Case Name: Oxford Production Credit Ass'n v. Bank of Oxford
Court: Mississippi Supreme Court
Jurisdiction: Mississippi
Decision Date: 1944-01-24
Citations: 196 Miss. 50
Docket Number: No. 35474
Parties: Oxford Production Credit Ass'n v. Bank of Oxford.
Judges: 
Reporter: Mississippi Reports
Volume: 196
Pages: 50–81

Head Matter:
Oxford Production Credit Ass'n v. Bank of Oxford.
(In Banc.
Jan. 24, 1944.
Suggestion of Error Overruled March 13, 1944.)
[16 So. (2d) 384.
No. 35474.]
Watkins & Eager, of Jackson, and Ethridge & Ethridge, of Oxford, for appellant.
V. D. Rowe and H. T. Holmes, both of Winona, for appellee.
L. O'. Andrews, of Oxford, for appellee.
Argued orally by Elizabeth. Hulen aud Pat Eager, for appellant, and by L. G. Andrews and H. T. Holmes, for appellee.

Opinion:
Roberds, J.,
delivered the opinion of tbe court.
Appellant Association, in this bill in equity, seeks a personal decree against appellee Bank in tbe principal sum of $5,960.32, tbe aggregate amount of fifteen checks and one sight draft drawn by the Association, as depositor, upon said'Bank as depository, and paid by the Bank upon forged endorsements of the names of the payees therein, and charged by the Bank to the account of the Association; the forgeries having been committed by one E. F. Henderson, who received the money, and who was an employee of said Association.
The Association had a bond with the Fidelity and Casualty Company of New York, under which the Casualty Company agreed and promised to pay to the Association any financial loss the Association might suffer through any dishonest, fraudulent or criminal act of Henderson, and before the institution of this litigation the Casualty Company had paid to the Association the money involved herein, and the Association had transferred and assigned to the Casualty Company all of its rights and claims, in law and equity, against said Bank. The Casualty Company is not a party to this proceeding. In this opinion we shall designate the parties as Association, Bank and Surety.
The Association urges, among other things, that it is entitled to a decree against the Bank because: (1) a depository-drawee-bank is under duty to determine at its peril the genuineness of the signature of 'an endorsing payee in a check and is liable in all events to the depositor for the money paid on forged endorsement of the payee, regardless of the bank's good faith or freedom from active negligence, and such bank is not relieved of liability by trusting the employee who may be guilty of the forgeries; and (2) that Association has the right to maintain the suit in its own name, regardless of the aforesaid assignment, and that its right of action is legal and no equitable defenses can be imposed against it, bnt, if mistaken in this, the equities of the Surety are superior to those of the Bank.
The Bank contends, among other things, that the Association cannot hold it liable because; (a) its negligence in conducting its business was the cause of the loss; (b) that the real party-complainant is the Surety Company; and (c) that the equities of the Bank are superior, or at least equal to, those of the Surety.
The chancellor dismissed the bill and the Association appeals.
The questions arise under these circumstances: The Association is a corporation, created and organized in 1934 under an Act of Congress entitled the Farm Credit Act of 1933, Title 12 U. S. C. A., sec. 1131 et seq., for the purpose of lending money to farmers upon their personal responsibility, and security of personal property, such as livestock, cattle, farming implements, crops, etc. Its territory covered ten -counties in North Mississippi, including the counties of Montgomery and Webster. Its domicile is at Oxford in Lafayette County. During the period involved heréin, it carried a large checking account with the Bank of Oxford, .a banking corporation, also domiciled at Oxford. In February 1935-, the Association employed a man by the name of E. F. Henderson, who lived at Kilmichael in Montgomery County. Henderson was a man of good reputation and rather widely known, having acted as deputy tax assessor of Montgomery County under both his father and mother as county assessors. Henderson, shortly after his appointment, became what is known as inspector-representative of the Association in Montgomery and Webster Counties. It was his duty and he had the power and authority to, and he did, take applications for loans from prospective borrowers in those two counties. He attended to the proper answering by the applicant of all of the questions called for in the application. .He inspected and appraised the property offered as security; prepared tbe notes and trust deeds securing them- and saw to their proper execution by the borrowers. He was a notary public and took the acknowledgements to such papers as needed to be acknowledged, and attended to the recording of the trust deeds. He made detailed, extensive reports to the Association on the standing' and financial ability of applicants and of the nature and value of the property offered as security, with recommendations as'to whether the loans should, or should not, be made. In cases of renewals or extensions of debts, Henderson recommended and had charge of that. He also made collections from the borrowers and remitted to the Association. In other words, Henderson had the sole duty, authority and "responsibility in making loans and collections in Montgomery and Webster Counties and the execution of the papers except that the Association retained the right to make or reject loans recommended by him.
