Aetna Life & Cas. Co. v. Hampton State Bank

• Decision Date: 31 May 1973
• Docket Number: No. 18036,18036
• Parties: 13 UCC Rep.Serv. 876 AETNA LIFE AND CASUALTY COMPANY, Appellant, v. HAMPTON STATE BANK, Appellee.
• Court: Texas Court of Appeals

Page 80

497 S.W.2d 80

13 UCC Rep.Serv. 876

AETNA LIFE AND CASUALTY COMPANY, Appellant, v. HAMPTON STATE BANK, Appellee.

No. 18036.

Court of Civil Appeals of Texas,

Dallas.

May 31, 1973.

Rehearing Denied June 28, 1973.

C. Edward Fowler, Jr., Bailey, Williams, Westfall & Henderson, Dallas, for appellant.

Bill J. Stephens, Stephens & Stephens, Dallas, for appellee.

GUITTARD, Justice.

Hampton State Bank sued Aetna Life and Casualty Company on an insurance contract called a 'banker's blanket bond' for a loss resulting from a forged check. Aetna answered that no insured loss occurred, since Hampton forwarded the check through banking channels to the drawee, Northwest National Bank, and after Northwest paid the check, Hampton asked Northwest to send it back and voluntarily refunded the payment. In order to determine whether an insured loss occurred, we must decide whether Hampton was legally required to make this repayment. We hold that repayment was not required and, consequently, that the loss was not insured.

The facts are undisputed and are stated in the trial court's findings of fact. The check in question was drawn on an account in Northwest National Bank in the name of Pizza Inn, Inc. Check forms furnished by Northwest to Pizza Inn, Inc. were stolen and one of these forms was filled in with the amount of $4,000 payable to the order of 'Pizza Inn, Inc., $32.' This name was fictitious, since no 'Pizza Inn, Inc. $32' existed. The signature of F. J. Spillman, president of Pizza Inn, Inc., was forged to the check in a credible likeness of the signature of that officer on file with Northwest. The forged check was endorsed 'Pizza Inn, Inc. $32 For Deposited Only, Account No. (Op1275 5) Ronnie Couch,' and was deposited in an account opened under that number in the name of 'Pizza Inn, Inc. No. 32' in Hampton State Bank. Hampton credited this account with $4,000, endorsed the check 'Pay Any Bank P.E.G.,' which in banking parlance means 'prior endorsements guaranteed,' and forwarded it for collection through banking channels to Northwest, which ran the check through its computer and, in accordance with its practice, compared the signature with the signature of F. J. Spillman on file, failed to discover the forgery, and paid Hampton for the check.

About twenty-two days later Hampton advised Northwest that the $4,000 check was forged, and that it intended to make a claim against its bonding company for it, and requested Northwest to return it. Accordingly, Northwest returned the check through banking channels to Hampton, which accepted it and repaid the $4,000 to Northwest. The trial court found that when Hampton requested return of the check it knew all the facts and was fully aware of any right which it may have had to claim that Northwest by accepting and paying the check could not recover the $4,000 from it. Hampton paid out $3,953.10 from the fictitious account before discovering the forgery, and the trial court found that it suffered a loss in that amount.

By the terms of its bond, Aetna agreed to indemnify Hampton and hold it harmless against certain losses, including 'any loss through FORGERY . . . of, on or in any checks. . . .'

The trial court rendered judgment for Hampton for the amount of the loss. The court found and concluded that Hampton breached its warranty of the endorsement in that the endorsement was forged, and that Hampton was not a holder in due course.

Our first question is whether Hampton breached its warranty of title under Tex.Bus. & Comm.Code Ann. § 4.207 (1968) ¹ which, as here pertinent, provides:

'(a) Each . . . collecting bank who obtains payment . . . of an item . . . warrants to the payor bank . . . that

(1) he has a good title to the item or is authorized to obtain payment . . . on behalf of one who has a good title . . ..' ²

Hampton contends that since the purported endorsement of the payee, 'Pizza Inn, Inc. $32,' as well as the signature of the drawer, was forged, the forged endorsement is inoperative under § 3.404(a):

'Any unauthorized signature is wholly inoperative as that of the person whose name is signed . . ..'

Hampton argues that it acquired no title by the forged endorsement, and, therefore, was liable to Northwest for breach of warranty under § 4.207.

Aetna contends that the endorsement was not inoperative, and that Hampton did not breach its warranty because anyone, even a forger, can effectively endorse the name of a fictitious payee in view of § 3.405, which provides:

'(a) An indorsement by any person in the name of a named payee is effective if . . .

(2) a person signing as or on behalf of a maker or drawer intends the payee to have no interest in the instrument . . ..'

