New York Cas. Co. v. Sazenski

• Decision Date: 09 October 1953
• Docket Number: No. 35837,35837
• Citation: 60 N.W.2d 368,240 Minn. 202
• Parties: NEW YORK CAS. CO. v. SAZENSKI.
• Court: Minnesota Supreme Court

Page 368

60 N.W.2d 368

240 Minn. 202

NEW YORK CAS. CO. v. SAZENSKI.

No. 35837.

Supreme Court of Minnesota.

Oct. 9, 1953.

Syllabus by the Court.

1. Under M.S.A. § 335.052(3) an instrument is regarded as payable to bearer when it is made payable to a fictitious or nonexisting person with knowledge of the maker that it is thus payable.

2. Where agent abandons object of agency and acts for self in committing fraud upon his principal, his capacity as agent ceases and his principal is not held to have constructive notice as to fraudulent nature of acts.

3. If, before title to check passes to person other than drawer, money is collected thereon through a forged endorsement, drawer may maintain action against person thus cashing it who later collects the amount thereof from drawee, even though person thus cashing check was ignorant of forgery. Casualty company, required by its policy to pay drawer amount of check fraudulently endorsed and charged by depository drawee against drawer's account, under principles of subrogation succeeded to rights of drawer as to remedies against party cashing check bearing forged endorsement.

4. Contract or bond insuring drawer and its drawee bank against loss resulting from fraud or forgery was not bond insuring integrity of any particular employee. Thereunder, insurer, having paid loss occasioned by employee's forgeries, succeeded to rights of drawer to proceed against party who cashed check on forged endorsement and subsequently received the amount thereof from drawee.

5. Drawer of check must examine it within reasonable time after cancellation to ascertain genuineness of his signature thereon and to determine that name of payee therein has not been changed or the amount thereof increased or altered. There is no duty upon such drawer to discover forged endorsement of payee where he would not be familiar with payee's signature. Delay in giving notice of discovery of forged endorsement does not affect drawer's right to use party negotiating forged instrument unless it be established that such delay damaged or prejudiced such party.

6. Negligence of drawer of checks in hiring dishonest employee and in unwittingly permitting him to requisition checks payable to fictitious persons so that he might forge endorsements thereon and cash checks, Held not to have affected conduct of party subsequently cashing such checks solely in reliance upon personal acquaintanceship with dishonest employee, so as to have been proximate cause of loss.

7. Defendant's actions in cashing checks with forged endorsements without investigation as to genuineness of endorsement; without inquiry as to how bearer obtained checks or his authority to possess them; without inquiry as to bearer's background; and without asking security or endorsement by financially responsible party, Held to be proximate cause of loss occasioned because of forged endorsements.

Robert Cowling and Walter P. Wolfe, Minneapolis, for appellant.

Fowler, Youngquist, Furber, Taney & Johnson, Minneapolis, for respondent.

THOMAS GALLAGHER, Justice.

The New York Casualty Company, hereinafter referred to as the Casualty company, instituted this action against Michael Sazenski, doing business as Mike's Bar, to recover $4,637.40 paid him by Farmers Union Grain Terminal Association, hereinafter referred to as Farmers Union, on 42 checks issued by the latter and cashed by defendant for a customer who had forged the endorsement of the payees thereon.

The Casualty company, under a policy issued by it to Farmers Union and its depository, American National Bank, had insured them both against loss occasioned by fraud or forgery. Under this policy it reimbursed Farmers Union for the loss sustained and received an assignment of all the rights of the latter against defendant. It then instituted this action against defendant as assignee and subrogee of Farmers Union. At the close of the testimony, the trial court directed a verdict in favor of the Casualty company. This is an appeal from an order denying defendant's subsequent motion for judgment notwithstanding the verdict or for a new trial.

The facts are as follows: In 1940 Farmers Union hired Howard E. Berke in a clerical capacity. Previous thereto he had been convicted and sentenced for forgery, although this was then unknown to Farmers Union. In 1943 he was transferred to the feed division of Farmers Union where he bought and sold feed; served as a bookkeeper; settled claims against Farmers Union; and issued requisitions to its cashier for checks to pay claims thus settled or for grain purchased by Farmers Union. The checks thus requisitioned were made out by the cashier, signed by proper officers of Farmers Union, and turned over to Berke for delivery to the payees designated therein.

