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Clearfield Trust Co. v. United States

    Brief Fact Summary
    The Government (Plaintiff) sought reimbursement on a check it issued to Barner, who never received it, but was endorsed through forgery and honored by Clearfield Trust Co. (Defendant).

    Synopsis of Rule of Law
    Federal law, and not local law, governs the rights and duties of the United States regarding commercial paper that it issues.

    Facts
    On April 28, 1936, the Government (Plaintiff) issued a check to Barner in the amount of $24.20 for services rendered to the Works Progress Administration.  Unexplainably, Barner did not receive the check.  Apparently the check was stolen and the endorsement forged, and the check was transferred to J.C. Penney Co. in exchange for cash and merchandise.  J.C. Penney endorsed the check over to Clearfield Trust Co. (Defendant) and Clearfield (Defendant) endorsed the check over to the Federal Reserve Bank of Philadelphia.  Defendant guaranteed prior endorsements as required by Treasury regulations.  Neither Defendant nor Penney were aware of or suspected a forgery.  Barner informed his foreman on May 10, 1936, that he never received the check.  Defendant and Penney learned of the forgery January 12, 1937.  Defendant was first notified that the Government (Plaintiff) was seeking reimbursement on August 31, 1937.  The Plaintiff’s cause of action was based upon the guarantee of the endorsement and was brought in federal district court in Pennsylvania.  The court held that Pennsylvania law applied under the Erie Doctrine, and because the Plaintiff unreasonably delayed in giving notice of forgery, the action was barred.  The court of appeals reversed, and Defendant appealed.

    Issue
    Doe federal law, and not local law, govern the rights and duties of the United States regarding commercial paper that it issues?

    Held
    (Douglas, J.)  Yes.  Federal law, and not local law, governs the rights and duties of the United States regarding commercial paper that it issues.  When the Government (Plaintiff) disburses its funds or pays its debts, it exercises a constitutional power.  In this case, the authority to issue the check was derived from the Constitution and was not dependent in any way on the laws of Pennsylvania or any other state.  The Plaintiff issues commercial paper on such a massive scale and in all states so that the application of state law would subject the rights and duties of the Plaintiff to great uncertainty.  The Plaintiff, therefore, was not barred from bringing suit as Clearfield (Defendant) had failed to show that the delay in receiving notice had caused it injury.  Affirmed.

    Discussion
    As shown in this case, the court has not been clear on the question of what its authority is for creation of federal common law.  Some lower courts have indicated that in cases where the United States is a party, such as cases in admiralty and suits between states, the federal courts have lawmaking powers.  However, note that the Erie Doctrine is not limited to diversity cases.  The federal courts may make substantive law only in cases where the court may effect a policy derived from the Constitution or from a valid act of Congress.


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