Eatinger v. First Nat L. Bank of Le

No. 82-04 IN THE SUPRE.MJ3 COURT OF THE STATE OF !JIONTANA

RUTH H. EATPNGER, Plaintiff and Appellant, VS.

FIRST NATIONAL BANK OF LEWISTOWN, a National Banking Corporation, Defendant and Respondent.

Appeal from: District Court of the Tenth Judicial District, In and for the County of Fergus Honorable LeRoy L. McKinnon, Judge presiding. Counsel of Record: For Appellant: K. Robert Foster argued, Lewistown, Montana For Respondent: Peter L. Rapkoch argued, Lewistown, Montana

Submitted: July 8, 1982

Decided: August 11, 1982

Mr. Chief Justice Frank I. Haswell delivered the Opinion of the Court. In an action by a depositor against a bank for conversion of two checks, the jury returned a verdict in favor of the bank and judgment was entered thereon. Follow- ing denial of her motion for a new trial, the depositor appeals. We reverse. On August 4, 1976, plaintiff Eatinger drew a check on her account at defendant First National Bank of Lewistown in the amount of $7,128.32. She gave the check to Ervan Glover, a contractor working for her, who was to take the check to Great Falls to pick up the various supplies indicated on the face of the check (specific dollar amounts were allocated for "poles," "form material," "lumber ,' etc., I totaling $7,128.32) from Intermountain Company, the payee. Unknown to plaintiff, Glover endorsed the check at defendant bank "for exchange only to Intermountain Company by Ervan Glover." Defendant issued a cashier's check to Intermoun- tain Company for $7,128.32 which listed plaintiff as the remitter and was signed by an officer of the bank. Glover applied the cashier's check to his own account with Inter- mountain rather than using it to buy materials for plaintiff. On August 17, 1976, plaintiff similarly drew a check for $5,500, and Glover followed the same procedure and applied defendant's cashier's check to his account at Custom Corrugating and Supply, the payee. After plaintiff reviewed her August bank statement wherein the two checks were charged against her account, she discovered that Glover had endorsed them. She went to defendant bank and was told by one of the bank's employees

that there was nothing to worry about since the cashier's checks were made out to the appropriate payees. Late in October Glover called plaintiff and told her he was out of money and was not finishing his contracting job for her. Plaintiff then discovered that Glover had applied the proceeds to his own accounts with the payees rather than her account. Glover has subsequently disap- peared. On March 27, 1977, plaintiff filed an amended com- plaint for the conversion by defendant bank of the two checks and prayed for judgment in the total sum of the two checks ($12,628.32) plus interest. Defendant answered, denying any failure to properly perform its duties, and raised as defenses plaintiff's failure to timely notify defendant of any claimed mistakes and the fact that the intended payees of the checks received the proceeds thereof. After plaintiff's motion for summary judgment was denied, the case was tried to a jury which returned a verdict for defendant. Plaintiff's motion for a new trial was denied, and plaintiff appeals. Although appellant presents numerous issues for our review on appeal, one issue is dispositive in this case, i.e., whether the District Court erred in denying plain- tiff's motion for summary judgment. A successful motion for summary judgment requires that there be no genuine issues of material fact and that the moving party be entitled to judgment as a matter of law. Rule 56(c), l4.R.Civ.P. Appellant contends that the denial of her summary judgment motion runs counter to several cases including

H i l l s l e y v. S t a t e Bank of A l b a n y ( 1 9 6 6 ) , 1 8 N.Y.2d 952, 277 N.Y.S.2d 1 4 8 , 22.3 N.E.2d 5 7 1 , and T o n e l l i v . C h a s e M a n h a t t a n Bank (1977), 4 1 N.Y.2d 667, 394 N.Y.S.2d 858, 363 N.E.2d 564. B o t h o f t h e s e cases h o l d t h a t , i n a forged endorsement o r a b s e n t endorsement c a s e , even though t h e intended payee may receive t h e p r o c e e d s of a check, if t h e funds a r e n o t applied for the purpose for which they were intended the bank may be h e l d liable. A p p e l l a n t a l s o c i t e s Conwed Corp o r a t i o n v . F i r s t C i t i z e n s Bank & T r u s t Co. ( 1 9 7 4 ) , 262 S.C. 48, 202 S.E.2d 22, w h i c h r e v e r s e d a summary j u d g m e n t f o r t h e d e f e n d a n t bank i n s i m i l a r c i r c u m s t a n c e s and remanded f o r a

t r i a l on t h e m e r i t s . R e s p o n d e n t a t t e m p t s t o d i s t i n g u i s h T o n e l l i on s e v e r a l

g r o u n d s i n c l u d i n g t h e f a c t t h a t t h e r e a c a s h i e r ' s c h e c k was i s s u e d on an unendorsed check whereas h e r e Glover e n d o r s e d t h e checks. Respondent a l s o a r g u e s t h a t d e f e n d a n t is n o t l i a b l e because the payee r a t i f i e d Glover's actions. On o r a l argument respondent further contended that Glover had apparent authority t o negotiate p l a i n t i f f ' s checks because many residents of the area knew that he was employed by plaintiff.

