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Montgomery v. First National Bank

March 23, 1973

MONTGOMERY ET AL, RESPONDENTS,
v.
FIRST NATIONAL BANK, APPELLANT



Appeal from Circuit Court, Multnomah County. Berkeley Lent, Judge.

Dean DeChaine, Portland, argued the cause for appellant. With him on the briefs were Miller, Anderson, Nash, Yerke & Wiener, Portland.

Gerald R. Pullen, Portland, argued the cause for respondents. With him on the brief was Roger G. Rose, Portland.

Bryson, Justice. O'Connell,*fn* Chief Justice, and McAllister, Denecke and Holman, Justices. Tongue, Justice, concurs in the result.

Bryson

Plaintiffs brought this action against the defendant bank for conversion of a draft in the amount of $5,000 issued by an insurance company. The draft of

$5,000 was made payable to defendant Smith and plaintiff R. A. Montgomery. Smith forged Montgomery's endorsement on the draft and received full payment on the instrument from defendant bank. Defendants Smith and Besco Construction Company are nominal defendants and not parties to this appeal. The trial court, sitting without a jury, entered judgment in favor of plaintiffs. The defendant bank appeals. We affirm.

The evidence discloses the following facts. Plaintiff R. A. Montgomery is president and a shareholder of plaintiff M & S Construction Co. (M & S), and defendant Evans Smith is president of defendant Besco Construction Company (Besco). On April 1, 1968, M & S sold to Smith and Besco a seven-acre parcel of real estate, with a two-story building, located in Troutdale, Oregon. Smith's purpose in purchasing the property was to recondition the building to enhance its value, insure it heavily, burn it down, and collect the insurance proceeds.

Smith and Besco purchased the property for $50,000, paying $10,000 down. The purchase agreement obligated the purchasers to insure the building against fire in an amount not less than $40,000. In the event of a fire, the insurance proceeds were to be paid to the vendor to reduce the unpaid balance of the purchase price.*fn1

Smith refurbished the building and insured it with Farmers Insurance Group for $100,000, together with heavy coverages for equipment, stock, and fixtures. Although there was no mortgage on the property and M & S was the actual conditional vendor holding the security interest, R. A. Montgomery was named in the policy as mortgagee due to erroneous information given the insurer by Evans Smith.

Smith had the building set on fire on April 13, 1968. The fire caused some structural damage but was extinguished before the building was extensively burned. Smith decided to repair the building with the money he received from the insurance company for the partial loss. Within one month of the fire Smith received three insurance company drafts totaling approximately $40,000. Because of the policy's mortgagee loss payable endorsement, the draft for $5,000 involved in this litigation, representing a partial payment for fire loss to the building, named both Smith and Montgomery as payees. Smith forged Montgomery's signature on the back of the draft, presented it to defendant bank, and received the face value.

Smith spent $15,000 to $20,000 of the fire insurance proceeds to repair the building and install several improvements. On August 21, 1968, after the repairs had been completed, the property was appraised and valued at $56,000. Smith and Besco subsequently defaulted on their purchase agreement, and in March 1969 plaintiff M & S sued to foreclose on the contract. In April 1969 Evans Smith was tried on various criminal charges and during the trial, Montgomery, who had been subpoenaed as a witness, first learned of Smith's forgery of the $5,000 insurance draft.

While the M & S foreclosure suit was pending, Mr. and Mrs. Gene L. Davis acquired the interests of

Smith and Besco in the subject property. M & S and the Davises signed a settlement agreement effective November 1, 1969, whereunder M & S would take a decree of foreclosure in its suit and then sell the property to the Davises. Under the terms of the sale, M & S was able to recoup all expenses incurred in the foreclosure suit, all taxes and fire insurance paid on the property since the default of Smith and Besco, and all principal and interest which would have been due under the sale to Smith and Besco. Additionally, the Davises agreed to pay the remaining principal on terms more favorable to M & S than in the original sale. In short, the settlement relieved M & S of virtually all its losses in the transaction with Evans Smith and Besco.

In the settlement with the Davises, M & S agreed to apply in reduction of the purchase price any fire insurance proceeds received by it as a consequence of the fire on April 13, 1968. At the time of the fire, M & S owned a separate fire insurance policy written by Centennial Insurance Co. in the amount of $10,000. On October 29, 1969, M & S settled its claim on this policy for $2,000 in anticipation of a recovery from Farmers Insurance Group of the $5,000 involved in the forged draft. The proceeds of the settlement were credited to the Davises in reduction of their obligation to M & S, as required by the settlement agreement.

The defendant bank's first assignment of error contends that as a matter of law there was no forgery of the draft in question. Defendant relies on the "fictitious payee" rule embodied in ORS 73.4050(1)(b), which states:

"(1) An indorsement by any person in the name of a named payee is effective if:

"(b) A person signing as or on behalf of a

maker or drawer intends the payee to have no interest in the instrument * * *."

The draft in this case was drawn by a Mr. Hunt, the fire claim manager for Farmers Insurance Group. Evans Smith testified that he conspired with Hunt on the forged endorsement and that Hunt received $2,000 from the draft when Smith cashed it. Defendant contends that this demonstrates that Hunt never intended R. A. Montgomery to have an interest in the draft.

There clearly was a forgery in this case so the question is whether the drawer (Hunt) intended the payee (Montgomery) to have an interest in the draft. ORS 73.4050(1)(b).

Neither party called Mr. Hunt as a witness so the only testimony is that of Smith. The plaintiffs impeached Smith's testimony on cross-examination by eliciting his admission that he had been convicted of approximately twenty-six felonies.

Whether or not Mr. Hunt intended R. A. Montgomery to have an interest in the draft is a question of fact. We are required to uphold the trial court's judgment in favor of the plaintiff if there is sufficient evidence to sustain it, and all factual disputes concerning the circumstances must be resolved in a manner most favorable to the plaintiff. Multnomah Co. v. Oregon Auto Ins. Co., 256 Or 24, 27, 470 P2d 147, 149 (1970). The evidence that Hunt wrote the draft and named R. A. Montgomery as a co-payee supports a finding that Hunt did intend Montgomery to have an interest in the instrument. The trial court found in favor of the plaintiff and therefore disregarded Smith's testimony concerning Hunt's intention in writing the draft. The court did not err in concluding that the

"fictitious payee" rule in ORS 73.4050 (1)(b) was not applicable to the facts of this case.

In its second assignment of error, the defendant bank contends that as a matter of law it is not liable for conversion of the instrument in question because it was a collecting bank in this transaction.

Defendant argues that ORS 73.4190(3) precludes an action for conversion against a collecting bank which has dealt with a negotiable instrument in good faith. ORS 73.4190 states, in part:

"(1) An instrument is converted when:

"* * *.

"(c) It is paid on a forged indorsement.

"* * *.

"(3) Subject to the provisions of the Uniform Commercial Code concerning restrictive indorsements a representative, including a depositary or collecting bank, who has in good faith and in accordance with the reasonable commercial standards applicable to the business of such representative dealt with an instrument or its proceeds on behalf of one who was not the true owner is not liable in ...


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