We conclude that Aetna's interpretation of the Code is correct. The person who forged the check may not have been a 'drawer' for all purposes, but he signed 'as or on behalf of' the drawer, within § 3.405. Obviously he 'intended the payee to have no interest' in the check because the payee was fictitious. Since, under this section, anyone is authorized to endorse on behalf of a person not intended to have any interest in the instrument, the endorsement in the name of 'Pizza Inn, Inc. $32' was effective to pass title to Hampton It may seem odd to speak of a warranty of title to a forged check, but that is exactly what we have here. Title to a check does not necessarily mean the right to collect it from the drawer, since the drawer may have a good defense. A person (other than the drawee bank) who has paid value for a forged check has title to the spurious instrument which enables him to recover against his transferor under § 3.417(b)(2) and against prior endorsers under § 3 .414. A warranty of title is nothing more than an assurance that no one has better title to the check than the warrantor, and therefore, that no one is in a position to claim title as against the warrantee, as the payee or other owner of a genuine check could do if his endorsement were forged. United States v. Guaranty Trust Co., 293 U.S. 340, 55 S.Ct. 221, 79 L.Ed. 415 (1934); First Nat'l Bank of Wichita Falls v. First Nat'l Bank of Borger, 37 S.W.2d 802 (Tex.Civ.App., Amarillo 1931, writ ref'd). On payment of the check to Hampton, Northwest's loss could not be said to have resulted from any breach of Hampton's warranty of title because no person whose name appeared to be endorsed on the check has asserted any claim of title based on lack of a genuine endorsement. Northwest's loss was rather the result of paying out its money on a check to which its own depositor's name was forged.

Hampton also argues that it was liable to Northwest on its express warranty, 'P.E.G.,' meaning 'prior endorsements guaranteed,' although it does not enlighten us as to what this express warranty adds to the warranty of title implied under § 4.207, above quoted. The comment by the commissioners who drafted the Uniform Commercial Code explains that § 4.207 'is intended to give the effect presently obtained in bank collections by the words 'prior indorsements guaranteed' in collection transfers and presentments between banks.' Uniform Commercial Code § 4--207, Comment 2. A warranty of endorsements serves only to warrant the title as against the claim of any person whose name appears as an endorser. Therefore, this express warranty would have afforded no additional ground for Northwest to recover its payment from Hampton.

Hampton's argument that its warranty of the endorsement 'contributed' to Northwest's loss in paying the forged check and that Northwest was entitled to rely on Hampton's warranty as assurance of the genuineness of the check is equivalent to an assertion that Hampton's warranty of the endorsement amounted also to a warranty of genuineness of the drawer's signature. Adoption of such a rule would expand the warranty beyond that provided in § 4.207, and would be contrary to the better-reasoned decisions before the Code. United States v. Chase Nat'l Bank, 252 U.S. 485, 40 S.Ct. 361, 64 L.Ed. 675 (1920); First Nat'l Bank v. United States Nat'l Bank, 100 Or. 264, 197 P. 547 (1921); Fidelity & Deposit Co. v. Peoples Exchange Bank, 270 Wis. 415, 71 N.W.2d 290 (1955); J. Brady, Bank Checks § 15.16 (4th ed. H. Bailey 1969).

Hampton relies on First Nat'l Bank of Winnsboro v. First Nat'l Bank of Quitman, 299 S.W. 856 (Tex.Comm'n App.1927), aff'g First Nat'l Bank of Quitman v. Wood County, 294 S.W. 324 (Tex.Civ.App., Texarkana 1927), in which the Commission of Appeals held that a payor bank could recover from a collecting bank money paid out on a forged check made payable to an existing person whose endorsement was also forged. The collecting bank had stamped the check 'All prior endorsements guaranteed.' The stated ground of the decision was that the action of the collecting bank in accepting the forged endorsement and putting it in circulation with a guarantee of integrity 'contributed' to the payment of the forged check. This holding seems to be based on negligence of the collecting bank, since the principal authority cited is Rouvant v. San Antonio Nat'l Bank, 63 Tex. 610 (1885), which allowed recovery by a drawee bank against an endorser in a case where the endorser's negligence in dealing with a forger contributed to the loss. The Supreme Court did not adopt the Quitman opinion, but only the judgment, which was sustainable on the negligence theory adopted by the Court of Civil Appeals.

In our opinion, whatever authority Quitman may have had was eliminated by enactment of the Uniform Commercial Code. A different decision would now be required under § 3.418, which provides:

'Except for recovery of bank payments as provided in the chapter on Bank Deposits and Collections (Chapter 4) and except for liability for breach of warranty on presentment under the preceding section, payment or acceptance of any instrument is final in favor of a holder in due course, or a person who has in good faith changed his position in reliance on the...