Case Name: UNITED STATES FIDELITY & GUARANTY CO. v. FIRST NAT. BANK IN DALLAS, TEX., et al.
Court: United States Court of Appeals for the Fifth Circuit
Jurisdiction: United States
Decision Date: 1949-01-11
Citations: 172 F.2d 258
Docket Number: No. 12249
Parties: UNITED STATES FIDELITY & GUARANTY CO. v. FIRST NAT. BANK IN DALLAS, TEX., et al.
Judges: 
Reporter: Federal Reporter 2d Series
Volume: 172
Pages: 258–269

Head Matter:
UNITED STATES FIDELITY & GUARANTY CO. v. FIRST NAT. BANK IN DALLAS, TEX., et al.
No. 12249.
United States Court of Appeals Fifth Circuit.
Jan. 11, 1949.
Rehearing Denied Feb. 15, 1949.
WALLER, Circuit Judge, dissenting in part.
Curtis White, of Dallas, Tex., for appellant.
John Touchstone, Chandler Lloyd, Thomas G. Murnane and W. C. Gowan, all of Dallas, Tex., for appellees.
Before HOLMES, WALLER, and LEE, Circuit Judges.

Opinion:
LEE, Circuit Judge.
United States Fidelity & Guaranty Co. brought this suit to recover from John H. Beall and the First National Bank in Dallas, Texas, the amount which it, as insurer of employees of the American Liberty Pipe Line Co., paid to that company in settlement of liability resulting from losses sustained by the Pipe Line Co. on its checks drawn on the bank and bearing endorsements of the names of the payees forged by Beall, an employee of the Pipe Line Co. By third-party complaints, those individuals, firms, and banks who had endorsed the checks after Beall were brought in and made parties to the suit.
The facts are not in dispute and may be summarized as follows: Beall was employed in the accounting department of the Pipe Line Co. from February 1944 to April 1946. He was in charge of a suspense ledger in which appeared the names of parties to whom oil payments were due by the Pipe Line Co. and whose addresses were unknown. It was his duty to locate the parties, obtain proper checks from those in authority, and send or deliver the checks to them. From August 1944 to April 1946, he caused to be issued some forty-six checks payable to various individuals to whom the Pipe Line Co. owed money for royalties. The checks were drawn on the First National Bank in Dallas. Beall forged the names of the payees, cashed the checks at local stores and banks in Dallas and the vicinity, and applied the proceeds to his own use. The First National Bank paid the checks on presentation and charged them to the account of the Pipe Line Co. During the period of Beall's employment, the Pipe Line Co. carried insurance with the United States Fidelity & Guaranty Co. which protected it against loss up to $25,000 through larceny, forgery, or other dishonest or fraudulent acts of any of its employees. After discovering the facts, the Pipe Line Co. called upon the bonding company to make good the shortage. After investigation, the United States Fidelity & Guaranty Co. paid the loss and took a written release of its own liability and an assignment of the Pipe Line Co.'s claim against Beall, the First National Bank, and the other endorsers of the checks. Three days after this settlement, the bonding company made a demand for payment upon the First National Bank, and some months later it filed the present suit against Beall and the bank. It claimed that upon payment of the loss it became subrogated to the rights of the Pipe Line Co. to proceed against Beall and the bank, and, in addition, that it acquired the rights of the Pipe Line Co. by written assignment. Beall admitted liability, but the bank and the third-party defendants denied liability and defended mainly on two grounds: (1) that plaintiff's claim was barred by the failure of the Pipe Line Co. to notify the bank in writing, within one year after receipt of its cancelled checks, that certain of them were forged and unauthorized, and (2) that the Pipe Line Co., having elected to recover from the surety of the defaulting employee, was bound by its election, as was the surety company holding under it, and could not thereafter pursue an inconsistent remedy against the bank. Both defenses were sustained by the court below, and judgment was entered against Beall. From that judgment, the bonding company prosecuted this appeal.
While other assignments of error are presented, the main assignments have to do with the correctness of the lower court's ruling on the limitation period and the election of remedies by which recovery against the bank was denied. We shall consider them in the order named.
