Liberty Mut. Ins. Co. v. First Nat. Bank in Dallas

• Court: Texas Supreme Court
• Writing for the Court: CALVERT
• Citation: Liberty Mut. Ins. Co. v. First Nat. Bank in Dallas, 151 Tex. 12, 245 S.W.2d 237 (Tex. 1951)
• Decision Date: 12 December 1951
• Docket Number: No. A-3266,A-3266
• Parties: LIBERTY MUT. INS. CO. v. FIRST NAT. BANK IN DALLAS.

Page 237

245 S.W.2d 237

151 Tex. 12

LIBERTY MUT. INS. CO. v. FIRST NAT. BANK IN DALLAS.

No. A-3266.

Supreme Court of Texas.

Dec. 12, 1951.

Rehearing Denied Jan. 30, 1952.

Brundidge, Fountain, Elliott & Bateman, Dallas, for petitioner.

Coke & Coke, Thomas G. Murnane and Malone, Lipscomb & Seay, all of Dallas, Greines & Greines, Fort Worth, for respondents.

CALVERT, Justice.

The controlling facts in this case are relatively few and simple. Liberty Mutual Insurance Company-hereafter referred to as Liberty Mutual-had in its employ as its claims manager and adjuster in its Ft. Worth office from December 16, 1946 to March, 1949, one Willard Hill. During this same period Liberty Mutual had an account in First National Bank in Dallas-hereafter referred to as Bank-and carried with Fidelity & Deposit Company of Maryland-hereafter referred to as Fidelity-a policy insuring it against loss sustained by reason of the dishonest acts of its employees. Over the period Hill illegally obtained the sum of $13,209.37 by inducing Liberty Mutual to issue and deliver to him its checks payable to fictitious claimants-some non-existent and some existent but to whom Liberty Mutual was not indebted-in settlement of fake claims, which checks were endorsed by him with the names of the fictitious payees and cashed. Checks in the sum of $6750.86 were drawn on Bank and upon being received in due course of business were honored and charged by Bank against Liberty Mutual's account. Upon discovery of its employee's fraud, Liberty Mutual made claim against Fidelity, and, coincident with payment of its claim, assigned to Fidelity its cause or causes of actions against all depository banks to require that debits against Liberty Mutual's account, based on such checks, be eliminated, that proper credits be made, or that money equal to the amount of such checks be paid over. Suit in Liverty Mutual's name was authorized. Pursuant to the terms of the assignment this suit against Bank was instituted in the name of Liverty Mutual. Prior endorsers were brought into the suit by Third Party and Fourth Party actions over.

Bank's principal defense and that upon which the trial court's judgment in Bank's favor was affirmed by the Court of Civil Appeals was that by pursuing its remedy against Fidelity, Liberty Mutual had made an election between inconsistent remedies thereby extinguishing its cause of action against Bank, leaving it with no cause of action to assign. Tex.Civ.App., 239 S.W.2d 738.

Other defenses urged by Bank-and urged here as independent reasons for affirmance of their favorable judgment-were: (1) That Liberty Mutual's loss resulted directly and primarily from its own negligence in failing to provide itself with a better system for supervising the activities of Hill and in failing to sooner discover that the checks were being charged to its account; (2) That since Hill knew the payees in the various checks were fictitious persons the checks were, in fact, payable to bearer and Bank and was therefore not liable; and (3) That the cause of action was barred in one year by Article 342-711, Vernon's Ann.Civ.St., or, in the alternative, that it was barred by Article 5526 as to all checks paid and charged against Liberty Mutual's account more than two years prior to the institution of suit. We shall first dispose of these contentions.

The burden of respondent's first contention is that since the record reflects that no periodic check of Hill's activities was made by other officers or employees of Liberty Mutual and no evidence was offered to show that monthly statements and cancelled checks were examined for forged signatures of fictitious payees, there is evidence to support an implied finding by the trial court that Liberty Mutual's loss was caused by its own negligence. In support of its contention respondent relies chiefly upon the opinion of this court in the case of Strickland Transportation Company v. First State Bank of Memphis, 147 Tex. 193, 214 S.W.2d 934 and a number of cases decided by the courts of other states. Although there is perhaps language in the opinion in the Strickland case which would seem to hold Liberty Mutual responsible in this case for its own loss by virtue of its negligence, the facts in the two cases are obviously distinguishable. The holding in the Strickland case is limited to the facts there involved. The reasoning of the courts in the cases from other states might be persuasive if the question had not been decided and set at rest in this state. In its opinion in the case of Liberty State Bank et al. v. Guardian Savings & Loan Association, 127 Tex. 311, 94 S.W.2d 133, this court held that the depositor was under no duty to examine the signatures of payees appearing on his cancelled checks and drafts and that his failure to discover that signatures of payees had been forged would not constitute negligence. See also Greenville National Exchange Bank et al. v. Nussbaum et al., Tex.Civ.App., 154 S.W.2d 672, 678, 680 (Ref. W.O.M.) and Republic National Bank of Dallas et al. v. Maryland Casualty Co. et al., Tex.Civ.App., 184 S.W.2d 496, 499 (no writ hist.).

