Nat. Union Fire Ins. Co. v. Riggs Nat. Bank

• Decision Date: 18 August 1994
• Docket Number: No. 93-SP-1278.,93-SP-1278.
• Citation: 646 A.2d 966
• Parties: NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Petitioner, v. The RIGGS NATIONAL BANK OF WASHINGTON, D.C., Respondent.
• Court: D.C. Court of Appeals

646 A.2d 966

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Petitioner, v. The RIGGS NATIONAL BANK OF WASHINGTON, D.C., Respondent.

No. 93-SP-1278.

District of Columbia Court of Appeals.

Argued May 24, 1994.

Decided August 18, 1994.

Edward G. Gallagher, Washington, DC, for petitioner.

Eva Petko Esber, with whom Nancy F. Preiss and Karen L. Peck, Washington, DC, were on the brief, for respondent.

Before STEADMAN, SCHWELB and FARRELL, Associate Judges.

STEADMAN, Associate Judge:

Before the court is a certified matter from the United States Court of Appeals for the District of Columbia Circuit relating to the applicability of the so-called "superior equities doctrine" in an action against a drawee bank by an insurance company as a conventional subrogee and assignee of its insured, a depositor in the bank. National Union Fire Ins. Co. v. Riggs Nat'l Bank, 303 U.S.App. D.C. 302, 5 F.3d 554 (1993). We conclude, given the facts described below, that under District of Columbia law, the superior equities doctrine does not apply to this action.

I.

The facts relevant to the questions certified are as follows.¹ Between April 20, 1990, and May 14, 1990, unknown individuals cashed 14 fraudulent checks,² totalling $640,712.38, drawn on the account of NHP Property Management, Inc. ("NHP") at the defendant Riggs National Bank ("Riggs"). On June 22, 1990, NHP requested that Riggs recredit its account for the loss. After Riggs formally denied the request on November 15, 1990, NHP submitted its proof of loss to National Union Fire Insurance Company ("National Union") and was paid $597,980 ($640,712.38 less $32,732.38 recovered from a third-party bank and a $10,000 deductible).

Section 14 of NHP's policy with National Union provides in relevant part:

In the event of any payment under this Policy, the Company shall be subrogated to all the Insured's rights of recovery therefor against any person or organization and the Insured shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights.

Pursuant to this provision, NHP assigned National Union all its rights against Riggs and agreed to be bound by the result of the suit.

National Union filed this suit against Riggs as an assignee and, by virtue of Section 14 of the policy, as a conventional subrogee of NHP. After a bench trial, the district court found that Riggs had complied with reasonable commercial standards in processing the checks and therefore was not negligent. The district court further held that, despite the clear presumption in the Uniform Commercial Code ("UCC") favoring the depositor against the bank,³ District of Columbia law requires a balancing of the equities when the depositor's insurer brings suit to recover from a bank, either by way of assignment or subrogation. Therefore, under the superior equities doctrine, as between two innocent parties—National Union and Riggs—the equities balanced in favor of Riggs. National Union appealed, asserting that the superior equities doctrine does not apply when the insurer sues as an assignee and conventional subrogee, as opposed to an equitable subrogee.

Pursuant to D.C.Code § 11-723 (1989), the United States Court of Appeals for the District of Columbia Circuit certified the following questions to us:

I. Under District of Columbia law, and given the facts described, does the superior equities doctrine apply to an action by an insurer as an assignee and conventional subrogee of its insured?

II. Under District of Columbia law, and given the facts described, does the adoption of the Uniform Commercial Code abrogate or modify the superior equities doctrine?

II.

A.

Subrogation—the substitution of one person in the place of another with reference to a lawful claim, demand, or right so that the substituted party succeeds to the rights of the other, BLACK'S LAW DICTIONARY 1427 (6th ed. 1990)—developed as a device of equity "established as a matter of necessity for the purpose of administering essential justice." 11 JOHN ALAN APPLEMAN AND JEAN APPLEMAN, INSURANCE LAW AND PRACTICE § 6502 (1981); see John D. O'Malley, Subrogation Against Banks on Forged Checks, 51 CORNELL L.Q. 441, 444 (1966). Where one party has paid the debt of another, justice requires that the payor be able to recover his loss from the one who should have paid it, to prevent unjust enrichment.⁴ APPLEMAN, supra, § 6502; see Washington Mechanics' Savings Bank v. District Title Ins. Co., 62 App.D.C. 194, 196, 65 F.2d 827, 829 (1933). The rights of the party who paid the debt in no way depend upon showing a contract provision or formal assignment; evidence of payment is sufficient. London Guarantee and Accident Co. v. Enterprising Servs. Inc., 192 A.2d 292, 293 (D.C.1963).

