American Surety Co. of New York v. Bank of California

• Decision Date: 23 December 1941
• Docket Number: No. 265.,265.
• Citation: 44 F. Supp. 81
• Parties: AMERICAN SURETY CO. OF NEW YORK et al. v. BANK OF CALIFORNIA.
• Court: U.S. District Court — District of Oregon

44 F. Supp. 81

AMERICAN SURETY CO. OF NEW YORK et al. v. BANK OF CALIFORNIA.

No. 265.

District Court, D. Oregon.

December 23, 1941.

Cake, Jaureguy & Tooze, Plowden Stott, E. L. McDougal, Randall S. Jones, and Maurice D. Sussman, all of Portland, Or., for plaintiffs.

McCamant, Thompson, King & Wood and Robert Miller, all of Portland, Or., for defendant.

JAMES ALGER FEE, District Judge.

This action was brought by American Surety Company of New York, a New York corporation, and E. L. McDougal, a citizen and resident of the State of Oregon, to recover amounts paid by the defendant upon checks carrying forged endorsements. Defendant "The Bank of California, National Association", is a corporation organized and existing under and by virtue of the National Banking Laws of the United States. "The place where its banking house or office shall be located and its operations of discount and deposit carried on and its general business conducted shall be the City and County of San Francisco with branches at Portland, Multnomah County, Oregon * * *¹".

The Interior Warehouse Company,² an Oregon corporation, doing business in Portland, was a depositor between October 2, 1935, and May 1, 1939, in the Portland branch of defendant bank, and during all of this period maintained a deposit in excess of the amounts hereinafter shown to have been improperly paid out. Crowe, a bookkeeper of the Interior, prepared but did not sign checks to cover pay-rolls and other incidental expenses. He conceived the scheme of writing additional checks upon defendant bank, either to persons on the pay-rolls in sums beyond what was actually due them, or to non-existing persons, and of obtaining the money thereon by forging the name of the supposed payee. He carried this out successfully over a period of years, forging the endorsements, and generally cashing these checks with Meier & Frank Company, a mercantile establishment in Portland, or with some individual. Crowe was not authorized to sign checks for the Interior, since this authority was vested only in two other employees. Neither of these men knew or suspected the scheme of Crowe, or the forging of the endorsements on the checks which they signed. Crowe compared the bank statements and returned checks with the records upon their receipt by Interior, and was thus able to delay detection. On trial, Crowe testified as to nineteen checks, the originals of which had been destroyed, that he had drawn the latter to fictitious payees and forged the endorsements thereon. The bank objected to the proof of these lost documents.

The American Surety Company of New York and the underwriters at Lloyds in London³ (assignors of E. L. McDougal), had written policies of insurance by which the employees of Interior, including Crowe, were bonded, and Interior insured against the loss it might sustain by reason of dishonesty of any of these employees. Interior procured and paid for these policies. No insurance was taken by Interior upon its checks, nor indemnity thereon for loss by reason of forgery.

On October 16, 1939, Interior and insurers notified defendant that payments on these checks were unauthorized. Thereafter the insurers paid Interior the full amount of the loss caused by the dishonesty of its employee, and accepted assignment of any rights which Interior might have against the Bank. This action was then brought for $6,562.33, the amount of the loss thus paid. The Bank contended that diversity of citizenship between it and each of the plaintiffs did not exist. The court overruled the motion based on this contention. The cause came on regularly for trial before the court, sitting without a jury, based upon a pre-trial order which fully set out the issues and listed the documentary evidence.

