STRICKLAND TRANSP. CO. v. FIRST STATE BANK OF MEMPHIS, 214 S.W.2d 934

BREWSTER, Justice. Petitioner, Strickland Transportation Company, a corporation, operating a motor truck line, employed one John W. Akar-d as its commission agent in Memphis, Texas. His duties included picking up and delivering freight transported by petitioner; he was authorized to accept checks of customers payable to petitioner for freight charges; but he was not authorized to indorse or cash these checks, only certain officers of the petitioner being -so authorized. Akard served as petitioner’s employee for about four weeks in December, 1945, and January, 1946.

During that time he received for freight charges due petitioner from a customer, White Auto Store, six -checks, totaling $1304.73, all -drawn by White Aut-o Store on respondent, First State Bank of Memphis. He indorsed these checks and presented them to the respondent for payment. They were made payable and indosed as follows: Upon being presented with the checks, the bank paid their amounts to Akard, and charged them against the account of White Auto Store, which at all times had on deposit sufficient funds to pay the checks. Later the canceled checks were returned by the bank to White Auto Store.

Akard appropriated to his own use the money so paid to him, and left for parts unknown. When petitioner learned of Akard’s misconduct it demanded that the bank pay it the amounts of the checks and offered to deliver the checks properly indorsed. It also got from White Auto Store an assignment of all of its rights and causes of action against the .bank, arising out of the transactions set out above. After the bank refused to make the payments demanded, petitioner filed this 'suit.

It alleged that the bank was liable to it, as payee of the checks, for wrongful conversion of the checks when “it was apparent to the defendant (bank), its agents and officers, that the said Akard was not acting for and on behalf of the plaintiff and was obtaining the funds for his own use and benefit.” It also alleged that the bank was guilty of negligence in cashing the checks without petitioner’s indorsement.

It further alleged that the payment' of the checks upon an unauthorized in-dorsement was a breach of the -bank’s duty to its depositor, White Auto Store, that the bank was without authority to charge the amounts paid to Akard against the account of such depositor, and that as assignee of White Auto Store, the petitioner was entitled to recover the amounts.

Respondent answered by special exceptions and a general denial and pleaded specially that the execution and delivery of the checks to Akard constituted payment of the indebtedness of White Auto Store to petitioner, and that the assignment made by White Auto Store to petitioner conveyed no rights, because White Auto Store had suffered no damage by the payment of the amounts of the checks by the bank to Akard and the charging of the amounts against the account of White Auto Store. The case was tried by the court without a jury and judgment was entered for the bank.

No findings of fact or conclusions of law were filed or requested. The court of civil appeals affirmed the judgment of the trial court. 207 S.W.2d 941. Petitioner’s first contention is that the bank is liable to it as payee of the checks on the theory of wrongful conversion. It concedes that under the decision in Fidelity & Deposit Co. v. Fort Worth Nat. Bank, Tex.Com.App., 65 S.W.2d 276, the payee of a check ordinarily has no direct cause of action against the drawee for payment of the check upon a forged or unauthorized indorsement.

While the theory of conversion is not discussed in the opinion in Fidelity & Deposit Co. v. Fort Worth Nat. Bank, supra, it is made evident from the opinion of the court of civil appeals in that case, 48 S.W.2d 694, that recovery was sought on that theory, and the denial by this court of liability on the bank’s

part can only be construed as a rejection of the conversion theory as a ground of liability. Furthermore the Commission of Appeals expressly refused to approve the earlier decisions of courts of civil appeals, allowing recovery- on the theory of conversion, in City Nat. Bank & Trust Co. v. Pyramid Asbestos & Roofing Co., Tex.Civ.App., 39 S.W.2d 1101 and Pierce Petroleum Corporation v. Guaranty Bond State Bank, Tex.Civ.App., 22 S.W. 2d 520. See Fidelity & Deposit Co. v. Fort Worth Nat. Bank, supra, 65 S.W.2d 276, at page 278. We must hold to that decision.

