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The deputy sold the fictitious orders, with an assignment on the back of each of them, signed by him in the names of the myths to whom they were payable, to the State Savings Bank, for their full face value, which was, in a way unnecessary now to state, paid to him. They bore interest at the rate of 7 per cent. per annum. The bank held them for about a year, then presented them to the county treasurer for payment, and received from him their full face value, with accrued interest, amounting to $7,866. Thereafter, on discovering the fraud perpetrated upon it, the county instituted its suit against the National Surety Company, surety on the auditor's official bond, and recovered judgment for the amount paid the State Savings Bank. After paying the judgment the surety company filed its bill in the court below to be subrogated to the rights of Ramsey county against the State Savings Bank and to recover the amount it had been required to pay as surety for the auditor. From an order sustaining a demurrer to the bill, and dismissing the same, the surety company prosecutes its appeal to this court.
Edmund S. Durment (Albert R. Moore and W. J. Griffin, on the brief), for appellant.
John D. O'Brien, for appellee.
ADAMS, Circuit Judge (after stating the facts as above). The bank purchased nonnegotiable orders or drafts upon the county treasurer, payable to fictitious persons, and by them apparently assigned to it. The orders being nonnegotiable, the bank acquired no greater right to them than its assignors had. The assignors being fictitious persons, and the orders theinselves without consideration, fraudulent, and void, the assignee acquired no right against the county. When it presented the orders to the treasurer for payment, and secured payment thereof, it received moneys of the county without consideration, and unquestionably thereby became liable to the county for money had and received to its use. The surety company, as surety for the auditor, whose official misconduct, through the act of his deputy, subjected it to liability (Board of Co. Com’rs v. Sullivan, 89 Minn. 68, 93 N. W. 1056), having restored to the county the amount of its loss, now claims to be subrogated to the county's right of action against the bank to recover from the latter the amount paid by it to the county. Can this be done? The bank places some reliance, in denying the claim of the surety company, upon section 5951, Gen. St. Minn. 1894, which reads as follows:
“The official bond or other security of a public officer to the state or any municipal body or corporation, whether with or without sureties, is to be construed as security to all persons severally for the official delinquencies against which it is intended to provide as well as to the state, body or corporation designated therein."
This section is in pari materia with section 710 of the same Statutes. The latter reads as follows:
“An action may be brought against the county auditor and his sureties in the name of the state of Minnesota and for its use or for the use of any coun. ty or person injured by the misconduct in office of the auditor or by the omission of any duty required of him by law.”
These sections of the statute must be read into and treated as a part of every official bond contemplated by them. Accordingly, if the bank had been injured by reason of its purciiase of the orders from Bourne, and that injury had been occasioned by Bourne's official delinquency or misconduct in office, it might have recovered its loss from the surety company. If, by virtue of these statutes, the bank could have recovered from the surety company, as a matter of course the surety company cannot now recover from the bank.
We are therefore to inquire whether, if the bank had failed to secure payment of its refunding orders from the county treasurer, its loss or injury would have been so produced by the misconduct in office of Deputy Auditor Bourne as to subject the surety of the auditor to liability for it. It is true the bank could not have lost any money, or could not have been injured, if Bourne had not in his official capacity signed the spurious refunding orders. That act, being performed in the line of his official duty, was a misconduct in office, within the meaning of the statutes referred to; but the question still renains whether it or some other cause produced the bank's assumed injury.
The misconduct of Bourne in much of what he actually did and in what was necessarily involved, namely, in falsely representing to the bank that the orders were genuine, that the payees had paid money to the county treasurer for taxes, and were entitled under the law to an order refunding the amount so paid, that they were actual persons, instead of myths, and his further misconduct in fraudulently signing the mythical nanies to the assignments, in negotiating with the bank, and wrongfully securing its money, were altogether personal in their character. They wer in no sense representative or official. No duty arising out of his official relation required him to make any of the representations or commit any of the crimes just alluded to. On the contrary, the nonnegotiability of the orders, and possibly the intervention and activity of Bourne, as shown by the bill, should have attracted the attention of the bank, and warned it against purchasing the orders without making diligent inquiry concerning their validity. Bourne's personal representations and acts were well adapted to be the effective cause of the bank's injury, and, giving to the original official misconduct its natural force and effect only, were, in our opinion, the direct moving cause of the injury, without which it could not have occurred. They did not in a mere incidental and subordinate way work out the natural and probable consequences of the original official misconduct, but were, as between the deputy and the bank, the proximate and all-sufficient cause of the latter's injury. An act is the proximate cause of those resu :: only which are its natural and probable consequences, and which ought to have been foreseen in the light of the attending circumstances. Milwaukee, etc., Railway Co. v. Kellogg, 94 U. S. 469, 474, 24 L. Ed. 256; Travelers Ins. Co. v. Melick, 12 C. C. A. 544, 65 Fed. 178, 184, 185, 27 L. R. A. 629; Citizens' Gas & Electric Co. v. Nicholson, 81 C. C. A. 515, 152 Fed. 389, and cases cited. Within the fair and reasonable meaning of the bond and statutes in question, Bourne's personal, as distinguished from official, acts caused the assumed injury which the bank sustained.
