First City Nat. Bank of Midland v. Federal Deposit Ins. Corp., 85-1128
| Decision Date | 20 February 1986 |
| Docket Number | No. 85-1128,85-1128 |
| Citation | 782 F.2d 1344 |
| Parties | 42 UCC Rep.Serv. 1687 FIRST CITY NATIONAL BANK OF MIDLAND, Plaintiff-Cross Appellee, v. FEDERAL DEPOSIT INSURANCE CORP., As Receiver for the First National Bank of Midland, Defendant-Third Party-Plaintiff-Appellant-Cross Appellee, v. H.L. BROWN, Jr., Third Party Defendant-Appellee-Cross Appellant. H.L. BROWN, Jr., Plaintiff-Appellee-Cross Appellant, v. FEDERAL DEPOSIT INSURANCE CORP., As Receiver for the First National Bank of Midland, Defendant-Appellant-Cross Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Michael C. Steindorf, Franklin H. McCallum, Midland, Tex., for FDIC.
Jack Tidwell, Odessa, Tex., for Brown.
C.H. Brockett, Jr., Midland, Tex., for First City Nat'l Bank.
Appeal from the United States District Court for the Western District of Texas.
Before RUBIN, RANDALL and WILLIAMS, Circuit Judges.
This case is the consolidation of two separate actions. First City National Bank of Midland ("First City") brought the first in state district court in Texas against First National Bank of Midland ("First National") for breach of warranty as to the genuineness of an endorsement upon a check paid by First National. After this suit was initiated, First National became insolvent. The Federal Deposit Insurance Corporation ("FDIC") was thereafter appointed as First National's receiver. The FDIC thereupon removed this action to the United States District Court for the Western District of Texas and then filed a third-party complaint against H.L. Brown, Jr.
Brown initiated the second action by suing the FDIC, as receiver for First National, in the United States District Court for the Western District of Texas. Brown claimed that First National had accepted for deposit on forged endorsements checks payable to him and that First National had also paid checks despite his order to the contrary. The district court determined that these two actions arose out of the same facts and circumstances and that they should be tried together.
This case was tried without a jury and largely on stipulated facts. The district court found for First City in its suit, but ordered recovery against Brown not the FDIC. The district court then, in trying Brown's claims, found that Brown had not been harmed as a result of First National's actions and thus that he could not recover against First National for conversion. The court, however, did find that First National had improperly paid checks after receiving a stop activity order. Brown and the FDIC appeal portions of the district court's judgment.
Brown is an independent oil man. He has done business as a sole proprietorship since 1955. One of the most important requirements of Brown's business is that he employ highly qualified professionals. Because such professionals are in great demand in this industry, Brown uses various incentives to retain them for his operations. Brown establishes individual trusts for some of his key employees as one means of providing them additional compensation. The employees' interests in these trusts vest after they have been with Brown for some minimum period of time.
One such trust was established for an employee named J.L. McGill. In 1977, Brown opened an account at First National to receive payments that were to be made to McGill's trust. Brown designated this account as the "H.L. Brown, Jr., Engineers Trust Account" ("trust account"). It was Brown's policy to have his controller serve as trustee for these accounts so Brown authorized his controller, Bill Kubena, as well as himself to write checks on the trust account. Brown also signed a depository contract with First National at that time. When Kubena later left Brown's employ in 1979, Brown authorized his new controller, Gary L. Plake, to write checks on the trust account.
Brown left the task of endorsing and depositing checks made payable to the trust account entirely up to Plake. Brown, however, maintained an established procedure for the endorsement of all checks received that were payable to him personally. He supplied his employees with a rubber stamp to provide his endorsement, and directed his employees to endorse all checks made payable to him only with this stamp. After the checks were endorsed, they were to be taken to the controller who assembled, photocopied, and then mailed the checks to Brown's account at the Fort Worth National Bank.
