Court Opinion

ID: 8765008
Source: CourtListenerOpinion
Date Created: 2022-11-26 12:22:17.14837+00
Date Added: 2024-06-11T17:01:48.874117
License: Public Domain

HOOK, Circuit judge
(dissenting). The case in brief is this: A deputy county auditor of Ramsey county, Minn., for whose official conduct and integrity the surety company stood sponsor, fabricated some orders on the county treasurer payable to fictitious persons. He forged the names of the payees to indorsements of the orders and disposed of them to the bank for face value. In form the orders were non negotiable, but it is conceded that in fact the bank acted innocently in buying- them. Afterwards the county treasurer, being in funds, paid to the hank the amount of the orders and accrued interest. When the criminal conduct of the deputy auditor was discovered, the county, acting through its board of county commissioners, cast about to recover its loss. It sued the auditor and the surety company, his official bondsman, and obtained judgment which met with the approval of the Supreme Court of Minnesota. Board of Co. Com’rs v. Johnson, 89 Minn. 68, 93 N. W. 1056. The surety company paid the judgment and now seeks reimbursement from the bank. It invokes the equitable doctrine of subrogation, and claims that the county could have maintained an action against the bank for the recovery of the money paid on the spurious orders, and therefore it should be put in the place of the county. It is admitted at the threshold of this proposition that if the bank had sustained the loss, instead of the county, and could in such case have recovered from the surety company, of course, the latter cannot now recover from the bank.
Could the bank have recovered from the surety company? I said at the beginning that the surety company stood sponsor for the of*32ficial conduct and integrity of the deputy. The Minnesota court so decided, and its decision to that effect lies at the root of the judgment which the county obtained and the surety company paid. A statute of Minnesota made the bond of the surety company available, not only to the county, but also to every person damaged by the official misconduct of the auditor; and in this connection we may substitute the deputy for the auditor, because the auditor and the surety company were responsible for whatever the deputy did by -virtue of his office. The sole test of the liability of the surety company to the county was loss resulting from official misconduct of the deputy. Precisely the same test applies between the surety company and the bank and every other person seeking indemnity for loss caused by the deputy. Now the Supreme Court of Minnesota held in effect that the loss sustained by the county by the payment of the money to the bank in redemption of the orders was due to the official misconduct of the deputy. The recovery by the county upon the bond of the surety company could have proceeded upon no other theory. The swindling scheme of the deputy commenced with his forgery of the spurious orders, and it must be conceded that this was done under color of his office; in other words, that it was official misconduct. He was convicted and sent to prison for it. State v. Bourne, 86 Minn. 426, 90 N. W. 1105. The final act in the transaction was the payment by the county treasurer to the bank; and the Supreme Court of Minnesota in effect held in the action brought by the county that the loss' of funds so caused was likewise due to the official misconduct of the deputy, and for that reason a recovery by the county upon the bond was sustained. The conclusion of my associates, therefore, exhibits this situation: The surety company, being answerable to every person injured by the official misconduct of the deputy auditor, is liable for loss caused by the forging of the orders, and also for loss caused by the payment of them by the county to the bank; but it is not liable for any intervening loss, because all intervening acts of the deputy were his personal acts, not done under color of his office. It seems to me that this is a short-circuiting that is not at all in harmony with the decision of the highest court of the state upon a matter peculiarly within its province to decide.. If the county could recover from the surety company for. the loss of the money it paid to the bank, and it was held that it could, I am unable to see why the bank, equally protected by the bond, would not, if the orders had remained on its hands, be entitled to recover the money it paid to the deputy auditor. That the bank might recover from the surety company seems clear, unless it is held that the decision of the Supreme Court of Minnesota is wrong, and that no recovery by the county from the surety company should have been allowed because, after the deputy, acting under color of his office, had forged the orders, he did some personal acts in furthering his scheme of obtaining moneys from the treasury, such as indorsing and selling them, which were not covered by the bond. That is what we are brought to. Can the conduct of the deputy properly be characterized as official delinquency towards the cpunty, and at the same time be called mere personal, unofficial conduct as to third persons, who are equally protected by the *33bond? What is there that makes the same conduct official in one view and personal in the other? Ordinarily the test is the scope of the officer’s powers and duties and the nature of the transaction in question.
