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NAVRIDES v. ZURICH INSURANCE COMPANY

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Court of Appeal, Second District, Division 4, California.

Audrey R. NAVRIDES, Plaintiff and Respondent, v. ZURICH INSURANCE COMPANY, Defendant and Appellant.

Civ. 35225.

Decided: October 21, 1970

Haight, Lyon & Smith and William M. Fitzhugh, Los Angeles, for defendant and appellant. Orloff & Wilner and Robert D. Wilner, Los Angeles, for plaintiff and respondent.

This is an action by Audrey Navrides against Zurich Insurance Company on a $9,000 check delivered by the latter to Mrs. Navrides' attorney in settlement of a personal injury action which she had brought against Zurich's insured. The check was made payable to Mrs. Navrides and her attorney. The indorsement of Mrs. Navrides was forged and her attorney absconded with the money.

Zurich cross-complained against the Bank of America, to whom the check had been negotiated on the forged indorsement. This cross-action was severed and is currently pending in the superior court. The main action on the complaint was tried without a jury, resulting in a judgment that Mrs. Navrides recover against Zurich the face amount of the check, plus interest. Zurich is appealing from that judgment.

The underlying facts are not in dispute. On February 19, 1962, Mrs. Navrides was injured on the premises of Ralph Crancer, who was insured by Zurich. She employed Attorney Robert S. Forsyth, who brought suit on her behalf on the injury claim. Forsyth then negotiated a settlement with Zurich for $9,000. When Forsyth told Mrs. Navrides of the proposed settlement she rejected it. Nevertheless, Forsyth led Zurich to believe that he had his client's approval, and in September 1964 Forsyth furnished to Zurich a release of all claims, purportedly signed by Mrs. Navrides, and a request for dismissal of the action. In return, Forsyth received a $9,000 check1 dated September 22, 1964, payable ‘to the order of: Audrey R. Navrides and Robert S. Forsyth, her attorney.’ The request for dismissal of the injury action was filed October 8, 1964, and the dismissal was duly entered. The check was negotiated to the Bank of America on September 25, 1964, after which it was paid by the drawee bank, Continental Illinois National Bank and Trust Company of Chicago.

The purported signatures of Mrs. Nevrides on the release and on the check indorsement were forgeries. During the succeeding months Forsyth represented to Mrs. Navrides that the action was still pending and that Zurich had increased its offer to $12,000, which offer Mrs. Navrides said was unacceptable. She did not learn of the dismissal until about September 1, 1965. She never received any of the proceeds of the check.

On October 15, 1965, plaintiff notified Zurich of the forgery and demanded payment of the $9,000. The present suit was filed on December 14, 1965. On November 21, 1966, she filed suit against Forsyth for breach of fiduciary duty. The default of Forsyth was subsequently entered in that action, but there was no judgment.

In the case at bench the complaint alleges in substance that Zurich, for valuable consideration, executed its check payable to plaintiff and Forsyth in the amount of $9,000, that this check was paid to a person other than plaintiff on a forged indorsement of plaintiff's name, and that $9,000 with interest is due plaintiff. The answer admits these allegations except it denies anything was due plaintiff from Zurich. The answer pleads a single affirmative defense that plaintiff is estopped in that she had held out Forsyth as her agent for handling all matters in connection with the settlement of the case of Navrides v. Crancer; and that this caused Zurich to change its position to its detriment.

The findings of fact made by the trial court set forth the facts admitted by the pleadings and declare that plaintiff's conduct did not estop her from asserting that she neither signed nor authorized an indorsement on the check.

The first contention made by Zurich on this appeal is that plaintiff had rejected the $9,000 offer and thus ‘there is no underlying agreement on which plaintiff can predicate an action against Zurich.’

This argument is not available to Zurich under the pleadings or the uncontroverted facts of the case. The complaint alleges and the answer admits that the check was issued ‘for valuable consideration.’ The check was executed in consideration of a release and dismissal of the Crancer action. The Crancer action was dismissed, and an instrument purporting to be a release was delivered to Zurich. Neither party has ever attempted to set aside either the dismissal or the release. In admitting that the check was given for a valuable consideration Zurich in effect acknowledged that it had obtained substantially what it had bargained for. In bringing her action upon the check which Zurich gave in exchange for the dismissal, Mrs. Navrides ratified the release and dismissal for which the check had been given.

The crucial issue is whether Mrs. Navrides can maintain any action against Zurich for the proceeds of the settlement check after the proceeds have been paid to her attorney of record in the injury action.