Henderson continued this work until May 1939. During this time, the only supervision exercised over his work by the Association was that the secretary-treasurer thereof visited and conferred with Henderson some seven or eight times, but it is not shown that he in fact inspected any of the properties held as security by the Association other than the property of Henderson himself, who, during the time of his employment, had negotiated two personal loans with the Association.
Beginning on December 14,1937, and extending to May 26, 1939, Henderson at different times prepared applications to the Association for the sixteen loans involved herein. Fourteen of these supposed applicants were negro tenants residing upon lands of Henderson, and two of them were tenants upon lands of Henderson's sister, which he had under lease and was operating, all lands being in Montgomery County; The majority of these supposed applicants, if not all of them, could neither read nor write. None of them knew of the applications. Henderson made a lengthy, detailed report to the Association upon the financial responsibility of the applicants -and the property contained in the applications, recommending, all of the loans. He prepared the notes and trust deeds. He forged all of the names of these tenants to all of the papers and took their supposed acknowledgments thereto as a notary public. He recorded all of the trust deeds. The Association approved the loans and mailed checks to the fifteen supposed applicants to the addresses given in the applications. The draft was delivered in person by the secretary-treasurer of the Association to a Mr. Knight at Winona in -Montgomery County, who was named as one of the payees as the holder of a lien on the property offered as security. These checks were all payable to the supposed borrowers, but in one of them Henderson was also a payee. It was a part of Henderson's duty to examine the records and ascertain if there were existing liens on the property tendered as security, and, if so, the check would be made payable to the borrower and Henderson jointly so that Henderson would be able to see that the prior lien was satisfied when the check was cashed. Henderson had arranged either to receive these checks through the mails or that the recipients should deliver them to him. He had told these tenants that this was his method of arranging for their supplies. Henderson got possession of all of the checks and the draft and forged the names of all the payees except Knight, who himself endorsed the draft, Henderson forging the name of the other payee. Henderson was well known to the Bank of Winona in Montgomery County. He cashed seven of the checks and the draft at that Bank. Eight of the checks he cashed through local business concerns, who, in turn, deposited them for credit at the Bank of Winona. He cashed one of the checks at the Bank of Eupora in Webster County, which bank in turn sent the check to the Bank of Winona. All of the checks, except one, were forwarded to a bank in Memphis, Ten nessee. That hank forwarded them to the First National Bank of Oxford, which bank collected them from the Bank of Oxford. The Bank of Winona mailed one check direct to the First National Bank it Oxford and the draft was collected through a bank in Jackson, Mississippi. The checks and draft were all paid by the Bank of Oxford and charged to the account of the Association.
Henderson was sentenced to a Federal penal institution upon a plea of guilty of forgery.
The Association, shortly after receiving all of these papers, discounted them at the Federal Intermediate Credit Bank at New Orleans and fonvarded all of the papers to that institution.
An auditor of the Farm Security Administration would each year mail to one-fifth of the borrowers a written statement of the amount then owing by such borrowers according to the records of the Administration, asking verification of the correctness of the amount. In May 1939, such an inquiry was mailed to one Armsted Stells. Stells was also a tenant on Henderson's farm and Henderson had likewise forged all of his papers, and received the money. Stells replied to this inquiry saying that he did not owe the Oxford Production Credit Association any amount. This resulted in an investigation, and Henderson was discharged. The Stells debt has been paid and is not involved.
The Surety, in its policy, "hereby undertakes and agrees to pay . . . any financial loss through any dishonest, fraudulent or criminal act of any employee . . . of the Association."
