Stone & Webster Engineer. Corp. v. Hamilton Nat. Bank

• Decision Date: 07 October 1952
• Docket Number: No. 11322.,11322.
• Citation: 199 F.2d 127
• Parties: STONE & WEBSTER ENGINEERING CORP. et al. v. HAMILTON NAT. BANK, for Use and Benefit of EMPLOYERS' LIABILITY ASSUR. CORP., Limited.
• Court: U.S. Court of Appeals — Sixth Circuit

199 F.2d 127 (1952)

STONE & WEBSTER ENGINEERING CORP. et al. v. HAMILTON NAT. BANK, for Use and Benefit of EMPLOYERS' LIABILITY ASSUR. CORP., Limited.

No. 11322.

United States Court of Appeals Sixth Circuit.

Decided October 7, 1952.

J. H. Doughty, Knoxville, Tenn. (Hodges & Doughty, Knoxville, Tenn., on the brief), for appellants.

Howard F. Jarvis, Knoxville, Tenn. (Jennings, O'Neil & Jarvis, Knoxville, Tenn., on the brief), for appellee.

Before MARTIN, McALLISTER and MILLER, Circuit Judges.

MARTIN, Circuit Judge.

In a court action tried in the United States District Court for Eastern Tennessee, judgment for $5,000, with accumulated interest, was awarded the appellee, Hamilton National Bank, for the use and benefit of its insurer, The Employers' Liability Assurance Corporation, Limited, against the appellants, Stone & Webster Engineering Corporation and its insurer, Liberty Mutual Insurance Company. Liability was grounded upon substantial evidence that Clyde Bales, an employee of Stone & Webster, had stolen $5,000 in cash from the Hamilton National Bank and turned it in to his employer's coffers in an effort to cover up an existing shortage in his accounts.

The record discloses that the appellee bank which operated a facility at Oak Ridge, Tennessee, was insured against loss by theft under a policy issued by the appellee insurance company. The appellant, Stone & Webster, carried on business activities in Oak Ridge and was insured by the appellant insurance company against loss due to the dishonest or fraudulent acts committed by any employee of that engineering corporation. Among the duties of his employment, Bales, as Chief Clerk of the War Bond Department of Stone & Webster, transacted business in Oak Ridge with the Hamilton National Bank, which supplied the bonds sold by Bales for cash and by payroll deductions to employees of Stone & Webster and to the general public. Additionally, he handled the sale of cigarettes, bus tickets and train tickets, and conducted various relief drives. In the performance of these duties, Bales handled an average of $25,000 to $30,000 each month in cash or its equivalent.

In order to permit him to perform his duties, the Hamilton National Bank gave Bales access to its banking house. Thus, he was enabled to steal from the bank the $5,000 in cash which he placed in the treasury of Stone & Webster as a credit to himself, by having a cashier of that corporation sign receipts to him when he turned in the funds which he had stolen from the bank. Concededly, the Stone & Webster Engineering Corporation had no knowledge of the thefts of Bales at the time the stolen money was turned over by him to its cashier.

On this appeal, Stone & Webster and its insurer, Liberty Mutual, contend that any money stolen by Bales from the bank was negotiable in character and, if used by him in payment of his preexisting indebtedness to Stone & Webster, passed title to the stolen money to his employer. They assert that Stone & Webster became handler of the monies as negotiable instruments in due course, good faith and for value, and without notice of defect in the title of Bales, the negotiator. It is urged, moreover, that monies used by Bales in paying any indebtedness owed by him to Stone & Webster were mingled with the general assets of that corporation so as to be indistinguishable, in consequence of which the bank is not entitled to a recovery.

Appellants set up the further defense that no privity of contract existed between the appellee Hamilton National Bank and the appellant Liberty Mutual Insurance Company which would entitle the bank to maintain this action, inasmuch as any obligation assumed by Liberty Mutual was solely for the use and benefit of its assured, Stone & Webster Engineering Corporation, and was distinctly not for the benefit of the Hamilton National Bank. Other defenses of appellants are: (1) that the bank had elected to pursue its claim against its insurer, The Employers' Liability Assurance Corporation, Limited, and having so elected should not be permitted to make later claim against Stone & Webster and its insurer, Liberty Mutual; (2) that Employers' Liability accepted monetary remuneration for its contract and obligated itself to pay the bank for losses resultant from the misconduct of others, and as such paid surety cannot recover from an innocent party; (3) and that Employers' Liability may not be subrogated to any claim which the bank might have against Stone & Webster, or Liberty Mutual, for the alleged reason that subrogation can be obtained only against the party causing the loss and not against innocent parties.