Petitioner, however, would distinguish the present case on the theory that respondent knowingly and willfully paid the checks to an unauthorized person. In this connection, petitioner argues that as a matter of law, because of the forms of the indorsements on thé checks, the bank knew that Akard was acting without’ authority. We cannot agree with that contention. We assume, without deciding, that if it had been established that the bank knowingly and willfully aided Akard in his wrongful disposition of the checks, the bank would be liable to petitioner. See American Surety Co. v. Fenner, 133 Tex. 37, 125 S.

W.2d 258. But the record does not establish as a matter of law that the bank had any such knowledge or intent. The evidence shows that Akard, in presenting the checks 'for payment, was purporting to act in a representative capacity. For some purposes, he was in fact the agent of petitioner. While the form of the indorse-ments was such as might reasonably cause inquiry as to Akard’s authority, we do not think that the bank was necessarily informed that he was acting without authority in cashing the checks.

The bank, as drawee, could pay the amount of the checks to the agent of the payee without requiring an indorsement, if it chose to do so. 9 C.J.S., Banks and Banking, § 341,' page 684. If Akard had been authorized to cash the checks, the bank would not be -liable for paying the amounts of the checks to him, regardless of the defects in the form of the indorsements.

By entering judgment against petitioner the trial court impliedly found that the bank was not acting in bad faith and that it did not have actual notice of Akard’s lack of authority to indorse and cash the checks, and we cannot say as a matter of law that the evidence does not ■support those implied findings. Mere negligence would not impose liability on the bank to the payee. See Quanah, A. & P. R. Co. v. Wichita State Bank & Trust Co., 127 Tex. 407, 93 S.W.2d 701, 106 A.L.R. 821; West v. First Baptist Church, 123 Tex. 388, 71 S.W.2d 1090.

Therefore we conclude that, under the record, the petitioner as payee of the checks has no direct cause of action against the bank. Petitioner also sues as the assignee of White Auto Store. This situation was not involved in Fidelity & Deposit Co. v. Fort Worth Nat. Bank, supra. The question on this aspect of the case is whether White Auto Store had any cause of action to assign; and to decide it we must determine whether the liability of White Auto Store to petitioner was discharged by the delivery of the checks to Akard and their subsequent payment by the bank to Akard.

The question appears to be one of first impression in this state. Turning to the authorities and decisions in other jurisdictions, we find some -hold unequivocally that the liability of White Auto Store was discharged, while others -hold with equal emphasis that it was not. In that situation we must choose, and we have concluded that the -better reasoned authorities hold that White Auto Store’s liability wa-s discharged when the checks were paid to Akard. It is admitted that the checks were good when given and were paid in full to Akard when presented.

The only thing that kept petitioner from getting the proceeds was the infidelity of its own agent. So the question is: Must the harm wrought by that ágent’s unfaithfulness fall, on the -one who selected him and sent him out to receive checks under an implied representation that he was worthy of that office or' on one who was wholly innocent both of him and of his breach of trust? There is an excellent discussion of the proposition in Mc-Fadden v. Follrath, 114 Minn. 85, 130 N.W. 542, 544, 37 L.R.A., N.S., 201. There the creditor instructed his agent to call on the debtor -to collect the account.

The agent had authority -to receive payment either in cash or by check, but he had no authority to indorse and' receive money on checks payable to the creditor. The debtor gave the agent a check covering the account and payable to the creditor. The agent indorsed the check and received its amount, in money, from drawee bank, which in turn charged debt- or’s account with the amount and returned the canceled check to -the debtor. The agent did not account to his principal, the creditor, whereupon the latter brought suit against the debtor on the account to pay which the check had been given.

In -affirming a trial court judgment for the defendant, the Supreme Court of Minnesota said: “Whether a check is delivered to an agent or sent by -mail, it usually comes into -the hands of employees, of the payee, who are not given the right, but are given the opportunity, by the payee, to indorse the checks and receive the money, provided th bank neglects its duty to see that payment is made to the payee or his order.

If the check is improperly paid, because of the dishonesty of the agent that the payee intrusts with the check, and the negligence of the bank, there would seem to be no sufficient reason for placing the responsibility therefor on the drawer of the check. The drawer of the check parted with control over it in the usual course of business, and in this case in the exact manner the payee requested.

