ISELIN JEFFERSON FINANCIAL COMPANY INC v. UNITED CALIFORNIA BANK (1975)

The parties involved in the transaction spawning this action are Iselin-Jefferson Finance Company (Factor), Rothchild Bros. Textiles, Inc. (Factor's customer), Robert S. Scott, Inc. (Scott) (Rothchild's customer), Dean & Edith Greenberg, William and Marilynn Durkin (the latter four being principal owners of Scott), Factory Direct Yardage, Inc., a corporate affiliate of Scott, United California Bank (Bank), Harold S. Minden, an employee of Bank who had a notarial commission and acted as one (Minden), and Fidelity & Deposit Company of Maryland (Fidelity), surety on Minden's notarial bond.

Factor is the plaintiff in the action and respondent on this appeal. Its complaint is predicated on three several guaranties purportedly signed by Yardage, Greenbergs, and Durkins. Scott was not named a defendant because it was not a party to any guaranty; Marilynn Durkin was not named a defendant in the action because her signature was forged. No reason appears why Rothchild is not named. Factor obtained default on stipulated judgment against Greenbergs and William Durkin for the full amount due, $71,441.39, a judgment against Fidelity for $5,000 and against Minden and Bank in the sum of $71,441.39. Bank, Minden and Fidelity are the appellants.

On January 18, 1971, Factor agreed to purchase from Rothchild Textiles, Inc., accounts receivable due to Rothchild from Scott and to pay Rothchild $76,001.48 for the same on condition that it would receive concurrently with the delivery of the Scott accounts three several guaranties complete with notarial acknowledgements; one from the Durkins, one from the Greenberge, and a third from Factory Yardage, Inc.

Factor, or Rothchild, or Scott (the stipulated facts upon which this action was tried do not make this clear) then transmitted Factor's form of guaranty to each of the three several guarantors which, with completed signatures, were taken by Scott to Bank with Scott did business with the request that Bank arrange for acknowledgement of each of the signatures to the respective guaranties.

An officer of Bank's factoring department, as a service to its customer Scott, instructed Minden, one of its employees who qualified as a notary, to affix the notarial acknowledgement to the guaranties, even though at least one of the guaranties, Marilynn Durkin (Marilynn) was not personally known to and did not appear before him, advising Minden that he had compared Marilynn's signature with data at bank and vouched for her signature. Marilynn's signature was forged. She and her husband William were having marital difficulties at the time and she had refused to sign.

The three several guaranties completed in the above manner were transmitted to Factor on or about January 18, 1971, and on or about that date Factor paid Rothchild for the Scott accounts. Subsequent to the above transaction one $4,000 payment was made to Factor prior to default thereon; whereupon Factor filed the current action on the guaranties described.

The case was tried upon stipulated facts generally summarized above and decided upon findings and conclusions of the trial court substantially similar in all respects to the stipulation. Specific facts pertinent to our decision will be detailed as may be necessary for lucid discussion of the issues raised. In its final paragraph the stipulation provided: ‘No evidence or testimony contrary to or inconsistent with any fact hereinabove stipulated to be true shall be offered or received in evidence.’

Appellants concede that the conduct of Minden as a notary was official misconduct and negligence;¹ do not contest his agency for Bank and concede that ‘* * * liability of the notary relates to the liability of all three appellants.’ (Emphasis added.) They assert however that Marilynn ‘at no time had any assets which would meet in whole or in part the obligations of Scott'² and that a notary is liable for negligence or official misconduct ‘* * * only if, such negligence or official misconduct proximately causes damages sustained by the aggrieved party.’ (McAllister v. Clement (1888) 75 Cal. 182, 16 P. 775; Heidt v. Minor (1891) 89 Cal. 115, 26 P. 627; Heidt v. Minor (1896) 113 Cal. 385, 45 P. 700;³ Kirsch v. Barnes, 153 F.Supp. 260 (N.D.Cal.1957).)

Kirsch summarizes the doctrine on which appellants stand and says at page 263:

‘Where a loss is sustained by reason of a false certificate of acknowledgment of a forged instrument the measure of damages recoverable for such official misconduct by the notary is determined by the evaluations of the rights which would have accrued to the injured party had the underlying instrument been valid.’ (Emphasis added.)

Respondent cites authority which indicates dissatisfaction with and perhaps some relaxation of the strict application of the rule of damages enunciated by McAllister and the cases which follow it calling our attention to Hemet Home Builders Ass'n. v. v. Wells (1934) 3 Cal.App.2d 65, 39 P.2d 233; Tutelman v. Agricultural Ins. Co. (1972) 25 Cal.App.3d 914, 102 Cal.Rptr. 296; Lewis v. Agricultural Ins. Co. (1969) 2 Cal.App.3d 285, 82 Cal.Rptr. 509, but there are crucial factual distinctions in the latter cases. We make no attempt to distinguish respondent's citations from those of appellants, because it is clear that if proof were made of the value of Marilynn's guaranty, Fidelity as surety would be liable to the extent of its bond and that irrespective of appellants' cases, Bank and Minden as an employee of Bank would be liable for negligence, not because Minden was a notary, but because he acted for Bank, and the negligence of both is governed by a codified statement of the principle of damages summarized in Kirsch and adopted as to banks in section 4103 subdivisions (1) and (5) of the Commercial Code. ‘(1) The effect of the provisions of this division may be varied by agreement except that no agreement can disclaim a bank's responsibility for its own lack of good faith or failure to exercise ordinary care or can limit the measure of damages for such lack or failure; but the parties may by agreement determine the standards by which such responsibility is to be measured if such standards are not manifestly unreasonable.

