Opinion
3-24-1950
CALIFORNIA MILL SUPPLY CORPORATION v. BANK OF AMERICA NAT. TRUST & SAVINGS ASS'N. Civ. 17182.
E. Briggs Howorth, Los Angeles, for appellant. Hugo A. Steinmeyer, G. L. Berrey, George L. Beckwith, Los Angeles, for respondent.
CALIFORNIA MILL SUPPLY CORPORATION
v.
BANK OF AMERICA NAT. TRUST & SAVINGS ASS'N.
March 24, 1950.
Hearing Granted May 22, 1950. *
E. Briggs Howorth, Los Angeles, for appellant.
Hugo A. Steinmeyer, G. L. Berrey, George L. Beckwith, Los Angeles, for respondent.
WHITE, Presiding Justice.
Plaintiff, California Mill Supply Corporation, sought to recover from defendant, Bank of America, the amount of eight checks drawn by plaintiff upon Security-First National Bank of Los Angeles. The checks, bearing forged indorsements, were deposited with Bank of America, which in turn presented them to the drawee bank for payment. The checks were duly paid, and the forgeries were not discovered for approximately a year. After trial before the court without a jury, findings were made adverse to the plaintiff and judgment entered that it take nothing. From such judgment this appeal is prosecuted.
During the period from July 5, 1944, to May 12, 1945, appellant was engaged in the business of processing waste paper, rags and miscellaneous junk material in the City of Los Angeles. Appellant purchased waste material from individual junk dealers and collectors. Most of the dealers and collectors were paid for their materials at the time of delivery. But appellant also maintained a debtor-creditor relationship with some of the dealers. Cash advances would be made to them upon request, the amounts thereof being charged to their accounts, and when such dealers made deliveries of material to appellant their accounts would be credited with the amount paid for the material.
Appellant maintained two commercial accounts in a branch of the Security-First National Bank of Los Angeles, one account being designated the 'General Fund' account and the other the 'Revolving Fund' account. Checks drawn on these accounts required the signature of one of three designated officers of appellant, S. F. Berg, Ben Berg, or M. F. Berg. Practically all purchases of waste material were consummated through appellant's purchasing department, then in charge of one Wendell G. Thompson. As appellant's purchasing agent, he was responsible for the pricing of cash payment purchases, supervision of cash advances to so-called credit dealers, preparation of invoices and receipt tickets and of checks issued by appellant in payment of cash purchases and cash advances.
During the period between July 5, 1944, and May 12, 1945, Thompson caused eight checks to be prepared in his department and presented to one of appellant's signing officers for execution. In each instance Thompson represented to the signing officer that the payment to the designated payee was proper and submitted documentary evidence required by the officer in support of the representation. In each instance the signing officer placed his signature upon the check in the belief that appellant was indebted to the named payee in the amount of such check or that the payment to such payee as a credit advance was warranted and proper, and in the belief that the check would be delivered to the designated payee and that he would receive the proceeds thereof. None of the checks was delivered to the named payee. As to seven of the checks, the indorsements of the named payees were forged and the check negotiated. The eighth check was made payable to 'Benicia Arsenal.' The check was then altered to read 'S. Oster, % Benicia Arsenal.' This check was then indorsed by S. Oster, an existing person, and negotiated. It should be noted that the names of the payees placed upon the checks were the names of real persons with whom appellant had business dealings, and although the payments represented by the checks were not due or owing to the named payees, it was the belief of appellant, through its signing officers, that such payments were properly due the named payees and it intended that the checks should be delivered to them. The employee Thompson, however, after forging the indorsements of the named payees, deposited two of the checks in an account maintained by him under a false name in a branch of respondent bank, negotiated four checks through S. Oster and a check exchange, and negotiated the remaining two through one Canary Poladian.
As to each check involved, plaintiff alleged in its complaint:
'That, after the endorsement of the payee named in said check had been forged thereon and negotiated, as aforesaid, said check was deposited with and accepted by the defendant Bank of America, and by said bank was endorsed: 'Pay to any bank or banker, all prior endorsements guaranteed,' and thereupon was presented by the defendant to the drawee bank, the said Security-First National Bank of Los Angeles, for honor and payment; that said drawee bank thereupon honored said check, paid the amount thereof to the defendant, and charged the same against plaintiff's commercial account as aforesaid, and, thereafter, returned the said check to the plaintiff with its regular monthly statement showing that the amount of said check had been charged against said account, and that the plaintiff thereupon accepted the said monthly statement of its account and approved the charge of the amount of said check against said account.
