Clearfield Trust Co. v. United States
Encyclopedia
Clearfield Trust Co. v. United States, 318 U.S. 363 (1943), was a case in which the Supreme Court of the United States
held that federal negotiable instruments were governed by federal law, and thus the federal court had the authority to fashion a common law rule
.
mailed a check
for $24.20, drawn on the Treasurer of the United States
, to Clair Barner. The check was Barner's paycheck from the Works Progress Administration
(WPA). Barner never received the check, which was stolen by an unknown party. The thief forged Barner's signature
and cashed the check at the J.C. Penney
department store in Clearfield, Pennsylvania
, where the thief assumed the identity
of Mr. Barner. J.C. Penney then turned the check over to Clearfield Trust Co. as its collection agent. Clearfield Trust Co. collected the check from the Federal Reserve Bank, knowing nothing about the forgery
.
On May 10, 1936, Barner informed his supervisors at the WPA that he had not received his paycheck. His complaint made its way up the chain of command, and on November 30, 1936, Barner signed an affidavit
alleging that the endorsement of his name on the check was forged. Neither J.C. Penney Co. nor Clearfield Trust Co. had any notice of the forgery until January 12, 1937, when the U.S. government sent its first notice about it. The United States sent its initial request for reimbursement on August 31, 1937, and filed suit against Clearfield Trust Co. in the United States District Court for the Western District of Pennsylvania
on November 16, 1939. The government based its cause of action
on the express guaranty of prior endorsements by Clearfield Trust Co.
The District Court determined that the dispute should be governed by the state law of Pennsylvania
. It then dismissed the government's complaint on grounds of laches
, holding that because the United States unreasonably delayed in notifying Clearfield Trust Co. of the forgery, it was barred from recovery. The United States Court of Appeals for the Third Circuit
reversed the dismissal.
, writing for a unanimous court, first distinguished the case from Erie Railroad Co. v. Tompkins
, holding that because the U.S. government was exercising a constitutionally
-permitted function in disbursing its own funds and paying its debt
s, the commercial paper
it issues should be governed by federal law rather than state law. Thus, the Erie doctrine
rule that a United States District Court
must apply the law of the state in which it is sitting did not apply, and that in absence of an applicable Act of Congress
, a federal court had the right to fashion a governing common law rule by their own standards.
While the Court's decision explicitly retained the option of applying state law in fashioning a federal common law rule, the Court chose instead to fashion its own rule based on prior decisions. Douglas identified a major federal interest in permitting the court to fashion its own rule: namely, the issue of uniformity in dealing with the vast amount of negotiable instruments and commercial paper
issued by the federal government. Douglas reasoned that if each transaction was subject to the application of a multiplicity of different state laws, it would lead to great confusion and uncertainty in the administration of federal programs.
Douglas chose to follow the rule set forth in United States v. National Exchange Bank of Providence, , in which the U.S. Supreme Court held that the U.S. government could recover on a check as a drawee from a person who had cashed a pension
check with a forged endorsement, despite the government's protracted delay in giving notice of the forgery. The National Exchange Bank case held the government to conventional business terms, but said nothing about whether lack of prompt notice was a defense for nonpayment of a check. The Court held that the Pennsylvania state law requiring prompt notice from the drawee presumed injury to the defendant by mere fact of delay. In this case, not only did Clearfield Trust Co. fail to demonstrate that it had suffered a loss because of the delay in notice, it could still recover the amount of the check from J.C. Penney, because none of its employees detected the fraud. The court chastised both companies for their "neglect and error" in accepting the forged check, and suggested that they should only be permitted to shift the loss to the drawee only when he can demonstrate that the delay in notice caused him damage.
Supreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...
held that federal negotiable instruments were governed by federal law, and thus the federal court had the authority to fashion a common law rule
Federal common law
Federal common law is a term of United States law used to describe common law that is developed by the federal courts, instead of by the courts of the various states...
.
