Liberty Mut. Ins. Co. v. Thunderbird Bank
| Decision Date | 12 November 1975 |
| Docket Number | CA-CIV,No. 1,1 |
| Citation | 542 P.2d 39,25 Ariz.App. 201 |
| Parties | LIBERTY MUTUAL INSURANCE COMPANY, a corporation, Appellant, v. THUNDERBIRD BANK, Appellee. 2533. |
| Court | Arizona Court of Appeals |
Appellant, Liberty Mutual Insurance Company (Liberty), brought this action against several defendants, incuding appellee, Thunderbird Bank (Thunderbird), seeking to recover monies it had paid to its principal, the Charles Bruning Company (Bruning), under a fidelity bond. The trial court granted Thunderbird's motion for summary judgment, and after a formal written judgment containing the requisite language of Rule 54(b), Rules of Civil Procedure, this appeal was perfected.
The basic facts giving rise to this action are not in dispute. Between June 1, 1964 and March 24, 1967, James L. Coffelt was the Phoenix, Arizona, branch manager of the Charles Bruning Company. During the period from approximately April 1, 1966 to approximately March 20, 1967, Coffelt intercepted over 200 checks payable to his employer in the approximate sum of $179,000, and without authority appropriated the proceeds to himself.
Substantially all of the checks were cashed for Coffelt by Arnold Ong, owner of Gene's Modern Market in Glendale, Arizona, on the endorsement: 'Charles Bruning Co. by J. L. Coffelt.' Ong, in turn, endorsed the checks for deposit to his account at Thunderbird. The checks were then presented to the drawee banks in the normal course of banking business and charged to the accounts of the various customers of Bruning.
During the period involved, Liberty had a surety contract (sometimes referred to as a fidelity bond) with Bruning, insuring it against pecuniary loss sustained by reason of fraud, dishonesty, forgery, theft or embezzlement of its employees. Upon being notified by Bruning of the defalcation of Coffelt, Liberty paid Bruning the sum of $175,197.13, and received an assignment from Bruning of its claims against all of the defendants, including Thunderbird. In addition, under the terms of the fidelity bond, Liberty became subrogated to any claims Bruning had against the defendants.
Liberty then brought this action against Coffelt, Ong and Thunderbird. Cross-claims were filed by Thunderbird against Ong, and Ong against Coffelt. In addition, Thunderbird and Ong filed third-party complaints against Bruning. As previously indicated, the only issue before us on appeal is the granting of summary judgment to Thunderbird on Liberty's complaint.
For its defense to the suit by Liberty, Thunderbird contends that Liberty's claim and hence its remedy is equitable in nature. It argues that the claim is based upon the equitable doctrine of subrogation and that subrogation is only called into play to bring about an equitable adjustment between the parties. The theory holds that as between two innocent parties (the surety and the collecting bank), the equities do not balance in favor of the surety since it received compensation for undertaking the risk and the bank did not participate in the wrongful act of the employee.
The fundamental question which is to be decided in this case is whether, as a matter of law, Liberty has stated a claim against Thunderbird for which the law will allow recovery. This depends upon whether Liberty's claim is identical to that which Bruning could have asserted against Thunderbird, or whether it is a substituted claim based on equitable principles and brought into existence by the doctrine of subrogation. The issue is brought squarely into focus by reason of the 'assignment' made by Bruning to Liberty which Liberty contends makes it unnecessary for Liberty to demonstrate 'equities' superior to those of Thunderbird. In one sence, the ultimate question is whether the rights claimed here are legal or equitable in nature.
Our analysis must inevitably take us to the law of subrogation, but first it is necessary to examine the cause of action originally accruing to Bruning when it discovered that its checks had been misappropriated.
For the purpose only of this appeal, the parties do not dispute that Bruning could have recovered the stolen funds from Thunderbird. While it is recognized as a harsh rule, the payee of a check may recover the proceeds from an intermediate collecting bank when at the outset it was cashed elsewhere by means of a forged or unauthorized endorsement and payment has been procured from the drawee bank. See Merchants and Manufacturers Association v. First National Bank, 40 Ariz. 531, 14 P.2d 717 (1932), where the court held:
A check made payable to an individual or corporation is an order on the drawee to pay the amount of such check out of the drawer's funds to the payee, and can be paid to no one else without the payee's consent or authority. If the drawee of the check pays it, or anyone else, bank or individual, in the course of business takes it with an unauthorized or forged indorsement, it is at the risk of having to make it good to the payee. (40 Ariz. at 536, 14 P.2d at 718.)
