National Union Bank v. Miller Rubber Co.

129 A. 688, 148 Md. 449, 1925 Md. LEXIS 54

• Court: Court of Appeals of Maryland
• Decided: June 11, 1925
• Status: Published

Opinion

Oeputt, J.,

delivered the opinion of the Court.

This appeal presents two questions, one, whether the ap^ pellee has thei right to recover from the appellant the proceeds of cheeks drawn to the appellee’s order, which were deposited by the appellant toi the credit of the appellee’s agents upon their unauthorized endorsements, and second, whether if such a right exists it can be enforced in a court of equity; and these questions are presented by the action of the Circuit Court of Baltimore City in overruling a der murrer to< a bill of complaint filed by the appellee against the appellant to require it to pay over to the appellee the proceeds of checks alleged to have been “fraudulently and wrongfully” diverted from its account by the concurring acts of its agents and the appellant.

The bill of complaint alleges that the appellee is engaged in the business of manufacturing and selling automobile tires, tubes, and accessories, aud kindred products, having its principal factory located at Akron, Ohio, and that it sells and distributes its products through agencies located at different points throughout the country. That on January lst; 1920, it entered into- a contract with G-. R. Schumann and R. Oator Robinson, trading as Schumann & Robinson, whereby they became the distributing agents at Baltimore for its products; and that they continued as its distributing-agents until January 1st, 1923, when Robinson retired, and that thereafter Schumann continued as its sole distributing agent until January 1st, 1924. That in the early part of February, 1920, the appellee -opened a deposit account with the Rational Union Bank of Maryland at Baltimore, Maryland, “one of the defendants herein, into which aceoiint, as was then fully explained to the said hank, and the said bank then well knew, all checks were to be deposited by the said Schumann & Robinson, given by purchasers of the manufactured products of your orator, drawn to the order of your orator, sold -and distributed, and to- he sold and distributed, through and by the said distributing agents, Schumann & Robinson, to all of which the said bank then 'agreed, and at which time, signature cards of your orator were given to the said hank, together with certain extracts from the by-laws of your orator with reference to the authorization of officers of your orator, to open hank accounts, and to withdraw therefrom the funds deposited therein.” That thereafter the distributing agents Schumann & Robinson daily deposited many checks draiwn to the appellee’s order to its account in the appellant hank, 'and the firnd-s so deposited were withdrawn from time to time by the appellee by check duly signed by its officers in accordance with the signature cards given to the appellant, until January 1st, 1923, when Robinson withdrew from the agency and thereafter the same practice was followed by Schumann until January 1st, 1924; that early in January, 1920, Schumann & Robinson opened an account in the 'same batik under the name of “Schumann & Robinson” and that account was continued until the early part of January, 1923, when it was closed and an account opened in the name of Schumann alone. The bill then states: “That your orator lias recently discovered that beginning on or about the- 4th of Janoary, 1920, and continuing thereafter until on or about January 1st, 1923, the said Schumann & Robinson fraudulently and for the purpose of diverting and misapplying funds of your orator, deposited in the said deposit account of Schumann & Robinson in the said Rational Union Bank of Maryland, opened as -aforesaid, instead of depositing in the said deposit account of your orator in the said Rational Union Bank of Maryland, opened as aforesaid, many checks given by purchasers of manufactured products -of your orator, drawn to the order of your orator, for manufactured products sold and distributed through and by the said Schumann & Robinson agency at Baltimore-, the said checks so- diverted having been fraudulently and without authority endorsed hy the -said Schumann & Robinson for deposit in their said bank account before- the said checks were presented to the said Rational Union Bank of Maryland to be so fraudulently deposited and notwithstanding the said checks, and all of them, at the time- they were- presented to the said Rational Union Bank of Maryland by the said Schumann & Robinson, contained the endorsement of Schumann & Robinson fraudulently, and without authority made by the said Schumann & Robinson, the- said Rational Union Bank of Maryland negligently and without exercising ordinary care and prudence, and in violation of the rights of your -orator, and in disregard of the duty -and obligation it owed to your orator, participated in and took p-art in, tbe fraudulent conversion and misapplication by depositing said cheeks in the hank account of the said Schumann & Robinson instead of in the hank account of your orator, where the said Rational Uni-on Bank of Maryland should have deposited said checks; and that on and after January 1st, 1923, the practice as aforesaid was continued by the said G. R. 'Schumann and the said Rational Union Bank of Maryland until on or about January 1st, 1924, tbe funds so fraudulently diverged and misapplied being in excess of $30,000, the exact amount thereof being unknown to your orator.” It then goes on to allege “that the said checks of purchasers of manufactured products of your orator, drawn, to the order of your orator, were received by the said Schumann & Robinson and/or G. R. Schumann in pursuance of an employment which reposed in them special trust and confidence, and imposing upon them and the said National Union Bank of Maryland specifically the duty of. depositing all of said checks in the said deposit account of your orator with the said National Union Bank of Maryland, the funds so represented by said checks, being impressed with a trust for the benefit of your orator.” And finally it alleges: “That the said National Union Bank of Maryland by its gross negligence, in depositing in the hank accounts of Schumann & Robinson and/or G. R. Schumann, cheeks given by purchasers of manufactured products of your orator, sold and distributed through the distribution agency at Baltimore, drawn to the order of your orator and fraudulently and without authority endorsed by Schumann & Robinson and/or by G. R. Schumann before the said checks were presented to said bank for deposit, thereby cooperating with the said Schumann & Robinson and/or the said G. R. Schumann, participated in and took part in the wrongful and fraudulent conversion of yonr orator’s funds, which wrongful and fraudulent conversion could have been prevented by the exercise of ordinary care and prudence by the said hank in declining and refusing to deposit the said checks in the deposit accounts of the said Schumann & Robinson and/or the said G. R. Schumann, at the time the said checks were presented to. the said bank by the said Schumann & Robinson and/or the said G. R. Schumann.”

