LETTER OF JANUARY 18, 1957, REQUESTING RECONSIDERATION OF THE ACTION TAKEN BY THE SPECIAL ASSISTANT TREASURER OF THE UNITED STATES, ON ADVICE FROM OUR OFFICE, IN DISALLOWING YOUR CLAIM FOR THE PROCEEDS OF CHECK NO. 73,941,076, DATED APRIL 30, 1956, DRAWN IN THE AMOUNT OF $216 TO THE ORDER OF CURTIS E. MORGAN, BUT SUBSEQUENTLY ALTERED BY THE PAYEE THEREOF TO $816.

THE CHECK WAS ISSUED AS A COMPENSATION PAYMENT TO THE PAYEE FOR $216, AND WAS SURRENDERED TO THE UNITED STATES SECRET SERVICE BY THE SAN ANTONIO BRANCH OF THE FEDERAL RESERVE BANK OF SAN ANTONIO, TEXAS, UPON THE CHECK BEING RETURNED BY THE FEDERAL RESERVE BANK OF DALLAS, TEXAS, BECAUSE THE AMOUNT HAD BEEN RAISED FROM $216 TO $816. AN INVESTIGATION WAS CONDUCTED BY THE SECRET SERVICE AND ITS REPORT REVEALS THAT THE PAYEE, WITH FRAUDULENT INTENT, RAISED THE AMOUNT OF THE CHECK. IN A SWORN STATEMENT OF THE PAYEE HE EXPLAINS HOW THIS WAS DONE, AS FOLLOWS "I TOOK A CARBON COPY OF A LETTER THAT I HAD AT HOME AND REMOVED FROM THIS LETTER A LETTER "I" OR A LETTER "I.' I USED BY POCKET KNIFE IN THIS OPERATION. I FINALLY SUCCEEDED IN REMOVING A LETTER THAT WOULD WORK IN THIS ALTERNATION. USED MY OWN SPIT IN WETTING THIS LETTER AND THEN USED THE POINT OF MY KNIFE TO PLACE IT DIAGONALLY ACROSS THE DIGIT "2" IN $216 ON MY CHECK. THEN USED THE COVER OF MY BALL POINT PEN TO SMOOTH THIS LETTER OVER THE "2.'"

THE RESULTING AMOUNT ON THE CHECK, $816, APPEARS OBVIOUSLY TO HAVE BEEN TAMPERED WITH, THE NUMBER "8" HAVING THE ROUNDED TOP OF THE ORIGINAL "2" AND ITS STRAIGHT BOTTOM, AND HAVING THE APPEARANCE OF HAVING BEEN TRACED OVER WITH PENCIL OR BALL POINT PEN. THE NUMBER "8" IS IRREGULAR IN SHAPE AND BY REASON OF THE TRACING APPEARS TO HAVE BEEN MADE IN PENCIL WHILE THE OTHER NUMBERS IN ITS AMOUNT ARE PRINTED OR TYPED. IT APPEARS THE PAYEE CASHED THE CHECK AT YOUR BANK AND RECEIVED THEREFOR THE SUM OF $816.

