Opinion
Decided January 21, 1935.
Negotiable instruments — Fraud committed by agents of drawee in procuring draft — Draft, after receipt by bank, taken up by drawee — Bank not guarantor of validity of indorsements, when — Drawee precluded from setting up claim of forged indorsement, when — Drawee cannot recover against innocent indorsers, when.
1. Where a draft was issued by agents of the drawee insurance company to pay an alleged claim for loss, and a bank, upon receipt of the draft, notified the drawee company, and that company, after examination, took up the draft by issuing its check therefor, the bank is merely an agent in collecting and disbursing the fund and the relation of banker and depositor does not exist to make the bank a guarantor of the validity of the indorsements.
2. Such drawee insurance company is guilty of laches which precludes its setting up the claim of forged indorsements when there is unreasonable delay, after discovery of the forgery, in giving notice thereof to the bank.
3. The drawee insurance company cannot recover against innocent indorsers of such draft where fraud is committed by agents of the drawee insurance company in procuring the draft, which fraud is made possible by its negligence.
ERROR: Court of Appeals for Hamilton county.
Mr. William J. Reilly, for The Central Trust Company, Messrs. Ernst, Cassatt Cottle, for The First National Bank, and Messrs. Maxwell Ramsey, for The Union Trust Company of Cleveland.
Mr. Harry Neal Smith and Mr. Fred. L. Maier, for defendant in error.
The defendant in error here, The Eureka-Security Fire Marine Insurance Company, brought suit against the plaintiffs in error to recover the amount paid to The Fourth and Central Trust Company, now The Central Trust Company, in taking up a certain draft, dated October 11, 1928, drawn by T.A. Manning Sons, general agents of the plaintiff insurance company in Dallas, Texas, on The Eureka-Security Fire Marine Insurance Company, of Cincinnati, payable to the order of Clarence Brooks, in the sum of $1200. The draft is indorsed in the following order:
"Clarence Brooks;
"Mrs. G.L. Maddox;
"North Texas National Bank, Dallas, Texas;
"The Union Trust Company, Cleveland, Ohio."
The draft contained the following notation:
"Paid through Cincinnati Clearing House
"October 16, 1928
"First National Bank."
At the trial of the case before a court and jury, after close of the plaintiff's evidence, the banks, defendants below, moved for an instructed verdict, which motion was overruled. At the close of all the evidence, the plaintiff, the insurance company, moved for a directed verdict in favor of the plaintiff against all the defendants with the exception of the Republic National Bank of Dallas, upon which no service had been had. The defendant banks renewed their motion for an instructed verdict on behalf of all the banks in the case; the Texas bank not being in the case because of the non-service.
The court, thereupon, by reason of the double motion, withdrew the case from the consideration of the jury and proceeded to determine the question. Upon consideration thereof the trial court found in favor of The Eureka-Security Fire Marine Insurance Company, against The Central Trust Company of Cincinnati, The First National Bank of Cincinnati, and The Union Trust Company of Cleveland, Ohio, in the sum of $1,584, and reserved the rights of the several parties under the indorsements upon the draft.
Motion for a new trial was overruled, and error is prosecuted to this court to reverse the judgment entered by the Court of Common Pleas.
This law suit grows out of a fraud perpetrated by the agents of The Eureka-Security Fire Marine Insurance Company in the city of Dallas, Texas. It appears from the record that Manning Sons was the general agent of the insurance company, plaintiff in this action. A.C. Cason Son was a local agent for the plaintiff in Dallas, Texas, and one George B. Ford was an agent of that agency. Ernest P. Tally was a salesman in Dallas. The insurance policy was issued by the plaintiff insurance company of Cincinnati, Ohio, through its agent, A.C. Cason Son, local agent for the general agent of the plaintiff company, T.A. Manning Sons, of Dallas, Texas, on August 9, 1928, and insured Clarence Brooks upon a certain automobile described. On October 8, 1928, a sworn statement and proof of loss were presented to the insurance company, signed "Clarence Brooks, the Insured." Following investigation, on October 11th the draft in question was drawn, signed T.A. Manning Sons, in the sum of $1,200, payable to the order of Clarence Brooks. As previously stated Manning Sons was the general agent of The Eureka-Security Fire Marine Insurance Company, and issued the draft in payment of the claim. The draft was presented to the bank in Dallas, Texas, and was indorsed by Clarence Brooks, and under that name appears the name "Mrs. G.L. Maddox." In due course the draft came to The Fourth and Central Trust Company of Cincinnati, which bank thereupon notified The Eureka-Security Fire Marine Insurance Company. A member of the insurance company called at the bank, inspected the draft, with some others, and issued a blanket check covering several drafts, of which the draft in question was one, took up the draft, and retained it up to the time of the trial. Later, it was discovered that there were some insurance frauds in Dallas, and investigation resulted in the indictment of Tally, Ford, and one other person, for perpetrating frauds, among them the one concerning the policy here in question. Tally testified at the trial, and stated that he had indorsed the name "Clarence Brooks" to the draft; that the signature of Mrs. G.L. Maddox was in the handwriting of Mr. Ford, who was an agent of the sub-agent of the plaintiff; that the notarial signature in the affidavit in proof of claim was a forgery, and it was upon this general statement of facts that the trial court entered judgment for the plaintiff insurance company upon the proposition of the guaranty of the genuineness of the signatures of the indorsers.
