(dissenting)-
I respectfully dissent from the result reached by the majority of this court.
The opinion of Judge Froeb and the opinion of Judge Eubank are both based upon the proposition that the rights of Liberty Mutual in this case arise solely from the equitable doctrine of subrogation, that is, subrogation is only called into play to bring about an equitable adjustment between the parties. The theory then continues that as between two innocent parties (the surety company and the collecting bank), the equities weigh in favor of the collecting bank, or the equities are balanced and since the surety received compensation for undertaking its risk, the loss should equitably fall upon the surety. See Meyers v. Bank of America Natl. Trust & Savings Ass’n., 11 Cal.2d 92, 77 P.2d 1084 (1938); Fidelity & Casualty Co. v. National Bank, 388 P.2d 497 (Okla.1963).
Liberty Mutual makes the following contentions as to the defense:
1. The defense is based upon faulty logic and should not be applied at all,
2. That if applied, Thunderbird’s liability is based upon negligence or con*209version (a wrongdoer) and therefore the equities between the parties are not equal and under the doctrine of subrogation it should prevail, and
3. That in any event, it obtained a legal assignment of Charles Bruning Co.’s rights and equitable doctrines should not be considered.
In my opinion, to resolve these issues, it is first necessary to analyze the nature of the underlying liability of Thunderbird as a collecting bank to the original payee, Charles Bruning Company. For purposes of this analysis, I take as a fact (because this matter comes to us by way of summary judgment) that Thunderbird received these checks bearing the unauthorized endorsement of the payee, and that the payee was not negligent nor did it ratify the unauthorized endorsement.
It appears to be well settled that a collecting bank is liable to the original payee whose unauthorized endorsement appears on the check. Merchants and Manufacturers Ass’n. v. First National Bank, 40 Ariz. 531, 14 P.2d 717 (1932); 6 Michie on Banks & Banking, Ch. 10, § 80 at 179 (1952); Annot. 100 A.L.R.2d 670 (1965). While this liability is well settled, the theory upon which the liability rests is not.
Some cases utilize the theory that the payee may ratify the check on the drawee bank and that the collecting bank is then liable to the payee for monies had and received. United States Portland Cement Co. v. United States National Bank, 61 Colo. 334, 157 P.202 (1916) ; Bell-Wayland Co. v. Bank of Sugden, 95 Okl. 67, 218 P. 705 (1923); George v. Security Trust & Savings Bank, 91 Cal.App. 708, 267 P. 560 (1928).
I have some difficulty with this theory since the common count of money had and received (assumpsit) was based upon the theory that the defendant had money belonging to the plaintiff which in equity and conscience should be paid to the plaintiff. See 1 Am.Jur.2d, Actions § 13 at 553 (1962). In the case of the collecting bank, the payee’s money has passed out of the collecting bank’s hands in the form of cash or credit to its depositor. Moreover, the selective ratification utilized in this theory is suspect, for if the payee ratifies the payment by the drawee bank, does the payee not also ratify the unauthorized endorsement which is the basis of the payment by drawee and thus defeat the action against the collecting bank ?
Other cases hold that as to the true payee of the check, the collecting bank has intermeddled with the check (by treating the check as genuine and collecting from the drawee) to the exclusion or disregard of the rights of the true owner and that this amounts to a conversion of the payee’s funds for which an action will lie. See Good Roads Machinery Co. v. Broadway Bank, 267 S.W. 40 (Mo.App.1924); Evenson v. Waukesha Natl. Bank, 189 Wis. 170, 207 N.W. 415 (1926); Moler v. State Bank, 176 Minn. 449, 223 N.W. 780 (1929). Again, in my opinion, such a theory has a twinge of artificiality about it, for the act of conversion, that is receiving the check for collection from the drawee bank, while technically qualifying as a conversion by the exercise of dominion over the check contrary to the rights of payee, is not the act which caused the payee’s loss — that act was the original unauthorized endorsement which put into action a series of events, of which the collecting bank’s accepting the check in the normal course of business is merely one of the steps, resulting in ultimate damage.
