Stowell v. Cloquet Co-op Credit Union

• Decision Date: 16 January 1997
• Docket Number: No. C4-95-1608,CO-OP,C4-95-1608
• Parties: 31 UCC Rep.Serv.2d 623 Randall E. STOWELL, Respondent, v. CLOQUETCREDIT UNION, Appellant, v. Robert NELSON, Third-Party Defendant.
• Court: Minnesota Supreme Court

Page 567

557 N.W.2d 567

31 UCC Rep.Serv.2d 623

Randall E. STOWELL, Respondent, v. CLOQUET CO-OP CREDIT UNION, Appellant, v. Robert NELSON, Third-Party Defendant.

No. C4-95-1608.

Supreme Court of Minnesota.

Jan. 16, 1997.

Syllabus by the Court

1. Provision of Draft Withdrawal Agreement requiring that the credit union account holder examine his monthly bank statements and notify the credit union of any errors within twenty days of the mailing of the statement was valid and enforceable.

2. There was no evidence in the record upon which the jury could have based its determination that the credit union failed to meet the statutory definition of "ordinary care" in paying forged checks in August 1993.

Faegre & Benson, James J. Hartnett, IV, William R. Joyce, Minneapolis, for appellant.

Crassweller, Magie, Andrew, Haag & Paciotti, Robert H. Magie, III, Duluth, for respondent.

OPINION

STRINGER, Justice.

Plaintiff/respondent Randall Stowell ("Stowell") brought this action in Carlton County District Court seeking to recover approximately $22,000 that had been paid by the defendant/appellant Cloquet Co-op Credit Union ("Credit Union") over a ten-month period on checks forged on Stowell's account by Stowell's neighbor. The district court held that a Draft Withdrawal Agreement requiring Stowell to notify the Credit Union of any errors in his account statement within twenty days of the mailing of the statement was manifestly unreasonable and refused to apply the agreement to bar Stowell's claim. After a two-day trial, the district court jury found the Credit Union liable for forged checks in the first four months of the scheme, Stowell responsible for forgeries in five of the next six months, and both parties responsible for the forgeries in the remaining month. The court of appeals affirmed in all respects. We reverse, concluding that the Draft Withdrawal Agreement was not manifestly unreasonable and should be enforced in the absence of proof of a lack of ordinary care by the Credit Union in paying the forged items. Further, because we conclude that the plaintiff presented no evidence establishing that the Credit Union failed to meet the statutory definition of ordinary care in paying the forged items in August 1993, we reverse the district court's holding that Stowell is entitled to recover seventy-five percent of his losses for that month.

The record indicates that the Credit Union uses an automated check processing system which reads the magnetically coded numbers printed across the bottom of each check. This system is used throughout the Federal Reserve System and by all banks and credit unions in the state of Minnesota. Because the Credit Union processes approximately one million transactions each day, it does not manually check individual signatures against signature cards to detect potential forgeries. Rather, the Credit Union provides its members with monthly account statements itemizing the transactions occurring in the previous calendar month, including the date of the transaction, the check number, the amount of the transaction, and the account balance before and after each transaction. Consistent with industry-wide practice, the Credit Union relies on the account holders to examine the statement each month and contact the Credit Union if they identify any unauthorized checks.

Stowell opened a savings account and a draft account at the Credit Union on May 29, 1984. In connection with the opening of the draft account, Stowell signed a "Draft Withdrawal Agreement" which contained the following provision:

The statements of the Draft Account shall be the only official record of the transactions on this account. If items on the statements are not objected to within twenty (20) days from the mailing date of the statement, the accuracy of the items on the statement shall be considered final.

Stowell is a sophisticated businessman. Prior to signing the agreement, he read it, understood its terms, and recognized that he had a responsibility to review his account statements and notify the Credit Union of any errors. For the next eight years after opening the account, Stowell used the draft account for both personal and business purposes and maintained a running balance of his deposits and withdrawals in his checkbook. At the beginning of each month Stowell would receive in the mail an account statement from the Credit Union which he checked against his own records on a monthly or bi-monthly basis.