Article 342 — 711, of Vernon's Civil Statutes of Texas, which the court below held prevented recovery against the bank, has not been interpreted by any Texas appellate court so far as we can find; however, it is similar in its context to statutes passed by most of the other States. It provides that the drawee bank be given written notice by the depositor within one year if a check charged to his account is forged, unauthorized, raised, or altered. Such statutes have been held, almost without exception, to apply to forged or altered items but not to forged endorsements, the reason being that a depositor has no duty to investigate or to report forged endorsements; the drawee bank must determine for itself whether the endorsement is genuine or forged. 7 Am. Jur., pp. 366-367; McCornack v. Central State Bank, 203 Iowa 833, 211 N.W. 542, 52 A.L.R. 1297; Detroit Piston Ring Co. v. Wayne County & Home Savings Bank, 252 Mich. 163, 233 N.W. 185, 75 A.L.R. 1273. Construing the Texas statute as such statutes are generally construed, a check is forged when the name of the depositor as maker is forged; it is raised or altered when the amount as originally executed is increased or when the body as originally executed is changed. It is unauthorized when any or all of these things are done or the depositor's name as maker is signed by a purported agent without authority. Hence, we agree with appellant that the court below erred in holding the limitation period in art. 342 — 711 applicable to a forged endorsement.
The question remaining has to do with the election of remedies. What is often spoken of in judicial opinions as a choice between remedies is in reality a choice between substantive rights. "An election between substantive rights goes not to the form, but to the substance, affecting some right selected." 18 Am.Jur., p. ' 131. The essential conditions in an election of remedies, as that term is generally used, are: (1) the existence of two or more remedies, (2) an inconsistency between such remedies, and (3) the choice of one of them and the actual pursuit of one to the exclusion of the other or others. In Texas, it would seem, for the doctrine of election of remedies to have effect and to justify the conclusion that the suitor is not entitled to pursue an alternative remedy, it must appear that he has received some benefit or that his opponent has suffered some loss or detriment. 15 Tex.Jur., p. 831. Whether appellant rely on subrogation to the rights of the Pipe Line Co. or on an assignment of that company's rights to recover from the drawee bank, appellant stands in the shoes of the Pipe Line Co. and-may assert only such rights as the Pipe Line Co. may assert. The first inquiry, therefore, is,
What right may the Pipe Line Co. assert against the drawee bank?
In Texas as elsewhere, the making and acceptance of an ordinary deposit creates between the bank and the depositor the relation of debtor and creditor, the title to the money or thing deposited passing to the bank. 6 Tex.Jur., p. 231. A bank may not charge to a depositor a check upon which the endorsement of the payee is forged; if it does, the depositor may compel restitution, 6 Tex.Jur., p. 308, unless negligence or fault of the depositor has misled the bank. While in this case the forgeries extended over a period of approximately two years, nothing came to the attention of the Pipe Line Co. to put it on inquiry. In such want of notice, it could rely upon the vigilance of the bank in detecting forged endorsements. Nor can it justly be said that the company was negligent in placing the checks in the hands of Beall for delivery. A corporation acts through its agents, and it may assume, until the contrary at least is suggested, that its agents are honest.
When the Pipe Line Co. discovered its loss and obtained full knowledge of all the facts of Beall's forgeries and embezzlements, it had open to it two remedies, based on alternative rights: (1) It could demand payment of its money from the drawee bank on the theory that when the bank paid the checks on forged endorsements of Beall the bank paid out its own money and not that of the Pipe Line Co. or (2) it could affirm the action of the bank in paying out the money, and, upon the theory that Beall had embezzled its money, could have pursued, as it did, Beall and his surety, and from Beall's surety obtained a return of the money embezzled by Beall. Either the drawee bank had
the Pipe Line's money and, as debtor, was liable for it, or Beall had obtained it and embezzled it, and he and his surety were liable for it. The two rights rest upon theories which are wholly inconsistent with each other; and the election of the Pipe Line Co. to pursue to a successful conclusion its right against the bonding company estopped it, we think, from asserting any claim against the drawee bank. Insurance Co. of North America v. Fourth National Bank, 5 Cir., 28 F.2d 933; United States Fidelity & Guaranty Co. v. Fidelity National Bank & Trust Co., 232 Mo.App. 412, 109 S.W.2d 47.
Since the exact question, however, does not seem to have been passed on by any of the Texas appellate courts, we shall not rest our opinion solely upon the bar which resulted from the election and successful pursuit of an alternative right by the Pipe Line Co. but shall consider the rights of the appellant under subrogation and assignment out of the Pipe Line Co.
Subrogation is an equitable remedy, and, while a surety may become subrogated to the rights and remedies of the creditor 'against a third person, he stands, with respect to the right of recovery against a third person, upon a different footing from that upon which he would stand with respect to the right to recover from a principal. With respect to recovery from a principal, the right is absolute; as to a third person, it is conditional. Since subrogation seeks to place the charge where it ought to rest, by compelling payment by him who in equity owes it, such right will generally not be enforced against a third person where the equities of such third person are equal or superior to those of the surety in respect to the liability. 50 Am.Jur., § 111 and 112, pp. 754-755.
