Bank of Fort Mill v. Lawyers Title Insurance Corp.

• Decision Date: 15 June 1959
• Docket Number: No. 7837.,7837.
• Citation: 268 F.2d 313
• Parties: BANK OF FORT MILL, a Corporation, Appellant, v. LAWYERS TITLE INSURANCE CORPORATION, a Corporation, Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

268 F.2d 313 (1959)

BANK OF FORT MILL, a Corporation, Appellant, v. LAWYERS TITLE INSURANCE CORPORATION, a Corporation, Appellee.

No. 7837.

United States Court of Appeals Fourth Circuit.

Argued April 15, 1959.

Decided June 15, 1959.

Huger Sinkler and Charles H. Gibbs, Charleston, S. C. (Wm. C. Boyd, Boyd, Bruton & Lumpkin, Columbia, S. C., and Sinkler, Gibbs & Simons, Charleston, S. C., on brief), for appellant.

Edward D. Buckley, Charleston, S. C. (Bailey & Buckley, Charleston, S. C., on brief), for appellee.

Before SOBELOFF, Chief Judge, SOPER, Circuit Judge, and BOREMAN, District Judge.

BOREMAN, District Judge.

Lawyers Title Insurance Corporation, herein referred to as Lawyers, brought action against the Bank of Fort Mill, herein referred to as defendant Bank, and from a judgment in favor of Lawyers, defendant Bank prosecutes this appeal.

Lawyers issued its policy of title insurance to Perpetual Building and Loan Association insuring the title of one Berford F. Sims to real property in Charleston, South Carolina, in connection with a mortgage loan which Perpetual intended to make to Sims. One Robert B. Stall, Jr., a practising lawyer of Charleston, South Carolina, who was listed in Lawyers roster of approved attorneys, negotiated the loan, procured for Perpetual the policy of title insurance and closed the loan. Without authority, Stall had signed Sims' name to the note and mortgage and certified the title to the mortgaged property as being in Sims, which certification was utterly false, the title being in a stranger to the transaction.

Perpetual had funds on deposit with defendant Bank and drew its check for the amount of the mortgage loan against such funds, making the check payable to the order of both Sims, the purported borrower, and Stall, Atty. Stall then endorsed the check, forged Sims' name thereon as endorser and deposited the proceeds to his own account with the First National Bank of South Carolina in Charleston. The last named bank, after crediting the amount of Perpetual's check to Stall's account, forwarded the check to defendant Bank for payment, with the usual unconditional guarantee of prior endorsements. The defendant Bank paid the check and charged it against Perpetual's account.

Through Stall's subsequent disclosures and admissions, the title defect became known and Lawyers, under the terms of its title insurance policy, paid Perpetual its loss, taking an assignment from Perpetual of all claims or causes of action arising out of the fraudulent transaction. Lawyers then brought this action against defendant Bank, claiming to be subrogated to Perpetual's alleged cause of action against defendant Bank for paying its depositor's check on a forged endorsement.

The District Court, sitting without a jury, held:

"Perpetual placed the borrower\'s name on the check in order to protect itself from the very thing which happened. The Bank by taking the forged endorsement unwittingly allowed Stall to consummate his fraud.

"If the check of Perpetual had not been honored, Perpetual * * * would have suffered no loss. Perpetual would still have had its funds and no matter how invalid the title might have been without loss there could have been no claim against plaintiff Lawyers.

"* * * Since the liability of the Bank to its depositor and plaintiff Lawyers to Perpetual rise under different obligations, plaintiff has never owed any duty to defendant, therefore, there is no reason for balancing equities.

"I can see no reason why the Bank should not pay its liability to plaintiff since it admits it is liable to its depositors."

This Court recognizes its duty to follow and apply South Carolina law and to decide the question whether the application of South Carolina law to the facts and circumstances here presented permits a paid surety to be subrogated to the right of the principal and to thus recover against an innocent drawee bank which has paid the check of the principal on a forged endorsement.

Counsel for the parties to this litigation agree that no specific South Carolina case is to be found which is directly in point and "on all fours to the case at bar". However, it seems to be well settled in South Carolina that the liability of a drawee bank to its depositor for paying a check mistakenly or on a forgery is absolute, and the question of negligence on the part of the bank is immaterial. Life Ins. Co. of Va. v. Edisto Nat. Bank, 1932, 166 S.C. 505, 165 S.E. 178. See, also, Ellis Weaving Mills v. Citizens & Southern Nat. Bank, D.C. W.D.S.C.1950, 91 F.Supp. 943, affirmed 4 Cir., 1950, 184 F.2d 43; Glens Falls Indem. Co. v. Palmetto Bank, D.C.W.D. S.C.1938, 23 F.Supp. 844, affirmed 4 Cir., 1939, 104 F.2d 671. Thus, the right of action which Perpetual had against defendant Bank was an absolute right of indemnity for paying Perpetual's check on a forged endorsement.

In the instant case, Lawyers contends that it is entitled to be subrogated to the right of Perpetual. By the overwhelming weight of authority, the right of subrogation is an equitable, rather than an absolute, right, applicable only where the equities of the party seeking subrogation are superior to those of the party against whom the right is asserted. See Note 1942, 137 A.L.R. 700. Also, it is the general view that a paid surety has fewer equities than an innocent bank, since the surety company is paid to assume the specific risk. American Surety Co. v. Bank of California, 9 Cir., 1943, 133 F.2d 160, affirming D.C.Or.1941, 44 F.Supp. 81; Washington Mechanics Savings Bank v. District Title Ins. Co., 1933, 62 App.D.C. 194, 65 F.2d 827; Meyers v. Bank of America Nat. Trust & Sav. Ass'n, 1938, 11 Cal.2d 92, 77 P.2d 1084; Louisville Trust Co. v. Royal Indem. Co., 1929, 230 Ky. 482, 20 S.W.2d 71. See Restatement, Security, § 141(c) (1941). Contra, First & Tristate Nat. Bank & Trust Co. of Fort Wayne v. Massachusetts Bonding & Ins. Co., 1936, 210 Ind. App. 361; 200 N.E. 449; Kansas City Title & Trust Co. v. Fourth Nat. Bank, 1932, 135 Kan. 414, 10 P.2d 896, 87 A.L.R. 334.

To support its contention, that the law of South Carolina is contrary to the general view and permits subrogation without regard to the equities of the parties, Lawyers relies strongly upon three South Carolina decisions mentioned and briefly discussed in the numbered paragraphs next following.

(1) In American Surety Co. v. Mills, 1939, 191 S.C. 362, 4 S.E.2d 308, 124 A.L.R. 1147, the Court expressly recognized the general law that subrogation is an equitable right but held the party against which liability was asserted by the party claiming the right of subrogation to be in an inferior equitable position in that it was constructively charged with negligence.

(2) Globe & Rutgers Fire Ins. Co. v. Foil, 1938, 189 S.C. 91, 200 S.E. 97, holds merely that where the tortious conduct of a third person is the cause of the loss covered by an insurance policy, the insurer, upon payment of the loss, becomes subrogated pro...