Between March 1, 1944, and July 1, 1946, Berke fraudulently requisitioned 42 such checks totalling $4,637.40 made payable either to nonexisting payees or payees who had no interest in the proceeds thereof. Thereafter, from time to time Berke, after fraudulently endorsing the names of such payees therein, and at times adding his own endorsement thereto, would present the checks to defendant for cashing. Defendant, without further inquiry as to Berke's right to the checks or as to the endorsements thereon, cashed them and paid the proceeds thereof to Berke. Defendant in turn endorsed them to his depository bank, which in turn presented them for payment to American National Bank of St. Paul against whom, as depository of Farmers Union, they were drawn. American National Bank, after honoring the checks thus presented, would in the usual course of business charge the amounts thereof against the deposits of Farmers Union.

Berke's misconduct was discovered during the course of an official audit of Farmers Union made in the latter part of 1946 after the last of the checks here involved had been cashed. Defendant was first advised of Berke's misconduct on April 21, 1948, when American National Bank demanded reimbursement from him for the checks honored by it. This was refused by defendant. Farmers Union thereupon demanded and received reimbursement for its loss from the Casualty company under the policy described. This action followed.

On appeal defendant contends (1) that in substance the checks were payable to bearer or his order and, hence, were properly endorsed; (2) that under its policy the Casualty company was not authorized to institute this action; and (3) that Farmers Union was guilty of negligence and laches in failing to discover the fraud or notify defendant thereof until some four years after the first check was presented for payment, thus barring this action.

1. We are of the opinion that the checks in question were not 'bearer' checks or payable to the 'order' of the holder thereof. M.S.A. § 335.052(3) provides that an instrument is payable to bearer only 'When it is payable to the order of a fictitious or non- existing person, and such fact was Known to the person making it so payable; * * *.' (Italics supplied.) In construing the foregoing in Jorgensen Chevrolet Co. v. First Nat. Bank, 217 Minn. 413, 418, 14 N.W.2d 618, 621, 153 A.L.R. 588, we stated:

'* * * where a check is payable to a nonexisting person and the drawer Does not know that the payee is nonexistent and intends no fraud, the check is not payable to bearer.'

The test is whether the maker or drawer of the instrument knew and intended that the instrument was to be made payable to a fictitious person. City of St. Paul v. Merchants' Nat. Bank, 151 Minn. 485, 187 N.W. 516, 22 A.L.R. 1221; Home Indem. Co. of New York v. State Bank, 233 Iowa 103, 8 N.W.2d 757; Los Angeles Inv. Co. v. Home Sav. Bank, 180 Cal. 601, 182 P. 293, 5 A.L.R. 1193; Swift & Co. v. Bankers Trust Co., 280 N.Y. 135, 19 N.E.2d 992; 7 Am.Jur., Bills and Notes, § 95; 10 C.J.S., Bills and Notes, § 129.

Here the checks were made by the cashier of Farmers Union upon the requisition of Berke. There is no evidence that the cashier or any other official of Farmers Union either knew that the payees described therein were fictitious, or intended that the checks should be issued to nonexisting persons. On the contrary, the evidence clearly establishes that the cashier intended that the payees named in such checks should receive payment thereof because of valid claims possessed by them against Farmers Union.

2. Defendant contends that Berke was in reality the drawer of the checks; that the cashier of Farmers Union was merely an automaton acting upon his direction; and that Berke's knowledge that the payees in such checks were fictitious was, therefore, imputable to Farmers Union so as to make the checks bearer instruments.

We do not agree with this. When an agent or employee abandons the object of his agency and acts for himself in committing a fraud upon his principal, his capacity as agent ceases. Blumberg v. Taggart, 213 Minn. 39, 5 N.W.2d 388; Rudd Lbr. Co. v. Anderson, 161 Minn. 353, 201 N.W. 548; Home Indem. Co. of New York v. State Bank, 233 Iowa 103, 8 N.W.2d 757; Los Angeles Inv. Co. v. Home Sav. Bank, 180 Cal. 601, 182 P. 293, 5 A.L.R. 1193; 2 Am.Jur., Agency, § 379; Annotations, 2 L.R.A.,N.S., 993 and 15 Am.St.Rep. 192. As stated in 2 Pomeroy, Equity Jurisprudence (5 ed.) § 675:

'* * * if * * * the agent commits an independent fraud for his own benefit, and designedly against his principal, and it is essential to the very existence * * * of such fraud that he should conceal the real facts from his principal, then the ordinary presumption of a communication from the agent to his principal fails; on the contrary, a presumption arises that no communication was made, and consequently the principal is not affected with constructive notice.'

See, Home Ind. Co. v. State Bank, supra; Los Angeles Inv. Co. v. Home Sav. Bank, supra. With these principles in mind it is clear that in the instant case the checks involved could not in any sense be regarded as 'bearer' pa...