It is also said that loss by the bank could not have been caused by the official misconduct of the deputy, because such loss does not naturally follow the forgery of uonnegotiable orders. With the greatest respect for the views oí my associates, 1 think this conclusion results from a misapplication of an admixture of rules of commercial paper with the doctrine of remote and proximate cause. They say in effect: If a county officer forges negotiable bonds and sells them the purchaser who sustains loss may recover from a surety which has contracted to protect everyone against official misconduct; but if he forges uonnegotiable county orders the purchaser who sustains loss may not recover. It cannot be denied that the officer is equally guilty of official misconduct hi each case; but it is said that in the latter case the loss is too remote from the original cause, for the reason that it could not reasonably have been foreseen in the light of attending circumstances. This latter proposition is qualified by the observation that a purchase of nonuegotiabie orders without inquiry as to their genuineness is out of the ordinary course of business, unnatural, improper, and incapable of anticipation. If this observation is vital to the position taken, it may be said that two answers suggest themselves: (a) The case before us is presented upon bill and demurrer. There is not the remotest suggestion in the bill that the bank purchased the orders without making inquiry as to their genuineness, (b) Nor is it averred that the purchase of such orders was not pursuant to a well-known business custom. I take it that every banker acquainted with the conduct of the fiscal affairs of counties knows that the purchase for investment of county orders which the county issuing them is not ready to pay is a common course of business. So in the last analysis the proposition is reduced to this: A loss sustained by the purchaser of forged nonnegotiable county orders is as a matter of law so remote from the act of forgery that the latter cannot be regarded as an efficient cause of the loss; that the mere fact that the orders were not payable to order or bearer breaks the otherwise obvious causal connection between the official misconduct and the loss. Even if the case before us can properly be reduced to this status, it seems to me to leap to the common understanding that the conclusion is unsound. It was just as likely that the orders would be dealt in by innocent parties as it was that the county treasurer would be finally so deceived as to pay them; and it is admitted that the payment by the treasurer was a proximate result of the forgery.
There is another.view of the case: Even conceding that the surety company would not be liable to the bank, it does not necessarily follow that the former is entitled to the subrogation sought and to a recovery from the latter. There remain to be considered the equities of the parties as between themselves, in view of their relations to the entire transaction. The final question in a case of this character is: Who in good conscience ought to stand the loss? In answering it, I am unwilling to say that the surety for a forger should *34be allowed to indemnify himself-at the expense Qf an innocent victim. The surety company says to the bank:
“The indorsement and sale of the orders by the deputy were his personal acts. I am not responsible for them. Therefore, because you bought the orders, you should stand the loss.”
But the bank may reply:
“You are responsible for his forgery, which was the first act and the dominant one in his scheme to defraud. Without it no one would have suffered loss. For a paid consideration you guaranteed the county and the public, including myself, against his official misconduct; and as between us you should not visit the loss upon one who acted innocently, and so wholly escape every consequence of a conceded breach of your bond.”
The bank, which is a defendant here, is in possession of and holds the legal title to the money it got from the county. At law the surety company has no right against the bank, but must make a case that challenges the conscience of a court of equity — not one that merely follows the devious technicalities of the law. When equities are equally balanced, the position of the defendant or the possessor of the thing in controversy is the better. The legal title added to an equity prevails over an equal equity that is not so supported. In Insurance Co. v. Clark, 203 U. S. 64, 27 Sup. Ct. 19, 51 L. Ed. 91, a man and his sister conspired to defraud an insurance company. The former, having insured his life, disappeared. The latter, as beneficiary, sued and obtained judgment, which was paid. Interests in the policies had been assigned to attorneys under contingent fee contracts, and they got their portions of the judgment. It was afterwards discovered that the insured was living and that a gross fraud had been perpetrated. The company brought suit in equity against the beneficiary and the attorneys to recover the money paid. In fact, the attorneys acted innocently and had paid for their shares by their services. Recovery from the beneficiary was allowed, but denied as to the attorneys, who held under the assignments from the guilty beneficiary. The company sought to charge the attorneys with notice because of the nonnegotiable' character of the policies. The Supreme Court said:
“But notice cannot be established by the mere fact that, while the appel-lees (the attorneys) held an interest in .the policies, they were assignees of choses in action, and took them subject to the equities. This is due to a chose in action not being negotiable. It does not stand on notice.”