If either the drawer or payee must suffer because of the dishonesty of the agent, the one who designated him to receive the check and intrusted him with it should suffer, rather than the drawer, who had no voice in the selection of such agent, and who is in no way responsible for -his acts.” In Morrison v. Chapman et al, 155 App. Div. 509, 140 N.Y.S. 700, 702, wherein the facts were quite similar and the defaulting agent was named Cooper, the court says, “The real question therefore is who shall suffer by reason of Cooper’s rascality”, citing Burstein v.

Sullivan, 134 App.Div. 623, 119 N.Y.S. 317, which holds that, as between debtor and creditor, the transaction should be treated as a payment, precisely as though cash had been paid, “even though the agent forges an indorsement and steals the money.” If the agent “was authorized by plaintiffs to receive this check from the defendant, any misappropriation of its proceeds by him is at the risk of the party who set him in motion and put it in his power t-o perpetrate the wrong.

Such party must suffer rather than the party who is in no wise accountable for, and has no control of the perpetration of -the wrong.” Sage et al. v. Burton, 84 Hun. 267, 32 N.Y.S. 1122. And see discussion in Birkett v. Postal Telegraph-Cable Co., 107 App.Div. 94 N.Y.S. 918, affirmed in 186 N.Y. 591, 79 N.E. 1101. The same conclusion was reached by the Supreme Court of Arkansas in Mills v.

Hurley Hardware & Furniture Co., 129 Ark.- 350, 196 S.W. 121, wherein a check wa-s mailed to the creditor and received by an agent who was authorized to receive and fill orders and to receive checks therefor but not to cash them. But the agent, one Gowens, cashed the check and appropriated the proceeds to his own use. Upon the debtor’s refusal later again to pay the account, to pay which the check had been drawn and mailed, the creditor filed suit.

The court said, “But appellee could not be held responsible for the dereliction of the agent of appellant whom appellant had clothed with express authority to receive checks. Notwithstanding Gowens had no authority to cash the checks which he was authorized to receive through the mail, he did have express authority to receive these checks. The check was sent to and received by the proper party. That ended ap-pellee’s responsibility, and constituted payment by the appellee the moment the check was cashed.

If Gowens, appellant’s agent, in violation of express authority, through misrepresentation and fraud, cashed the check, appellee was in no manner responsible for such dereliction.” Upon much the same reasoning the same holding was made by the Supreme Court of Alabama in Kansas City, M. & B. R. Co. v. Ivy Leaf Coal Co., 97 Ala. 705, 12 So. 395, and by Courts of Appeals of Missouri in Union House Furnishing Co. v. National Bank of Commerce, 53 S.W.2d 1067, and in Indemnity Mutual Marine Assur. Co., v. Powell & O’Rourke Grain Co., 216 Mo. App. 673, 271 S.W. 538.

A widely recognized authority, Mechem on Agency, 2d Ed.,V'ol. 1, sec. 953, p. 687, declares: “Of course, where the agent is authorized to receive the check, the fact that he afterwards wrongfully indorses it and obtains the money upon it, does not destroy the effect of the check as payment by the drawer.” “Where a check is delivered to the agent of the creditor and the agent wrongfully indorses and collects the check, the original indebtedness is extinguished.

The situation is the -same as if the amount had .been paid to the agent in cash and stolen by. him.” Brady on the 'Law of Bank Checks, 2d Ed., p. 24, citing the New York and Missouri cases, supra. It would serve no good purpose to attempt any argument with those respectable authorities which reach the opposite conclusion. We think those authorities which we have cited and discussed announce a sounder and more equitable rule, so we follow them.

The unfortunate position in which petitioner finds itself is not due to any act or omission of White Auto Store but arises solely from the unfaithfulness of petitioner’s own agent. Under those circumstances it would not be just to say that White Auto Store must pay its debt again, either on the theory that it has recourse against the bank or on the theory that petitioner may have no effective remedy against the bank. It should not have to suffer the annoyance and expense of litigation merely because petitioner’s agent proved untrustworthy; those burdens justly belong to petitioner.

We think White Auto Store’s liability was discharged by its delivery of the checks to Akard and their subsequent payment by the bank to Akard, and that, therefore, White Auto Store had no cause of action against the bank to assign to petitioner. And we so hold. Both judgments below are affirmed.