Facts & procedural history
On April 28, 1936, the Federal Reserve Bank of PhiladelphiaFederal Reserve Bank of Philadelphia
The Federal Reserve Bank of Philadelphia, headquartered in Philadelphia, Pennsylvania, is responsible for the Third District of the Federal Reserve, which covers eastern Pennsylvania, the 9 southern counties of New Jersey, and Delaware...
mailed a check
Cheque
A cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...
for $24.20, drawn on the Treasurer of the United States
Treasurer of the United States
The Treasurer of the United States is an official in the United States Department of the Treasury that was originally charged with the receipt and custody of government funds, though many of these functions have been taken over by different bureaus of the Department of the Treasury...
, to Clair Barner. The check was Barner's paycheck from the Works Progress Administration
Works Progress Administration
The Works Progress Administration was the largest and most ambitious New Deal agency, employing millions of unskilled workers to carry out public works projects, including the construction of public buildings and roads, and operated large arts, drama, media, and literacy projects...
(WPA). Barner never received the check, which was stolen by an unknown party. The thief forged Barner's signature
Forgery
Forgery is the process of making, adapting, or imitating objects, statistics, or documents with the intent to deceive. Copies, studio replicas, and reproductions are not considered forgeries, though they may later become forgeries through knowing and willful misrepresentations. Forging money or...
and cashed the check at the J.C. Penney
J.C. Penney
J. C. Penney Company, Inc. is a chain of American mid-range department stores based in Plano, Texas, a suburb north of Dallas. The company operates 1,107 department stores in all 50 U.S. states and Puerto Rico. JCPenney also operates catalog sales merchant offices nationwide in many...
department store in Clearfield, Pennsylvania
Clearfield, Pennsylvania
Clearfield is a borough in Clearfield County, Pennsylvania, United States. The population was 6,631 at the 2000 census. It is the county seat of Clearfield County.-Geography:Clearfield is located at ....
, where the thief assumed the identity
Identity theft
Identity theft is a form of stealing another person's identity in which someone pretends to be someone else by assuming that person's identity, typically in order to access resources or obtain credit and other benefits in that person's name...
of Mr. Barner. J.C. Penney then turned the check over to Clearfield Trust Co. as its collection agent. Clearfield Trust Co. collected the check from the Federal Reserve Bank, knowing nothing about the forgery
Forgery
Forgery is the process of making, adapting, or imitating objects, statistics, or documents with the intent to deceive. Copies, studio replicas, and reproductions are not considered forgeries, though they may later become forgeries through knowing and willful misrepresentations. Forging money or...
.
On May 10, 1936, Barner informed his supervisors at the WPA that he had not received his paycheck. His complaint made its way up the chain of command, and on November 30, 1936, Barner signed an affidavit
Affidavit
An affidavit is a written sworn statement of fact voluntarily made by an affiant or deponent under an oath or affirmation administered by a person authorized to do so by law. Such statement is witnessed as to the authenticity of the affiant's signature by a taker of oaths, such as a notary public...
alleging that the endorsement of his name on the check was forged. Neither J.C. Penney Co. nor Clearfield Trust Co. had any notice of the forgery until January 12, 1937, when the U.S. government sent its first notice about it. The United States sent its initial request for reimbursement on August 31, 1937, and filed suit against Clearfield Trust Co. in the United States District Court for the Western District of Pennsylvania
United States District Court for the Western District of Pennsylvania
The United States District Court for the Western District of Pennsylvania sits in Pittsburgh, Erie, and Johnstown, Pennsylvania. It is composed of ten judges as authorized by federal law. The Honorable Judge Gary L. Lancaster is currently Chief Judge of the Western Pennsylvania District...
on November 16, 1939. The government based its cause of action
Cause of action
In the law, a cause of action is a set of facts sufficient to justify a right to sue to obtain money, property, or the enforcement of a right against another party. The term also refers to the legal theory upon which a plaintiff brings suit...
on the express guaranty of prior endorsements by Clearfield Trust Co.