YOU MAKE CLAIM FOR THE ORIGINAL AMOUNT OF THE CHECK, $216, APPARENTLY ON THE THEORY THAT YOU ARE A HOLDER IN DUE COURSE OF THE INSTRUMENT. YOUR PRINCIPAL CONTENTION IS THAT THE GOVERNMENT'S FAILURE NOW TO PAY YOU THE SUM OF $216 WOULD RESULT IN THE PAYMENT BY YOU OF THE HONEST DEBT OF THE GOVERNMENT. WHILE YOU ADMIT THAT THE CASES CITED BY THE TREASURY DEPARTMENT SUPPORT THE DISALLOWANCE OF YOUR CLAIM, YOU STATE NO TEXAS DECISIONS WERE CITED AND CONTEND THE LAW IN THAT STATE WOULD RESULT IN ALLOWANCE OF THE CLAIM. AS POINTED OUT BY THE TREASURER'S LETTER OF APRIL 22, 1957, FEDERAL LAW RATHER THAN THE LAWS OF TEXAS WOULD BE CONTROLLING IF THERE WERE A CONFLICT BETWEEN THE TWO. BUT THE LAWS OF TEXAS, AS SUBSTANTIALLY ALL OF THE STATES IN THIS REGARD ARE BASED ON THE UNIFORM NEGOTIABLE INSTRUMENTS ACT AND WE HAVE NO REASON TO DOUBT THAT EVEN WERE THE MATTER FOR DECISION UNDER THE LAWS OF THAT STATE YOUR CLAIM WOULD BE FOR DISALLOWANCE. WE HAVE EXAMINED THE CASES WHICH YOUR ATTORNEYS HAVE SUBMITTED IN SUPPORT OF YOUR POSITION BUT WE MUST FRANKLY SAY THEY ARE NOT PERSUASIVE IN INDUCING US TO HOLD THAT YOU ARE ENTITLED TO THE PAYMENT OF THIS CHECK IN THE AMOUNT OF ITS ORIGINAL TENOR. YOU HAVE CITED CITIZENS BRIDGE CO. V. CUERRA, 258 S.W.2D 64, AS THE CASE WHICH SHOULD BE CONTROLLING IN THIS SITUATION. THAT CASE INVOLVED THE QUESTION OF WHETHER ONE WHO TOOK CORPORATE COMMERCIAL PAPER REGULAR ON ITS FACE FROM AN OFFICER OF A CORPORATION IN PAYMENT OF THE OFFICER'S PRIVATE DEBT TOOK IT IN GOOD FAITH SO AS TO BECOME A HOLDER IN DUE COURSE. OBVIOUSLY, IT IS NOT CONTROLLING HERE WHERE THE CHECK HAD BEEN RAISED, THE ALTERNATION WAS APPARENT, AND IT WAS NOT REGULAR ON ITS FACE WHEN RECEIVED BY THE BANK. AS FOR THE CONTENTION THAT THE BANK IS BEING MADE TO PAY THE GOVERNMENT'S JUST OBLIGATION BY THE DISALLOWANCE OF YOUR CLAIM, THE FRAUDULENT ALTERATION BY THE PAYEE OF THE CHECK DISCHARGED THE OBLIGATION OF THE GOVERNMENT TO HIM AND ANY PAYMENT SUBSEQUENTLY TO HIM BY THE BANK WAS UNWARRANTED AND PRESUMABLY GIVES IT A RIGHT OF ACTION AGAINST HIM FOR THE FULL AMOUNT PAID TO HIM.

THE GENERAL RULE OF LAW IS THAT A PURCHASER IS PUT ON INQUIRY BY MATERIAL ALTERATIONS WHICH ARE APPARENT ON THE FACE OF A NEGOTIABLE INSTRUMENT. C.J:S. PAGE 827. THE NEGOTIABLE INSTRUMENTS ACT OF TEXAS, TITLE 98, ARTICLE 5939 (VERNON'S CIVIL STATUTE OF THE STATE OF TEXAS, VOLUME 17), DISCUSSES THE SUBJECT OF WHEN A NEGOTIABLE INSTRUMENT IS DISCHARGED, AND SECTION 124 OF THAT ARTICLE PROVIDES AS FOLLOWS:

"SECTION 124. 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 ALTERATION, AND SUBSEQUENT ENDORSERS.

"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 ITS ORIGINAL TENOR.'