Still other cases hold that the collecting bank in acting upon the endorsement of negotiable papers is under a duty to ascertain the genuineness of prior endorsements and that the bank can be negligent in failing to act diligently in exercising this duty. See Massey-Ferguson, Inc. v. Fargo National Bank, 270 F.Supp. 227 (D.C.N.D. 1967) aff’d. 400 F.2d 223 (8 Cir. 1968); Gresham State Bank v. O and K Construction Co., 231 Ore. 106, 370 P.2d 726 (1962). I have further difficulty with this theory. If negligence is cast in terms of failure to *210act as a reasonable and prudent person, I first am unable to see how that reasonable person has the means to discover whether or not endorsements occurring prior to that of its depositor are genuine; and, second, if such means are available to it, how it can exercise these means of discovery on the thousands of third-party checks which pass through its offices each day without bringing the present check-oriented economy to a screeching halt. In short, while the law of negotiable instruments requires that endorsees of checks warrant the genuineness of prior endorsements, this is a warranty imposed by the nature of the instrument and the protection of commercial transactions, not because the duty imposed is that which is associated with the law of negligence.
In my opinion, the liability of the collecting bank to the payee should be predicated upon the nature of the occurrence which gives rise to the payee’s loss — the forgery or unauthorized endorsement. The Negotiable Instruments Act, which is the embodiment of common law on this subject, states that such an instrument is “wholly inoperative.”1 Being wholly inoperative, the obligation of the original maker of the check to the payee remains intact. Thus, in the absence of an agreement to the contrary, the payee could sue the maker on the original obligation. Steele v. Vanderslice, 90 Ariz. 277, 367 P. 2d 636 (1961). The maker in turn has a cause of action against the drawee bank for wrongfully paying his money. Valley Natl. Bank v. Electrical Dist. Number Four, 90 Ariz. 306, 367 P.2d 655 (1961). The drawee has a cause of action against the collecting bank for breach of its warranty as to the genuineness of prior endorsements. P & H Finance Co. v. First State Bank, 185 Okl. 558, 94 P.2d 894 (1939). The collecting bank has a cause of action against its depositor on the same theory and the depositor has a cause of action against the forger who started the unholy mess. By allowing suit by the payee directly against the collecting bank, multiplicity of suits is avoided. See, National Union Bank v. Miller Rubber Co., 148 Md. 449, 129 A. 688 (1925). As a practical matter, the suit by the payee against the collecting bank, puts into motion the round robin of litigation outlined, as is evidenced by the cross-claims and third party complaints filed in this action.
In my opinion then, the most sound and practical theory upon which the liability of the collecting bank can be predicated is upon its warranty of prior endorsements and the avoidance of multiplicity of actions.
Having thus established the character of the collecting bank’s liability, I find no reason why a claim based upon that liability is not assignable, see, Deatsch v. Fairfield, 27 Ariz. 387, 233 P. 887 (1925), nor do I find anything in that character to classify it as a wrongdoer so as to avoid the equitable defense of compensated surety, if that defense is valid.
I turn then to the defense of the compensated surety itself. As previously indicated, this defense is predicated upon the equitable doctrine of subrogation. The defense is adequately set forth in the case of. Louisville Trust Co. v. Royal Indemnity Co., 230 Ky. 482, 20 S.W.2d 71 (1929):
“In the circumstances, its [the surety’s] case depends altogether on the doctrine of subrogation, which is essentially a creature of equity, and is called into play only when it is necessary to bring about an equitable adjustment between the parties. . . . The case is one between a *211•paid surety and the trust company, whose negligence is claimed caused the loss. It must be conceded that the rule that makes the trust company liable to the Credit Clearing House Adjustment Corporation, is to say the least, a hard one.
“In its beginning the doctrine was applied with respect to deposits of public officers, guardians, and trustees, in whose selection or discharge the insured beneficiary or cestui que trust had no voice. It is now applied to the defalcation of agents subject in all respects to the will of their principal. Under that rule the bank must look to the sources of the deposits of all its depositors and see to it that the depositor does not pay out money except in the capacity in which the money should have been deposited. Since the duty thus imposed will operate as a poor check on an agent who has made up his mind to defraud his employer, it would seem that the proximate cause of loss is the dishonesty of the agent rather than a want of care on the part of the bank. Therefore, as between the employer and the bank, there is much to be said in favor of the position that the loss should fall on the employer who selects an unfaithful agent, and thus vouches for his integrity, rather than on the bank whose officers in many instances are called upon daily to examine and keep account of a large number of checks, a duty which, to say the least, operates .a severe strain on ordinary care. Though the rule as between the bank and the employer is settled, yet, in view of its extreme harshness, we are not inclined to go further and hold that the equities of a surety that has been paid to bear the loss are superior to those of the bank that receives no benefit from the transaction.” 20 S.W.2d at 71-72.
