Baker v. American Surety Co.

Ladd, J. 1. Subrogation : extent and limitation of right: doctrine inapplicable to primary liability. Tbis is an action by plaintiff in behalf of an association known as the Buxton Local Union No. 1799, District No. 13, a constituent part of an organization known as the “United Mine Workers of America,” against the defendant as surety on the bond of W. H. Brown, financial secretary and treasurer of said union from July 1, 1913, to July 1, 1914.' The petition alleges that, during October, 1914, other officers discovered that “said W. H. Brown had misappropriated all or a part of the moneys coming into his hands as such financial secretary and treasure^” and immediately gave — 636 — notice to defendant that defendant has “failed, omitted and neglected to pay said Local Union No. 1799 the money so lost, although the same has been demanded,” and judgment for $800 was prayed. A .copy of the bond in the usual form was attached, and also an itemized statement of the several sums alleged to have been embezzled. Thereupon defendant filed a cross-petition, making the Buxton Savings Bank defendant, alleging what plaintiff claims, and further that the “items set out in the said list were paid out by the said Buxton Savings Bank and charged against the checking account of said Local Union with the said bank. The claim of the said Local Union is that the said bank made such payments without authority therefor, upon checks or orders forged or the endorsements upon which were forged by said W. H. Brown, and charged the same to said checking account, and that thus the alleged loss accrued to the said Local Union. This defendant says that, if such claims of said Local Union be true, that then and in that event the primary liability for such loss is that of the said bank, and not of this defendant; and that, if it be true the defendant is under liability herein, then defendant should be allowed to recover herein against the said bank all sums for which this defendant shall be adjudged to be liable to plaintiff, and for costs. The said checks or orders are not in possession nor under the control of this defendant, and this defendant is unable to set out copies of them. Wherefore, this defendant prays that, if judgment should be rendered against this defendant herein, that the defendant have judgment for the same amount against the Buxton Savings Bank and for costs.” The Buxton Savings Bank moved that cross-petition be stricken from the files, for that: (1) The facts recited did not justify the filing of a cross-petition; (2) the savings bank might not be joined as defendant in this manner; (3) the cross-petition is not material to the issue raised by — 637 — the petition; (1) there is no privity of contract between defendant and the savings bank requiring the bringing in of said bank as a party to the action; and (5) the savings bank is not a necessary party to any adjudication between the original parties to the suit. The motion was sustained. The appeal is from this ruling. In reviewing the ruling on the motion, the allegations of the cross-petition must be assumed to be true. If so, we have this situation: The American Surety Company bound itself to pay “such- pecuniary loss, not exceeding fl,000, as said employer shall have sustained of money or other personal property (including that for which employer is responsible) by any act or acts of fraud, dishonesty, forgery, theft, embezzlement, wrongful abstraction or misapplication on the part of said employee, directly or through connivance with others, while in any position or at any location in the employ of said employer.” The Local Union deposited its funds in the Buxton Savings Bank, and, as is alleged, Brown forged checks or orders of the Local Union, or endorsements thereon, and the bank paid these from the funds of said Local Union. As we understand it, the orders were properly drawn payable to persons entitled to the amounts named therein; bnt Brown,- as is alleged, forged the payee’s name thereon and drew' the money, which he appropriated to his own use. If so, this is within the averments of the cross-petition quoted, and the loss therefrom, if any, was occasioned by the dishonesty of Brown, as much as though he had forged the checks or orders. Because of the dishonesty of Brown, the funds of the Local Union have been paid out by the bank, and the theory of the plaintiff is that said union may look to the Surety Company and Brown, instead of the bank, to recoup the loss. The contention of the surety is that the bank paid the money on the forged checks, orders or endorsements, and, upon paying the Local Union the loss suffered by it — 638 — through Brown’s dishonesty, it is entitled to be subrogated to the claim the Local Union held against the bank because of paying out its money without its authority on the forged instruments. The bank, through its motion to strike, denied that the surety company has the right to subrogation, under the circumstances disclosed, and raised several other questions not necessary to be considered, in view of our conclusion. Subrogation is defined by Bispham as the equity by which a person who is secondarily liable for a debt, and has paid the same, is put in the place of the creditor, so as to entitle him to make use of all the securities and remedies possessed by the creditor, in order to enforce the right of exoneration as against the principal debtor, or of contribution against others wh'o are liable in the same rank with himself. Bispham’s principles of Equity (9th Ed.), Section 335. Subrogation is said, in Section 1 of Sheldon on Subrogation, to be: “The creature of equity, and is so administered as to secure real and essential justice without regard to form, independently of any contractual relations between the parties to be affected by it. It is broad enough to include every instance in which one party pays a debt for which another is primarily answerable, and which, in equity and good conscience, should