American Bonding Co. v. State Savings Bank

MR. JUSTICE HOLLOWAY delivered the opinion of the court. From the first Monday of January, 1905, to the first Monday in January, 1909, W. E. Davies was the duly elected, qualified and acting clerk of the district court of Silver Bow county. During a portion of that period W. P. Farrell was his chief deputy. The American Bonding Company of Baltimore was the surety on Davies’ official bond. During the time Farrell was acting as deputy clerk he issued false and fictitious jurors’ certificates, none of which bore the imprint of the official seal, and these certificates, to the amount of $2,076, came into the possession of the State Savings Bank of Butte and were by it — 337 — presented to the county treasurer and paid. The fraudulent character of the certificates having been discovered, the county made demand upon the clerk of the district court and the bonding company, his surety, to repay the amounts which the county had paid out on such certificates, and, this demand having been refused, action was commenced by the county and prosecuted to favorable judgment, which judgment was affirmed on appeal by this court. (County of Silver Bow v. Davies et al., 40 Mont. 418, 107 Pac. 81.) The bonding company having paid the judgment, which included the amount received by the State Savings Bank, took an assignment of any right of action which the county may have had against the bank, and thereupon commenced this action to recover from the bank the $2,076 which the bank had received from the county upon the fictitious certificates held by it. The complaint sets forth the foregoing facts somewhat more in detail, and concludes by alleging that the bank has not repaid or returned to the county or to the bonding company the $2,076, or any part thereof. To this complaint a demurrer was interposed and sustained, and plaintiff electing to stand upon its complaint, suffered judgment to be entered against it and appealed. The only question presented for our determination is: Does the complaint state a cause of action in favor of the bonding company and against the bank? The facts concerning Farrell’s peculations and the character of the instruments which he issued will be found detailed at length in In re Farrell, 36 Mont. 254, 92 Pac. 785, and in County of Silver Bow v. Davies et al., referred to in the statement above. Appellant insists that the certificates held by the bank were void, citing In re Farrell, above, and therefore the bank had no just claim against the county for their payment; that, having paid the bank the face value of the certificates, the county could have recovered back the money so paid in an action for money paid by mistake. To this extent appellant’s contention may be conceded for the purposes of this appeal. It is further insisted that since the county chose to proceed against the district clerk and the surety company, — the surety on his official bond,- — to compel them to make good tfie county’s — 338 — loss, the surety company, upon paying the amount which the bank had received from the county, thereby became subrogated to the right which the county had to compel the bank to repay the amount which it had received. With this contention we do not agree. Furthermore, it must be conceded that if the bank would have had a cause of action against the bonding company in case the county had refused to pay the fictitious certificates, then the bonding company cannot have a cause of action against the bank in this instance. 1. Assuming that the county of Silver Bow had a cause of action against the bank to recover back the money it paid out on spurious certificates, it does not follow that by paying the county’s loss the surety on the clerk’s official bond became [1] subrogated to the county’s right. The doctrine of subrogation had its origin in the civil law. It has been adopted and invoked by the courts of equity in order that justice may be done as nearly as possible. The application of the doctrine must therefore depend upon the circumstances of each particular case. When, therefore, this surety company seeks to be [2] subrogated to the right which the county may have had against the State Savings Bank, it is necessary that something more be made to appear than that the bank could have been made to repay to the county the amount which it received upon the spurious certificates which it [held. The surety company must show that as between it and the State Savings Bank, if either must suffer loss because of Farrell’s peculations, in equity and good conscience the bank should be the one to lose. This is the rule recognized with practical unanimity. (American Bonding Co. v. Welts, 193 Fed. 978, 113 C. C. A. 598; United Fidelity & G. Co. v. Title Guaranty & Surety Co., 200 Fed. 443.) Does this complaint show such a state of facts? We think not. There is not any charge of negligence or wrongdoing on the [3] part of the bank in purchasing the certificates. So far as the complaint discloses, the bank acted in perfect good faith, and was following a common custom in dealing in these certificates without their bearing the impress of the official seal. Someone must suffer now for Farrell’s official miscon — 339 — duct. Shall it be the bank which acted in good faith and parted with its money for the spurious certificates issued by Farrell, or shall it be the surety company which for a compensation undertook to be responsible for Farrell’s official delinquencies not only to the state, and to Silver Bow county, but to this bank as well ? To such an inquiry a court of conscience can make but one answer. Upon the showing made in its complaint, the' surety company has failed to show .itself entitled to be subrogated to the right which the county may have had. (Stewart v. Commonwealth, 104 Ky. 489, 47 S. W. 332.) For this reason the complaint does not state a cause of action. 