Pacific Indem. Co. v. Security First Nat. Bank

• Decision Date: 25 January 1967
• Citation: 248 Cal.App.2d 75,56 Cal.Rptr. 142
• Court: California Court of Appeals Court of Appeals
• Parties: , 4 UCC Rep.Serv. 392 PACIFIC INDEMNITY COMPANY, a corporation, Plaintiff and Appellant, v. SECURITY FIRST NATIONAL BANK, a National Banking Association, Defendant and Respondent. Civ. 29733.

Page 142

56 Cal.Rptr. 142

248 Cal.App.2d 75, 4 UCC Rep.Serv. 392

PACIFIC INDEMNITY COMPANY, a corporation, Plaintiff and Appellant, v. SECURITY FIRST NATIONAL BANK, a National Banking Association, Defendant and Respondent.

Civ. 29733.

Court of Appeal, Second District, Division 2, California.

Jan. 25, 1967.

Anderson, McPharlin & Conners and Robert C. Haase, Jr., Los Angeles, for appellant.

Voegelin, Barton, Harris & Callister, E. Talbot Callister and Robert A. Smith, Los Angeles, for respondent.

HERNDON, Justice.

Plaintiff Pacific Indemnity Company appeals from the judgment denying it any recovery from respondent bank for sums paid by plaintiff under its indemnity contract with Credit Managers Association of Southern California in compensation for losses sustained by Credit Managers by reason of the alleged negligent and unauthorized actions of respondent bank which enabled one Nolan Brown, a Credit Managers employee, to consummate his plan to embezzle his employer's funds. Appellant's complaint sets forth causes of action sounding in negligence and conversion.

Regrettably the relatively simple and determinative issues involved in the instant action were confused and left undecided by reason of the interjection of a legal rule having no controlling application to the problem presented. This error, coupled with the enigmatic nature of the evidence presented to the trial court and the extremely anomalous stipulations entered into by the parties, requires us to remand this cause for further proceedings.

The basic question presented in this action is the following: 'May a bank which has received a check presented to it by an employee of the drawer, and drawn payable to the order of the bank for a specified purpose as indicated upon its face, retain the proceeds thereof after it has credited an equal amount from its own funds to the employee's personal account at his request and has permitted him to make withdrawals therefrom?' Absent some showing of ostensible authority on the part of the employee, such question, of course, must be answered in the negative. However, the findings of fact and conclusions of law made by the trial court never reached this question because it accepted respondent's contention that the checks in issue were Bearer paper.

So far as may be gleaned from the terse record before us, one Nolan B. Brown was employed by Credit Managers at all times pertinent to the present action and appellant was surety for Credit Managers upon a standard form of employee fidelity bond. Credit Managers appears to have been engaged in the business of administering the affairs and assets of various businesses which had made assignments to it for the benefit of creditors. In the course of settling the indebtednesses of its clients, by compromise, settlement or otherwise, Credit Managers would issue checks made payable to the order of the various creditors of these clients. ¹ In addition, on the face of the checks, in a box provided therefor in the upper left-hand corner, the debtor would be identified and a brief description given designating the particular indebtedness to which the proceeds of the check were to be applied by the named creditor-payee in the event he accepted the tendered payment in full satisfaction thereof.

During the period of 37 days beginning on August 7 and ending on September 12, 1962, Brown caused six checks to be drawn against the account of his employer with the Union Bank. All six checks were made payable to respondent bank. These checks were imprinted with the drawer's name and the signatures of certain of its officers. The amounts had been placed thereon by means of a 'check writing machine.' Each of the checks stated on its face in the upper left-hand corner the purpose for which it was purportedly made payable to respondent.

