Borserine v. Maryland Casualty Co.

• Decision Date: 18 July 1940
• Docket Number: No. 11640.,11640.
• Citation: 112 F.2d 409
• Parties: BORSERINE v. MARYLAND CASUALTY CO.
• Court: U.S. Court of Appeals — Eighth Circuit

112 F.2d 409 (1940)

BORSERINE v. MARYLAND CASUALTY CO.

No. 11640.

Circuit Court of Appeals, Eighth Circuit.

June 17, 1940.

Rehearing Denied July 18, 1940.

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Lyman Field and Clay C. Rogers, both of Kansas City, Mo. (C. Jasper Bell, of Kansas City, Mo., on the brief), for appellant.

Elliot Norquist, of Kansas City, Mo. (Paul G. Koontz and Harry F. Murphy, both of Kansas City, Mo., on the brief), for appellee.

Before GARDNER, SANBORN, and WOODROUGH, Circuit Judges.

SANBORN, Circuit Judge.

This appeal is from a judgment for the plaintiff, Maryland Casualty Company, in a suit brought to recover from L. H. Borserine, Jr., the amount which the Casualty Company, as the insurer and indemnitor of the Merchants Bank of Kansas City, Missouri, against loss from paying checks bearing forged endorsements, had paid in settlement of the liability of the bank upon eight checks received from Borserine bearing forged endorsements of the payees.

The facts are not in dispute and are in substance as follows:

B. C. Christopher & Company, the maker of the checks, was a firm engaged in the grain commission business in Kansas City, Missouri. In 1930 it had checking accounts in the First National Bank and the Fidelity National Bank & Trust Company, both of that city. Thomas Manning, as chief clerk of the Grain Department of the firm, was in charge of the grain accounts. It was his duty to see that customers of the firm who shipped grain to it were paid. When a shipment was received from a customer, Manning would requisition from the cashier of the firm a check payable to the customer for the amount due him. The check would be drawn by the firm upon one of the banks in which it had an account or would be a cashier's check purchased by the firm from one of those banks. The check would then be delivered to Manning to be remitted to the customer to whom it was payable. The firm did an extensive business and issued many checks. During the year 1930, among the checks requisitioned by Manning and delivered to him by his employer were the eight checks in suit, which aggregated $4,574.02. All of them were payable to customers of the firm. Three were drawn on the First National Bank, two upon the Fidelity National Bank & Trust Company, and three were cashier's checks of the First National Bank. The firm was not, at the time the checks were issued, indebted to the persons to whom the checks were payable and Manning did not procure the checks for the benefit of such persons but with the intention of forging their endorsements and cashing the checks in furtherance of a scheme which he had devised and was carrying on for the purpose of obtaining money for himself. He made false entries in the books to cover his defalcations. He forged the endorsements of the payees of the checks and cashed each of them at the B. & B. Pharmacy, a drug store owned and operated by L. H. Borserine, Jr. Manning was a frequenter of this drug store and was well known to Borserine, who had, at Manning's request, cashed many of the customers' checks drawn by the firm. Borserine had an account with the Merchants Bank of Kansas City, Missouri. He endorsed each of the checks "B. & B. Pharmacy, L. H. Borserine, Jr.", and received either cash or credit for them from that bank, which in turn endorsed them and put them through the Kansas City Clearing House, and thus received credit for them from the banks upon which they were drawn. The drawee banks then charged the checks (except cashier's checks) to the account of Christopher & Company, stamped the checks "paid" and returned them to the firm. In January, 1931, the firm first discovered that Manning had forged the endorsements of the payees of the checks and had appropriated the proceeds. It then demanded of the drawee banks the amount of the checks. These banks demanded that the Merchants Bank restore to them the funds represented by the checks, as required by a rule of the Clearing House. Suits were commenced by Christopher & Company against the banks on which the checks were drawn, and they demanded that the Merchants Bank defend the suits and indemnify them against loss. The Merchants Bank was insured by the Maryland Casualty Company against loss from paying checks bearing forged endorsements. After notifying Borserine of the alleged forgeries of the payee endorsements by Manning, the Merchants Bank demanded that the Casualty Company take over the defense of the suits brought by Christopher & Company against the drawee banks and protect the Merchants Bank from loss. The Casualty Company complied. In order to secure a discharge of the liability of the drawee banks and the Merchants Bank and a dismissal of the suits, the Casualty Company, in January, 1935, paid to Christopher & Company $3,651 in full settlement. On February 10, 1939, it brought this suit against Borserine, upon his endorsements of the checks, to recover the amount which it had paid Christopher & Company, claiming that it (the Casualty Company) had by equitable subrogation become the owner of the checks and had succeeded to all of the rights of the Merchants Bank against Borserine as an endorser of the checks, to the extent of the Casualty Company's payment to Christopher & Company.