Where, therefore, the right of the party seeking subrogation stems solely from this equitable principle, it is understandable that the thought arose that the doctrine may be invoked only where the equities of the party seeking to benefit are "greater than those of its adversary." Schrier v. Home Indemnity Co., 273 A.2d 248, 251 (D.C.1971); Washington Mechanics' supra, 62 App.D.C. at 196, 65 F.2d at 829. Otherwise, equity perceives no reason to vary the status quo. This so-called "superior equities doctrine" may be seen in its manifestation as the "compensated surety defense," which is invoked to bar a compensated surety from recovering from a third party who would be liable in a suit directly by the insured, unless the surety can show equities superior to the third party. We have applied this principle in several cases in this jurisdiction, most notably Washington Mechanics, Schrier, and American Sec. Bank v. American Motorists Ins. Co., 538 A.2d 736 (D.C.1988).

However, the case now before us is different. Here, the claim of the surety does not depend upon invoking an equitable principle of unjust enrichment. Rather, it flows from the express agreement of the insured that the surety shall be subrogated, here accompanied by an assignment to the surety of the insured's cause of action against the bank. This "conventional subrogation" arises from an express or implied agreement between the payor and the debtor or creditor, in contrast to "equitable subrogation," which arises from the mere fact of payment by a third party. APPLEMAN, supra, § 6501.

In a case involving facts quite similar to those here, we recently took note of the potential difference between these two quite distinct doctrinal bases for invocation of the right to recover from a third party. In American Sec. Bank, supra, an insured depositor discovered twenty-four forged checks and notified the bank. 538 A.2d at 737. After the bank refused to recredit the depositor's account for the amount it had paid on the forged checks, the depositor was reimbursed by the insurer for the full amount. The insurer then sued the bank for that amount. The bank challenged the insurer's right to do so. We noted:

Because the insurer did not produce the necessary declarations page of its insurance policy with ASPEN the insured, the trial court deemed the policy inadmissible. The insurer thus failed to prove conventional subrogation. See 16 COUCH ON INSURANCE 2D §§ 61:2, 61:3 (Rev. ed. 1983) (distinguishing conventional subrogation arising out of contract from subrogation by operation of law). Nevertheless, under equitable principles, the insurer's payment to ASPEN for its insurance claim conferred upon it "instanter" the right to sue in ASPEN's stead.

Id. at 737 n. 1.⁵ Since equitable subrogation was thus involved, we then went on to deal with the bank's argument, based on the superior equities doctrine, without suggesting, however, that the doctrine would necessarily also have applied had the insurer proven conventional subrogation. That is the issue we must decide on this certified matter.

B.

As American Sec. Bank indicates and as the United States Court of Appeals observed in its order of certification, we agree that prior case law has not definitively resolved the issue here. Although admittedly a broader reading is possible, we think the decisions have rested upon a factual postulate of equitable subrogation and its concomitant analysis,⁶ and we do not view their inclusion in supporting citations of cases in other jurisdictions involving conventional subrogation as determinative of the issue before us, particularly where conventional subrogation is coupled with an express assignment.⁷

Case law from other jurisdictions presents a mixed picture, with three basic approaches to the issue. First, a few states do not apply the superior equities doctrine to equitable subrogation, conventional subrogation, or assignment. Indeed, commentators have noted that not only has the compensated surety defense "outlived any usefulness that it may once have had," but in the modern world "the `superior equity' doctrine is arbitrary in giving to an insured the choice of allocation of ultimate loss, and unjust in increasing the burden of the insured because of his foresightedness in insuring," E. Allan Farnsworth, Insurance Against Check Forgery, 60 COLUM.L.REV. 284, 324 (1960); moreover, in light of the fact that the vast majority of modern banks are insured against forgery, shifting the loss from one surety to another makes little sense, O'Malley, supra, at 463. See also, e.g., Hartford Fire Ins. Co. v. Riefolo Constr. Co., 81 N.J. 514, 410 A.2d 658, 662 (1980) (rejecting doctrine of superior equities and allowing subrogation as long as insured and insurer have not engaged in behavior which would make such relief unconscionable); South Carolina Nat'l Bank v. Lake City State Bank, 251 S.C. 500, 164 S.E.2d 103, 106 (1968) ("serious challenges have been levied against the usefulness and practicality of the compensated surety defense under modern banking practices").

Some jurisdictions have chosen a second approach and adopted the superior equities doctrine in all cases of equitable or...