THE TEXAS LAW FURTHER DEFINES A "MATERIAL ALTERATION" IN SECTION 125 OF ARTICLE 5939 IN THE FOLLOWING LANGUAGE:

"SEC. 125. ANY ALTERATION WHICH CHANGES:

1. THE DATE;

2. THE SUM PAYABLE, EITHER FOR PRINCIPAL OR INTEREST;

3. THE TIME OR PLACE OF PAYMENT;

4. THE NUMBER OR THE RELATIONS OF THE PARTIES;

5. THE MEDIUM OF THE CURRENCY IN WHICH THE PAYMENT

IS TO BE MADE OR WHICH ADDS A PLACE OF PAYMENT WHERE NO PLACE OF PAYMENT IS SPECIFIED, OR ANY OTHER CHANGE OR ADDITION WHICH ALTERS THE EFFECT OF THE INSTRUMENT IN ANY RESPECT, IS A MATERIAL ALTERATION.'

AS YOU WELL KNOW THERE ARE TWO QUESTIONS TO BE DETERMINED IN THIS MATTER: FIRST, WHETHER THERE HAS BEEN A MATERIAL ALTERATION OF THIS CHECK UNDER THE LAW OF THE STATE OF TEXAS; AND SECOND, WHETHER YOUR BANK BY NEGOTIATING THIS CHECK BECAME A HOLDER IN DUE COURSE.

THERE CAN BE NO DOUBT THAT THE ALTERATION IN THE AMOUNT OF THE CHECK IS A MATERIAL ALTERATION UNDER THE DEFINITION CONTAINED IN PARAGRAPH TWO OF SECTION 125. IT IS FURTHER OUR OPINION THAT AN INSPECTION OF THIS CHECK BY ANY DISINTERESTED PARTY, BE HE A LAYMAN, JURYMAN, OR A PRUDENT BANKER, WOULD RESULT IN THE OPINION THAT THE ALTERATION WAS PERFECTLY APPARENT ON THE FACE OF THE INSTRUMENT AND THAT ANY REASONABLY PRUDENT BANK EMPLOYEE SHOULD HAVE DETECTED THE ALTERATION BY INSPECTION, PRIOR TO CASHING THE SAME. IT FURTHER FOLLOWS THAT THE CASHING OF THIS CHECK BY YOUR BANK WITHOUT FURTHER INQUIRY, IN OUR OPINION, CONSTITUTED NEGLIGENCE ON YOUR PART, WHICH WAS THE PROXIMATE CAUSE OF THE LOSS.

THE QUESTION OF LEGAL EFFECT OF ALTERATION OF AN INSTRUMENT HAS BEEN CAREFULLY CONSIDERED BY THE COURTS. THEY UNIFORMLY HOLD THE EFFECT IS TO RENDER THE NEGOTIABLE INSTRUMENT VOID. THE LEGAL EFFECT OF SECTIONS 124 AND 125, AFORESAID, HAS BEEN CONSIDERED IN HOUSTON AIRCRAFT CO. V. CITIZENS STATE BANK, 184 S.W.2D 335, AND THE TEXAS COURT IN THAT CASE HAS SAID, AT PAGE 336,"IN CONSTRUING THE ABOVE PROVISIONS OF SAID ARTICLE 5939, OUR COURTS HAVE UNIFORMLY HELD THAT A MATERIAL ALTERATION OF AN INSTRUMENT BY A PARTY THERETO WILL VITIATE IT, THOUGH MADE WITH NO FRAUDULENT INTENT AND WITH AN ENTIRELY HONEST MOTIVE. THE LAW HOLDS THE INSTRUMENT VOID, NOT BECAUSE THE THING DONE IS ACTUAL FRAUD, BUT BECAUSE A CONTRARY RULE WOULD OPEN THE DOOR FOR FRAUD AND BECAUSE THE ALTERATION CHANGES THE IDENTITY OF THE PAPER AND CAUSES IT TO SPEAK A LANGUAGE DIFFERING IN LEGAL EFFECT FROM THAT WHICH IT ORIGINALLY SPOKE.' TO THE SAME EFFECT SEE ALSO GLASSCOCK V. FIRST NATIONAL BANK, 266 S.W. 393; STEVENS V. WHEELER, 3 S.W. 2ND 122; COMMERCIAL CREDIT CO. V. GILES, 207 S.W. 596; AND COOPER V. HAMPDON, 123 S.W. 2ND 941. IT IS TO BE NOTED THAT THE TEXAS COURT IN THE HOUSTON AIRCRAFT CO. CASE HAS SAID THAT A MATERIAL ALTERATION VITIATES AN INSTRUMENT "EVEN THOUGH MADE WITH NO FRAUDULENT INTENT AND WITH AN ENTIRELY HONEST MOTIVE.' THE FACT IS THAT IN THE CASE OF YOUR CASHING THE CHECK OF THE PAYEE, CURTIS E. MORGAN, THE ALTERATION WAS CLEARLY MADE WITH A FRAUDULENT INTENT, APPARENT ON THE FACE OF THE CHECK.