On November 2,1939, the Surety Company, on demand of the Association, paid to the Association the amounts involved herein. About this time, or shortly thereafter, the Association, by writing, transferred and assigned all of its rights and claims against Henderson and his bondsmen as notary public and the Bank to the Surety Company, but, because of an error in the name of the assignee, the Association, on Angnst 29, 1941, executed another such assignment to the Surety in its proper name.
On February 6, 1940, the Surety wrote the Bank that it had paid these claims and made demand upon the Bank for reimbursement to it. The Bank declined to pay the Surety.
On October 16, 1941, the Surety, in its own name, filed a bill in equity in Montgomery County against the Bank of Oxford and Henderson and the U. S. Fidelity & Guaranty Company, the surety on Henderson's bond as a notary public. After a number of pleas had been filed, that suit was dismissed without prejudice in June 1942, and eight days thereafter, the Oxford Production Credit Association instituted an action in its name against the Bank of Oxford in the Circuit Court of Lafayette County, seeking a judgment against the Bank for the amount of these checks and the draft. Upon motion of the Bank of Oxford, the case was transferred tó the Chancery Court of Lafayette County, whereupon the Association filed this bill in that court.
We think that the rights of the parties under the foregoing circumstances are solvable by a decision of these questions: First — The effect of bringing the suit in the name of the Association; Second, the effect of the assignment itself; and, Third, whether the equities of the Surety are superior to those of the Bank.
On the first question, the proof shows that after the Surety dismissed its action in the lower court in Montgomery County, it requested the Association to institute in its -name the proceeding in Lafayette County, and that the attorneys for the Surety prepared all of the papers and pleadings and have prosecuted this suit and conducted all of the legal proceedings on behalf of the Association.
Section 505, Mississippi Code of 1930, provides: 'The assignee of any chose in action may sue for and recover on the same in his own name, if the assignment be in writing. In case of a transfer or an assignment of any interest in such chose in action before or after suit brought, the action may be begun, prosecuted and continued in the name of the original party, or the court may allow the person to whom the transfer or assignment of such interest has been made, upon his application therefor, to be substituted as a party plaintiff in said action."
In Bolivar Compress Co. et al. v. Mallett, 139 Miss. 213, 101 So. 79, this court held that an assignee of a chose in action assigned before suit may sue in the name of the original party or be substituted as a party-plaintiff for the assignor, but in either event the suit is that of the assignee. The court in that case said: "We have here, the real party in interest bringing the action in the name of his assignor who has no interest whatever in the cause of action. The court has jurisdiction of the cause and of the defendants; and the plaintiff, although not before the court in name, is prosecuting the action through his attorneys; ."
So, in the case at bar, it could be instituted and prosecuted in the name of the Association, but the suit is entirely for the benefit of the Surety. The Association has been paid and has itself no claim whatever against the Bank. The Surety is the real party-complainant.
As to the Second question — the effect of the assignment —Association, in its able brief, urges, that even though the suit is for the benefit of the Surety and the Surety is the real complainant, its rights and the defenses thereto rest alone upon the legal assignment, and no equitable defenses can be interposed on behalf of the Bank. It then invokes the general rule that a drawee-depository bank has no right to charge against the drawer a check which the bank pays on a forged endorsement of the payee, and that this legal right of-the depositor in this'case was assigned to the Surety. The Bank answers the first proposition by saying that even as against the depositor the liability does not exist against a bank if the negligent act or conduct of the depositor has contributed to the loss, the bank itself being free of negligence, and that under the facts of this case, the Association is responsible for the loss, First, by conferring upon Henderson such far-reaching duties and powers, without any supervision over, or check upon, his acts; and, Second, by retaining the checks after they were cashed without itself detecting the forgeries and reporting them to the Bank. Since we place our decision on other grounds, as shown hereinafter, we express no opinion on that question. ' The Bank further replies that the assignment added nothing to the rights of the Surety; that all substantial rights vested in the Surety by the doctrine of subrogation when it paid the debt to the Association. In this we think the Bank is correct.
The assignment in this record is dated August 29, 1941, a year and nine months after the payment of the obligation by the Surety. There is proof of a prior assignment but the date thereof is not shown, and a fair construction of the evidence on the point is that the prior assignment was subsequent to such payment.
