Court Opinion

ID: 6481754
Source: CourtListenerOpinion
Date Created: 2022-06-26 23:05:37.58164+00
Date Added: 2024-06-11T15:54:10.681294
License: Public Domain

EUBANK, Judge
(specially concurring).
While I agree with the disposition of this matter upon the equitable doctrine of subrogation, I do not agree that it is necessary or wise to give any credence to the “compensated surety” doctrine in the process of reaching a decision.
The compensated surety defense is this: a paid (or “compensated”) surety is not entitled to be subrogated to the rights of its insured against a bank which would be legally liable for any wrongful payments made but which is innocent of any fraud. See O’Malley, “Subrogation Against Banks on Forged Checks,” 51 Cornell L.Q. 441, 449-450 (1966).
The reason for the existence of the defense is shrouded in historical haze. All early sureties were gratuitous and thus received the protection of the courts. However, when suretyship became a business for profit, the courts rather quickly divested the paid sureties of their favored status, and the distinction between gratuitous and paid sureties became significant. Thus, parties were able to defend themselves in equity by asserting simply that their creditor’s subrogor was a “compensated” — rather than “gratuitous” — surety. See O’Malley, supra.
I reject the compensated surety defense to the extent that it arises solely from the fact of the surety’s being compensated for providing protection to the creditor. However, this does not mean that I am rejecting the applicability to these cases of the equitable concept of subrogation; I see no good reason to recognize that compensation paid to a surety will cause the surety to be disadvantaged one way or the other in equity. The relative rights of the parties must continue to be determined by subrogation, and this will always necessitate a balancing of the equities.
At the outset, several factors must be noted with respect to such a balancing. First, since we hold that this is a problem of subrogation, we ignore any attempt by a surety to avoid equity by transforming equitable proceedings into actions at law. We refer specifically to the use of an assignment of the creditor’s rights against the collecting bank. Commonly, assignments in this type of litigation have been used in an attempt to circumvent the compensated surety defense, but their desired effect is also to eliminate all equitable defenses. In a suretyship problem, these assignments are superficial devices which should not succeed in depriving equity of its jurisdiction.
Suretyship relations, and attendant rights of subrogation, are defined in terms of equitable principles. I am not saying that I am affirming the equitable nature of subrogation because it always has been so; traditional responses to this problem are not adequate to explain why an assignment to a surety will be ineffective. Rather, I say that subrogation is a concept which has no meaning outside of its foundation in suretyship, and a surety’s rights cannot have an independent, contractual base. Unless this were true, a surety would not be a surety, but simply an assignee or transferee, and I cannot see allowing a business to mantle itself in equitable protections and call itself a surety, *208but also to be permitted to sue at law when it appears more advantageous. Further, suretyship is regulated in Arizona as a part of the Insurance Code as is the specific conduct insured against in this matter. See A.R.S. § 20-257.
Second, I do not consider an assumption of risk by the surety to be an “equity” which must be balanced. Of course, the surety is in the business of assuming these risks, but to use this in the balancing process would be nothing more than a method of penalizing a compensated surety. Since I have explicitly rejected the compensated surety defense, it would be inconsistent for the same considerations to be utilized implicitly in this manner.
Third, the wrongful payment of money by the bank, despite its legal impropriety, does not by itself constitute an equity in favor of the surety. However, if the payment is negligent, or intentional, then equities may rise in the surety’s favor.
Finally, it should be noted that the compensated surety defense apparently was devised in order to resolve questions in which both parties appeared to be equally free from fault. See Comment, “The Right of a Paid Surety to Subrogation,” 44 Marq.L.Rev. 194, 198 (1966). In other words, the defense has been used effectively to avoid reaching hard decisions. I suggest that in no instance are the equities perfectly balanced and that one party can always show a superior equity to the other without resort to such substitutes for analysis.
When I examine and balance the equities in this litigation, I determine that Liberty Mutual cannot be subrogated to Bruning’s rights against Thunderbird; the equities are balanced in favor of the bank. The bank behaved reasonably, regardless of any absolute liabilities imposed by statute or by contract. In an economy which relies so heavily upon bank drafts and other negotiable instruments, it is unrealistic to expect a collecting bank to verify every prior endorsement, as well as the authority of the prior endorsers, on a depositor’s check.
Moreover, since Liberty Mutual stands in the shoes of Bruning, any negligence attributable to Bruning also must be attributable to Liberty Mutual. The record shows that Coffelt’s embezzlement occurred over an lli/j month period and involved over 200 checks totalling nearly $179,000. Arguably, Bruning was negligent in installing Coffelt in this position of trust to begin with; certainly, Bruning was negligent in failing to discover this extended defalcation before it did.
Therefore, since subrogation will not lie between the parties to this appeal, the trial court properly granted Thunderbird’s motion for summary judgment. I would therefore affirm the judgment.