The theory of recovery in the Merchants and Manufacturers Association case was that the cashing bank was required to account to the payee for money had and received. Decisions in other jurisdictions have permitted recovery on theories of conversion and negligence. Whatever may be the nature of the cause of action, we need not dwell upon it in this case as it would be collateral to the issues before us. In general, see cases collected at 100 A.L.R.2d 670, 'Right of check owner to recover against one cashing it on forged or unauthorized indorsement and procuring payment by drawee.' See also 10 Am.Jur.2d Banks, § 632.
Turning to the facts of this case, we see that Bruning elected to sue neither the original drawers of the checks nor Thunderbird, but chose instead to recover the lost funds from Liberty under the fidelity bond protecting it against dishonest employees. Upon payment of the claim in full, Bruning assigned to Liberty its rights against all parties responsible for the loss. Although Thunderbird contends that recovery should be barred by reason of an election of remedies by Bruning, we have decided this case on other grounds and thus do not deal with this issue.
Having paid Bruning for the loss, does Liberty now stand squarely in the shoes of Bruning for the purpose of recovering against Thunderbird? Liberty contends that it does by reason of the assignment. Thunderbird contends that it does not, because the original claim has been discharged by Liberty's payment to Bruning and its rights are now equitable in nature as they arise by reason of subrogation. Thunderbird argues that the assignment can add nothing to these rights as they are created by operation of law. A fidelity bond is a contract whereby, for a consideration, one agrees to indemnify another against loss arising from the want of honesty, integrity, or fidelity of an employee or other person holding a position of trust. Upon payment to an employer of a loss, the surety on a fidelity bond is subrogated pro tanto to any right of action which the employer may have against the defaulting employee. The surety's right to subrogation has also been held to extend to any right of action existing in favor of the employer against a third person who may have been involved with the defaulting employee or who was chargeable with notice of his wrongful acts, particularly where the third person benefited from the transaction. See 35 Am.Jur.2d, Fidelity Bonds and Insurance, §§ 1, 101.
The right to recover based on subrogation arises by operation of law under principles of equity, not by reason of contract. D. W. Jaquays & Co. v. First Security Bank, 101 Ariz. 301, 419 P.2d 85 (1966). It has been described by the Arizona Supreme Court as follows:
. . . Subrogation is the substitution of another person in the place of a creditor, so that the person in whose favor it is exercised succeeds to the rights of the creditor in relation to the debt. It is a creature of equity, and was adopted from the Roman and not from the common law. Its purpose is the prevention of injustice and is the mode which equity adopts to compel the ultimate payment of a debt by one who in justice, equity and good conscience ought to pay it. It rests upon the principle that substantial justice should be attained, regardless of form. While the nature and grounds of subrogation are very clear, the difficulty arises in its application to the innumerable complications of business, and no general rule can be stated which will afford a test in all cases for its application. Whether it is applicable or not depends upon the particular facts and circumstances of each case as it arises. (Mosher v. Conway, 45 Ariz. 463, 468, 46 P.2d 110, 112 (1935).)
We must first determine then whether the undisputed facts of this case give rise to recovery by way of subrogation against Thunderbird. We hold they do not.
A crucial factor leading to this conclusion is that Thunderbird, the collecting bank, did not deal with Coffelt, the dishonest employee. As is seen from the facts, Coffelt wrongfully endorsed the checks which were then, in each instance, cashed by Arnold Ong, doing business as Gene's Modern Market. Thereafter, Ong deposited the checks to his account at Thunderbird for collection. There is nothing in the record to show that Thunderbird had any connection with these transactions other than to handle the checks for collection upon Ong's direction and endorsement in the normal course of its banking business. While it is conceded that Thunderbird might have been liable to Bruning had the latter brought its claim against it, there is no basis in equity for Liberty to recover against Thunderbird on...
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Liberty Mut. Ins. Co. v. Thunderbird Bank
...for review by plaintiff Liberty Mutual Insurance Company ('Liberty') of an opinion of the Court of Appeals, Division One, 25 Ariz.App. 201, 542 P.2d 39, affirming an order of the trial court denying Liberty's motion for summary judgment and granting the motion of the defendant Thunderbird B......