'That, by its presentation of said check, with the aforesaid endorsement thereon, for honor and payment, the defendant represented that all prior endorsements on said check were genuine; that plaintiff was entitled to rely on said representation in accepting said check from the drawee bank and approving the charge made against its account therein as aforesaid, and that at the time said representation was made, defendant well knew, or should have known, that plaintiff would rely thereon for said purposes; that said representation was false; that plaintiff believed said representation of defendant, did rely thereon and, by reason thereof, approved the charge made by the drawee bank against its account to cover said check and agreed to an account stated with said drawee bank whereby said check was charged against and deducted from plaintiff's account as aforesaid.
'That plaintiff did not know or discover that the endorsement of the said payee thereon was not genuine until long after said check had been paid by the drawee bank and charged against plaintiff's account, nor until long after the payment of said check and the charge of the amount thereof had been made against its account therein by the drawee bank, had been approved by plaintiff as aforesaid and an account stated had been reached between plaintiff and the drawee bank as aforesaid.'
For a second cause of action as to each check it was alleged 'that defendant thereupon upon converted said sum to its own use and benefit and that at all of the times herein mentioned plaintiff was lawfully entitled to said check and to the sum collected thereon by defendant, as aforesaid.'
As a third cause of action on each check, it was alleged that the defendant received the amount thereof for the use and benefit of plaintiff.
In addition to certain denials in its answer, defendant bank pleaded, as a second, separate defense, that the checks were payable to fictitious persons and were never delivered to any payee thereof; that each check was negotiated to the defendant for value and defendant received the same without notice or knowledge of any forgery or defect in the title of the persons negotiating the check, and without notice of any defense to any of the instruments. These allegations the trial court found to be true.
As a third, separate defense, it was alleged that Thompson prepared the checks within the scope of his employment and with knowledge that the named payees were not entitled to receive any payment, and with intent to forge the names of the payees; that each check was negotiated to the defendant by a person to whom the same had been negotiated by Thompson and was received by defendant for value and without knowledge of any defect or defense, and without negligence. These allegations were also found to be true. It was further alleged in the third affirmative defense, upon information and belief, that plaintiff was protected by a fidelity bond issued by a surety company which indemnified plaintiff against loss, and that this action, although in the name of the plaintiff, was actually for the benefit of the surety company, and that plaintiff had no loss by reason of any of the matters set forth in the complaint. These allegations the trial court found to be untrue.
The court further found that all allegations of the first amended complaint inconsistent with the portions of the affirmative defenses found to be true were untrue, but that all other allegations of the first amended complaint were true.
Appellant states the principal question of law involved on this appeal to be as follows: 'Does the drawer of a check payable to an existing payee have a direct cause of action against a collecting bank for recovery of the amount collected from the drawee bank by negotiation of the check with a forged endorsement of the payee, the drawee bank having accepted the check when presented by the collecting bank bearing the forged endorsement and charged the amount thereof to drawer's account?'
Respondent conceives the questions involved to be as follows:
'May the drawer of a check stolen from the drawer's possession before delivery and negotiated to a defendant collecting bank upon a forged signature of the name of the payee maintain an action against such collecting bank?
'Assuming the same facts and the additional fact that the payee was a fictitious person, may such action by maintained against a collecting bank?
'Where the name of the payee in a check does not purport to be the name of any person, may the drawer of such check maintain an action against the collecting bank for collecting the check from the drawee?' (This last question involves only the check originally drawn in favor of Benicia Arsenal and changed by the forger to 'S. Oster, c/o Benicia Arsenal.'