But it is urged that the Supreme Court of Minnesota in Board of Com’rs v. Sullivan, supra, sustained a recovery by the county against the surety company for its loss made in paying the forged orders on the ground that Bourne's wrongful acts constituted "misconduct in office," within the meaning of the Statutes of Minnesota, and that the same rule of law would have been applicable if the bank had sued the surety company for its assumed loss. We cannot agree to this. The orders in question were apparently lawfully drawn, lawfully countersigned, and genuine. The natural and probable consequence of their issue was their presentation to the treasurer, to whom they were addressed, and paynient of them by him. The statutes of the state made it his duty to pay authorized orders of that kind. The surety company was liable to the county, because the presentation to the treasurer and the payment of the orders by him were the natural and probable consequence of their issue, and might have been reasonably anticipated by any prudent person. Right here is the radical and decisive difference between the position of the county and that of the bank. While the payment by the county was, in the ordinary course of business, reasonable and probable, the purchase of the orders by the bank on the assignments made in the name of myths by Bourne was not the natural or probable consequence of their issue. No one could have reasonably anticipated that a bank or any rational person would disregard the law which makes a nonnegotiable chose in action in the hands of an assignee subject to every defense existing in favor of the maker against the assignor, purchase a nonnegotiable order of the kind in question, and pay the purchase price thereof to one who was not the payee named therein, without inquiring into the genuineness of the assignment and the genuineness of its execution. Such a purchase would be out of the ordinary course of business, unnatural, improbable, incapable of anticipation, and in no legal sense the natural and probable consequence of the issue of the orders. For these reasons the purchase by the bank cannot be held to have so resulted from the "misconduct in office" of Bourne as to subject the surety company to liability to the bank for any loss it might have sustained by reason of its purchase.
Again, it is elementary that no liability could exist in favor of the bank against the surety on the bond of the auditor, unless it existed against the principal in the bond, the auditor himself, or the county of Ramsey, for which he was acting. If any argument is necessary to demonstrate that the bank never could have recovered its loss from the auditor himself, the following observations will be sufficient: The bank purchased nonnegotiable refunding orders, made nonnegotiable obviously for the purpose of preventing fraudulent practices and fraudulent dealings with them, and took them by assignment of the rights of the supposed payees. All it got by such assignment was the right which the supposed payees themselves had; and that, according to the undisputed facts in this case, was nothing. The bank took them subject to all the equities existing between the supposed payees and the auditor, or the county, whom the auditor represented; and those equities, according to the undisputed facts of the case, were unquestionably sufficient to defeat any claim of the bank against either of them. Taking an assignment of nonnegotiable securities, it was bound to inquire, not only whether all steps had been taken to create a legal liability against the county, but also as to the genuineness of the assignment of the right of the original payees. If such inquiry had been made at the places and of the officers plainly suggested on the face of the securities themselves, the bank would have unquestionably learned the fact that they were bogus and fraudulent, and saved itself from any possible loss. In such circumstances failure to make inquiry was culpable negligence. In no view, therefore, could the bank, by virtue of the statutes referred to, have maintained an action against the surety company, which incurred no greater liability than the principal in the bond, to recover its loss, if the county treasurer had not honored and paid the orders.