We are unable to see any particular in which the equities of the bonding company are superior to those of the drawee bank. Neither one was guilty of negligence so far as the record shows. The bonding company, for a consideration, guaranteed the faithful conduct of employees of the Pipe Line Co., hence enabled Beall to hold the position of trust which he occupied. The bank was acting consistently with hanking business in paying checks the genuineness of which in all particulars it had no reason to doubt. The bank did not participate in Beall's wrongdoing; it was in no wise responsible for his default. Notwithstanding its innocence, its liability to the Pipe Line Co. was occasioned by Be-all's fraud. Subrogation in behalf of a surety "is never applied against an innocent person wronged by the principal's fraud." American Surety Co. of New York v. Lewis State Bank, 5 Cir., 58 F.2d 559, 561.
What was said by the Ninth Circuit Court in American Surety Co. v. Bank of California, 133 F.2d 160, 164, in dealing with a similar situation, is particularly apposite :
" In the instant case [the] Bank was liable, if at all, not because it was a wrongdoer but because of its absolute liability on an implied contract to repay money on deposit only to the persons to whose order the checks arc drawn. The checks improvised by Crowe [the defaulting employee of the depositor] were cashed in the ordinary course of [the] Bank's business. No indication is found that [the] Bank knew any facts which would suggest the fraud of an employee of its depositor. Insurers [the bonding company], on the other hand, expressly contracted to secure Interior [the depositor] against losses caused by a dishonest employee, such as Crowe. They accepted the responsibility for such losses for a compensation, the premiums paid to them, which they have retained. Both they and [the] Bank are innocent of any wrongdoing, although all were liable to Interior on the basis of independent contract obligations— the implied contract of [the] Bank to pay only to those entitled, and the contracts of Insurers to indemnify against losses caused by a defalcating employee. Since Insurers expressly, voluntarily and for a compensation guaranteed against loss in the exact situation involved, the equity in the situation cannot lie in favor of Insurers and against [the] Bank for the payment made. Commercial Casualty Ins. Co. v. Petroleum Pipe Line Co., 10 Cir., 83 F.2d 412; Washington Mechanics' Sav. Bank v. District Title Ins. Co., 62 App.D.C. 194, 65 F.2d 827; New York Title & Mortgage Co. v. First National Bank, 8 Cir., 51 F.2d 485, 77 A.L.R. 1052; Meyers v. Bank of America N. T. & S. Ass'n, 11 Cal.2d 92, 77 P.2d 1084; Louisville Trust Co. v. Royal Indemnity Co., 230 Ky. 482, 20 S.W.2d 71; Northern Trust Co. v. Consolidated Elevator Co., 142 Minn. 132, 171 N.W. 265, 4 A.L.R. 510; American Central Ins. Co. v. Weller, 106 Or. 494, 212 P. 803."
When the appellant paid the Pipe Line Co., it took a release of its liability and an assignment of the Pipe Line's claim against Beall, the drawee bank, and all endorsers. See footnote 2. The executed document first expressly releases and discharges the appellant from all liability by reason of the dishonest actions of Beall under the indemnity policy issued by the appellant to the Pipe Line Co.; then it embodies an assignment from the Pipe Line Co. to appellant of all of the Pipe Line Co.'s claims against other parties. It is self-evident that when the bonding company paid the Pipe Line Co. the amount of Beall's embezzlement, there remained in existence no enforceable claim by the Pipe Line Co. against the drawee bank which the Pipe Line Co. could assign to appellant. As pointed out in American Surety Co. v. Bank of California, supra:
" The distinction between subrogation and assignment is clearly set forth in 6 C.J.S., Assignments, § 3, page 1051: 'So also subrogation presupposes an actual payment and satisfaction of the debt or claim to which the party is subrogated, although the remedy is kept alive in equity for the benefit of the one who made the payment under circumstances entitling him to contribution or indemnity, while assignment necessarily contemplates the continued existence of the debt or claim assigned.' "
Appellant had no right of subrogation as against the drawee bank, nor did it acquire by the assignment any cause of action against it.
The judgment appealed from is
Affirmed.
The release and assignment reads as follows:
"The State of Texas,
County of Dallas.