In the fall of 1992, Robert Nelson moved into a cabin located on the same country road as Stowell's house. Nelson's mailbox was next to Stowell's and both boxes were located approximately one-half mile from Stowell's house. Soon after he moved in, Nelson stole a number of Stowell's checks and, from November 1992 to September 1993, forged Stowell's signature on fifty of the stolen checks and cashed them at various banks and businesses in the Barnum/Cloquet area. As a part of his fraudulent scheme, Nelson removed Stowell's Credit Union account statements out of Stowell's mail each month to prevent Stowell from discovering the forgeries.

In December 1992, Stowell realized that he had not received an account statement from the Credit Union for the previous month. After waiting a few more weeks for the statement to arrive, he informed an employee of the Credit Union's branch office that he had not received it. Although the Credit Union mailed a duplicate statement to Stowell's correct address, Stowell never received the duplicate either. In fact, due to Nelson's theft, Stowell did not receive any items of mail whatsoever from the Credit Union between December 1992 and September 1993.

During this period, Stowell periodically contacted the Credit Union and complained that his account statements had failed to arrive. On each occasion a Credit Union employee mailed Stowell duplicate statements. At no time did Stowell ask to have a statement printed as he waited or to look at copies of his canceled checks, nor did any Credit Union employee suggest such measures. Other than complaining that his statement had not arrived, Stowell did nothing to inform anyone at the Credit Union that he suspected anything was wrong with his draft account or his mail. Despite the fact that over $22,000 was eventually unlawfully withdrawn from his account by virtue of Nelson's forgeries, Stowell never expressed concern to any Credit Union employee regarding his diminishing account balance as disclosed in each transaction receipt.

In August 1993, Stowell called Credit Union vice president Terrance Kimber and informed him that he had not received any mail from the Credit Union for some time. Kimber replied that the Credit Union would again mail Stowell copies of his account statements and told him that he should contact the Credit Union if the statements did not arrive within a few days. Again, neither Stowell nor Kimber suggested taking further measures such as hand delivering to Stowell printed copies of the statement. Kimber mailed the statements to Stowell as promised but again, Stowell never received them; Stowell apparently ignored Kimber's directive to contact him if the statements were not received and did not contact Kimber until several weeks later.

Nelson's forgery scheme was finally discovered on September 15, 1993, when Stowell received a telephone call from the Finlayson State Bank at Barnum informing him that a check he had written to Robert Nelson had bounced. Because he had never written any checks to Nelson, Stowell became suspicious and notified the police and the Credit Union. Upon reviewing Stowell's account statements, Stowell and the Credit Union discovered that between November 13, 1992 and September 15, 1993 Nelson had forged fifty checks on Stowell's account in the total amount of $22,329.34. Stowell acknowledged at trial that he could identify the forged checks from his account statements.

When the Credit Union refused to reimburse Stowell for the full amount of the forged checks, Stowell brought suit against the Credit Union in district court. The Credit Union's pretrial motion for summary judgment was denied by the district court, concluding that the clause in the Draft Withdrawal Agreement providing that objections to the account statement must be made within twenty days of the mailing of the statement was manifestly unreasonable as a matter of law because, in the district court's view, the Uniform Commercial Code ("UCC") requires that a reasonable time to examine a bank statement begins to run when the customer gains possession of the statement rather than when the bank mails it.

After two days of testimony, the jury found that from December 1992 through March 1993 the Credit Union acted with reasonable care in paying the forged checks, and that Stowell was also without fault in failing to discover the unauthorized payments. Therefore, based upon UCC rules 4-401(a) and 4-406(c)(d) placing liability for items paid over forged drawer's signatures on the bank, in the absence of a lack of reasonable promptness on the part of the account holder in examining his account statements and reporting the unauthorized items, the court held that Stowell was entitled to recover from the Credit Union the amounts of the forged checks paid from November 1992 through March 1993. For the months of April through July 1993 and September 1993, the jury found that Stowell should reasonably have discovered the forgeries, and the court therefore held that the Credit Union was not liable for the forged checks paid during those months. Finally, as to August 1993, the jury found that both the Credit Union and Stowell failed to exercise ordinary care and apportioned the fault for the payment of the forged checks in that month seventy-five percent to the Credit Union and twenty-five percent to Stowell. On the basis of the special verdict, the court awarded Stowell a judgment of $12,266.27 plus $635.70 in interest.

On appeal, the court...