In his answer Borserine asserted: (1) That the Casualty Company had stated no cause of action upon which relief could be granted. (2) That its cause of action was barred by limitations and by laches. (3) That the Casualty Company had discharged a liability that it was under no legal obligation to pay, (a) because Christopher & Company, after its discovery of the forgeries of Manning, elected to demand restitution of him and his surety, and his surety paid the loss, and thereby the maker of the checks ratified Manning's acts in endorsing the checks; (b) because the maker in issuing the checks did not take precautions which would have disclosed that the checks were payable to persons to whom no money was owing, and held Manning out as its agent with authority to negotiate checks issued by it; and (c) because it was negligent in not inspecting the cancelled checks returned to it and thereby discovering the forgeries. On motion of the plaintiff, so much of the defense as was based upon the charge that Christopher & Company had elected an inconsistent remedy by demanding payment from Manning and his surety was eliminated, over the objection of the defendant. The remaining issues were tried to the court.

The court found the facts to be substantially as we have stated them. It found that Christopher & Company knew nothing of the forgeries until January, 1931; that audits were made by public accountants for the firm for the years 1929 and 1930, but the forgeries were not discovered and were not easily ascertainable from an examination of the books. The court concluded that it had jurisdiction; that the Merchants Bank and the drawee banks were not required to verify the endorsements of the payees of the checks and were entitled to rely upon Borserine's endorsements; that Borserine, being the initial acceptor of the checks, was obligated to verify the endorsements of the payees, and that by his endorsements he guaranteed the genuineness of the payee endorsements; that the plaintiff's right of action accrued January 17, 1935, the day it paid Christopher & Company, and was not barred by limitations; that Christopher & Company was not guilty of such negligence in the issuance of the checks or the discovery of the forged endorsements as would bar its right of recovery from the drawee banks, and that the payment made by the Casualty Company was in discharge of a valid obligation.

The contentions of Borserine are:

(1) That the court was without jurisdiction because of ß 41(1), Title 28 U.S.C., 28 U.S.C.A. ß 41(1), which denies to federal courts jurisdiction of any suit "to recover upon any promissory note or other chose in action in favor of any assignee, or of any subsequent holder if such instrument be payable to bearer * * * unless such suit might have been prosecuted in such court to recover upon said note or other chose in action if no assignment had been made."

(2) That plaintiff was not entitled to equitable subrogation, since it discharged its own primary obligation, since its equities were not superior to those of Borserine, and since it made only part payment.

(3) That the checks and all endorsers were discharged by payment of the checks.

(4) That no recovery could be had against Borserine for money had and received, (a) because he was not negligent, and (b) because such a cause of action was barred by limitations.

(5) That the drawee banks, the Merchants Bank, and the plaintiff were under no legal obligation to reimburse Christopher & Company, (a) because, when it demanded payment from the forger's surety it thereby released all others from liability, and (b) because it was guilty of negligence.

Before considering the legal aspects of the case, it may be helpful to summarize the practical aspects of it. Christopher & Company issued these checks in the ordinary course of its business upon the representation of Manning, a trusted employee, that the payees were entitled to the checks. Borserine, at his own risk, cashed these checks for Manning in reliance upon Manning's honesty and in the belief that the payees had endorsed the checks. When Borserine endorsed the checks he guaranteed that the payee endorsements were genuine and in effect undertook to pay the checks himself if they were not genuine. The Merchants Bank, in accepting the checks from Borserine and giving him cash or credit, did so in reliance upon his endorsements. The drawee banks paid the checks in reliance upon the guaranty of the Merchants Bank that the payee endorsements upon the checks were genuine and upon its implied undertaking to refund the proceeds if they were not. The Casualty Company was a stranger to all parties connected with the checks except the Merchants Bank. It...