have been discharged by the latter; but it is not to be applied in favor of one who has, officiously and as a mere volunteer, paid a debt of another, for which neither he nor his property was answerable, and it is not allowed where it would work any injustice to the rights of others.” .The doctrine was derived from the civil law, but was early engrafted into the equity jurisprudence of England, and in this country its principles have been more widely applied than in England. Originally, it was exclusively of — 639 — equitable cognizance, but in recent years, seems to have been exercised in the common-law courts. Harris on Subrogation, Section 1. Wherever the doctrine is made use of, it is always for the promotion of justice and the prevention of inequitable results. It will never be enforced when doing so would be inequitable, or where it would work injustice to others having equal equities. Makeel v. Hotchkiss, 190 Ill. 311 (83 Am. St. 131); 37 Cyc. 370. It necessarily follows that the equities of one seeking subrogation must be greater than those of him against whom subrogation is sought. Fort Dodge B. & L. Assn. v. Scott, 86 Iowa 431. “The doctrine of subrogation never interferes with equal or superior rights of others.” Vaughan v. Jeffreys, 119 N. C. 135 (26 S. E. 94). See Musgrave v. Dickson, 172 Pa. St. 629 (51 Am. St. 765). As remarked in Acer v. Hotchkiss, 97 N. Y. 395: “The doctrine of subrogation is a device to promote justice. We shall never handle it unwisely if that purpose controls the effort, and the resultant equity is steadily kept in view.” Subject to these principles, the rule is well established that: “Where one person or his property is surety or stands in the position of a surety for the payment of a debt, for the payment of which another is primarily liable, the one who is only secondarily liable, upon payment of the debt to the original creditor, is entitled to be subrogated to all the rights, remedies, liens and securities held by the original creditor, as they existed at the time of such payment, as against the principal debtor and his property, or against any other person who may be liable for the payment of such debt. And this doctrine applies as well between co-sureties, co-debtors and co-obligors as between principal and surety, with the single exception that, as between the — 640 — paying surety and the principal debtor, there is no question of contribution.” Harris on Subrogation, Section 197. The surety company, then, is entitled to subrogation, if at all, to any claim the Local Union may have against the principal on the bond, Brown, or against any security said union may have on his property. But it had none, and the surety company is praying, for no relief as against Brown or his property. Its cross-petition is based on the bank’s liability to said union for the amount paid out by it on the forged checks, orders or endorsements, and it prays therein for subrogation to the claim of the Local Union on the theory that the bank’s liability is primary and its liability secondary thereto. Of course, the bank necessarily assumed the risk in paying others than those to whom genuine instruments were payable, and in paying to others it acted without authority, and might not charge sums so paid to the account of the Local Union. The Local Union could have insisted that the bank account for all moneys on deposit, including those wrongfully applied on the forged checks, orders or endorsements, and on refusal maintain an action therefor. German Sav. Bank v. Citizens Nat. Bank, 101 Iowa 530. But the wrongful diversion of these moneys was induced by the dishonest conduct of Brown, to whom the money was paid, and, were the bank held for the payment of the funds dissipated, it would have a cause of action against Brown therefor. The plain difference in the situation of the two is that, were recovery had by the Local Union against. Brown, he could not recoup in an action against the bank, whereas the bank, if compelled to restore to the union the moneys paid on the forged instruments, might demand reimbursement from Brown,, and upon refusal, recover judgment against him. The Local Union has elected to sue the surety on the bond of Brown, rather than the bank. If the surety is adjudged — 641 — liable thereon, and pays the alleged loss occasioned by Brown’s dishonesty, it will merely pay Brown’s indebtedness, and not that of another, even though the other may also be liable therefor. At the most, it is a case where each of two parties may be held for the dissipation of the same moneys, the bank because of paying out without authority, and the other because of fraudulently inducing the bank so to do. In such a case, both are absolutely liable, and neither entitled to subrogation; for either, in paying, is satisfying his own indebtedness. But the bank, on payment, undoubtedly could recover over from the wrongdoer. More-ever, the equities of the surety, upon payment, would be measured by those, if any, existing in behalf of its prinr cipal, Brown; and, as between Brown and the bank, all are in favor of the bank, and under the rules stated, subrogation must be denied. Otherwise, the forger or his surety would be preferred to the one swindled by his forgeries. 2. pleading: murrer as de" As, on the allegations of the cross-petition, the surety would not be entitled to relief, there was no error in striking it from the files. Probably the point might more appropriately have been raised by demurrer, but if so, this portion of the'motion may be treated as a demurrer, and the ruling be made accordingly. It is not to be inferred from anything said that we express any opinion as to the liability of either Brown or the American Surety Company to the Local Union. We merely rule that the allegations of the cross-petition do not entitle the defendant and cross-petitioner to subrogation in event it is required to pay the loss of said union.- — Affirmed. Gaynor, C. J., Evans and Salinger, JJ., concur.