The defense has received somewhat wide acceptance. See, Meyers v. Bank of America Natl. Trust & Savings Ass’n., supra, 11 Cal.2d 92, 77 P.2d 1084 (1938); Fidelity & Casualty Co. v. National Bank, supra, 338 P.2d 497 (Okl.1963); American Surety Co. v. Lewis State Bank, 58 F.2d 559 (5th Cir. 1932); Washington Mechanics’ Sav. Bank v. District Title Ins. Co., 62 U.S.App.D.C. 194, 65 F.2d 827 (1933); National Surety Corp. v. Edwards House Co., 191 Miss. 884, 4 So.2d 340 (1941); Bank of Fort Mill v. Lawyers Title Insurance Corp., 268 F.2d 313 (4th Cir. 1959); American Surety Co. v. Bank of California, 133 F.2d 160 (9th Cir. 1943) ; McNeil Construction Co. v. Livingston State Bank, 185 F.Supp. 197 (D.Mont. 1960) aff’d 300 F.2d 88 (9 Cir. 1962) ; Oxford Production Credit Ass’n. v. Bank of Oxford, 196 Miss. 50, 16 So.2d 384 (1944).
As previously indicated, the bottom upon which the defense rests is that the rights of the compensated surety to step into the shoes of its principal are derived through the doctrine of subrogation — an equitable doctrine attendant with all the equitable defenses of competing equities. Undoubtedly, in the case of a surety, this was at one time true, as the equitable doctrine of subrogation had its origin in the surety-principal relationship. See, Pomeroy’s Equity Jurisprudence Vol. 4, § 1211 (5th ed. 1941). Thus, the surety of a defaulting principal debtor was allowed to obtain as a means of repayment all securities or other remedies in the hands of the creditor without the necessity of a written agreement to this effect. See 73 Am.Jur.2d, Subrogation, § 53-61. It was an expression of a court of equity to compel the ultimate discharge of an obligation or debt by the one who in good conscience ought to pay it, and is founded on the maxim that no one will be enriched by another’s loss. In re Farmers’ & Merchants’ State Bank, 175 Wash. 78, 26 P.2d 631 (1933).
As can be seen the equitable doctrine of subrogation had its origins in the debtor-creditor relationship, to avoid unjust enrichment. However, the contracted right of an insurer to the rights held by its insured in my opinion does not rest upon such a basis. In this regard I view a fi*212delity surety as an insurer of the trustworthiness of its insured employees. While unjust enrichment may still linger in the background in the insurance subrogation field, obviously the right to an assignment of the rights of the insured rests on legal contractual obligations entered into between the parties rather than upon equitable principles of unjust enrichment. Moreover, these contractual rights exist regardless of the conduct of third parties or their equities.
These contractual assignment rights have been referred to as “conventional” subrogation as compared to “legal” subrogation which takes place as a matter of equity, without agreement to that effect and which comes into being with the person paying the debt. First Natl. Bank v. American Surety Co., 71 Ga.App. 112, 30 S.E.2d 402 (1944). Whether we can refer to these rights as “conventional” or “legal” subrogation in my opinion is somewhat immaterial in this setting. The problem remains as to whether or not the courts will allow enforcement of those contract rights unattended by the trappings of equity.