Preliminarily, it is to be noted that under the holding in Security-First National Bank of Los Angeles v. Bank of America, 22 Cal.2d 154, 137 P.2d 452, the checks here involved were not 'bearer' paper. In the cited case, as here, a faithless employee was authorized to prepare checks, but not to sign them. He presented checks payable to an actual person who knew nothing of the transaction, with debit slips showing that the payment was authorized. Under section 3090 of the Civil Code, as it stood at the time of the decision, an instrument was payable to bearer '* * * When it is payable to the order of a fictitious or nonexisting person, and such fact was known to the person making it so payable * * *.' While recognizing the settled rule that although the name of the payee may be that of an actual person the instrument may nevertheless be deemed payable to a fictitious payee if the drawer does not intend the named payee to have any interest in it, the court nevertheless held (two justices dissenting) that since the officer who signed the checks was without knowledge that the payee was not to receive them, the checks could not be deemed payable to a fictitious payee--in other words, that the knowledge must be that of the person authorized to sign, and not that of the employee who is merely authorized to prepare. It rejected the argument that the officer signing was a mere automation acting upon the assurances of the employee. It also distinguished the cases of Union Bank & Trust Co. of Los Angeles v. Security-First National Bank, 8 Cal.2d 303, 65 P.2d 355; Goodyear Tire & Rubber Co. of California v. Wells Fargo Bank, 1 Cal.App.2d 694, 37 P.2d 483, and Rancho San Carlos v. Bank of Italy, 123 Cal.App. 291, 11 P.2d 424.
In 1945 the Legislature amended subdivision (3) of section 3090 of the Civil Code to provide that an instrument is payable to bearer 'When it is payable to the order of a fictitious or nonexisting or living person not intended to have any interest in it and such fact was known to the person making it so payable or known to his employee or other agent who supplies the name of such payee.' (Emphasis added.) However, the transactions here involved took place prior to such amendment, and it must therefore be held, under the authority of Security-First Nat. Bank of Los Angeles v. Bank of America, supra, that the instruments in question were not bearer paper. It follows, therefore, that the plaintiff herein had a cause of action against the drawee bank for the amount of its loss. Apparently no suit was brought against the drawee bank. The present suit was brought a little over a year after the date of the latest forgery committed by the employee. Plaintiff alleged in its complaint that it relied upon defendant bank's guarantee of prior indorsements and as a result an account was stated between plaintiff and the drawee bank.
The fact that plaintiff's loss is directly attributable to the fraud of its own trusted employee constitutes no defense to an action against the drawee bank, under the rule applicable at the time these transactions occurred, and as stated in Security-First Nat. Bank of Los Angeles v. Bank of America, supra, 22 Cal.2d at page 158, 137 P.2d at page 454, 'When the drawer or his signer is the victim of the fraud of the bookkeeper who is charged with examining the drawer's accounts and informing him of his liabilities, the person buying or paying the check has no right to a release at the expense of the innocent drawer from the responsibility of determining the authenticity of the indorsements. See Brannan's Negotiable Instruments (Beutel's Sixth Ed. 1938) p. 223, 224.'
It follows from the foregoing that the instruments herein were not, as found by the trial court, drawn in favor of fictitious payees, and the fact that respondent bank accepted the checks in good faith, for value, and without notice of any infirmity, is no defense to this action, assuming that plaintiff may maintain it.
We are thus met squarely with the question heretofore propounded by appellant: 'Does the drawer of a check payable to an existing payee have a direct cause of action against a collecting bank for recovery of the amount collected from the drawee bank by negotiation of the check with a forged endorsement of the payee, the drawee bank having accepted the check when presented by the collecting bank bearing the forged endorsement and charged the amount thereof to drawer's account?'
It appears that a majority of courts have held that an action such as this is maintainable. 'Although agreeing uniformly in the reasons given for their decisions, most courts hold as a general rule that in intermediary bank which receives a check on a forged indorsement and collects it from the drawee bank is liable to the drawer of the check for his loss, the bank's acceptance of the check for collection being at its peril as to a possible forged indorsement. Rather, the theory upon which recovery has been allowed by some well-considered cases has been that of the implied obligation to pay to the true owner the money received by the collecting bank and erroneously paid by it to the wrongdoer on the strength of the forged indorsement; such an action, whether denominated an action in assumpsit for money had and received or an action in trover, is upon the implied contract growing out of the circumstances. * * *.' 7 Am.Jur. 431. See also 9 C.J.S., Banks and Banking, § 356, page 738. This was the view of the court in Railroad Bldg., Loan & Sav. Ass'n v. Bankers' Mortgage Co., 142 Kan. 564, 51 P.2d 61, reported in 102 A.L.R. 140. To the same effect are the following decisions: U. S. Fidelity & Guaranty Co. v. First National Bank of El Paso, Tex.Civ.App., 93 S.W.2d 562; Washington Mechanics Sav. Bank v. District Title Ins. Co., 62 App.D.C. 194, 65 F.2d 827.