It is generally conceded that, subject to statute, an insurer, on payment of a loss, acquires the right to be subrogated pro tanto to any and all rights which the insured may have against, not only the principal, but also third persons whose wrongful act or neglect caused the loss. The right of subrogation is founded, not upon contract, but upon justice and equity, and rests upon the principle that substantial justice should be attained regardless of form. It is a creature of equity, and is the mode which equity adopts to compel the ultimate payment of a debt by one who, in equity and good conscience, ought to pay it. And the rule applies to contracts of fidelity or guaranty insurance the same as to other insurance and indemnity contracts, and the term "third persons" includes banks who have paid out deposits on forged endorsements of payees. 60 C. J. 695-699; American Bonding Co. v. First Nat. Bank, 85 S. W. 190, 27 Ky. L. Rep. 393; American Nat. Bank v. Fidelity & D. Co., 129 Ga. 126, 58 S. E. 867, 12 Ann. Cas. 666; Louisville Trust Co. v. Royal In demnity Co., 230 Ky. 482, 20 S. W. (2d) 71; United States v. United States F. & G. Co., 6 Cir., 247 F. 16; Dantzler Lumber & Export Co. v. Columbia Casualty Co., 115 Fla. 541, 156 So. 116, 95 A. L. R. 258; Borserine v. Maryland Casualty Co., 8 Cir., 112 F. (2d) 409; American Surety Company of New York v. Bank of California, D. C. Or., 44 F. Supp. 81; National Surety Corporation v. Edwards House Co., 191 Miss. 884, 4 So. (2d) 340; 137 A. L. R. 697; American Surety Co. v. Citizens' Nat. Bank, 8 Cir., 294 F. 609; Meyers v. Bank of America Nat. Trust & Sav. Ass'n, 11 Cal. (2d) 92, 77 P. (2d) 1084.
• Upon payment by the Surety here, it became vested immediately by tbe doctrine of subrogation with all of the rights of the Association, against the Bank, subject, of course, to the priority of equities as between the Surety and the Bank, as is shown hereinafter. The only effect of a formal assignment, it appears, is to enable a Surety to institute the proceeding in its own name in the absence of a statute so providing. Borserine v. Maryland Casualty Co., supra. Association cites and mainly relies upon Grubnau v. Centennial Nat. Bank, 279 Pa. 501, 124 A. 142, and National Surety Co. v. Bankers' Trust Co., 210 Iowa 323, 228 N. W. 635. The contention of Association that the existence of the formal assignment places the parties on a different basis from that of subrogation finds support in these two cases, but they may be differentiated from the case at bar. Both proceedings, were in law courts, and in the Grubnau case the forgery was of the signature of the depositor (which imposes much greater responsibility on the bank than forgeries of endorsements as will be noted hereinafter), and the court also observed "Nor is it a ease of subrogation, wherein the equities of the bank may be said to exceed those of the insurer" [279 Pa. 501, 124 A. 144]. In the Bankers' Trust case [210 Iowa 323, 228 N. W. 636], the court said "This action is predicated on an assignment. . At the outset, it may be noticed that the theory or doctrine of subrogation is not involved in the instant case." In the case at bar, the Bank, in dne time, moved the circuit court to transfer to chancery the law case which had been instituted in the name of the Association as plaintiff. In support of this motion it set up not only that the Association, by reason of its negligent system of doing business and failure to discover the forgeries, was itself estopped to recover against the Bank, but also that, as between the Surety, which, for satisfactory consideration, had agreed to pay for the wrongs of Henderson, and the Bank, which, as. it claimed, had not been negligent, the equities of the Surety were inferior, or certainly not superior, to those of the Bank, and that these equitable defenses could be availed of only in a court of equity. Under this situation the trial judge properly transferred the case to equity under our jurisprudence. When so transferred, proof of all equities and the effect thereof could properly be made and considered, which could not have been done in a law court, as was the situation in the Bankers' Trust Company and Grubnau cases. In Meyers v. Bank of American Nat. Trust & Savings Ass'n, supra, Meyers had a contract with a surety company under which the surety agreed to indemnify Meyers against damage Meyers might suffer as a result