Fargo National Bank v. Massey-Ferguson, Inc.

• Decision Date: 29 August 1968
• Docket Number: No. 19075.,19075.
• Parties: FARGO NATIONAL BANK, a Corporation, Appellant, v. MASSEY-FERGUSON, INC., Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

400 F.2d 223 (1968)

FARGO NATIONAL BANK, a Corporation, Appellant, v. MASSEY-FERGUSON, INC., Appellee.

No. 19075.

United States Court of Appeals Eighth Circuit.

August 29, 1968.

COPYRIGHT MATERIAL OMITTED

John D. Kelly, of Wattam, Vogel, Vogel, Bright & Peterson, Fargo, N. D., for appellant; Philip B. Vogel, Fargo, N. D., on brief.

Charles A. Feste, of Conmy, Conmy & Feste, Fargo, N. D., for appellee; E. T. Conmy, Fargo, N. D., on brief.

Before MEHAFFY, GIBSON and LAY, Circuit Judges.

LAY, Circuit Judge.

This is a diversity suit brought by Massey-Ferguson, Inc. against Fargo National Bank to recover proceeds of checks made payable to Massey-Ferguson, Inc. and either cashed at the Fargo National Bank or deposited to a personal account in said bank by the latter's district manager by unauthorized endorsements. One T. A. Geering, Massey-Ferguson's district manager, converted these funds over a period of time extending from December 11, 1961 until early in 1965. The checks were drawn on various banks by dealers, made payable to Massey-Ferguson, Inc., and given to Geering as the district manager in payment of accounts with Massey-Ferguson. Geering would endorse Massey-Ferguson's name followed by his signature and endorse "deposit only" on the checks. The proceeds were deposited in Geering's personal checking account in the Fargo National Bank. Investigation disclosed that $60,814.11 had been thus diverted into Geering's hands. The suit was tried before the Honorable Ronald N. Davies in the District Court of North Dakota without a jury. The court entered judgment against the Bank in the sum of $47,618.74 plus interest from June 6, 1965, the date of demand by Massey-Ferguson against the Bank. The full facts and findings are set forth in the district court's opinion, 270 F. Supp. 227 (D.N.D.1967), and need not be repeated here.

Fargo National Bank urges on appeal (1) that since Massey-Ferguson was fully covered for the loss by a surety company there can be no recovery against the Bank under the doctrine of "compensated surety"; (2) that since Geering had both ostensible and implied authority to negotiate checks on Massey-Ferguson's behalf, Massey-Ferguson is precluded from recovery; (3) that Massey-Ferguson was negligent and is thereby precluded from recovery; (4) that Massey-Ferguson was not entitled to sue for "conversion" since the checks cashed were not issued in payment of obligations due and owing it; (5) that the trial court failed to give proper credit for all replacement funds; and (6) that Massey-Ferguson is not entitled to interest before judgment.

We find no merit in the Bank's claims and affirm the judgment.

Massey-Ferguson's cause of action is premised on the general rule that a bank acting upon an endorsement of negotiable paper must ascertain the genuineness of the endorsement at its own peril. If the instrument is forged or unauthorized the bank is liable for proceeds to the payee. 100 A.L.R.2d 670. This is the rule in North Dakota. See Fidelity & Cas. Co. v. First Nat'l Bank & Trust Co., 71 N.D. 465, 1 N.W.2d 401, 407 (1941).

(1) The doctrine of compensated surety rests upon the theory that a surety who has paid a loss has no standing to subrogate unless equitable considerations dictate otherwise. We agree with the trial court's analysis. No decision need be rendered as to whether this doctrine constitutes the law of North Dakota, since the district court found no evidence that the surety paid or had entered into any agreement with Massey-Ferguson dealing with this case. Under the circumstances, Massey-Ferguson is clearly the real party in interest and entitled to bring this claim.

(2), (3) The Bank's claim that Geering had either ostensible or implied authority to negotiate checks was argued before the district court and rejected. The trial court held that Geering's role as district manager did not in any way cloak him with the implied authority to negotiate checks drawn to Massey-Ferguson. The record clearly justifies this conclusion.

Ostensible authority relates to the acts of the principal which, either intentionally or by lack of ordinary care, induce third persons to accept the agency as one of fact although there has been no express or implied authority given to the agent. See N.D.Cent.Code § 3-02-02 (1959). The Bank's argument that Massey-Ferguson held Geering out as having ostensible authority is based upon Geering's authorization to collect the checks from the dealers. Controlling this contention, as well as the Bank's argument that Massey-Ferguson was negligent was N.D.Cent.Code § 41-02-23 (1959), which provided:

"Forged signature — Effect. Where a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority."¹

Massey-Ferguson's alleged preclusion from enforcing this right against the Bank is related to principles of estoppel under North Dakota law. Olsgard v. Lemke, 32 N.D. 551, 156 N.W. 102 (1916); First Nat'l Bank v. Plante, 60 N.D. 512, 235 N.W. 135 (1931). In Loff v. Gibbert, 39 N.D. 181, 166 N.W. 810, 811-12 (1918), the North Dakota Supreme Court, in discussing elements of estoppel, said:

"An equitable estoppel arises when one by his acts, representations, or admissions, or by his silence when he ought to speak out, intentionally or through culpable negligence induces another to believe certain facts to exist and such other rightfully relies and acts on such belief, so that he will be prejudiced if the former is permitted to deny the existence of such facts." (Emphasis ours.)

See also Tostenson v. Ihland, 147 N.W. 2d 104 (N.D.1966). Estoppel to deny Geering's authority requires reliance of the Bank on the acts or admissions of the principal, Massey-Ferguson. Conklin v. North Am. Life & Cas. Co., 88 N. W.2d 825 (N.D.1958). Under these circumstances, unless the Bank relied upon Massey-Ferguson's alleged culpable conduct in dealing with its agent, Massey-Ferguson is estopped neither by its alleged negligence nor by the ostensible or implied authority allegedly given to its agent. Cf. Smith v. Courant, 23 N.D. 297, 136 N.W. 781 (1912).

In terms of negligence, unless Massey-Ferguson's acts proximately caused the Bank's acceptance of the forged endorsement, the Bank cannot avail itself of the statutory defense of preclusion as to Massey-Ferguson's recovery. This is explained in a recent Fourth Circuit case R. Mars, The Contract Co. v. Massanutten Bank, 285 F.2d 158, 161 (4 Cir. 1960), where the Court of Appeals said:

"When an instrument is offered for negotiation or deposit, the primary obligation to determine whether there is

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