Preliminarily we note that there is no specific allegation or finding, and no direct evidence, that Attorney Forsyth actually received the proceeds of the check. However, the record indicates that the case was tried on the assumption that this was an established fact. The trial judge thought so,2 plaintiff's attorney referred to it in araument3 and defendant placed in evidence the verified complaint in the case of Navrides v. Forsyth, wherein Mrs. Navrides had alleged that Forsyth ‘has failed and refused and still fails and refuses to pay said sum of $9,000.00 to plaintiff, and [Forsyth] has wrongfully and unlawfully converted the same to his own use, * * *’

We therefore review the legal issues upon the facts accepted as true by all parties in the trial court.

In Helgeson v. Farmers Ins. Exchange (1953) 116 Cal.App.2d Supp. 925, 255 P.2d 484 the defendant delivered to plaintiffs' attorney two checks, payable to the order of plaintiffs and their attorney, in settlement of accident claims. The attorney forged plaintiffs' indorsements, cashed the checks and absconded. The appellate department of the superior court affirmed judgments in favor of plaintiffs against the defendant, as drawer of the checks, upon the ground that the attorney had neither actual nor ostensible authority to indorse the names of his clients on the checks.

The Helgeson case was followed in Cignetti v. American Trust Co. (1956) 139 agent who was authorized by a lender to collect the proceeds of a loan. Payment was in the form of a check payable to the lender. The agent signed the lender's name on the check and collected and used the proceeds. In the lender's suit against the drawer of the check, a judgment of the trial court in favor of the drawer was reversed. Following the reasoning of the Helgeson case, the appellate court said that authority to collect the debt did not carry with it authority to indorse a check which was payable to the principal. Therefore, the indorsement was a forgery which, under the familiar rule of the negotiable instruments law, was a nullity (former Civ.Code, § 3104). The drawer of the check thus remained indebted to the payee despite having once paid the check on the forged indorsement.

The Cignetti case is indistinguishable from the case at bench except that the absconding agent was a real estate and loan broker collecting a real estate loan, instead of an attorney collecting the proceeds of a tort action settlement. But the Cignetti case turned, as did Helgeson, upon the rule of the negotiable instruments law that the unauthorized indorsement by the agent was a nullity, and thus the drawer of check remained liable to the payee on the instrument. The application of the principle to the case at bench calls for an affirmance.

But there is another rationale which will support the opposite result.

An attorney has authority ‘To receive money claimed by his client in an action or proceeding during the pendency thereof, or after judgment, unless a revocation of his authority is filed, and upon the payment thereof, and not otherwise, to discharge the claim or acknowledge satisfaction of the judgment.’ (Code Civ.Proc. § 283, subd. 2.)

It is well established by California case law that where an agent authorized to collect a debt owed to his principal receives a check payable to the agent, payment of the check discharges the debtor. (National Bank of San Mateo v. Whitney (1919) 181 Cal. 202, 183 P. 789; Pacific Acceptance Corp. v. Jones (1928) 95 Cal.App. 365, 369, 272 P. 1084; California Stearns Co. v. Treadwell (1927) 82 Cal.App. 553, 256 P. 242.)

Under these cases the obligor would be discharged if he gave the attorney cash or a check payable of the attorney alone.

The Restatement Second of Agency has abopted the same rule where payment is in the form of a check payable to the client.

The Restatment says in section 178, subdivision (2):

‘If an agent who is authorized to receive a check payable to the principal as conditional payment forges the principal's endorsement to such a check, the maker is relieved of liability to the principal if the drawee bank pays the check and charges the amount to the maker.’

Comment c under this rule says:

‘If a debtor, having an account at a solvent bake sufficient to pay a ckeck, gives to an authorized agent a check payable to the principal in accordance with business customs as conditional payment, he has performed his obligation, and any loss caused by delay because of conduct of the agent is at the creditor's risk. Thus, if the drawee bank cashes the check after a forgery and embezzlement by the agent and sharges the amount to the debtor, the latter is relieved of his debt. The creditor then would be subrogated to the right of the debtor against the bank. If, in the meantime, the bank becomes insolvent, it is the creditor and not the debtor who loses.’ (Emphasis added.)