The first proposition is that The Fourth and Central Trust Company, upon receipt of the draft, notified the insurance company, and that company, after examination, took up the draft by issuing its check therefor. The relation of banker and depositor did not, therefore, exist. The Central Trust Company acted as the agent in collecting and disbursing the fund which the insurance company furnished in payment of the draft.
The Central Trust Company was not, as erroneously designated in the case, the drawee. The draft on its face designates the plaintiff insurance company the drawee, and contains the notation "Payable through The Fourth and Central Trust Company, Cincinnati, Ohio."
The relation did not make the bank a guarantor of the validity of the indorsements. The drawee, after the inspection of this draft, furnished the bank with the funds to pay, and assumed the full responsibility for the indorsements when it paid the draft and retained it. The bank was bound to disburse the fund in accordance with its instructions. These principles are announced in the cases of Armour v. Greene County State Bank, 112 F., 631, and Dodge v. National Exchange Bank, 20 Ohio St. 234, 5 Am. Rep., 648.
We are further of the opinion that the plaintiff insurance company was guilty of laches, which precludes its setting up the claim of forged indorsements. It appears that in the spring of 1929 the insurance company was first made aware of the fraud perpetrated by its Texas agents. It had the draft in its possession at that time. No notice was given to the bank of any claim of fraud or forgery until October 25, 1929, when a letter was addressed to The Central Trust Company, outlining and explaining the fraud practiced, out of which grew the draft in question. The insurance company did not in that letter demand reimbursement.
If the banks, as a banking proposition, did guarantee the genuineness of the prior indorsements, and were bound thereunder, the banks might have protected themselves as against the original indorser, to wit, the bank in Texas which first made payment (The North Texas National Bank), which is primarily liable under its indorsement, had prompt notice been given. Prior to the notice, The North Texas National Bank had passed out of existence, and The Union Trust Company of Cleveland was in the hands of a conservator. The draft was never returned by the plaintiff drawee.
In the case of Van Wert National Bank v. First National Bank, 6 C.C., 130, 3 C.D., 380, it was held:
"To shift the loss sustained upon forged commercial paper, the holder must give prompt notice of the forgery, when discovered, and return the check to the party upon whom the loss is sought to be cast."
It has been held that any unreasonable delay, after discovery of the forgery, in giving notice thereof to the bank, discharges the bank, without regard ordinarily to the question of whether the bank was prejudiced by such delay. In the case under consideration here it was shown that actual prejudice did result to the banks from the delay in giving notice.
Moreover, the real issue in this case grows out of the fraud perpetrated on the company by its own agents.
In the last analysis, to hold in favor of the insurance company in this case would be to hold that the banks, by their indorsement of the draft, insured the principal against fraud perpetrated upon it by its own agents, made possible by the negligence of the principal, the plaintiff in this case.
The policy was issued to Clarence Brooks. True, he did not exist, or, if he ever did, he had disappeared, and his name was used for the purpose of fraud. The proof of claim and loss was filed by Clarence Brooks. The draft was made payable to Clarence Brooks. The draft was indorsed by Clarence Brooks. Unless the use of a fictitious name is a forgery, forgery did not exist in this case. E.P. Tally was the real party, but he used in all the proceedings the name "Clarence Brooks." It would therefor appear that the draft was regular, with the exception of the indorsement of Mrs. G.L. Maddox, which is unimportant. The draft was paid to the person who held the policy, who claimed the loss, and was indorsed by him. The defect concerning the draft is not a forgery in the draft itself, but grows out of a fraud in procuring the draft, and that fraud was committed by the agents of the drawee insurance company. It would be contrary to all principles of equity to permit a recovery in this case and to cause the loss to fall on the bank.
The draft was drawn by an agent on his principal, by authority of his principal, and may be treated as a promissory note. It was drawn as recited on its face, "in full settlement and compromise of all claims and demands against said Company for loss or damage sustained September 25, 1928, to property insured under policy No. 62621," which was the policy out of which the whole transaction arose.
It is also a well-settled rule of law that where one of two innocent parties must suffer, through fraud, the loss must fall on the party who made the fraud possible. The plaintiff insurance company was the principal mover in causing the loss, and it may not recover from the other innocent parties; in this case, the banks.
See, also, Brannan's Negotiable Instruments Law (5th Ed.), Section 9 (3) et seq., where many cases bearing on this subject are collated and commented upon.
The judgment will be reversed, and on the facts presented judgment will be entered here in favor of the plaintiffs in error.
Judgment reversed and judgment for plaintiffs in error.
ROSS and MATTHEWS, JJ., concur.