The appellant denies that it is liable to' the appellee either at law or in equity for the proceeds of the checks drawn to the appellee’s order and deposited to the account of Schumann & Robinson, because it says there is no privity of contract between it and the Miller Rubber 'Company, and in support of that contention it relies mainly upon the ease of Tibby Bros. Glass Co. v. Bank, 220 Pa. 1.

The decision in that ease rested, as the appellant’s contention here rests:, upon a supposed analogy between the rights of a payee of a check against a drawee bank which has paid it on a, forged endorsement, and the rights of such a payee against a collecting hank which has paid a check on a forged endorsement and collected it from the drawee bank.

That case undoubtedly supports the appellant’s contention, but it cites no authority in support of its conclusion that the payee cannot recover against the collecting bank because of a want of privity between them; it has not been followed in other states, and is opposed to whatever authority there is. on the question.

In this State a cheek does not operate as an assignment of the fund upon which it is drawn, and gives the payee no lights against the drawee. Moses v. Franklin Bank, 34 Md. 574. And if the analogy between such a case and the one before us is sound, the appellee has no claim either at law or in equity against the appellant. But upon the decided weight of authority the two. cases involve distinct principles and there is no. analogy between, them.

The right of a payee to recover against a drawee bank the amount of a check which it has paid on a forged endorsement is denied, because the funds of the drawer are not diminished by such payment nor is the indebtedness of the drawer to the payee 'affected thereby, and since no interest in the fund has been assigned to him, the payee has no contractual relation whatever with the drawee bank, which holds the fund for the drawer and not for the payee.

Where, however, a collecting hank cashes a check on a forged endorsement a different principle applies. There the collecting hank on the forged endorsement acquires no title whatever to the paper because the endorsement, its only source of title, is a nullity. It therefore is wrongfully in possession of the check and in equity and good conscience holds it for the payee. If, while in possession of it, it by means of the forged endorsement collects it, then it holds the proceeds of the collection in the same way for the payee, and that relationship creates a privity between it and the payee. And if the payee elects to' ratify the collection of the check by the collecting bank he may recover from it the amount collected.

There may be a certain artificiality about this reasoning, but it is not only supported by the weight of authority, but the result reached by it in the end i's the same which would be effected under the rule stated in Tibby v. Bank, supra, and in reaching that end it avoids a useless multiplication of litigation. For under that rule the collecting bank would be liable to the drawee; the drawee would still be liable to the drawer, the drawer to> the payee, and the forger to the collecting bank.

Nowhere are the reasons for the rule, which permits the payee to recover from a collecting bank the amount of a check which came into its possession upon a forged endorsement, inore clearly stated than in Buckley v. Second National Bank of Jersey City, 35 N. J. L. 402, where it is said: “Can there be any doubt that the plaintiff owned the check when it came into the defendants’ hands ? Having been sent to the plaintiff’s agent, and received by him for the plaintiff’s use, the transfer of title from the United States to1 the plaintiff was complete. The plaintiff, by such transfer, became the absolute owner of the check. Did he cease to be the owner when, by means of a forged endorsement of the plaintiff’s name, the check was passed by Grossman to the defendants ? On this point the law is well settled. ‘When a bill is assignable only by endorsement,’ says Mr. Chitty, ‘as m> interest can be conveyed otherwise than by that act, and . as it is a general rule that no title could be obtained through a forgery, -any person getting possession of it by a forged endorse^ ment, will not acquire any interest in it, although he was not aware of the forgery. * * * It is clear, then, that nothing-passed to the defendants by virtue of the forged endorsement. The' plaintiff’s right to the cheek remained precisely as it was before bis name was forged. The check, therefore, when the defendants obtained the money on it, was the property of the plaintiff, and in that ease he may, as we have seen, recover the amount in this action, as money received by the defendants to his use. * * * The defendants’ ease is not helped by the fact that the forged endorsement was made or contrived by the plaintiff’s agent. Johnson v. Windle, 3 Bing. N. C. (32 E. C. L. R. 112) 225; Smith, Assignee of Bagnall & Hand, v. Sheppard, a MS. case of Lord Mansfield, cited in Chitty on Bills 261.”

