American Surety Co. v. Bank of California, 10188.

CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)
Citation133 F.2d 160
Docket NumberNo. 10188.,10188.
PartiesAMERICAN SURETY CO. et al. v. BANK OF CALIFORNIA.
Decision Date16 January 1943

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

Borden Wood, of Portland, Or. (McCamant, King & Wood and Robert S. Miller, all of Portland, Or., of counsel), for appellee.

Before MATHEWS, STEPHENS and HEALY, Circuit Judges.

STEPHENS, Circuit Judge.

In a suit brought by American Surety Company and E. L. McDougal against the Bank of California, the District Court gave judgment in favor of defendant bank. The plaintiffs appeal.

Plaintiff American Surety Company is a New York corporation, and plaintiff E. L. McDougal, a citizen of Oregon. Defendant Bank of California (hereinafter referred to as "Bank") is a national banking association, incorporated under the laws of the United States, with its principal place of business at San Francisco, California, and with a branch bank in Portland, Oregon.

Interior Warehouse Company (hereinafter referred to as "Interior"), an Oregon corporation, was a depositor in defendant Bank's Portland branch. Crowe, a bookkeeper of Interior, was charged with the duty of preparing payroll checks. Over a period of years Crowe fraudulently made out checks to former employees, to present employees paid in some other manner, and to fictitious persons. The checks were duly signed by authorized officials of Interior and were returned to Crowe, who forged the payees' names, cashed the checks and used the money so received for his own purposes. Detection was delayed through Crowe's falsification of Interior's books and by his own checking of the bank statements.

Interior was insured by American Surety Company and the underwriters at Lloyds of London (hereinafter called Insurers), against loss sustained through the dishonesty of its employees. The Insurers paid Interior the full amount of the loss and took assignments of Interior's claim against Bank. Subsequently, Lloyds assigned its claim to plaintiff E. L. McDougal, who joined American Surety Company in suit herein against Bank to recover their payments to Interior, and the United States District Court of the Judicial District of Oregon accepted jurisdiction.

The Jurisdictional Question.

The citizenship of the Bank, for purposes of determining the jurisdiction of the federal court, depends upon the interpretation of 28 U.S.C.A. § 41 (16) "* * * And all national banking associations established under the laws of the United States shall, for the purposes of all other actions by or against them, real, personal, or mixed, and all suits in equity, be deemed citizens of the States in which they are respectively located." No case defining "located", in this connection, has come to our attention. The quotation from the cited section reveals a departure from the old rule that the incorporation of national banking associations under the laws of the United States is a basis for federal jurisdiction. Continental Nat. Bank of Memphis v. Buford, 191 U.S. 119, 24 S.Ct. 54, 48 L.Ed. 119. There would appear to be a close analogy between such a bank and a corporation national in scope. The citizenship of a corporation is fixed by its principal place of business, a rule which prevails even though it extends its field of endeavor into other states under the sanction of the laws of such other states. St. Louis & San Francisco Ry. Co. v. James, 161 U. S. 545, 16 S.Ct. 621, 40 L.Ed. 802; Southern Ry. Co. v. Allison, 190 U.S. 326, 23 S. Ct. 713, 47 L.Ed. 1078. In addition, a logical interpretation of the phraseology of 28 U.S.C.A. § 41 (16) leads to the conclusion that the "States in which they national banking associations are respectively located" are those states in which their principal places of business are maintained. If the Congress had intended to provide that a national banking institution should be given the privilege and should carry the duties of citizenship in various states upon the basis of branch business offices being established therein, it would be a noteworthy departure from the general rule, and more likely than not Congress would have plainly stated such intent. The mere suggestion of such a provision in the law implies constitutional questions of great academic interest.

In the course of the oral argument to this court the jurisdiction of the District Court was raised as to the cause of action of American Surety Company, it having paid less than $3,000 on the loss caused by Crowe's dishonesty. We hold that the District Court had jurisdiction upon the ground that both claims were based upon one subject matter, which concerned the recovery of more than the jurisdictional requirement of $3,000. For further exposition of the matter, see Troy Bank v. Whitehead & Co., 222 U.S. 39, 32 S.Ct. 9, 56 L. Ed. 81.

The trial court was right in holding that defendant is a citizen only of the state in which its principal place of business is located, the State of California. Diversity of citizenship having been established and the controversy having been shown to be greater in value than $3,000, jurisdiction lay in the trial court from which this appeal is brought.

Bases for the Claimed Bank Liability to Insurers.

Insurers contend that Bank incurred liability to Interior in breaching its contract with its depositor by charging the account of the latter with the amounts dispersed on checks bearing forged indorsements. They maintain, further, that they became subrogated to the rights of Interior against the Bank when they reimbursed Interior in the sum of money paid upon the fraudulent checks. Unless both contentions are correct, Insurers are not entitled to relief in the premises under the doctrine of subrogation.

Assuming, but not deciding, that Interior, had it not been compensated for its loss by Insurers, could have recovered directly from Bank, now that it has been so compensated, it does not seem to us that the facts of this case are sufficient to raise the equitable right of subrogation in favor of Insurers as against Bank. As we shall hereinafter show, in these circumstances the assignments of Interior's claim in no way improve Insurers' position.

The right of subrogation is a creature of equity, applicable where one person is required to pay a debt for which another is primarily responsible, and which the latter should in equity discharge. In theory one person is substituted to the claim of another, but only when the equities as between the parties preponderate in favor of the plaintiff. That is, a surety's right of recovery from a third party through subrogation does not follow, as of course, upon proof that the losing but recompensed party could have recovered from the third party. Accordingly, subrogation will not operate against an innocent person wronged by a principal's fraud. A surety may pursue the independent right of action of the original creditor against a third person, but it must appear that said third person participated in the wrongful act involved or that he was negligent, for the right to recover from a third person is merely conditional in contrast to the right to recover from the principal which is absolute. The equities of the one asking for subrogation must be superior to those of his adversary. If the equities are equal or if the defendant has the greater equity, subrogation will not be applied to shift the loss.

The basic principles set forth above are consistently reiterated in connection with the right of subrogation, and are clearly supported by the majority of reported decisions. The cases, dealing with the surety's alleged right of subrogation to the claim of the original creditor against a third party with whom the indemnitor is not in privity, indicate that the result reached depends upon a careful analysis of the facts involved. Obviously, we do not have before us an indemnity agreement running to any person injured, as so often appears in surety contracts of public officials, rather than to specifically named persons. Cases with the turning point as to subrogation correctly or incorrectly resting upon that fact should not be allowed to confuse the situation. The same may be said as to many opinions to be found in the books which erroneously, as we think, fail to note that the touchstone upon which subrogation, as to parties not under contractual...

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