The following decisions favor the theory that the collecting bank has obtained no rights in or to the forged instrument and that its act of presenting the check to the drawee for collection, receiving the amount thereof from the drawee, and paying it to the forger or to a party claiming through the forger, amounts to a conversion of the check and its proceeds, for which it is liable to the rightful owner of the instrument--the drawer: Home Indemnity Co. of New York v. State Bank of Fort Dodge, 233 Iowa 103, 8 N.W.2d 757; Sidles Co. v. Pioneer Valley Savings Bank, 233 Iowa 1057, 8 N.W.2d 794; Gustin-Bacon Mfg. Co. v. First National Bank, 306 Ill. 179, 137 N.E. 793.
Respondent urges the adoption of the so-called minority rule as exemplified by the following authorities: General Fire Assurance Co. of Paris, France, v. State Bank, 177 App.Div. 745, 164 N.Y.S. 871; Land Title & Trust Co. v. Northwestern National Bank, 196 Pa. 230, 46 A. 420, 50 L.R.A. 75, 79 Am.St.Rep. 717; Lavanier v. Cosmopolitan Bank & Trust Co., 36 Ohio App. 285, 173 N.E. 216. See also Vol. 6, Zollman Banks and Banking, Perm.Ed., § 4263. The reasoning of these cases is illustrated by the following quotation from the Land Title case, supra [196 Pa. 230, 46 A. 422]: 'Between the bank and the trust company, as the drawer of the check, no relation, contractual or otherwise, existed. The drawer of a check cannot maintain an action against one who collects it on a forged indorsement from the bank on which it was drawn, although the bank paying the check may. The remedy of the drawer is against the bank which pays his check, and the bank's remedy is against the person to whom it paid. The liability of the party collecting the check arises from his implied warranty of the indorsement. This liability is founded on contract, and not on negligence, and it exists, if at all, whether there was negligence or not.'
The rule is thus stated by Zollman:
'Since the drawee's act in paying a check on a forged indorsement is a nullity, the drawer's right to his deposit remains unaffected, and he hence cannot recover against the bank through whose hands the check has passed.
'The payment by the drawee to the presenting bank is not money received for his use.
'Though the drawee bank may have a cause of action against the presenting bank, the drawer has no cause of action against such presenting bank because he is not damaged by the payment by the drawee. His right of action, if any, is against the drawee.'
The decision upon which respondent most strongly relies is Metropolitan Life Insurance Co. v. San Francisco Bank, 58 Cal.App.2d 528, 136 P.2d 853, 854 (hearing denied by Supreme Court July 1, 1943). The appeal arose upon the sustaining of a demurrer of the collecting bank to the amended complaint of the drawer. The allegations of the complaint were that plaintiff was induced, through the fraud of an employee who had no authority to issue checks, to draw and issue checks payable to various 'fictitious persons not known to plaintiff to be fictitious persons and having no interest whatsoever in or to any part of the proceeds of said checks'; that the employee fraudulently secured possession of the checks and indorsed the name of the fictitious payee; that the San Francisco bank received the checks, guaranteed prior indorsements and presented them to the plaintiff's bank, which paid them. It was urged on appeal that plaintiff was entitled to recover from the collecting bank upon either a contractual or a conversion theory. The District Court of Appeal in its opinion noted that it could find no authority for permitting such a direct recovery upon any theory, contractual or otherwise, and that there was respectable authority from other jurisdictions (see cases hereinabove cited) holding that such recovery could not be had. The court then, however, narrowed the scope of its decision by the following language:
'But we are not called upon here to determine the rights and remedies of the parties in a case where a check is made payable to an existing payee. Suffice it to state that we are of the opinion that where, as here, a check is made payable to a fictitious and nonexisting person, no contractual obligation arises in favor of the drawer upon the guarantee of the collecting bank of the validity of the forged endorsement of the signature of the fictitious payee for the reason that the very act of the drawer, in signing a check made payable to a fictitious payee under the circumstances alleged, makes impossible any valid endorsement of such check.'