The District Court determined that the dispute should be governed by the state law of Pennsylvania
Pennsylvania
The Commonwealth of Pennsylvania is a U.S. state that is located in the Northeastern and Mid-Atlantic regions of the United States. The state borders Delaware and Maryland to the south, West Virginia to the southwest, Ohio to the west, New York and Ontario, Canada, to the north, and New Jersey to...
. It then dismissed the government's complaint on grounds of laches
Laches (equity)
Laches is an "unreasonable delay pursuing a right or claim...in a way that prejudices the [opposing] party" When asserted in litigation, it is an equitable defense, or doctrine...
, holding that because the United States unreasonably delayed in notifying Clearfield Trust Co. of the forgery, it was barred from recovery. The United States Court of Appeals for the Third Circuit
United States Court of Appeals for the Third Circuit
The United States Court of Appeals for the Third Circuit is a federal court with appellate jurisdiction over the district courts for the following districts:* District of Delaware* District of New Jersey...
reversed the dismissal.
Decision
Justice DouglasWilliam O. Douglas
William Orville Douglas was an Associate Justice of the United States Supreme Court. With a term lasting 36 years and 209 days, he is the longest-serving justice in the history of the Supreme Court...
, writing for a unanimous court, first distinguished the case from Erie Railroad Co. v. Tompkins
Erie Railroad Co. v. Tompkins
Erie Railroad Co. v. Tompkins, 304 U.S. 64 , was a decision by the Supreme Court of the United States in which the Court held that federal courts did not have the judicial power to create general federal common law when hearing state law claims under diversity jurisdiction...
, holding that because the U.S. government was exercising a constitutionally
United States Constitution
The Constitution of the United States is the supreme law of the United States of America. It is the framework for the organization of the United States government and for the relationship of the federal government with the states, citizens, and all people within the United States.The first three...
-permitted function in disbursing its own funds and paying its debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
s, the commercial paper
Commercial paper
In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial Paper is a money-market security issued by large banks and corporations to get money to meet short term debt obligations , and is only backed by an issuing bank or...
it issues should be governed by federal law rather than state law. Thus, the Erie doctrine
Erie doctrine
In United States law, the Erie doctrine is a fundamental legal doctrine of civil procedure mandating that a federal court in diversity jurisdiction must apply state substantive law....
rule that a United States District Court
United States district court
The United States district courts are the general trial courts of the United States federal court system. Both civil and criminal cases are filed in the district court, which is a court of law, equity, and admiralty. There is a United States bankruptcy court associated with each United States...
must apply the law of the state in which it is sitting did not apply, and that in absence of an applicable Act of Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
, a federal court had the right to fashion a governing common law rule by their own standards.
While the Court's decision explicitly retained the option of applying state law in fashioning a federal common law rule, the Court chose instead to fashion its own rule based on prior decisions. Douglas identified a major federal interest in permitting the court to fashion its own rule: namely, the issue of uniformity in dealing with the vast amount of negotiable instruments and commercial paper
Commercial paper
In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial Paper is a money-market security issued by large banks and corporations to get money to meet short term debt obligations , and is only backed by an issuing bank or...
issued by the federal government. Douglas reasoned that if each transaction was subject to the application of a multiplicity of different state laws, it would lead to great confusion and uncertainty in the administration of federal programs.
Douglas chose to follow the rule set forth in United States v. National Exchange Bank of Providence, , in which the U.S. Supreme Court held that the U.S. government could recover on a check as a drawee from a person who had cashed a pension
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
check with a forged endorsement, despite the government's protracted delay in giving notice of the forgery. The National Exchange Bank case held the government to conventional business terms, but said nothing about whether lack of prompt notice was a defense for nonpayment of a check. The Court held that the Pennsylvania state law requiring prompt notice from the drawee presumed injury to the defendant by mere fact of delay. In this case, not only did Clearfield Trust Co. fail to demonstrate that it had suffered a loss because of the delay in notice, it could still recover the amount of the check from J.C. Penney, because none of its employees detected the fraud. The court chastised both companies for their "neglect and error" in accepting the forged check, and suggested that they should only be permitted to shift the loss to the drawee only when he can demonstrate that the delay in notice caused him damage.