On September 30, 1980, McGill, the subject of the trust account, left Brown's employ. After Mc Gill had been paid his interest in the trust account, Brown instructed Plake to close the account. Plake did not do so, however. Instead, he set out on a scheme of embezzlement. Plake deposited checks into the trust account that on their face were not payable to the trust account but were payable to H.L. Brown, Jr. Plake endorsed these checks "H.L. Brown, Jr., Trust," "Gary L. Plake" or "H.L. Brown, Jr." These checks were improperly honored by the bank because the trust account was not the payee. Further, Plake was not authorized by Brown to endorse any checks made payable to Brown personally other than by use of the rubber stamp referred to above. After depositing these checks, Plake would write checks on the trust account and withdraw the proceeds for his own purposes and not for the purposes intended by the drawers of the checks.
On January 4, 1983, a check was drawn by Moran Exploration, Inc., on First City in the amount of $24,954.04 and made payable to H.L. Brown, Jr. After accepting this check for deposit into the trust account upon Plake's improper endorsement, First National stamped the back of the Moran check with the letters P.E.G., indicating that prior endorsements were guaranteed by First National to all subsequent transferees. First National then forwarded the check to First City for payment. First City paid the item and debited Moran Exploration's account accordingly. Plake, thereafter, withdrew $24,954.04 from the trust account along with other monies and embezzled the same for his own purposes.
Through January 31, 1983, Plake had endorsed and deposited checks in the amount of $132,962.11 into the trust account. Plake had embezzled these funds by subsequently writing checks payable to cash or to himself on this account. On February 3, 1983, an overdraft on the trust account of $12,500 appeared. First National notified Plake who instructed the bank that he would immediately make a deposit to cover this amount. Charles Frazier, President of First National noticed, however, that the trust account had been opened five years before, that this check was written on a temporary check form, and that this check was made payable to Plake, signed by him, and endorsed by him. Frazier instructed his secretary, Darlene Mertink, to get in touch with Brown who was at that time in Pebble Beach, California. When advised of the situation by Mertink, Brown returned to Texas and confronted Plake on February 8, 1983. Plake was then discharged. 1
No written notice was sent by Brown to First National instructing it to terminate Plake's authority with respect to the trust account. Between February 7, 1983, and February 17, 1983, nine additional checks and money orders in the amount of $27,552.78 were honored by the bank on the trust account. Subsequently, $2,000 was transferred from another of Plake's accounts to the trust account so that total funds in the amount of $25,552.78 were withdrawn from the trust account during those ten days. Brown claims that he had instructed First National, on February 3, 1983, to cease all further activity in the trust account. First National contends that Brown never gave it such an order. First National further contends that even if given such an instruction, it was not bound under Texas law or under its depository contract with Brown because written notice was not provided. This disagreement was the only fact not the subject of a stipulation at trial. In view of the conflict in this evidence, the finding of the district court that Brown did give oral notice must stand.
When Brown had discovered the embezzlement, he made demand upon Moran to issue a new check payable to him in the amount of $24,954.04. Moran acceded to Brown's demand and issued a second check. Using an affidavit prepared by Brown that claimed that the endorsement on the first check had been a forgery, Moran then made demand upon First City to reverse the debit to Moran's account. First City acceded to this demand and then itself made demand upon First National to return the $24,954.04 that First City had previously paid. First National refused.
Upon trial, the district court held that First National had not converted these checks within the meaning of Sec. 3.419 of the Texas Business and Commercial Code ("TBCC") because Brown had constructively received the proceeds of the embezzled checks. The district court, however, did find that Brown had given First National a directive to cease activity with regard to the trust account on February 3, 1983. Although this directive was not in writing as required by Sec. 4.403 of the TBCC and the depository contract, the district court reasoned that First National had failed to act in accordance with reasonable commercial standards in honoring Plake's checks withdrawing funds from the trust account after February 7, 1983.
The district court also found that First National had not breached its transferor warranties to First City under Sec. 4.207 of the TBCC. It found that since the proceeds of Moran's first check reached an account that Brown constructively owned, First National had good title to the Moran check and thus properly received payment from First City for it. The district court, however, continued with its analysis and found that Moran nonetheless had suffered a loss as a result of these transactions. Moran's remedy, the court found, lay against Brown, not First National. Because Brown had improperly...
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