W e a r e n o t p e r s u a d e d by r e s p o n d e n t ' s r e a s o n i n g . Here t h e d e f e n d a n t a c c e p t e d and n e g o t i a t e d two c h e c k s w h i c h w e r e n o t e n d o r s e d by t h e p a y e e s o r by a n y o n e who was c l o t h e d w i t h a p p a r e n t o r a c t u a l a u t h o r i t y t o s o a c t f o r them. G l o v e r was n o t c o n n e c t e d w i t h t h e p a y e e s i n a n y way.

S e c t i o n 30-4-401(1), MCA, provides that a bank may charge a customer's a c c o u n t f o r a n i t e m t h a t is " p r o p e r l y

payable." There a r e a number of cases w h i c h h a v e i n t e r - preted this language t o require proper endorsements. For

example, i n K o s i c v. N a r i n e M i d l a n d Bank ( 1 9 8 l ) , 5 5 N.Y.2d

620, 446 N.Y.S.2d 264, 430 N.E.2d 1317, a check with "Captain Blake's, Inc." as t h e p a y e e was endorsed by "S.

Ferry." The c o u r t f o u n d t h a t t h e d e f e n d a n t bank b r e a c h e d its d u t y t o its customer by c h a r g i n g t h e s e c h e c k s a g a i n s t

h i s a c c o u n t b e c a u s e t h e y were n o t p r o p e r l y p a y a b l e (citing U.C.C. s e c t i o n 4-401). The c o u r t a l s o r e j e c t e d t h e b a n k ' s

defense that t h e funds reached t h e intended payee because t h e proceeds never reached t h e account of Captain B l a k e ' s , Inc. Similarly, i n Cincinnati I n s u r a n c e Co. v. First National Bank of Akron (1980), 63 O h i o St. 2d 220, 407 N.E.2d 519, a c h e c k l a c k i n g t h e e n d o r s e m e n t of one of the

joint payees was held not properly payable under the c o u n t e r p a r t of our s e c t i o n 30-3-116, MCA. Here, t h e bank a c c e p t e d and c h a r g e d a g a i n s t p l a i n t i f f ' s a c c o u n t two c h e c k s which were n o t p r o p e r l y e n d o r s e d and t h e r e f o r e n o t p r o p e r l y

payable. The bank may not charge plaintiff's account therefor.

The b a n k ' s d e f e n s e on t h e g r o u n d s t h a t t h e p r o c e e d s

of the checks reached the i n t e n d e d p a y e e s must similarly fail. T h i s r u l e is b a s e d o n t h e e q u i t a b l e p r i n c i p l e t h a t t h e d r a w e r s h o u l d n o t be u n j u s t l y e n r i c h e d o r be p e r m i t t e d t o recover f r o m t h e d r a w e e bank w h e r e h e h a s s u f f e r e d no

l o s s from t h e improper payment of t h e check, Kosic, supra. Here i t i s u n c o n t r o v e r t e d that plaintiff suffered substan- tial losses because she did not receive the building m a t e r i a l s f o r which t h e c h e c k s were drawn. Consequently, t h e r e is no u n j u s t e n r i c h m e n t . The c o r r e c t r u l e o f l a w t o b e a p p l i e d i n t h i s case i s

outlined in Tonelli and Hillsley, supra. In Tonelli a messenger took a certified check made payable to Totowa Savings and Loan to the drawee bank and, at the messenger 's request, the bank issued a cashier's check payable to Totowa without Totowa's endorsement. The messenger opened an account at Totowa but used the funds for a purpose other than that for which the original check was drawn. In finding liability in favor of the drawer against the drawee bank, the New York Court of Appeals stated the following: ". . . Totowa, the true payee, never actually received the proceeds of the original certi- fied check for the purpose i n t e n d e d b y the drawer. By virtue of the issuance of the cashier's check, the thieves were able to convert the fund's moneys to their own use. Under these circumstances, the reasoning of Hillsley v. State Bank of Albany (24 A.D.2d 28, 263 N.Y.S.2d 578, aff'd. 18 N.Y.2d 952, 277 N.Y.S. 2d 148, 223 N.E. 2d 571), is appli- cable to the instant case. In Hillsley (pp. 30-31, 263 N.Y.S.2d pp. 580-581), the court held that a drawee bank, which paid a certi- fied check over a forged indorsement, could not rely upon the defense that the funds eventually reached the rightful payee where the proceeds of the check were not applied by the payee for the purpose intended by the drawer." (Emphasis added.) 394 N.Y.S.2d at 861, 363 N.E.2d at 567. Respondent contends that plaintiff's summary judgment motion was properly denied because there were issues of rnaterial fact including the standard of commercial reason- ableness to be applied to the bank and plaintiff's lack of timely notice of the bank's purported errors. We disagree. The issue of commercial reasonableness arises by virtue of section 30-3-406, MCA, which reads as follows: -- -- - - "Nepl igence contributing to alteration or unauthorized signature. Any person who by his negligence substantially contributes to a material alteration of the instrument or to the making of an unauthorized signature is precluded from asserting the alteration or lack of authority against a holder in due