2. According to the allegations of this complaint, the State Savings Bank is in possession of and holds the legal title to the money which it secured from the county upon the fictitious certificates. At law this surety company would not have any right of action against the bank; but to state a cause of action at all it must allege such facts as will appeal to the conscience [4] of a court of equity. If the equities of the respective parties are equally balanced, the position of the defendant— the possessor of the thing in controversy — is the better; in other words, the legal title, added to its equity, prevails over an equal equity which has no legal title to support it. (2 Pomeroy’s Equity Jurisprudence, 3d ed., secs. 727, 768; Fidelity Mut. Life Ins. Co. v. Clark, 203 U. S. 64, 51 L. Ed. 91, 27 Sup. Ct. Rep. 19.) 3. If the county had refused to pay the certificates held by the bank, would the bank have had a cause of action against the surety company for its loss? The surety company was [5] responsible for Farrell’s official misconduct (Rev. Codes, sec. 384), to any party injured thereby, and such party could maintain an action for his damages (sec. 398). That it was Farrell’s official misconduct which caused the county’s loss has been judicially determined. (County of Silver Bow v. Davies et al., above; Board of County Commissioners v. Sullivan, 89 Minn. 68, 93 N. W. 1056.) If the county had refused to pay the certificates, the resulting loss to the bank would have been occasioned by the same acts of official misconduct (Stewart v. Com — 340 — monwealth, above), and it is not any defense that by omitting to stamp the impress of the seal upon the certificates, Farrell avoided punishment or set afloat securities which were invalid. (County of Silver Bow v. Davies et al., above.) It would seem to follow as of course that the bank’s right of action against the surety company under such circumstances would be absolute. To sustain their contentions, counsel for appellant rely upon the decision in National Surety Co. v. State Savings Bank, 15fi Fed. 21, 13 Ann. Cas. 421, 14 L. R. A. (n. s.) 155, 84 C. C. A. 187. Bourne, the deputy auditor of Ramsey county, Minnesota, fraudulently issued spurious refunding orders on the county treasurer, procured the chairman of the board of county commissioners to authenticate them, indorsed the names of the fictitious payees, and then sold the orders to the State Savings Bank. The bank presented them for payment and received from the county their face value, with accrued interest. The fraud having been discovered, the county brought action against the auditor and the surety company, the surety on his official bond, and recovered. The surety company, having paid the county, commenced an action against the bank’ to recover the amount which the bank had collected from the county. A general demurrer to the bill was sustained. The surety company appealed to the circuit court of appeals for the eighth circuit. The majority of the court held that Bourne’s personal, as distinguished from his official, misconduct would have been the proximate cause of the bank’s loss had the county refused to pay the orders, and therefore the surety on the auditor’s official bond could not be held responsible for such personal misconduct. But it was Bourne’s official misconduct which called the spurious orders into existence. (Board of County Commrs. v. Sullivan, above.) If he had issued them to real persons, but to persons not entitled to them, and such persons had negotiated them to the bank, there is not any question that the bonding company would have been liable to the bank for the injury sustained. Now by just what species of legal legerdemain Bourne’s forgeries of the indorsements of the fictitious payees, added to his wrongful act in issuing the spurious orders, could — 341 — operate to relieve the surety company is beyond our comprehension. It was further held that since the orders were nonnegotiable — made so by statute for the very purpose of preventing misuse of them — the bank was guilty of gross negligence in purchasing them without inquiry, and for that reason it could not have recovered from the surety company if the county had refused payment. But, as pointed out in the dissenting opinion of Judge Hook, there was not anything before the court -to justify it in assuming the existence of such a state of facts. It was further decided that, since the bank had procured from the county upon these fictitious certificates money to which it was not entitled as against the county, the county might have recovered it back, and since the county proceeded against the surety on the auditor’s official bond and enforced payment, the surety company became thereby subrogated to the right which the county might have exercised, to proceed against the bank, and this, too, without any apparent consideration of the relative equities of the respective parties. Upon each of the questions decided, Judge Hook dissented, and in our opinion his position upon each question is unassailable. It is also worthy of note that this case was remanded to the district court for further proceedings; that answer was filed, issues joined, the cause tried, and judgment rendered in favor of the bank on the merits. The surety company again appealed; but this time the same circuit court of appeals — two of the judges being different persons — affirmed the judgment (National Surety Co. v. Arosin et al., 198 Fed. 605, 117 C. C. A. 313), and held that the bank was not guilty of negligence in purchasing the orders; and that it was Bourne’s official misconduct in manufacturing the orders which was the primary cause of the loss. Nothing is said upon the question of subrogation. In our opinion, there is not any substantial difference in the facts disclosed upon the trial and those appearing upon the face of the bill in the first appeal, and that the decision upon the second appeal ought to be treated as overruling the decision of the majority upon the first appeal. But whether it be so considered or not, we decline to follow — 342 — the majority opinion upon the first appeal as unsound, and as opposed to the decided weight of authority. Rehearing denied June 28, 1913. The complaint does not state a cause of action, and the judgment of the district court is affirmed. Affirmed. Mr. Chief Justice Brantly and Mr. Justice Sanner concur.