Airco Supply Co. v. Albuquerque Nat. Bank

• Citation: 1961 NMSC 31,360 P.2d 386,68 N.M. 195
• Decision Date: 15 March 1961
• Docket Number: No. 6747,6747
• Parties: AIRCO SUPPLY COMPANY, Inc., a New Mexico Corporation, Plaintiff-Appellant, v. ALBUQUERQUE NATIONAL BANK, a National Banking Corporation, Defendant-Appellee.
• Court: Supreme Court of New Mexico

Page 386

360 P.2d 386

68 N.M. 195

AIRCO SUPPLY COMPANY, Inc., a New Mexico Corporation Plaintiff-Appellant, v. ALBUQUERQUE NATIONAL BANK, a National Banking Corporation Defendant-Appellee.

No. 6747.

Supreme Court of New Mexico.

March 15, 1961.

Fred L. Nohl, Albuquerque, for appellant.

Modrall, Seymour, Sperling, Roehl & Harris, Daniel A. Sisk, Allen C. Dewey, Jr., Albuquerque, for appellee.

COMPTON, Chief Justice.

Appellant, Airco Supply Company, Inc., plaintiff below, brought this action against the Albuquerque National Bank, defendant below, to recover monies paid out on forged checks charged to its account. The district court denied recovery and this appeal follows. For convenience, we will refer to appellant as Airco.

A narration of Airco's general business practices, particularly with respect to appellee, is required. Airco has maintained a commercial checking account in appellee's bank since December, 1956. At the time the account was opened, the bank's signature card was signed by W. M. Carroll and H. H. Carroll, his wife, and they were the only persons authorized to draw checks against Airco's account. They owned sixty-three percent of the voting stock, and W. M. Carroll managed and operated the business and made all the policy decisions.

Airco is engaged in the business of distributing supplies such as refrigeration units, air conditioners, heating equipment and the like. It makes purchases from some two to three hundred different manufacturers, paying these suppliers with checks signed by W. M. Carroll, president of the company. Its bookkeeper from February of 1958 to December of 1958 was Emily Duran. In the course of her employment, Emily Duran prepared all of Airco's checks for the signature of either W. M. Carroll or H. H. Carroll.

During the period of time between February 10, 1958, and November 4, 1958, a series of twenty forged checks were drawn on Airco's account, sixteen of which were made payable to the B & E Co. The signature of W. M. Carroll as drawer had been forged on each by Emily Duran, and, in addition, the checks bore endorsements made by Emily Duran. Each of the forged checks was deposited in the account of 'J. B. or Emily Duran' at the Bank of New Mexico, except one check made payable to the Bank of New Mexico, one to Southwestern Company and two made payable to the Oasis Co. Airco did no business whatever with the B & E Co., Oasis Co., Southwestern Company or the Bank of New Mexico.

The record discloses that even though the first four forged checks were returned to Airco in February, 1958, the forgeries were not discovered until December, 1958, when Airco's annual audit showed an inventory shortage of some $35,000. When this fact was discovered, the appellee bank was alerted that a series of checks had been forged on the account of Airco Supply Company. Subsequently, the validity of each check issued by Airco was confirmed by telephone conversation prior to payment and a new series of check numbers was arranged.

The appellee bank prepared two statements a month for Airco, and W. M. Carroll usually called in person at the bank for the cancelled checks and statements. Mr. Carroll did not look at the cancelled checks or statements before placing them in an office file. At the end of each month a firm of auditors and accountants secured the checks and bank statements and reconciled the books. According to the testimony, it was not their job to determine the propriety of the checks drawn on the account or to determine whether Carroll had signed all the checks. The auditors were not furnished with invoices or vouchers showing to whom payments were in fact owing, and they did not know what firms or persons with which Airco did business.

The trial court found that each of the sixteen checks made payable to the order of B & E Co. 'was payable to the order of a fictitious or non-existing or living person not intended to have any interest in it, and that such fact was known to the person making said checks so payable.' The court, therefore, concluded that these particular checks were payable to bearer.

Appellant recognizes that the court's legal conclusion flowing from the finding of fact is correct. A check drawn to a fictitious payee or others listed in Sec. 50-1-9, NMSA, 1953 Comp., is the same as if it were made payable to bearer. Mueller & Martin v. Liberty Insurance Bank, 187 Ky. 44, 218 S.W. 465. And, since an endorsement on such paper is not necessary to its validity or negotiability, a bank is not liable for paying on a forged endorsement on bearer paper. Britton, Bills and Notes, Sec. 149; Prugh, Combest & Land, Inc., v. Linwood State Bank, Mo.App., 241 S.W.2d 83; Bartlett v. First National Bank of Chicago, 247 Ill. 490, 93 N.E. 337.