Moreover, there is no evidence here that greater diligence would have led to an earlier discovery of the fraud. The testimony of Hill-the only testimony on the question-was to the effect that the files had been so cleverly faked that an examination thereof would not have brought to light the spurious nature of the claims. Not knowing the signatures of the various payees in the checks an inspection of the cancelled checks would not have reflected the forged endorsements. We do not agree with respondent that the judgment in its favor can be sustained on this ground.

Neither can we agree that respondent was relieved of liability under its implied contract with petitioner on the ground that the checks, having been made payable to fictitious payees with the knowledge of Hill, were payable to bearer. Respondent's contention seems to be founded upon paragraph 3, section 9, Article 5932, V.A.C.S., which provides that an instrument is payable to bearer 'when it is payable to the order of a fictitious or nonexisting person, and such fact was known to the person making it so payable'. There is no evidence here that Liberty Mutual, the nominal drawer of the checks, knew that the checks were payable to fictitious persons. Neither is there any evidence that the employee actually signing the checks knew that they were payable to fictitious persons. But respondent contends, in effect, that Hill was actually the person making the checks payable to fictitious persons since the writing of the checks by a minor employee was but a mere formaility attendant upon Hill's requisition. It is then contended that by the language of the Article above quoted it is the knowledge of Hill, 'the person making it so payable', and not the knowledge of Liberty Mutual, the nominal maker or drawer, that determines the character of the checks.

There is a division of authority on the question of whether under the statutory language above quoted the character of commercial paper payable to the order of a fictitious person is determined by the knowledge of the nominal maker or drawer or by the knowledge of the signer of the paper. See 10 C.J.S., Bills and Notes, § 129, p. 580. There is respectable and well reasoned authority supporting the view that the knowledge of the nominal maker or drawer controls; Seaboard Nat'l Bank v. Bank of America, 193 N.Y. 26, 85 N.E. 829, 22 L.R.A., N.S., 499; American Sash & Door Co. v. Commerce Trust Co., 332 Mo. 98, 56 S.W.2d 1034 ('Obviously it is the intention of the responsible creator of the paper which governs'); Home Indemnity Co. v. State Bank of Fort Dodge, 233 Iowa 103, 8 N.W.2d 757; 7 Amer.Jur., p. 839, Sec. 95, p. 844, Sec. 102); although perhaps the weight of authority supports the view that the knowledge of the actual signer controls. Mueller & Martin v. Liverty Ins. Bank, 187 Ky. 44, 218 S.W. 465; Union Bank & Trust Co. of L. A. v. Security-First Nat'l Bank of L. A., 8 Cal.2d 303, 65 P.2d 355; Britton on Bills & Notes, p. 699; Beutel's Brannan Negotiable Instruments Law, 317-329. The precise question has not been decided in this State and we find it unnecessary to decide it now, for Bank cannot prevail on its defense even under the theory it has adopted. Hill was not 'the person' making the check 'so payable' within the meaning of the Act. The idea that he was because the actual signer of the checks was subservient to Hill's orders and was therefore but an automaton or an instrument through which Hill acted is not without force, but the identical idea was rejected by the Supreme Court of Iowa in the case of Home Indemnity Co. v. State Bank of Fort Dodge, supra, 8 N.W.2d at page 772, where it was contended that the actual signer 'was but an automaton, a mechanical device, or marionette, as it were, without mind or intention, operated by Noland.' It is also rejected here. A good reason for its rejection is suggested in Beutel's Brannon Negotiable Instruments Law, Seventh Edition, p. 317, where it is said that 'any attempt to decide how far' the signer 'uses his mind in examining the payee's name on a check and how far he uses his hand only would lead to endless fine distinctions.'

Respondent's third contention raises the question of the applicable period of limitations within which a cause of action such as is involved here shall be asserted. Respondent says that the one-year period set up in Article 342-711, V.A.C.S. is applicable, and, in the alternative, that the general two-year period set up in Article 5526, V.A.C.S., is applicable. On the other hand, petitioner contends that by virtue of the provisions of Article 342-707, V.A.C.S., the general four-year period set up in Article 5527 is applicable. Prior to enactment in 1943 of the Texas Banking Code, of which Articles 342-711 and 342-707 are a part, the general two-year statute rather than...