The application of the Restatement rule in this case would result in judgment for the obligor, Zurich, upon the ground that its obliation had been discharged by delivery of a valid check. The Restatment distinguishes between the position of the obligor who, under the agency rules, is discharged and the position of the bank which, under the negotiable instruments law, may be held liable if it pays on a forged indorsement.4

Neither the Helgeson nor the Cignetti opinion appears to have considered the possible distinction between the position of the obligor and the bank, and the distinction between authority to discharge a claim and authority to indorse a check. Helgeson cites six out-of-state cases as supporting its conclusion, four of which were actions against the paying bank. The Cignetti opinion relies in part upon ‘the rule in Arcade Realty Co. v. Bank of Commercc [1919] 180 Cal. 318, 181 P. 66, 12 A.L.R. 102’ which deals with the liability of a drawee bank. Both Helgeson and Cignetti were decided prior to the adoption of the Restatement Second of Agency (May 23, 1957). Section 178 of the original Restatement did not contain the language now found in subdivision (2).

Among the decisions of other jurisdictions, the greater number hold that the obligor is discharged, on one theory or another, when the attorney or agent receives a check payable to the obligee even though the obligee never receives the proceeds.5

Notwithstanding the considerations which may be said to support a contrary view, we conclude that the Helgeson and Cignetti cases are indistinguishable from the case at bench and under the principle of stare decisis we should follow them.

One other point raised requires brief comment. At oral argument of this appeal Zurich's counsel asserted that Mrs. Navrides was guilty of laches because she dicovered the fraud approximately September 1, 1965, and did not notify Zurich until October 15, which was after the one-year statute of limitations may have run on any action Zurich might take against the bank. This defense of laches was not pleaded, and the trial court had no opportunity to determine exactly when Mrs. Navrides made her discovery and whether her conduct thereafter was unreasonable. The issue cannot be raised here for the first time.

The judgment is affirmed.

FOOTNOTES

1.  Plaintiff calls the instrument a check and defendant calls it a draft, but neither makes any point of the distinction. If it is a draft, the drawer is also the drawee and the Continental Illinois Bank is the place of payment. In any event, there is no question of the liability of the drawer or maker to the payee on the instrument at the time it was delivered to Forsyth. (Former Civ.Code, §§ 3141, 3142, 3211.) Since the instrument was issued and paid prior to January 1, 1965, the Commercial Code does not apply.

2.  At the beginning of the trial there was this colloquy with plaintiff's counsel:‘THE COURT: Where is Robert Forsyth? Long gone?‘MR. WILNER: He, your Honor, did serve some time in the penal institutions of the State of California and we were unable to locate him after the deposition was taken.‘THE COURT: We don't need him here. I was just curious. You wonder why a lawyer will go sour for that kind of loot. I mean, you know, Jiminey Christmas, it cost him more than that to go through law school.‘MR. WILNER: Well, I have been informed that this was not the only matter.’

3.  MR. WILNER: Your Honor, I would like to just make a few brief observations in the evidence that has been taken by the Court.(1) I don't think there is really any serious question as to the fact that there was a forgery. That was not authorized, of course. That speaks for the fact that it is a forgery and that Mrs. Navrides did not have any knowledge of this action on the part of her then attorney until approximately one year had elapsed from the time that he actually undertook to do the act.'

4.  For an illustration of the distinction (prior to the aboption of the Restatement) see Zidek v. West Penn. Power Co. (1941) 145 Pa.Super. 103, 20 A.2d 810, where the drawer-obligor was held to have been dishcharged, and Zidek v. Forbes National Bank (1046) 159 Pa.Super. 442, 48 A.2d 103, where the paying bank was held liable upon the same instrument. See also Central Trust Co. v. Hahn-Jacobsen Co. (1935) Ohio App., 4 Ohio Opin. 509, 33 N.E.2d 388.

5.  Holding that the obligor is discharged:Brown v. Grimes (1921) 74 Ind.App. 655, 129 N.E. 483;Zidek v. West Penn. Power Co. (1941) 145 Pa.Super. 103, 20 A.2d 810;National Fire Ins. Co. v. Eastern Building & Loan Ass'n (1902) 63 Neb. 698, 88 N.W. 863, opinion on rehearing 65 Neb. 483, 91 N.W. 482;Patterson v. Southern Ry. Co. (1930) 41 Ga.App. 94, 151 S.E. 818;McCully v. Kelley-Dempsey Co. (1933) 227 Mo.App. 775, 57 S.W.2d 784;Cohen v. Goldman (1957) 85 R.I. 434, 132 A.2d 414;Bailey v. United States (9th Cir. 1926) 13 F.2d 325.Holding that the obligor is not discharged:Berlowite v. Horowitz (1937) 250 App.Div. 728, 293 N.Y.S. 450;Holloway v. Barbee (1932) 203 N.C. 713, 166 S.E. 895.

FILES, Presiding Justice.

JEFFERSON and KINGSLEY, JJ., concur.

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