Summary
In First American State Bank v. Aetna Casualty Surety Co., 25 Wis.2d 190, 130 N.W.2d 824, 827 (1964), the Supreme Court of Wisconsin reserved the question whether (E) was intended "to cover only those writings which have legal efficacy", but in an obvious hint that the matter was hardly free from doubt the opinion commended the problem "to the attention of the draftsmen of the bond."
Summary of this case from First Nat. Bk. of Ft. Walton B. v. U.S.F. GOpinion
September 28, 1964 —
October 27, 1964.
APPEAL from a judgment of the circuit court for Marathon county: GERALD J. BOILEAU, Circuit Judge. Reversed.
For the appellants there were briefs by Elmer W. Beasley of Hartford, Connecticut, and E. L. Everson of Green Bay, attorneys, and Everson, Whitney, O'Melia, Everson Brehm of Green Bay of counsel, and oral argument by Mr. Beasley and Mr. E. L. Everson.
For the respondent there was a brief by Smith, Puchner, Tinkham Smith, attorneys, and C. Duane Patterson of counsel, all of Wausau, and oral argument by Mr. Patterson.
Action for indemnity on a bond executed by defendants in favor of plaintiff. Defense, that the loss sustained by plaintiff was not covered under the bond and that notice of loss was not given at the earliest practicable moment after the discovery of loss as required by the provisions of the bond. Pertinent provisions of the bond follow:
"Section 1. THIS BOND DOES NOT COVER: . . .
"(d) Any loss the result of the complete or partial nonpayment of or default upon any loan made by or obtained from the Insured, whether procured in good faith or through trick, artifice, fraud or false pretenses, except when covered by Insuring Clause (A), (D) or (E)."
Insuring Clause (E) is as follows:
"(E) Any loss through the Insured's having, in good faith and in the course of business, whether for its own account or for the account of others, in any representative, fiduciary, agency or any other capacity, either gratuitously or otherwise, purchased or otherwise acquired, accepted or received, or sold or delivered, or given any value, extended any credit or assumed any liability, on the faith of, or otherwise acted upon any securities, documents or other written instruments which prove to have been counterfeited or forged as to the signature of any maker, drawer, issuer, endorser, assignor, lessee, transfer agent or registrar, acceptor, surety or guarantor or as to the signature of any person signing in any other capacity, or raised or otherwise altered or lost or stolen, or through the Insured's having, in good faith and in the course of business, guaranteed in writing or witnessed any signatures, whether for valuable consideration or not and whether or not such guaranteeing or witnessing is ultra vires the Insured, upon any transfers, assignments, bills of sale, powers of attorney, guarantees, endorsements or other documents upon or in connection with any securities, obligations or other written instruments and which pass or purport to pass title to such securities, obligations or other written instruments; EXCLUDING, HOWEVER, any loss through FORGERY OR ALTERATION of, on or in any checks, drafts, acceptances, withdrawal orders or receipts for the withdrawal of funds or Property, certificates of deposit, letters of credit, warrants, money orders or orders upon public treasuries; and excluding, further, any loss specified in subdivisions (1) and (2) of Insuring Clause (D) as printed in this bond, whether or not any amount of insurance is applicable under this bond to Insuring Clause (D)."
The case was tried to the court without a jury on stipulated facts. Beginning on February 3, 1959, plaintiff extended a line of credit to Marathon Manufacturing Company through Merrill A. Sischo, Jr., its controlling stockholder, president, and manager. The loans made were evidenced by promissory notes payable on demand, secured by written assignments of accounts receivable. The assigned accounts receivable were evidenced by duplicate copies of Marathon's invoices to its customers. These copies were delivered to the bank by Sischo. Plaintiff loaned 75 percent of the face amount of the invoices to Marathon.
The account debtors were not notified of the assignments. As Marathon collected the accounts it paid the proceeds to plaintiff. Plaintiff credited Marathon's notes with 75 percent of the amounts remitted and credited Marathon's bank account with the remaining 25 percent.
In the summer of 1960, Marathon began to assign nonexistent accounts to plaintiff as security for loans. These nonexistent accounts were evidenced by duplicate copies of invoices which had not been sent to Marathon's customers. In some cases the accounts were wholly fictitious; in other cases Marathon had received an order for goods but the order had not yet been filled. On occasions, valid as well as false invoices were delivered to plaintiff.
Between July 29, 1960, and February 16, 1961, Sischo, as president and general manager of Marathon, delivered to plaintiff 103 invoices which evidenced nonexistent accounts receivable. The face amount of these invoices was $28,195.68. The plaintiff loaned Marathon $21,146.76 against them.
On February 21, 1961, plaintiff checked Marathon's books and discovered many discrepancies. On February 22, 1961, plaintiff cut off Marathon's line of credit. The amount of nonexistent accounts assigned to plaintiff was discovered later after audit. Through the collection of valid accounts assigned to plaintiff, and from other sources, plaintiff reduced its loss to $9,749.05. Both Marathon and Sischo are insolvent.
All signatures on the promissory notes evidencing loans, all signatures on assignments of nonexistent accounts receivable, and all signatures on lists of invoices contained in the assignments, are Sischo's. The false copies of invoices were signed by no one. These false copies were prepared by Sischo, or under his direction. He knew that they did not evidence genuine accounts receivable at the time they were made and at the time they were delivered to plaintiff. He prepared these invoices for the purpose of obtaining loans from plaintiff against the nonexistent accounts receivable which the invoices purported to represent.