In a consideration of the equities of the parties, an important feature of the position of the bank is its innocence and good faith. Reference is made in the foregoing opinion to supposed negligence of the bank in buying the orders. The case comes here on bill and demurrer, and if the bank is to be charged with negligence the foundation for it must be found in the bill. I can find no averment in the bill directly or indirectly charging the bank with any negligent conduct whatever. It is not even said that in purchasing the orders it acted irregularly or out of the usual well-known course of business. On the contrary, there is an affirmative admission that it knew nothing of the fraudulent character of the orders. Moreover, the absence of any charge of negligence against the bank is given emphasis by the fact that there are affirmative charges of negligence against *35the county treasurer, the chairman of the board of county commissioners, and the depositary of the county funds. It is true that it appears from the bill that the bank purchased nonnegotiable orders and obtained payment of them by the county treasurer; but the status of the parties in such a case results from a fixed rule in the law of dioses in action, and not from any supposed negligence of the purchaser in failing to make inquiries. Insurance Co. v. Clark, supra. As bearing upon the assumption of negligence, it is said that an inquiry at the auditor’s or treasurer’s office would have quickly disclosed the fraud; but the bill fails to charge either that such inquiry was not made or that, if it had been made, it would have resulted in the information. So how can we assume this fact prejudicial to the bank? On the contrary, we know from the averments of the bill and the statutes of Minnesota (Gen. St. Minn. 1878, c. 8, § 169) that about the time of the purchase of the orders they were taken to the treasurer, who indorsed on them a recital of lack of funds for their payment. We also know that about a year later these very orders were paid by the treasurer without question of their validity. The orders were fair on their face, every written evidence of their validity being genuine. When the bank secured them they bore the genuine signature of the deputy auditor, who had authority to execute valid orders; also an impression of the official seal of the auditor’s office; also the genuine signature of the chairman of the board of county commissioners to a recital that they were issued by the authority of the board. Under these circumstances, would it not have been an unusual exhibition of diligence had the bank ignored these evidences of regularity and instituted an independent investigation of its own? Are we to say, in the absence of information from the pleader, that the bank omitted to do what ordinarily prudent men engaged in that business would have done under the same circumstances? It is a matter of common knowledge that such orders are widely dealt in by investors, much the same as special tax warrants are in the larger cities., If, when they are presented to the county treasurer, there is no money in the fund upon which they are drawn, the treasurer indorses that fact upon them, and thenceforth they draw interest until funds are available for their redemption. The interest is the inducement to the investors. State v. Bourne, 86 Minn. 432, 90 N. W. 1108.
It is suggested that, if the bank did not have actual knowledge of the fraud (and the bill admits it did not) it had constructive knowledge of all the facts which reasonable inquiry would have disclosed, and therefore of the fraud itself. As to this I need only refer to the rule applied by Mr. Justice Brewer in United States v. Detroit Lumber Co., 200 U. S. 321, 333, 26 Sup. Ct. 282, 285, 50 L. Ed. 499, a case in which conflicting equities were weighed:
“Wlien a person has not actual notice, he ought not to be treated as if he had notice, unless the circumstances are such as enable the court to say, not only that he might have acquired, but also that he ought to have acquired, it but for his gross negligence in the conduct of the business in question. The question, then, when it is sought to affect a purchaser with constructive notice, is not whether he had the means of obtaining and might by prudent *36caution have obtained- the knowledge in question, but whether not obtaining was an act of gross or culpable negligence.”
So when it is said that the orders, being nonnegotiable, were taken subject to the defenses of the county, all is said that is relevant. Negligence, ordinary or gross, and notice, whether actual or constructive, have nothing to do with the case made by the bill in this cause. They are not for our consideration in weighing the equities of the bank, and were not considered by the trial court. ,
In my opinion the decree should be affirmed.