course or against a drawee or other payor who pays the instrument in good faith ind - in -------- accordance with the reasonable commercial standards of the drawee's or Davor's business." (Emphasis added.) The scheme of the U.C.C. requires that the depository bank authenticate the signatures on instruments presented to it. Tubin v. Rabin (N.D. Tex. 1974), 389 F.Supp. 787. See, Atlas Building Supply Co., Inc. v. First Independent Bank of Vancouver (1976), 15 Wash.App. 367, 550 P.2d 26 (the bank's failure to determine whether a copayee's endorsement was authorized was not in accord with reasonable commercial standards). In Twellman v. Lindell Trust Co. (Mo.App. 1976), 534 S.W.2d 83, 93 ALR3d 943, the court held, as a matter of law, that the drawee bank, in accepting a check whose first en- dorsement was made by someone other than the payee, did not act in accordance with reasonable commercial standards and affirmed the directed verdict for the plaintiff. Here, copies of the checks were attached to the amended complaint and clearly showed the endorsement was by someone other than the payee. Because of this, the bank did not act in accordance with reasonable commercial standards as a matter of law. Moreover, section 30-4-207(4), MCA, gives the plain- tiff a reasonable time to notify the bank after learning of any breach. Here, plaintiff's affidavit indicated that she notified the bank immediately after she discovered the irregular endorsements. This sworn affidavit must be taken as true on motion for summary judgment. See, State v. Conrad (1982), Mont. , 643 P.2d 239, 39 St.Rep. 680. The notice here was certainly given within a reason-

a b l e t i m e under s e c t i o n 30-4-207(4), MCA. See, Twellman, supra, where the court held that, within the time frame given there, t h e r e had been n o t i f i c a t i o n w i t h i n a r e a s o n a b l e

t i m e as a m a t t e r o f law. S i n c e w e h o l d t h a t p l a i n t i f f s h o u l d have been g r a n t e d

summary judgment, we need not address plaintiff's other i s s u e s w h i c h d e a l w i t h t h e s u b s e q u e n t t r i a l . By o u r v a c a t i o n of t h e D i s t r i c t C o u r t judgment, t h e award of c o s t s is l i k e -w i s e vacated, Rule 3 3 ( a ) , M.R.App.Civ.P. Appellant shall s u b m i t a memorandum o f her costs a s prescribed in section 25-10-503, MCA.

R e v e r s e d a n d remanded t o t h e D i s t r i c t C o u r t f o r e n t r y of judgment in favor of plaintiff d e p o s i t o r i n t h e sum o f $12,628.32, interest from August 4, 1976, on the sum of $7,128.32 a n d f r o m A u g u s t 1 7 , 1 9 7 6 , o n t h e sum o f $ 5 , 5 0 0 , to d a t e of judgment, and c o s t s .

%& A, g# Chief J u s t i c e

We concur: /'

Mr. J u s t i c e F r a n k B. M o r r i s o n , J r . , s p e c i a l l y concurring:

I concur but take exception t o t h e language i n t h e m a j o r i t y o p i n i o n which s t a t e s : " T h i s sworn a f f i d a v i t must be

t a k e n as t r u e on m o t i o n f o r summary judgment.'' The C o u r t c i t e s S t a t e v. Conrad ( 1 9 8 2 ) , Mont. , 643 P.2d 2 3 9 , 39 S t . R e p . 680. The C o n r a d case h o l d s t h a t an a f f i d a v i t must be t a k e n a s t r u e where f i l e d i n s u p p o r t of a n informa- t i o n and w h e r e p r o b a b l e c a u s e is s o u g h t t o t h e r e b y b e e s t a b - lished. T h i s is w e l l - a c c e p t e d law b u t h a s no a p p l i c a t i o n here. I n C o n r a d t h e a f f i d a v i t a l l o w s t h e case t o g o f o r w a r d where h e r e , under t h e m a j o r i t y h o l d i n g , t h e a f f i d a v i t ends the litigation. I n t h i s case p l a i n t i f f s u p p o r t s a m o t i o n f o r summary judgment with an a f f i d a v i t . The a f f i d a v i t , if u n r e f u t e d ,

may f o r m t h e b a s i s f o r g r a n t i n g summary j u d g m e n t . However,

i t n e e d n o t be a c c e p t e d by t h e t r i a l c o u r t a s t r u e . The t r i a l c o u r t c o u l d f i n d t h a t t h e d o c u m e n t was n o t c r e d i b l e . The r e s u l t h e r e d o e s n o t c h a n g e . T h e r e i s no c o n f l i c t i n t h e e v i d e n c e p r o d u c i n g a g e n u i n e i s s u e of fact. Given

t h i s r e c o r d t h e p l a i n t i f f is e n t i t l e d t o summary j u d g m e n t .