of wrongful acts of his office manager. The manager forged endorsements of payees in checks and collected them. The surety paid Meyers, whereupon Meyers assigned, in writing, his cause of action against the Bank which paid the forged checks. Then Meyers brought an action against the Bank and recovered a judgment in the lower court. The same contentions were made there as are made here. The Supreme Court stated them in these words [11 Cal. 2d 92, 77 P. 2d 1085]: ' ' On the part of appellant bank, in effect, it is contended that whatever right plaintiff's assignee may have had to maintain an action against the defendants, ultimately, if at all, its success must have depended upon an application of the doctrine of subrogation. On the other hand, respondent insistently urges the point that since originally he was the owner of an assignable cause of action against the defendant bank, he also had the legal right to assign it to his indemnitor; furthermore, that because both the right of action and its assignment were legal in their nature, the action was one at law, with the necessary consequence that the equitable doctrine of subrogation was inapplicable." The court rejected the contention of the surety, saying: "In that regard, at the outset, it should be noted that assignment of an assignable cause of action is but one of the recognized forms of subrogation, and that when entitled to substitution in the place of one entitled to institute and to maintain an action, neither a written nor an oral contract is necessary to effect a transfer of such right; consequently, with reference thereto repeatedly it has been ruled not only that a formal, written assignment of a claim of the nature of that here involved adds nothing to the enforceability by the assignee of the cause of action, but also that it is subject to the same-defenses as though no assignment thereof of any sort had been made." The court then said that plaintiff placed great reliance on the Grubnau case, supra, and quoted therefrom this rule: "Where an insurance company had paid a loss resulting to insured from the forgery of checks on its deposit at a bank, and had taken an assignment of its cause of action against the bank there was no subrogation wherein the equities of the bank could be'said to exceed those of the insurer."
The court then remarked that this holding was out of harmony "with other precedents of like nature," citing a number of cases supporting its conclusion. It then cites and quotes from a number of cases to the effect that the written assignment adds nothing whatever to the substantive rights of the surety. See 60 C. J. 749, sec. 60; American Surety Co. v. Lewis State Bank, 5 Cir., 58 F. (2d) 559; American Bonding Company of Baltimore v. State Savings Bank, 47 Mont. 332, 133 P. 367, 46 L. R. A. (N. S.), 557; Louisville Tr. Co. v. Royal Indemnity Co., 230 Ky. 482, 20 S. W. (2d) 71; New York Title & Mortg. Co. v. First National Bank, 8 Cir., 51 F. (2d) 485, 77 A. L. R. 1052. We hold that the assignment in this case added nothing to the substantive rights of the surety.
On the Third question — the comparative equities of the Bank and Surety — it is the universal rule that subrogation being equity's method of compelling the ultimate payment by one who in justice and good conscience ought to pay, that it is not an absolute right, but depends upon the superiority of the equity of him who asserts it over the one against whom it is sought. It will never be enforced when the equities are equal. Plaintiff must show a superior equity. "It is well settled that since the doctrine of subrogation is a creature of equity, it will not be enforced where it will work injustice to the rights of those having equal or superior equities. " Annotation: 137 A. L. R. 700, and many authorities cited in that note; Southern Surety Co. v. Tessum, 178 Minn. 495, 228 N. W. 326, 66 A. L. R. 1136. It was said in National Surety Corporation v. Edwards House Co., Miss., supra [191 Miss. 884, 4 So. (2d) 341], "When it is sought to enforce the right of subrogation something more must be shown than that defendant could have been compelled by the original creditor to pay the debt and . . . the right of a surety to recover from a third person does not stand on the same footing as the right to recover from the principal." Northern Trust Co. v. Consolidated Elevator Co., 142 Minn. 132, 171 N. W. 265, 4 A. L. R. 510.
