La Sara Grain Co. v. First Nat. Bank of Mercedes

Citation673 S.W.2d 558
Decision Date23 May 1984
Docket NumberNo. C-1784,C-1784
Parties38 UCC Rep.Serv. 963 LA SARA GRAIN COMPANY, et al., Petitioners, v. FIRST NATIONAL BANK OF MERCEDES, Texas, Respondent.
CourtSupreme Court of Texas

William E. York, McAllen, Adams, Graham, Jenkins, Graham & Hamby, Ferriel C. Hamby, Jr., Harlingen, for petitioners.

Kelly, Looney, Alexander & Sawyer, Ralph L. Alexander, Edinburg, for respondent.

SPEARS, Justice.

This action concerns a bank's liability for honoring checks with fewer than the required number of signatures, failing to follow a restrictive endorsement, and other alleged wrongful acts and deceptive trade practices which allowed an employee to embezzle funds from his employer. After a nonjury trial, the district court rendered judgment against the bank for $911,329.66; that figure included actual damages, additional damages under the Deceptive Trade Practices Act (DTPA), interest, and attorney's fees. The court of appeals reversed the judgment of the trial court and rendered judgment that plaintiff La Sara take nothing. 646 S.W.2d 246. We affirm that portion of the judgment of the court of appeals that removed the award of DTPA additional damages. We reverse the judgment of the court of appeals in all other regards, and affirm the trial court judgment for actual damages. We remand the cause for the consideration of a factual insufficiency point and for the recalculation of prejudgment interest.

La Sara Grain Company, a corporation, hired Harold Jones as general manager and opened a checking account with First National Bank of Mercedes in 1975. La Sara filed with the bank a corporate resolution naming the four officers of the corporation as authorized signatories and providing that any two of them could sign checks for the corporation. Jones was one of the officers named in this resolution. The bank also provided La Sara with a signature card; however, during its circulation among the four officers, the card was altered to require only one signature rather than two. From the spring of 1975 to the fall of 1978, the bank honored checks drawn on La Sara's account bearing the signature of only one officer, ordinarily Jones, the officer in charge of La Sara's day-to-day affairs. During this period, La Sara received monthly statements of its account with the bank.

In the fall of 1978, La Sara fired Jones. An audit subsequently revealed that Jones had embezzled over $300,000. In July of 1979, La Sara filed suit against Jones to recover the amounts embezzled. La Sara thereafter amended its petition to join as defendants Fidelity & Deposit Company of Maryland and the First National Bank of Mercedes. Prior to trial, La Sara settled its claims against Jones and Fidelity. Jones agreed to make restitution; Fidelity paid $90,000 to settle La Sara's claim on a fidelity bond and then intervened in La Sara's suit against the bank, claiming a right to subrogation. 1

I. Application of TEX. UCC § 4.406(d)

La Sara's primary complaint at trial was that the bank had breached the depository contract by paying checks signed only by Jones without the second signature required by the corporate resolution. The bank denied liability. The basis of the bank's defense was that it had sent La Sara monthly statements accompanied by all checks paid, but that La Sara had failed to examine the statements and report the unauthorized signature within the one-year period prescribed by section 4.406(d). Tex.Bus. & Com.Code Ann. § 4.406(d) (Tex.UCC) (Vernon 1968).

Section 4.406 places a duty upon the depositor to promptly examine his bank statement and report to the bank the discovery of any "unauthorized signature or any alteration." 2 Id. § 4.406(a). If the depositor

fails to comply with this duty, the bank is protected from loss so long as it has exercised ordinary care and paid the item in good faith. Id. § 4.406(b), (c). If a depositor does not report an unauthorized signature within one year from the time the statement and items are made available to him, the bank's care or lack thereof becomes irrelevant, id. § 4.406(d); at that point, the customer's only claim is that the item was not paid in good faith. Id. § 4.406(d).

A. La Sara's Checks

The courts below interpreted the term "unauthorized signature" differently and therefore disagreed on the application of section 4.406. The trial court rejected the bank's defense under section 4.406. It found that, because Jones's signature was one of four authorized in La Sara's corporate resolution, the checks were not paid on an "unauthorized" signature. The court of appeals, on the other hand, concluded that the bank was entitled to rely on section 4.406, saying "when a bank honors a check or withdrawal on less that the required number of signatures, the signature is an unauthorized signature within the meaning of 4.406(d)." 646 S.W.2d at 252.