The first check dated August 7, 1962, in the amount of $575 stated on its face in bold type: 'When properly endorsed this check is accepted in full payment of the following items: RE: ROLAND BIRD FOR REIMBURSEMENT OF OVERDRAFTED FUNDS.' The check dated August 21, 1962, in the amount of $1,629.53 read: 'When properly endorsed this check is accepted in full payment of the following items: RE: P & L TRUCK PAYMENT IN FULL ON CONTRACT.' The check dated August 23, 1962, in the amount of $2,874.00 read: 'When properly endorsed this check is accepted in full payment of the following items: RE: P & L TRUCK FOR FINAL PAYOFF ON CONTRACT.' The check dated August 28, 1962, in the amount of $8,997.62 read: 'When properly endorsed this check is accepted in full payment of the following items: RE: HATFIELD CONSTRUCTION CLAIM PAYMENT IN FULL.' The check dated September 7, 1962, in the amount of $5,739.97 read: 'When properly endorsed this check is accepted in full payment of the following items: RE: SHIGERU HIRATA FOR FULL PAYMENT OF COND. SALES.' The final check dated September 12, 1962, in the amount of $3,263.47 read: 'When properly endorsed this check is accepted in full payment of the following items: RE: HERSCHEL LUND FOR FULL PAYOFF OF COND. SALES CONTRACT.'

The only evidence introduced by either party tending to establish the office practices and procedures of Credit Managers was that supplied by the testimony of its employee Brown. He was called as a witness by respondent and without amplification testified that his position with the company was that of 'Assistant to the Eastates Manager.' He was not questioned concerning the nature of his duties or the authority accorded to his position. He answered the following question in the affirmative: 'In the course of your duties, were you called on from time to time to make out check orders in the course of your business?' He was then shown certain documents captioned 'Check Orders' and asked to describe the procedure he had followed 'with respect to those and culminating in the issuance of checks?'

Brown testified: 'I made the order out. Then, it was submitted to the Estates Manager (Mr. Moyer) for his signature and initialing. And it was also submitted to Mr. Engelman for his initialing.' He further stated that he did not recall whether or not the signatures or initials of Mr. Moyer or Mr. Engleman appearing on the orders were genuine. Subsequently, however, the parties stipulated that these signatures were forged by Brown.

Brown also testified that the persons or businesses whose names appeared on the face of the checks were clients whose affairs were being handled by Credit Managers Association. He testified at one point that these persons' accounts with his employer actually required payments to be made to respondent bank and at another point that 'the terminology' used in the notations was 'something made up entirely by (him) in order to get the check issued by the Credit Managers Association.' He explained that he had caused the checks to be drawn payable to the order of respondent bank rather than to himself because he knew they would not have been issued if they had been made payable to him.

As might be expected of a man who had been the subject of a criminal prosecution for his actions in the premises, Mr. Brown gave accommodating but unenlightening answers to the several ambiguous and conclusional legal questions propounded to him by counsel for both parties. Thus, he admitted that his intention throughout was to defraud his employer but with equal facility he conceded that he did not intend respondent bank to have any interest in the proceeds of the checks issued by his employer. We doubt that Mr. Brown ever seriously considered the question of who would or should ultimately bear the loss resulting from his wrongful acts, but in any event his personal opinion or intention on this legal issue does not aid in its judicial resolution.

No evidence was introduced to establish who within the company actually made out the checks, although apparently it was not Brown himself, or how Brown came to receive possession of them. No evidence was introduced tending to establish that the protective procedures adopted by Brown's employer were unreasonably lacking in care or failed to conform with business practices generally prevailing or reasonably to be expected of it. In fact, as previously indicated, the record actually fails to establish that the checks involved herein did not constitute proper payments due to respondent bank on behalf of Credit Managers' clients. When questioned on this point during oral argument on this appeal, neither counsel was able to enlighten this court on this question.

However, in whatever fashion Brown had obtained possession of these checks made payable to respondent bank, he took them to respondent's Pico-Alvarado branch where he maintained a personal checking account. This branch was the bank nearest to Credit Managers' offices and was patronized by some 300 3f its employees. In addition, respondent bank's employees stated in their depositions which were received in evidence that Credit Managers itself maintained an account with respondent bank in another of its branches and that certain of its employees frequently made 'inter-branch' deposits on its behalf at the Pico-Alvardao branch. Also, by way of affirmative defense, respondent alleged that 'Said (Credit Managers) Association had done and was doing a large volume of business with this defendant at other of its branches without untoward incident, and this defendant and its agents and employees were therefore desirous of giving said Association the best service possible.' (Emphasis added.)

Nevertheless, despite this allegation and the fact that all the evidence presented was to the contrary, the parties entered into a stipulation which the trial court included as a finding of fact that 'there was no business relationship of any kind or nature existing between Credit Managers Association of Southern California and * * * (Security First National Bank), and there was no indebtedness owed to * * * (Security First...