The case at bar, as heretofore noted, does not involve checks payable to fictitious payees, but forged indorsements of the names of actual payees. Appellant argues, therefore, that the Metropolitan case is distinguishable. Respondent urges that the reasoning of the case is applicable to the case at bar. Analysis of the opinion, however, discloses that the court held: (1) That no contractual obligation arises in favor of the drawer upon the guarantee of the collecting bank of the validity of the forged indorsement of the signature of the fictitious payee. (2) 'The allegations of the amended complaint were insufficient to show that the checks, as such, had any value whatever. On the contrary, the allegations showed that said checks were not payable to anyone and that they were not negotiable instruments. They therefore were not and could not become of any value to any one.' Consequently, no action could be maintained on the theory of conversion of the checks. (3) There could be no action for conversion of plaintiff's money, because the relationship between him and his bank was that of debtor and creditor; title to funds deposited by him passed to the bank, which paid out its own money on the checks and not that of the plaintiff.
We are of the view that the reasoning of the Metropolitan case, supra, is not applicable where the collecting bank has presented and guaranteed the indorsement of a check which is not payable to a fictitious person. Disregarding any negligence of the drawer, as no such issue is present in this case, it cannot be denied that the drawer has suffered a loss through the act of the collecting bank in accepting, presenting and securing payment of the check on a forged indorsement. True, had the drawer discovered the forgeries in time, he could have recovered from his bank, which in turn would have recovered from the collecting bank. But the very failure to discover the forgery in time is due to the act of the collecting bank. As said in Home Indemnity Co. of New York v. State Bank of Fort Dodge, supra [233 Iowa 103, 8 N.W.2d 779], 'As between all parties interested herein, the [defendant] is the one ultimately liable for the loss, and the [plaintiff] is the one to be reimbursed. So long as the [defendant] has no rights against anyone who is by-passed, the logical and sensible action is a direct one by the [plaintiff] (drawer) against the [defendant] (collecting bank).'
Included in the language used by some decisions in denying such liability is the statement that the drawer has suffered no damage, in that he has lost in funds--the action of the drawee bank in paying its own funds having no effect upon the debtor-creditor relation between the drawee bank and its depositor. This is true only so long as the depositor retains a right of action against his own bank. When, however, it is impossible for the depositor to recover from his own bank--as where an account has been stated, the statute of limitations has run, or the bank becomes insolvent, he has suffered a loss directly traceable to the act of the collecting bank. It would seem, then, that in such circumstances, simple justice requires that the liability of the collecting bank to the drawer be upheld on the theory of money had and received.
In the case of the check made payable to 'Benicia Arsenal' and then altered to read 'S. Oster, c/o Benicia Arsenal', a different situation is presented. In this instance, admittedly the collecting bank, in guaranteeing previous indorsements, guaranteed the actual indorsement of an existing named payee. In such circumstances, it cannot be said that there is any causal connection between the conduct of the collecting bank and the depositor's loss. Its loss in this instance was occasioned solely by the perfidy of its own employee. When a check bears the name of an existing payee and such payee actually indorses the same, no liability can attach to the collecting bank, because its guarantee simply extends to the fact that the indorsement was written by the person to whom the check was made payable. So far as the collecting bank is concerned, any loss sustained by the plaintiff herein through the faithlessness of the employee must be borne by the plaintiff.
The judgment as rendered is reversed and the cause remanded with directions to the court below to enter judgment in favor of defendant upon the aforesaid check indorsed by S. Oster referred to in the 24th and 25th causes of action, and as to the remaining seven checks to enter judgment in favor of plaintiff. Each party to bear its respective costs on appeal.
DORAN and DRAPEAU, JJ., concur. --------------- * Subsequent opinion 223 P.2d 849.