But appellant contends that the finding made is not supported by substantial evidence. It is appellant's position that the sixteen checks were not bearer paper and thus the bank, under the general rule, is liable for paying out monies on forged endorsements. Britton, Bills and Notes, Sec. 142.

Before discussing the substantial evidence issue, we would point out that no problem is presented as to whether 'person making it so payable' refers to the actual maker or the nominal maker. See Mueller & Martin v. Liberty Insurance Bank, supra. This is because Sec. 50-1-9, NMSA, 1953 Comp., provides in pertinent part as follows:

'The 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 ours.)

In our opinion there is substantial evidence to support the court's finding that the sixteen checks made payable to the B & E Co. 'were payable to the order of a fictitious or non-existing or living person not intended to have any interest in it.'

It is not controverted that Emily Duran was an employee of appellant and that she supplied the names of the payees on the checks. She made out all sixteen checks, inserting the name B & E Co. as the payee and filling in the date, amount and signature of W. M. Carroll. Although she customarily prepared checks only when given vouchers by Mr. Carroll, no vouchers for B & E Co. had been given to her and there was no reason for Airco to make B & E Co. the payee on any of its checks. Airco had no business with any firm known as B & E Co., Mr. Carroll testifying that he had never heard of such a company.

After preparing the checks, Emily Duran wrote the endorsements 'B & E Co.' and 'J. B. Duran' on the back of each. J. B. Duran was Emily Duran's husband and Airco had no business dealings with him. All of the checks made payable to B & E Co. and endorsed in the manner stated above were deposited to the joint account of 'J. B. or Emily Duran' in the Bank of New Mexico. This bank in turn paid out money in the amount of these deposits on checks drawn upon the Duran account.

The above facts constitute substantial evidence that if a B & E Co. did in fact exist, Emily Duran had no intention whatever that it should have any interest in the proceeds of these checks. This is the only reasonable inference that can be drawn from the evidence, and, in reviewing the evidence, all reasonable inferences supporting the trial court's judgment will be indulged by this court. Totah Drilling Company v. Abraham, 64 N.M. 380, 328 P.2d 1083.

Appellant insists, however, that since Emily Duran did not testify in person, there is no evidence as to her actual intent. This contention overlooks the principle that inferences may properly be drawn from circumstantial evidence, and that a wellconnected train of circumstances, as are present in this case, is as cogent of the existence of a fact as any array of direct evidence, and may even outweigh opposing direct testimony. Robinson v. Southern New England Tel. Co., 140 Conn. 414, 101 A.2d 491; McCready v. Atlantic Coast Line R. Co., 212 S.C. 449, 48 S.E.2d 193. See Lopez v. Townsend, 42 N.M. 601, 82 P.2d 921.

The next issue is whether the trial court correctly concluded that the drawee bank was entitled to debit the appellant's account for payment made on checks on which the drawer's signature had been forged.

It is the generally accepted rule that in the first instance the drawee bank has no right to debit the account of a depositor on a check which bears a forged signature of the drawer. Denbigh v. First National Bank of Seattle, 102 Wash. 546, 174 P. 475; Britton, Bills and Notes, Sec. 132. The undertaking of the bank is to pay according to the depositor's order to the extent of his balance. If the depositor has done nothing to lead the bank reasonably to believe that a forged check is genuine, and has acted prudently under the circumstances, the payment of a forged check does not operate to decrease the bank's indebtedness. So when nothing else happens it is quite correct to say that 'the bank pays as its peril.' Arant, Forged Checks--The Duty of the Depositor to His Bank, 31 Yale L.J. 598.

But, while the drawee bank does not have the right, in the first instance, to debit the account of the depositor on forged checks, subsequent events may relieve the bank of any liability for such action. Britton, Bills and Notes, Section 132. This principle is stated as follows in Morgan v. United States Mortgage & Trust Co., 208 N.Y. 218, 101 N.E. 871, 872, L.R.A.1915D, 741:

'(1) The general rule of law is that a bank may pay and charge to its depositor only such sums as are duly authorized by the latter, and of course a forged check is not authority for such payment.

'(2) It is, however, permitted to a bank to escape liability for repayment of amounts paid out on forged checks by establishing that the depositor has been guilty of negligence which contributed to such payments and that it has been free from any negligence. * * *'

The...