‘* * *

‘(5) The measure of damages for failure to exercise ordinary care in handling an item is the amount of the item reduced by an amount which could not have been realized by the use of ordinary care, and where there is bad faith it includes other damages, if any, suffered by the party as a proximate consequence.'⁴

There is no suggestion of bad faith at bench by any of appellants.

The fact that Minden was a notary is of relevance only insofar as the liability of Fidelity is concerned. It is not material to the liability of Bank and Minden. In respect of the latter two appellants, the question narrows itself to what is the liability of Bank when its responsible employees certify or guarantee as genuine a forged signature affixed to commercial paper when it is obvious that such instrument will be used in a business transaction. We have been cited to no authorities on this proposition, and the only California authority we find is Kriste, cited as part of footnote 4. The fact that Minden acknowledged instead of certified Marilynn's signature as genuine is immaterial. If, as is true in similar transactions, Bank had been requested to certify or guarantee Marilynn's signature instead of acknowledging it, Bank would still be a defendant and the officer, who at bench vouched for the signature and instructed Minden to acknowledge it, would himself have certified it, he would have been named defendant instead of Minden. Thus, whether we apply the rule enunciated in McAllister, or the rule enunciated in Commercial Code, section 4103, subdivisions (1) and (5), we conclude on the facts before us that no action of appellants' caused damage to Factor.

Respondent, complementing its primary position that appellants by transmitting completed guaranties are the proximate cause of its entire loss, argues that there can be no assumption that the Marilynn guaranty was valueless, and fortifies its ancillary position by citing St. Paul Fire & Marine Insurance Co. v. Bank of Stockton, 213 F.Supp. 716, at page 719 (N.D.Cal. 1963), in which the court said:

‘* * * neither the parties to this action or [sic] the Court should be required or permitted to speculate concerning how much could have been recovered from the Velas or what would have been the value of a judgment against the Velas if the forgery had not intervened. Innumerable factors could make a good judgment worthless or a valueless judgment collectible the day after either was obtained.’

Respondent's ancillary position is adopted by Heidt v. Minor (1896) 113 Cal. 385, 45 P. 700, one of the cases relied on by appellants (see fn. 3). However, Factor elected to proceed on a stipulation of facts which omits any reference to Marilynn's potential ability to respond to a judgment and also elected to stand on the trial court's finding that her inability to so respond was immaterial (fn. 2).

One can't help but wonder why the one entity apparently responsible in all respects, which would have been and may still be the logical defendant, to wit, Rothchild was not a defendant to Factor's complaint. Rothchild was Factor's customer; the deal between the two was conditioned upon the delivery of valid guaranties to Factor, and Factor paid the purchase price to Rothchild on condition that valid guaranties would be delivered.

The judgment is vacated and the trial court is directed to enter judgment for the respective appellants in accordance with this opinion. Costs to appellants.

FOOTNOTES

1.  The trial court as part of its Finding 12 stated: ‘* * * Minden's conduct in falsely acknowledging said signature constituted negligence and official misconduct under the provisions of Government Code section 8214.’

2.  The trial court found: ‘On the date of the purported execution of said guarantee by Marilynn Durkin she had no assets which would be separate property under California law and did not have assets on March 11, 1974, which could be levied upon to satisfy a judgment if plaintiff was able to and did in fact obtain such a judgment against her.’The trial court also found: ‘The fact that Marilynn Durkin had no separate assets on the date of the purported execution of the guarantee, or any other specific date or point in time, and the fact that she did not have assets which could be levied upon to satisfy a judgment on the date of trial, or on any other specific date or point in time, is immaterial to the issue of proximate cause.’ (Emphasis added.)

3.  This second trial and appeal in Heidt accepts the principle of limitation of damages urged by appellants but clearly indicates that evidence is permitted to show potential fiscal responsibility of a guarantor (Marilynn, at bench) as a base upon which to predicate a judgment. The stipulation at bench provides no such evidence and none was offered.

4.  In the California Comment to the Commercial Code, it is stated: ‘6. Subdivision (5) has no statutory counterpart in prior California law. The maximum recovery is the amount of the item unless bad faith is established. Official Comment 6.‘The prior California rule was that the measure of damages was ‘prima facie’ the face amount of the instrument. Kriste v. International Savings & Exchange Bank, 17 Cal.App. 301, 119 Pac. 666 (1911) quoting Bolles' Modern Law of Banking.‘Subdivision (5) is in accord with the statement in this case but adds flexibility to the measure of damages by stating the plus and minus factors in the basic liability for the face amount of the instrument.‘* * *The Uniform Commercial Code Comment, which is also reprinted as an annotation to the section, states in pertinent part: ‘6. Subsection (5) sets forth a rule for determining the measure of damages which, under subsection (1), cannot be limited by agreement. In the absence of bad faith the maximum recovery is the amount of the item concerned. When it is established that some part or all of the item could not have been collected even by the use of ordinary care the recovery is reduced by the amount which would have been in any event uncollectible. This limitation on recovery follows the case law. Finally, when bad faith is established the rule opens to allow the recovery of other damages, whose ‘proximateness' is to be tested by the ordinary rules applied in comparable cases. Of course, it continues to be as necessary under subsection (5) as it has been under ordinary common law principles that, before the damage rule of the subsection becomes operative, liability of the bank and some loss to the customer or owner must be established.’

ROTH, Presiding Justice.

COMPTON and BEACH, JJ., concur.