Briefly sketching the somewhat overlapping arguments of appellants, they contend that, if the statutes and decisions of Tennessee are controlling, the United States District Court was in error in holding as it did that money is not a negotiable instrument under section 7325 of Williams Tennessee Code Annotated.¹ They cited Union National Bank v. Bluff City Bank, 152 Tenn. 486, 496, 279 S.W. 797. They contend, however, that the District Court erred in applying Tennessee law, for the reason that the rights and duties of the United States on commercial paper which it issues are governed by Federal rather than by local law. Clearfield Trust Co. v. United States, 318 U.S. 363, 366, 63 S.Ct. 573, 87 L. Ed. 838; National Metropolitan Bank v. United States, 323 U.S. 454, 456, 65 S.Ct. 354, 358, 89 L.Ed. 383; United States v. Standard Oil Company of California, 332 U. S. 301, 305-311, 67 S.Ct. 1604, 91 L.Ed. 2067. But the appellants, citing cases none of which we think establishes their proposition, state that under either Tennessee or Federal authorities the court committed reversible error in holding that paper money is not a negotiable instrument. They say further that the District Court erred in finding that Stone & Webster did not receive monies from Bales in due course of trade; in holding that Stone & Webster became unjustly enriched when it received the stolen monies from Bales; and in declining to find that any monies allegedly stolen by Bales from the bank were negotiable in character and, if used by Bales in payment of a preexisting indebtedness to Stone & Webster, passed title to the monies to that corporation with the result that the equivalent of such monies could not be recovered by the bank or its insurer.

Appellants contend further that the District Court erred in refusing to find that, if Bales paid any indebtedness owed by him to Stone & Webster, he did so with negotiable currency of which Stone & Webster became holder in due course, in good faith, and for value, and without notice of any defect in the title of the thief, Bales, who negotiated it.

Appellants, resting upon the proposition that currency of the United States, being payable to the bearer on demand, is a negotiable instrument, insist that a person is a holder in due course and for value who receives currency in extinguishment of a preexisting debt. In support of this contention, appellants quote section 7349 of the 1932 Code of Tennessee, which provides: "Value is any consideration sufficient to support a simple contract. An antecedent or preexisting debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time."

The opinion of the Supreme Court of Tennessee in Figuers v. Fly, 137 Tenn. 358, 373, 374, 193 S.W. 117, is cited to the effect that the bank to which a forged check was given in payment of a preexisting debt is a holder for value, though it was the payee and not an endorsee on purchase or discount, especially where it surrendered in return for the check a note signed by personal solvent sureties. Among other authorities cited in support of its argument upon the point are Crane & Co. v. Hall, 141 Tenn. 556, 213 S.W. 414; Nickey Bros. v. Lonsdale Mfg. Co., 149 Tenn. 391, 258 S.W. 776; Neely v. Clarence Saunders Company, 169 Tenn. 30, 81 S.W.2d 390; 36 American Jurisprudence (1941), pages 460-461; State National Bank v. United States, 114 U.S. 401, 5 S.Ct. 888, 29 L.Ed. 149; Rankin v. Chase National Bank, 188 U.S. 557, 23 S.Ct. 372, 47 L.Ed. 594; Gale v. Chase National Bank, 2 Cir., 104 F. 214.

The opinion of this court in Kean v. National City Bank, 6 Cir., 294 F. 214, 222, is cited to the effect that "where the agent, for himself or for another, is dealing at arm's length with his principal, as any stranger might deal, the principal is not charged with the knowledge of the agent in respect to such transaction." Section 7349 of Williams Tennessee Code is quoted in support of the proposition that an antecedent or preexisting debt constitutes value and is sufficient to establish consideration.

Appellants next argue that the knowledge possessed by Bales that he had stolen the money used by him in discharging his indebtedness to Stone & Webster is not imputable to that corporation as his employer. Smith v. Mercantile Bank, 132 Tenn. 147, 177 S.W. 72.

In support of its insistence that The Employers' Liability Assurance Corporation is not entitled to subrogation, appellants cite American Surety Co. of New York v. Bank of California, 9 Cir., 133 F.2d 160; United States Guarantee Co. v. Hamilton National Bank, 189 Tenn. 143, 223 S.W.2d 519; New York Title & Mortgage Co. v. First National Bank of Kansas City, Mo., 8 Cir., 51 F.2d 485, 77 A.L.R. 1052.

We have attempted to set forth fully the contentions of appellants and will now consider the arguments made by attorneys for the appellees.

First, appellees say that while performing the regular duties delegated to him by his employer, Bales, through the arrangements made by his employer which gave him access to the banking house of the Hamilton National Bank, was enabled to steal $5,000 from that institution and to place the money in the treasury of his employer as a credit to himself against an existing shortage, thereby unjustly enriching Stone & Webster by means of...