Know All Men By These Presents: That American Liberty Pipe Line Company, a corporation, of Dallas, State of Texas, in consideration of the payment by the United States Fidelity and Guaranty Company, a corporation, of the sum of $3,459.42, the receipt of which is hereby acknowledged, does hereby release, acquit, exonerate and discharge the United States Fidelity and Guaranty Company, its successors and assigns, from all actions, suits, claims, damages and liabilities whatsoever that it, the said United States Fidelity and Guaranty Company, has incurred by reason of losses sustained by the American Liberty Pipe Line Company due to larceny, theft, embezzlement, forgery, misappropriation, wrong-
ful abstraction, wilful misapplication, or other dishonest or fraudulent act or acts, of John H. Beall, our former employe, under and by virtue of that certain comprehensive, dishonesty, disappearance, and destruction policy, dated January 1, 1946, issued by said United States Fidelity and Guaranty Company, naming American Liberty Pipe Line Company, among others, an assured.
It is not intended by this agreement of settlement and release, executed by American Liberty Pipe Line Company to United States Fidelity and Guaranty Company, to release any other person, firm, corporation, association or bank, than the United States Fidelity and Guaranty Company, which may now be liable to the American Liberty Pipe Line Company on any cause of action which the said American Liberty Pipe Line Company may have against said person, firm, corporation, association or bank, growing out of the dishonest or fraudulent act or acts of John H. Beall.
In consideration of the above recited payment by the United States Fidelity and Guaranty Company to the American Liberty Pipe Line Company, American Liberty Pipe Line Company, a corporation, does hereby assign and set over unto the said United States Fidelity and Guaranty Company, its successors and assigns, to its own proper use and benefit, any and all claims, demands and causes of action of whatsoever kind, which it has or may have against John H. Beall, or against the indorsers of forged indorsements placed on certain checks by the said John II. Beall, and against the First National Bank in Dallas on which said checks were drawn, and by means of which the said John H. Beall defrauded American Liberty Pipe Line Company of the sum of §3,459.42.
And the said American Liberty Pipe Line Company hereby authorizes the United States Fidelity and Guaranty Company, in its own name, to proceed against the said John II. Beall, or the First National Bank in Dallas, or any of the indorsers of forged indorsements on a series of checks drawn on the First National Bank in Dallas, and by means of which John II. Beall defrauded the American Pipe Line Company, for the collection of any and ail claims, demands or causes of action which the said American Liberty Pipe Line Company may have against said John H. Beall, the First National Bank in Dallas, or said indorsers.
Executed: this 9th day of December, 1946, at Dallas, Texas.
American Liberty Pipe Line Company,
By (S) D. R. Zaehry,
Vice-President."
"A bank may notify a depositor by-mail at his address as reflected by the records of tbo bank to call for cancelled items charged to his account, or may mail such cancelled items to the depositor at such address. No depositor shall be permitted to dispute any charge to his account on the ground that the same is based upon a forged, unauthorized, raised or altered item unless, within one (1) year from the time the check was paid, he shall notify the bank in writing that the item in question is forged, unauthorized, raised, or altered. Acts 1943, 48th Leg., p. 154, ch. 97, subch. VII, art. 11."
" 'inconsistency of remedies' is not in reality an inconsistency between the remedies themselves, but must be taken to mean that a certain state of facts relied on as the basis of a certain remedy is inconsistent with, and repugnant to, another certain state of facts relied on as the basis of another remedy. If a party, therefore, invokes a remedy appropriate to a certain state of facts and there exists another remedy appropriate to a different state of facts, his invocation of the first remedy is an election. Whether coexistent remedies are inconsistent is to be determined by a consideration of the relation of the parties with reference to the right sought to be enforced as asserted in the pleadings. Two modes of redress are inconsistent if the assertion of one involves the negation or repudiation of the other, as where one of them admits a state of facts and the other denies the same facts 18 Am.Jur., § 12, p. 135.
As a witness, the attorney for the Pipe Line Co. was asked:
"Q. You satisfied yourself not later than December 9, 1946 on the facts pertaining to this entire transaction in which Mr. Beall had been involved? A. Yes, sir.
"Q. You realized at that time you also had a claim which you could assort against the First Nationa] Bank, as your depository, didn't you? A. Yes, sir.
"Q. You elected to assert your claim, however, against yo'nr bonding company, didn't you? A. Yes, sir.
"Q. And did receive a payment in full from it? A. Yes, sir.
"Q. Your bonding company, on the total amount of your loss, with reference to the Beall transaction? A. The total amount we daimed, yes, sir."
Ho was also asked if the Pipe line Co. made a demand against the bank, and be answered that it did not.