Now, applying these rules, are the equities of the Surety superior to those of the Bank? The obligation of the Bank to repay the Association, its depositor, the money it paid out on these forged endorsements does not grow out of negligence on the part of the Bank, in this case but rests upon an implied contract to repay the deposit. Of course a bank, in addition to the implied obligation to repay, may also be negligent, or guilty of fraud, or have knowledge of and participate in the wrongful act of withdrawing the money, and practically all of the cases which have come under our observation holding banks liable to sureties on forged endorsements have included some such proven factor. See Annotation: 137 A. L. R. 700-706. But that is not the case at bar. The bank here was not negligent. It did not know the payees in the checks nor their signatures. They were obscure persons living in another county. As a practical proposition, the Bank could not, after receiving and before paying the checks, seek out the endorsers and verify their signatures. No bank could operate under such requirement. The rigid rule of duty upon a bank to know at all hazards the signature of its depositors,, with whose signatures it is familiar, does not apply to endorsements of payees, with whose signatures they are seldom familiar. Citizens Bank of Hattiesburg v. Miller, 194 Miss. 557, 11 So. (2d) 457. We do not mean'to detract in any degree from the obligation of a bank to repay a depositor money it has paid on forged endorsements of payees, where such payment has not been caused by the negligence or fault of the depositor, but we do mean to emphasize that in this case there is no proof of negligence on the part of the Bank. There is only the implied contract to repay. Now, what is the foundation of the right of the Surety? It contracted, for a consideration satisfactory to itself, to indemnify the Association for loss from any dishonest act of Henderson. It. did so indemnify and thereby performed a primary obligation for which it had been compensated. In other words, the only obligations involved here are contractual — that implied on the part of the Bank to repay its depositor and that' of the Surety to make good any default of Henderson. The only wrong, or negligence here, as between the Surety and the Bank, is that of Henderson. Henderson was the sole cause of the money being paid out — and the Surety had contracted to pay for his wrong. If neither the Bank nor the Surety was the wrong-doer, but, by independent contract obligation, each was liable to the Association, then the satisfaction of such primary obligation by the-Surety would not entitle the Surety to recover against the Bank under the doctrine of subrogation, the Bank not being a wrong doer. It is not seen how the Surety can have a superior equity to the Bank under these conditions. The great weight of authority supports this conclusion. American Surety Co. v. Citizens' Nat. Bank, American Bonding Co. v. State Savings Bank, American Surety Co. v. Lewis State Bank, Meyers v. Bank of American Nat. Trust & Savings Association, Northern Trust Co. v. Consolidated Elevator Co.; Louisville Trust Co. v. Royal Indemnity Co., all supra; New York Title & Mortg. Co. v. First Nat. Bank, 8 Cir., 51 F. (2d) 485, 77 A. L. R. 1052, certiorari denied 284 U. S. 676, 52 S. Ct. 131, 76 L. Ed. 572; Washington Mechanics' Savings Bank v. District Title Ins. Co., 62 App. D. C. 194, 65 F. (2d) 827; Baker v. American Surety Co., 181 Iowa 634" 159 N. W. 1044; Com., for Use of Coleman, v. Farmers Deposit Bank, 264 Ky. 839, 95 S. W. (2d) 793; United States Fidelity & G. Co. v. Title Guaranty & S. Co., D. C., 200 F. 443; American Surety Company v. Bank of California, D. C. Or., 44 F. Supp. 81.
In Washington Mechanics' Savings Bank v. District Title Ins. Co., supra [62 App. D. C. 194, 65 F. (2d) 830], a bonded employee stole the drawn checks of his employer, forged the endorsements and collected the money, and the Surety, having paid the employer the loss, sought by subrogation to hold the bank responsible for such payments. The court, after observing that subrogation is an equitable'remedy which cannot be invoked as a matter of right, without regard to the circumstances of the particular case, but only in cases where justice demands and where the equities of the party asking subrogation are greater than those of its adversary, used this language, which is particularly applicable to the case at bar, "We are unable to see any particular in which the equities of the bonding company are superior to those of the appellant bank. Neither one was guilty of culpable negligence in the transaction. The bonding company, being in the business of guaranteeing for a consideration the faithful conduct of employees, enabled the defaulting employee to hold the position of trust which he occupied. The appellant hank was acting consistently with the ordinary course of banking business in accepting a check, whose genuineness it had no reason to doubt. It cannot be said that either one of these parties, as compared with the other, was primarily liable for the default. It follows that the equities of neither are superior to the equities of the other in the transaction. ' ' Recovery here requires the establishment of an equity in the Surety superior to that in the Bank, and that has not been done.
We find no error in the other assignments.
Affirmed.