Clearfield Trust Co. V. United States - Decision

Decision

Justice Douglas, writing for a unanimous United States Supreme 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 debts, 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. In the absence of an applicable Act of Congress, a federal court had the right to fashion a governing common law rule by its 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. Justice Douglas identified a major federal interest in permitting the Court to fashion its own rule: uniformity in dealing with the vast amount of negotiable instruments and commercial paper issued by the federal government. Douglas reasoned that if each transaction were subject to the application of a multiplicity of different state laws, confusion and uncertainty in the administration of federal programs would be the result.

Justice Douglas chose to follow the rule set forth in United States v. National Exchange Bank of Providence, 214 U.S. 302 (1909), in which the U.S. Supreme Court held that the U.S. government, “as drawee of commercial paper stands in no different light than any other drawee” and 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 the 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.