At the outset the jurisdictional point must be met. The Bank contends that it is a citizen of Oregon by virtue of its operation of a branch in this state. The defendant is a corporation formed under the federal banking laws of general application. Formerly, it was a state bank of California and was thus enabled as a "mother bank" to carry its branches into the federal system.⁴

The history of legislation relating to national banks indicates that the statutes contemplate that such an institution shall have situs in one state⁵, and that jurisdiction of a federal court attaches under the ordinary rules as to diversity of citizenship based on that assumption⁶. Federal jurisdiction is not any longer based upon the fact of federal incorporation of a bank⁷. Nor has the opposite view been adopted by Congress, namely, that such incorporation carries with it citizenship in each state of the Union. The intent of the statutes is to steer a middle course and to confer upon a national bank the right to come into or remove a cause to a United States court in common with private corporations invested with powers by the several states⁸. The state of incorporation is the criterion of residence and citizenship of corporations authorized by the laws of the various states⁹. Congress intended that analogous tests should be applied in cases of entities endowed with existence by federal power. The principal place of business is the distinguishing factor. Dual incorporation has not been the rule with corporations organized in the various states¹⁰, probably because the right to go into a federal court outside the state of incorporation might be thereby lost.

The whole doctrine of diversity of citizenship of corporations is founded upon a judicial fiction¹¹ of extremely technical character. Reasoning from such artificial premises is illusory. In view of the historical sanction, it is believed Congress used the doctrine as a foundation for the enactments relating to national banks. Although, then, the modern tendency has been to limit jurisdiction based on diversity of citizenship actual or implied, no hardship or inconvenience is discovered in the application of a rule analogous to that of state corporations¹². Therefore, until the entire foundation crumbles, a national bank should be considered as a citizen of the state where it has its principal place of business, irrespective of the fact that it has authorized branches in other states. A state corporation carries on business in many states and may have branches widely scattered, yet it is a citizen of the state where it is incorporated. The court has jurisdiction, because the Bank must be viewed as a citizen of California. Questions of venue were waived.

An examination of the merits is now required. These is no binding authority in the state of Oregon upon the exact situation here presented. Many authorities have been cited from other jurisdictions. But calculation of numerical weight of authority from other jurisdictions will not suffice. This court must attempt to give weight to the considerations which, judged from previous utterances, will affect the Supreme Court of Oregon, when that tribunal deals with a state of facts such as is here presented.

The rule is uncontroverted in most jurisdictions that a bank, which receives a deposit, makes a contract that it will pay out the money only upon the order of the depositor¹³. If, therefore, a bank pays money upon the depositor's check bearing a forged endorsement of the name of the payee, the bank is liable therefor¹⁴. This position is ordinarily justified in legal theory by the presumption that the bank under such circumstances pays out its own money and not the money of the depositor¹⁵. The depositor, on the other hand, is not required to know the signature of the payee of his check¹⁶. He may, therefore, receive back the statements of his account, accompanied by cancelled checks with forged endorsements of the respective payees and hold these without examination, and the bank will still be liable to pay him all moneys which it has not disbursed in accordance with his order.

This general rule has been questioned, however, where a trusted employee of a large concern supplies the data upon which the checks are drawn to one of the officers charged with signing the checks and, thereafter, forges the checks which he has theretofore improperly submitted to such an officer. Under such circumstances, some courts will hold that the depositor had no duty at any time with regard to either its employee or the forged endorsements on the checks¹⁷. Other courts hold there was a duty owed to the public to supervise the employee and there was a further duty to see that checks for amounts which the concern did not owe should not be consistently placed in the hands of the public nor offered to the drawee bank¹⁸. The better view would seem to be that if such conduct were long pursued, a denial of recovery from the drawee bank could be justified, either on principles of negligence or estoppel.

In this case the court finds that the Interior did not discover within a reasonable time that checks for amounts which it did not owe on payrolls were consistently signed by its responsible officers and, thereafter, forged by its dishonest employee, Crowe, and that thereby defendant and the prior endorsers were misled. The Bank was not guilty of negligence and was not involved in the misconduct of Crowe. It is liable, if at all, solely on the contract implied from the deposit by Interior. Since there is no decision of the state courts upon this point cited, however, no attempt will be made to determine the instant case on this ground.

Irrespective of whether the Bank was liable to Interior, its liability to the insurers presents an entirely different problem. Courts of many jurisdictions, which are entitled to the highest respect, have held that a bank is liable to a surety¹⁹ under circumstances similar in certain phases to those in the case at bar²⁰. The controlling factors in these decisions are, usually, the rule that the Bank is absolutely liable wherever it pays out money on a forged endorsement of the payee²¹, and, secondly, the alleged principle...