A HOLDER IN DUE COURSE IS DEFINED IN THE NEGOTIABLE INSTRUMENTS ACT OF TEXAS (VERNON'S TEXAS CIVIL STATUTES TITLE 98, ARTICLE 5935), AS FOLLOWS:

"SEC. 52. A HOLDER IN DUE COURSE IS A HOLDER WHO HAS TAKEN THE INSTRUMENT UNDER THE FOLLOWING CONDITIONS:

1. THAT IT IS COMPLETE AND REGULAR ON ITS FACE;

2. THAT HE BECAME THE HOLDER OF IT BEFORE IT WAS

OVERDUE, AND WITHOUT NOTICE THAT IT HAD

BEEN PREVIOUSLY DISHONORED, IF SUCH WAS THE

FACT;

3. THAT HE TOOK IT IN GOOD FAITH AND FOR VALUE;

4. THAT AT THE TIME IT WAS NEGOTIATED TO HIM HE HAD

NO NOTICE OF ANY INFIRMITY IN THE INSTRUMENT OR

DEFECT IN THE TITLE OF THE PERSON NEGOTIATING

IT.'

THE FACTS OF RECORD ESTABLISH THAT THE BANK IS NOT A HOLDER IN DUE COURSE UNDER SECTION 52 IN THAT THE CHECK WAS NOT COMPLETE AND REGULAR ON ITS FACE AT THE TIME IT WAS CASHED BY THE BANK AND THE BANK WAS ON NOTICE OF AN INFIRMITY IN THE INSTRUMENT. AN EXAMINATION OF SECTIONS 55 AND 56 OF SAID ARTICLE 5935, INDICATES CLEARLY THAT THE TITLE OF THE PAYEE TO THIS CHECK WAS DEFECTIVE AND THAT THE CHECK BECAME A LEGALLY VOID INSTRUMENT AT THE TIME OF THE ALTERATION AND THAT YOUR BANK UPON ACQUIRING THE SAME TOOK THE CHECK WITH NOTICE OF THE INFIRMITY BECAUSE THE INFIRMITY WAS PERFECTLY APPARENT ON THE FACE OF THE INSTRUMENT.

WE ARE OF THE OPINION THAT UNDER THE TEXAS CASES ON THIS SUBJECT, IN THE CIRCUMSTANCES HERE, YOUR BANK IS NOT A HOLDER IN DUE COURSE. THE QUESTION INVOLVED HEREIN HAS BEEN HERETOFORE CONSIDERED BY OUR OFFICE IN 27 COMP. GEN. 647, ON A SIMILAR STATE OF FACTS, AND WE HELD THERE THAT THE BANK WAS NOT A HOLDER IN DUE COURSE AND NOT ENTITLED TO PAYMENT OF THE CHECK ACCORDING TO ITS ORIGINAL TENOR.

HENCE, OUR OPINION IS THAT YOUR BANK IS NOT A HOLDER IN DUE COURSE OF THIS CHECK AND THAT THE CHECK IS AVOIDED AS TO THE BANK AND YOU HAVE NO LEGAL RIGHT TO PAYMENT ACCORDING TO ITS ORIGINAL TENOR. THE ACTION TAKEN IN DISALLOWING YOUR CLAIM IS ACCORDINGLY SUSTAINED.