Plaintiff gave defendants written notice of claim for loss on June 3, 1961. Defendants denied liability on the ground the loss was not covered under Insuring Clause (E) of the bond.
The trial court concluded that the false invoices constituted securities, documents, or other written instruments which proved to have been counterfeited or forged as to the signature, and came within the meaning and wording of Insuring Clause (E); that plaintiff gave timely notice of loss to defendants under the circumstances; and that defendants waived the defense of failure to receive timely notice. From a judgment in favor of plaintiff, defendants appeal.
On this appeal we have determined that the unsigned copies of invoices in question and the written assignments of accounts receivable which these invoice copies purported to represent were neither counterfeited nor forged as to the signature of any person signing in any capacity.
In holding that no forgery as to signature exists in this case, we must decline to follow the lead of the Seventh circuit in Security Nat. Bank v. Fidelity Casualty Co. (1957), 246 F.2d 582, holding on facts almost identical to ours that unsigned copies of invoices were forged. That case relied on Quick Service Box Co. v. St. Paul Mercury Indemnity Co. (7th Cir. 1938), 95 F.2d 15, for the proposition that a false making might be accomplished by the application of a false signature to a true instrument or a true signature to a false instrument. The Quick Service Box Case involved the signature of an employee on a company check in an amount he was not authorized to sign. It was held this constituted a forgery. See also Anno. 41 A.L.R. 229, supplemented 46 A.L.R. 1529. and 51 A.L.R. 568.
It is pointed out in Anno. 52 A.L.R.2d 207. 210, that forgery under the coverage of a forgery bond is generally defined at least as broadly as the criminal statutes of the jurisdiction construing the bond. Under our forgery statute, sec. 943.38, a writing may be forged if it is falsely made or altered. In our view, false making relates to genuineness of execution, Marteney v. United States (10th Cir. 1954), 216 F.2d 760, while alteration may relate to falsity of content. In Quick Service Box there was a false making in that the agent's execution purported to be made by authority of one who did not give such authority. The same cannot be said for the Security Nat. Bank Case.
Security Nat. Bank, supra, also relied on sec. 343.56, Stats. 1953, which provided that assignment of a bill of exchange, promissory note, or other assignable instrument was a subject of forgery. It is difficult to see how an unsigned copy of an invoice could fail within that definition. Subsequent cases from other jurisdictions have rejected Security Nat. Bank. State Bank v. Maryland Casualty Co. (8th Cir. 1961), 289 F.2d 544; North Carolina Nat. Bank. v. United States Casualty Co. (4th Cir. 1963), 317 F.2d 304.
In holding that these copies of invoices were not counterfeited, we decline to follow Fidelity Trust Co. v. American Surety Co. (3d Cir. 1959), 268 F.2d 805, holding on facts similar to ours that unsigned copies of invoices were counterfeited. In that case the court said (p. 807):
"We think that common usage would indicate that counterfeit is something that purports to be something that it is not. And that is just what these spurious invoices were."
This view has been rejected by the Fourth circuit in First Nat. Bank v. Glens Falls Ins. Co. (1962), 304 F.2d 866, and North Carolina Nat. Bank v. United States Casualty Co. (1963), 317 F.2d 304. Those cases construed "counterfeited" to be modified by the phrase "as to the signature." The North Carolina Nat. Bank Case goes further by way of dictum (p. 309):
". . . [copies of invoices] having no intrinsic value in themselves and being non-negotiable, are not the usual subjects of counterfeiting or forgery. When they are fictitious only in the sense that they contain an implicit or explicit representation that a valid, collectible, but uncollected, receivable exists, it is very doubtful, whatever writing appeared upon them, they could be held to be the subject of counterfeiting or forgery so long as the writing did not misrepresent their origin."
We are not willing to restrict the counterfeiting coverage of Clause (E) to signatures. However, we consider these writings to be exactly what they purport to be — copies of invoices. That goods covered by the original invoices had been shipped to fill purchase orders was a false representation contained in the body of the invoices and made by delivering the copies to plaintiff. Sischo obtained his loans by false pretenses, not by uttering forged or counterfeited writings.
Defendants also argue that invoices are not "securities, documents or other written instruments," within the meaning of Insuring Clause (E) of the bond, citing Rockland Atlas Nat. Bank v. Massachusetts Bonding Ins. Co. (1959), 338 Mass. 730, 157 N.E.2d 239. That case held that a balance sheet accompanied by a letter of purported certification from a certified public accountant whose signature had been forged thereto was not a document or instrument within the meaning of Clause (E). The Massachusetts court considered "instrument" to be the broadest term in the phrase and defined it as, "`A writing, made and executed as the expression of some act, contract, or proceeding. . .'"
Under sec. 943.38(1)(a), Stats., writings whereby legal rights or obligations are created, terminated, or transferred, and those which are commonly relied upon in business or commercial transactions as evidence of debt or property rights, are the subject of forgery. We assume that the bank extended credit on the faith of the false copies of invoices, an inference which defendants do not dispute. This is evidence prima facie that copies of invoices are commonly relied on in business and commercial transactions.
The issue reduced to its simplest terms is whether Clause (E) was intended to cover only those writings which have legal efficacy. We reserve this question for future determination, meanwhile commending it to the attention of the draftsmen of the bond.
In view of our disposition of the coverage issues, there is no need to discuss the issues as to notice of loss and waiver thereof.
By the Court. — Judgment reversed, and cause remanded with directions to dismiss the complaint.