The results have been mixed. If head counting is to be the measure of a “majority” and “minority” rule, it would appear that the umbilical cord of equity birth giving rise to the doctrine of subrogation will not be cut by a majority of courts, even though the surety’s rights arise by legal contractual rights or assignment. Illustrative of this rule is Meyers v. Bank of America Natl. Trust & Savings Ass’n., supra, 11 Cal .2d 92, 77 P.2d 1084 (1938):
“[T]he conclusion seems inevitable that one who asserts the right of subrogation, whether by virtue of an assignment or otherwise, must first show a right in equity, to be entitled to such subrogation, or substitution, and that where such right is clearly shown by the application of equitable principles, an assignment adds nothing to his rights thereto. Otherwise stated, where by the application of equitable principles, a surety has not been found not to be entitled to subrogation, an assignment will not confer upon him the right to be so substituted in an action at law upon the assignment. His rights must be measured by the application of equitable principles in the first instance, his recovery being dependable upon a right in equity, and not by virtue of an asserted legal right under an assignment.” 77 P.2d at 1086-87 (emphasis in original)
See also, American Surety Co. v. Lewis State Bank, 58 F.2d 559 (5th Cir. 1932); Louisville Trust Co. v. Royal Indemnity Co., 230 Ky. 482, 20 S.W.2d 71 (1929); American Surety Co. v. Bank of California, 133 F.2d 160 (9th Cir. 1943) (coming to the same result but on the theory payment by the surety company destroyed the claim by the principal against the bank so nothing remained to be assigned. A questionable theory to say the least); American Central Ins. Co. v. Weller, 106 Or. 494, 212 P. 803 (1932); 73 Am.Jur.2d, Subrogation § 9. There is, however, authority to the contrary; First Natl. Bank v. American Surety Co., supra, 71 Ga.App. 112, 30 S.E.2d 402 (1944); Aetna Casualty & Surety Co. v. Lindell Trust Co., 348 S.W. 2d 558 (Mo.App.1961).
The problem I have in applying the rule enunciated in Meyers, supra, is the assertion that the surety’s rights to an assignment of its principal’s claim must be founded in equity. As previously stated, this was historically true, but does that mean that merely because of principle of law had its origin in equity, the parties as between themselves, cannot contractually make those principles legally binding? Or put more directly, does the fact that the legal theory has origin in equity, require an application of equitable defenses, even though a compatible theory existed at law, without these defenses? I see no logical reason for making such a requirement, especially when the law recognizes the assignability of the claim here involved. Deatsch v. Fairfield, supra, 27 Ariz. 387, 233 P. 887 (1925). Moreover, it appears somewhat incongruous that principles of *213equity and fairness which admittedly give rise to a right of subrogation to prohibit an injustice are now invoked to prohibit enforcement of that right. No one seriously argues that the payee’s cause of action against the bank is not assignable, nor that a third party assignee could not maintain the action at law. What then happens to the maximum of equity that “equity follows the law and does not supersede it?”
Logically, probably the most basic problem underlying the defense of the compensated surety is the glaring fact that the true payee of the forged endorsement check has a valid cause of action against the collecting bank, and but for the payment by the fidelity surety, the bank would have to pay that payee the amount of its loss. Should the bank complain that it had to pay A $175,000, as compared to B who was owed the money, especially when all the defenses it has against B are available against A? See A.R.S. § 44-144. Insofar as the bank is concerned, it reaps a windfall because B had the foresight to be insured against the loss for which the bank is liable, thereby in some manner extinguishing its debt, through no action of its own. In this regard, the defense smacks of derogation of the collateral source rule applied in tort actions.
I am convinced that the application of the compensated surety defense in cases where a valid assignment exists, does not have its origin in logic, but in the reluctance of courts to enforce what many consider a harsh rule — the liability of the collecting bank to the payee. The temptation to yield to this reluctance is not without appeal, for, in essence, the law requires an “innocent” party to bear a loss for which it was not initially responsible, nor against which it could reasonably guard. This is a risk, however, that the bank undertook when it became engaged in the banking business. I find no logical reason why the claim of the payee against the bank is not assignable. Being assignable, I find no logical reason why the surety merely because it received a premium for undertaking the risk which resulted in the assignment, should not be entitled to enforce that assignment.
I would therefore hold that the security company, having a contractual right to an assignment of its principal’s claim against the collecting bank, receives such a claim subject to all the defenses available against its principal, but only such defenses — -the defense of the compensated surety or equitable subrogation not being one of these.
Because the trial court based its judgment in favor of the bank on the viability of the defense of compensated surety, I would reverse the judgment and remand the matter to the trial court for further proceedings.
. At the time these transactions occurred, the Negotiable Instruments Act was in effect. A.R.S. § 44-423 (1956) of that Act provided:
“When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right, is precluded from setting up the forgery or want of authority.”