U.S. Fidelity & Guaranty Co. v. Peoples Nat. Bank of Kewanee

• Decision Date: 08 February 1960
• Docket Number: Gen. No. 11292
• Citation: U.S. Fidelity & Guaranty Co. v. Peoples Nat. Bank of Kewanee, 164 N.E.2d 497, 24 Ill.App.2d 275 (Ill. App. 1960)
• Court: Appellate Court of Illinois
• Parties: UNITED STATES FIDELITY & GUARANTY COMPANY, a corporation, Plaintiff-Appellee, v. PEOPLES NATIONAL BANK OF KEWANEE, a United States banking corporation, Defendant-Appellant.

Page 497

164 N.E.2d 497

24 Ill.App.2d 275

UNITED STATES FIDELITY & GUARANTY COMPANY, a corporation Plaintiff-Appellee, v. PEOPLES NATIONAL BANK OF KEWANEE, a United States banking corporation, Defendant-Appellant.

Gen. No. 11292.

Appellate Court of Illinois, Second District, Second Division.

Feb. 8, 1960.

Rehearing Denied March 2, 1960.

Andrews & Andrews, Kewanee, for appellant.

Coyle, Stengel & Gilman, Rock Island, for appellee.

SOLFISBURG, Presiding Justice.

This is an appeal arising out of an action at law for damages brought by United States Fidelity & Guaranty Company, a Maryland corporation (hereinafter referred to either as plaintiff or as USF&G) against Peoples National Bank of Kewanee, a United States banking corporation (hereinafter referred to as defendant or bank), based on the cashing of a draft drawn by the plaintiff's adjuster on plaintiff's treasurer at Baltimore, Maryland, payable through the First National Bank of Baltimore, Maryland. The cause was heard by the court sitting without a jury upon the complaint of the plaintiff, the answer of the defendant and the reply of the plaintiff. Judgment was entered in favor of the plaintiff and against the defendant for $2,241.84 by a judgment order which recites that the court found the issues for the plaintiff. This appeal followed.

The complaint of the plaintiff consisted of three counts. Count I of the complaint alleged the following facts: Plaintiff was the insurer of one Willis E. Moden on a policy of insurance providing, among other things, for coverage upon a certain tractor for damage caused by malicious mischief; on April 16, 1954, Moden's tractor was damaged by malicious mischief and plaintiff arranged with Roesch-Zeller, Inc., at Springfield, Illinois, to make the repairs which cost $2,241.84; on June 1, 1954, plaintiff mailed the draft in question to Willis E. Moden, payable to the order of Moden, Roesch-Zeller, Inc. and Enright Coal Company; on June 9, 1954, Moden presented the draft to defendant bank with only his own name endorsed on the back thereof; the defendant bank credited to the account of Moden the sum of $2,316.84 and thereafter honored checks drawn by Moden on the defendant bank for various sums totaling $2,316.84; plaintiff promised Roesch-Zeller, Inc. to pay for the repair of said tractor and did so on or about May 26, 1955, to the damage of the plaintiff; the plaintiff is entitled to the recovery of the sum of $2,241.84 plus interest at 5% per annum, pursuant to Chapter 74, Section 2, Ill.Rev.Stats. Count II of the complaint repeated all of Count I and in addition alleged that Roesch-Zeller, Inc., on May 26, 1956, assigned to plaintiff all of its rights to said draft. Count III repeated all of the allegations of Count I and in addition averred that defenant endorsed on said draft before collection 'Pay to the order of any bank or bankers. All prior endorsements guaranteed.' Count II and Count III prayed judgment in the same amount demanded in Count I. In its answer, defendant bank admitted collecting the draft and paying the proceeds to Moden and also, by way of affirmative defense, alleged the negligence of the plaintiff in several respects. The negligence charged was chiefly with regard to payment of the draft without objection to the absence of any endorsements and the failure of plaintiff to notify defendant of any objections until February, 1955. Defendant charged that it relied on the payment by plaintiff in honoring checks by Moden and was thereby damaged.

A considerable portion of defendant's brief is devoted to argument that plaintiff's complaint is based upon the theory of payment of monies under a mistake, for which, according to defendant's argument, plaintiff is not entitled to recover. The plaintiff takes the position that Count I of its complaint presents a direct action by the drawer-drawee for common-law conversion against the cashing bank for failure to obtain endorsements of all named payees; that Count II states a cause of action for common-law conversion against the cashing bank by the damaged co-payee, Roesch-Zeller, Inc., which did not endorse the draft in question; and that Count III is a cause of action based upon the warranty contained in the endorsement guaranteeing all prior endorsements. While the decided cases on this subject base recoveries upon a variety of theories, including those contended for by the parties here, upon present day concepts of pleading this court will look to the substance of the allegations of the complaint rather than to any technicalities of the now long-abolished forms of action. Suffice to say, numerous decisions of appellate tribunals of this state, as well as foreign jurisdictions, permit recoveries by the drawee against the cashing bank in cases of this general kind. The fact that the drawee is also the drawer of the instrument should make no difference in that regard.

The defendant in its brief and argument is compelled to acknowledge its fault in failing to secure the endorsements of the payees, Roesch-Zeller, Inc. and Enright Coal Co., before cashing the draft in controversy. The applicable section of the Illinois Negotiable Instruments Act (which is identical with Section 41 of the Uniform Negotiable Instruments Act) provides: 'Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others', Chapter 98, Section 61, Ill.Rev.Stats. The decision in this case would be rendered simple were it not for the certain facts with regard to the conduct of the plaintiff insurance company, and to those facts we shall advert shortly. Although decisions involving so-called 'missing endorsements' are few and although no reviewing court in Illinois has considered such a case, the Illinois decisions involving forged endorsements and other irregular endorsements provide settled authority for the rule that one called upon to act upon the faith of a written instrument, including an endorsement of commercial paper, must ascertain its genuineness at his peril. The principle rests in public policy and has been universally considered necessary for the security of commercial transactions, Jackson Paper Mfg. Co. v. Commercial National Bank, 199 Ill. 151, 65 N.E. 136, 59 L.R.A. 657; Hamlin's Wizard Oil Co. v. United States Express Co., 265 Ill. 156, 106 N.E. 623; Geske v. State Bank of Heyworth, 273 Ill.App. 294. The soundness of this principle cannot be seriously questioned. The absence of an endorsement by the holder is, in our view, more serious than a forged endorsement for the reason that the former is easily discernible while the latter is the result of an error in the identification of the payee. If, as has been said, it is the duty of the cashing bank to know to a positive certainty the identification of the payee or the payees named therein and its failure so to do imposes a duty of reimbursing the drawee, it seems abundantly clear that the failure to secure the endorsement of all the payees imposes an even greater duty on the cashing bank. While the defendant bank in this case seeks to find a defense in the position that it was merely acting as an agent for collection on behalf of its depositor, Moden, the record herein and the authorities indicate that in fact this was a deposit available for immediate withdrawal and not a true collection. Finally, it is our conclusion that the rule is that a drawer-drawee and a damaged payee each has a cause of action against a cashing bank for damages sustained where the cashing bank fails to obtain the endorsements of all...