The same principle is stated in these words in Morse on Banking (4th ed.), vol. 1, p. 483: “If a negotiable instrument having a forged indorsement come to the hands of a bank and is collected by it, the proceeds are held for the rightful owners of the paper, and m¡ay be recovered by them, although the bank gave value for the paper, or1 has paid over the proceeds to the party depositing the instrument for collection.”

And it is supported in a number of cases referred to in a note to U. S. Portland Cement Co. v. U. S. Nat. Bk., L. R. A. 1917 A, 148.

And so far as we have been able to discover the only case announcing a contrary doctrine’ is Tibby Bros. Glass Co. v. Bank, supra. In our opinion the better rule, both upon reason and-authority, is that stated in Morse on Banking, supra. and if the facts stated in the bill are- sufficient to bring the appellee’s claim within that rule it is good as against the appellant. Accepting the allegations of the hill as true-, the only negligence chargeable against either party must be imputed to tbe appellant. In 1 Halsbufy’s Laws of England, p. 594, it is said : “Apart from, a procuration signature, any indication that the customer is using for his own benefit a document prima facie created for the- benefit of, and being the property of, another person should put the- banker o-n inquiry,” and that we think is a sound rule. In this- case (ho appellant knew the appellee’s- signature, it knew Schumann & Robinson’s relation to the appellee, and it knew that they had no authority to endorse checks drawn to' the appellee’s order for their individual account. Their endorsement was wholly unauthorized and for the purposes of this case must be treated as forgery, and the appellant by ordinary diligence could have ascertained that fact.

Assuming for the moment that it is sufficiently stated, 'the next question is whether equity has jurisdiction to enforce the appellee’s claim. In Lupton v. Amer. Wholesale Corporation, 148 Md. 333, the court was dealing with the claim of a principal against an agent for monies which the agent collected but failed to pay over to the principal as he was bound to do. In that case the court held that the agent, under the circumstances of the case, in collecting the money acted in a fiduciary capacity, and that the fund collected by him was impressed with a trust in favor of the principal, and decided that equity had jurisdiction to enforce that trust. And to the same effect are the cases of Dillon v. Mutual Ins. Co., 44 Md. 386, and Dombrovski v. Baltimore, 141 Md. 422. In principle it is not clear how this case can be distinguished from Lupton v. Amer. Wholesale Corporation, supra, except that here the suit is not against the agent but against one which is said to have co-operated with the agent in wrongfully securing possession of the principal’s, funds. The money which the bank secured in that manner did not belong to it, but it held it in equity and good conscience for the rightful owner’, and if, as the bill states, the appellant by its negligence or other wrongful act participated in the breach of trust said to have been committed by the appellee^ agents, then it as well as the defaulting agents may be required to answer in equity for the consequences of its acts (Swift v. Williams, 68 Md. 236; Duckett v. Bank, 86 Md. 401; Safe Dep. & Tr. Co. v. Cahn, 102 Md. 535), where, as in this case, the dealings between the parties extended over several years and included a large number of transactions, some of which were not known to the principal. 2 C. J. 888-889.

So far we have dealt with the two propositions submitted by the appellant in its brief, as though the allegations of the bill were sufficient to present those questions, although technically speaking it is defective because it fails, to aver that the checks which were cashed for the appellee’s agents- were ever collected by the appellant. Unless it did collect them, manifestly it is not liable to the appellee, for the only theory upon which it could he held is that it actually collected the checks and held the proceeds for the appellee. The bill does, however, allege a diversion of its funds, and it may be inferred from that that it collected the checks, and as that is the construction which the appellant apparently placed upon that allegation, we will assume that that is what it means.

It follows from what lias been s-aid that the order appealed from will be affirmed and the case remanded for further proceedings, with costs to the appellee.

Order -affirmed and case remanded for further proceedings, with costs to the appellee.