The initial issue is whether the checks drawn on La Sara's account were paid on unauthorized signatures. La Sara contends that, because no signatures were forged and the signature of Jones was authorized, section 4.406(d) does not protect the bank. We do not agree.

An unauthorized signature includes more than just a forgery. Pine Bluff National Bank v. Kesterson, 257 Ark. 813, 520 S.W.2d 253, 258 (1975). An unauthorized signature is defined as "one made without actual, implied or apparent authority and includes a forgery", Tex.Bus. & Com.Code Ann. § 1.201(43) (Tex.UCC) (Vernon 1968), and includes a signature made by an agent in excess of his authority. Id. § 3.404, comment 1. La Sara's argument that section 4.406 does not apply focuses on Jones's signature rather than that of La Sara, the bank's customer. La Sara's signature required the joint signatures of two officers. Although Jones was one of four authorized to sign, his signature alone was not La Sara's. When the bank paid the checks bearing only one of two required signatures, it paid on an unauthorized signature within the meaning of section 4.406(d).

La Sara also argues that the checks were not paid in good faith. If so, the bank cannot claim the protection of section 4.406. The time limits of that section apply only to items paid in good faith. Id. La Sara contends that the bank actually knew Jones's signature alone was insufficient, yet paid the checks anyway, and therefore did not exercise good faith. The trial court agreed, finding that the bank had actual knowledge of the unauthorized change of the signature card from a dual to a single-signature requirement. The court of appeals, however, held that there was no evidence to support this finding. At trial, the evidence showed that La Sara's corporate resolution, which the bank required, was in the bank's files; the corporate resolution specified that two signatures were necessary. The bank president testified that the bank would know of anything that was in the files. The bank, a corporation, is bound by the knowledge of one of its agents if that knowledge came to him in the course of the agent's employment. City of Fort Worth v. Pippen, 439 S.W.2d 660 (Tex.1969); Wellington Oil Co. of Delaware v. Maffi, 136 Tex. 201, 150 S.W.2d 60 (1941). The bank does not contend that the corporate resolution was filed outside the normal course of business. Moreover, the checks were paid pursuant to an obviously altered signature card, and many were deposited into Jones's personal account. The trial court found that, under these facts, the bank knew that Jones's signature alone was not the authorized signature of La Sara. There is evidence supporting that finding. La Sara is entitled to recover for the checks paid on Jones's signature alone, less a credit for the funds from which La Sara benefited. 3

§ 4.406(a). Moreover, an obligation of good faith is imposed on the performance of every contract or duty within the Code. Id. § 1.203. Good faith is defined as "honesty in fact in the conduct or transaction concerned." Id. § 1.201(19). The test for good faith is the actual belief of the party in question, not the reasonableness of that belief. Riley v. First State Bank, 469 S.W.2d 812 (Tex.Civ.App.--Amarillo 1971, writ ref'd n.r.e.).

B. La Sara's other claims

In addition to the unauthorized payment of its checks, La Sara complains that the bank failed to follow a restrictive endorsement, allowed Jones to orally transfer money from its account, and paid Jones the proceeds of loans made in La Sara's name. These complaints concern four separate transactions:

1. On July 15, 1977, the Holland Farms check made payable to La Sara and endorsed "For Deposit Only" was split with $40,000 deposited to Jones's personal account and $22,600 deposited to La Sara's account.

2. On May 12, 1977, the bank transferred $14,000 from La Sara's account to Jones's personal account at Jones's oral request.

3. On June 8, 1976, a $19,506 loan was made to La Sara at Jones's request. Proceeds of the loan were used by Jones to purchase a cashier's check payable to the McCrabb Brothers.

4. On July 22, 1977, a $35,000 loan was made to La Sara at Jones's request. The proceeds were split with $12,000 deposited to Jones's personal account and $23,000 deposited to La Sara's account.

The court of appeals did not expressly address these claims but implicitly held that section 4.406(d) barred La Sara's right to recovery. La Sara argues that section 4.406(d) does not shield the bank from liability. We agree.

In Fultz v. First National Bank, 388 S.W.2d 405 (Tex.1965), we held that a bank breached its depository contract when it failed to follow its depositor's restrictive endorsement, "For Deposit Only." Although Fultz predates the adoption of the Uniform Commercial Code, the rule remains unchanged. Under the Code, a depositary bank is liable for paying an instrument other than in accordance with the terms of a restrictive endorsement. Tex.Bus. & Com.Code Ann. §§ 3.206(c), (d), 3.419(c), (d) (Tex.UCC) (Vernon 1968).

The bank also breached its...

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