Having now disposed of the proposition that defendant is not protected by the Minnesota Statutes relied on, we are brought to the meritorious equitable question in the case, whether the surety company, which, as surety for the auditor, paid the county the amount of its loss, is entitled to be subrogated to the rights of the county against the bank, which improperly received its money and occasioned its loss. Subrogation is not a matter of strict right, but is purely equitable in its nature, dependent upon the facts and circumstances of each particular case, and intended to serve the purpose of compelling the ultimate discharge of a debt or obligation by him who, in good conscience, ought to pay it. American Bonding Co. v. National Mechanics' Bank, 97 Md. 598, 55 Atl. 395 (see note to same case in 99 Am. St. R. 474); Crippen v. Chappel, 35 Kan. 195, 499, 11 Pac. 453, 57 Am. Rep. 187; Barnes v. Mott, 64 N. Y. 397, 401, 21 Am. Rep. 625; Arnold v. Green, 116 N. Y. 566, 571, 23 N. E. 1; McCormick's Adm'r v. Irwin, 35 Pa. 111. The bank had a fund in its possession, so obtained from the county that it became liable to the latter as for money had and received to its use. Most naturally the county, when it found its money was gone, should have proceeded against the person or persons who had it, and thus simply have retaken its own; but, instead of doing so, it resorted to and recovered from the surety company on its contract of indemnity. Had the county, upon receipt of its money from the surety company, assigned its claim against the bank which had the lost money (a thing which equity and good conscience certainly would have approved, if not required), no one could doubt the right of the surety company to recover on the claim so assigned; and, inasmuch as in equity and fair dealing such an assignment should have been made, we cannot doubt the justice and equity of treating that done which ought to have been done. Subrogation is nothing more than an equitable assignment. When equity and good conscience requires the assignment to be made, subrogation, if necessary, will be allowed.
The general proposition that a surety, upon paying to a creditor the debt of his principal, is entitled to be subrogated to all the rights of the creditor against the principal, and to the benefit of all securities for the debt held by the principal, is universally acknowledged. According to this doctrine the surety company in the present case could have proceeded against the auditor to enforce any rights or securities held by the county against him. But the question now is whether its rights can be extended beyond the general rule, and it be subrogated to a claim and cause of action which the county had against the bank for appropriating the money which made the surety company liable to
the county. However limited the right of subrogation originally was, the remedy now has been so broadened that it has been called“the mode which equity adopts to compel the ultimate payment of a debt by one who in equity, justice, and good conscience should pay it." Arnold v. Green, 116 N. Y. 566, 571, 23 N. E. 1, and cases cited.
In Baylies on Sureties and Guarantors, p. 358, it is said:
“The right of subrogation to the remedies of the creditor on payment of the debt of the principal is not restricted to the remedies which the creditor had as against the principal, but extends to all the remedies which he had against the principal and others liable for the debt."
In the case of Lidderdale v. Robinson, 12 Wheat. 594, 6 L Ed. 740, the Supreme Court, after referring to the principle that a court of equity lends its aid to compel a creditor to assign a cause of action which it has against a third person to sureties who have paid the debt of their principal, says:
"This fully affirms the right to succeed to the legal standing of their principal; and, after establishing that principle, it is going but one step farther to consider that as done which the surety has a right to have done in his favor, and thus to sustain the substitution, without an actual assignment."
In Rooker v. Benson, 83 Ind. 250, 255, the doctrine as announced by Baylies (supra) is held to be the law.
In Fox v. Alexander, 1 Ired. Eq. (N. C.) 340, it is held that a surety of a guardian, who pays a debt of the guardian to the ward, stands in the shoes of the ward, and may follow the trust fund wherever it goes.
In Blake v. Traders' Bank, 145 Mass. 13, 12 N. E. 414, the facts are that a trustee pledged to a 'bank certain shares of stock belonging to a trust estate as security for the payment of his individual debt to the bank. The bank, or its successor, afterwards sold the shares and applied the proceeds on the debt of the trustee. The bank knew, or could have known from an inspection of the papers, that the shares were held by its debtor as trustee. A surety on the trustee's bond was compelled to pay to the trust estate the value of the stock converted by the bank. It was held that the surety was subrogated to the rights of the trust estate and could maintain a bill in equity against the bank to recover the amount paid by him. The court in its opinion, among other thing's, said:
“In this case the defendant and the surety were both liable to the trustees for the amount of the trust property—the former, in consequence of participating in the wrongful act of the first trustee; and the latter, by his contract to indemnify the estate against such act. The cases are analogous where one owner of property has claims for a loss against an insurer and a tortfeasor. The insurer is in the nature of a surety, and, upon paying the loss, he is subrogated to the rights of the owner to recover for the tort"--citing Hart v. Western Railroad, 13 Metc. (Mass.) 99, 46 Am. Dec. 719; Clark v. Wilson, 103 Mass. 219, 4 Am. Rep. 532; Mercantile Ins. Co. v. Clark, 118 Mass. 288.
See to the same effect, Sheldon on Subrogation, $ 89.
It is said in American Bonding Co. v. National Mechanics' Bank, 97 Md. 599, 606, 55 Atl. 395, 397, 99 Am. St. Rep. 466:
"That the doctrine of subrogation does go to the extent of giving to the surety, who has paid the debt of the principal, the benefit of the rights and