Guaranty Bank & Trust Co. v. Federal Reserve Bank

• Decision Date: 25 August 1977
• Docket Number: No. CIV-76-0940-T.,CIV-76-0940-T.
• Citation: 454 F. Supp. 488
• Parties: GUARANTY BANK & TRUST CO., a State Banking Corporation, Plaintiff, v. FEDERAL RESERVE BANK OF KANSAS CITY, a Federal Banking Corporation and the First National Bank, Yukon, Oklahoma, a State Banking Corporation, Defendants and Third-Party Plaintiffs, v. Kenneth W. KINSEY, Third-Party Defendant.
• Court: U.S. District Court — Western District of Oklahoma

454 F. Supp. 488

GUARANTY BANK & TRUST CO., a State Banking Corporation, Plaintiff, v. FEDERAL RESERVE BANK OF KANSAS CITY, a Federal Banking Corporation and the First National Bank, Yukon, Oklahoma, a State Banking Corporation, Defendants and Third-Party Plaintiffs, v. Kenneth W. KINSEY, Third-Party Defendant.

No. CIV-76-0940-T.

United States District Court, W. D. Oklahoma.

August 25, 1977.

James E. Britton, McClelland, Collins, Sheehan, Bailey & Bailey, Oklahoma City, Okl., for plaintiff.

James R. Stout and Thomas C. Williams, Wheatley & Stout, Yukon, Okl., for defendants and third-party plaintiffs.

Jerry L. Hemry, Hemry & Hemry, Oklahoma City, Okl., for Garn Mattlingly Pools, Inc.

ORDER GRANTING SUMMARY JUDGMENT

RALPH G. THOMPSON, District Judge.

Guaranty Bank and Trust Company (Guaranty) has moved for summary judgment on its claim of breach of warranty against Federal Reserve Bank of Kansas City (Reserve) and The First National Bank of Yukon (Yukon Bank). Guaranty bases its claim for breach of warranty on 12A O.S.1971, § 4-207. From a careful review of the facts admitted in the pleadings, established by affidavit and appearing from the depositions, the Court has concluded that no genuine issue as to any material fact exists and that the plaintiff is entitled to judgment as a matter of law.

The facts established by the record are briefly as follows: On April 13, 1976, Kenneth W. Kinsey (Kinsey) secured a cashier's check in the amount of $3,500.00 from Guaranty as proceeds for an automobile loan. The cashier's check was issued naming C. J. Tate & Son Construction payee. Kinsey had represented to Guaranty that he was employed by C. J. Tate & Son Construction and that he was purchasing a pickup from them. Guaranty gave the check to Kinsey for delivery. Kinsey forged the endorsement of C. J. Tate & Son Construction and D. L. Tate. He then deposited the funds in the account of D. L. Tate at the defendant Yukon Bank. Upon learning that the money had been deposited in his account without his knowledge or authorization, D. L. Tate made demand upon Yukon Bank to remove the funds from his account. Yukon Bank issued an advice marked "deposit in error Kinsey" and issued a cashier's check payable to Kinsey. Yukon Bank gave the cashier's check to D. L. Tate who then delivered it to Kinsey. D. L. Tate is Kinsey's stepfather.

Yukon Bank sent Guaranty's cashier's check through the Federal Reserve Bank of Kansas City for collection and upon presentation it was paid by Guaranty Bank. Both Yukon Bank and Reserve endorsed the check P.E.G. which in banking practice means "prior endorsements guaranteed."

Upon Kinsey's failure to pay the July payment on his loan on Guaranty when it was due on July 15th, Guaranty contacted D. L. Tate to determine both the whereabouts of Kinsey and the pickup. Through its conversation with D. L. Tate, Guaranty learned that Kinsey had never worked for the construction company nor had the company sold Kinsey a pickup. Through further conversation it was determined that the endorsement of C. J. Tate & Son Construction and D. L. Tate had been forged on the cashier's check.

Guaranty then made immediate demand on both Reserve and Yukon Bank for return of the funds which it had paid to them over the forged endorsement. This demand was refused by both defendant banks and this lawsuit resulted.

On the basis of these uncontroverted facts, the Court concludes that both defendant banks have, as a matter of law, breached their implied warranties provided in section 4-207 of the Uniform Commercial Code and are liable thereon to Guaranty. 12A O.S.1971, § 4-207 provides in pertinent part:

"(1) Each customer or collecting bank who obtains payment or acceptance of an item and each prior customer and collecting bank warrants to the payor bank or other payor who in good faith pays or accepts the item that

"(a) he has a good title to the item or is authorized to obtain payment or acceptance on behalf of one who has a good title; . . ."

Upon the receiving the item over a forged endorsement, the Yukon Bank failed to acquire good title to the cashier's check. This same result would obtain in the absence of both defendant banks having endorsed the instrument P.E.G. Section 4-207 is intended to effect this same result which was achieved prior to the enactment of the Uniform Commercial Code by such an endorsement. The Code Redactors Comment 2 to this section reads in part as follows:

"2. In addition to imposing upon customers and collecting banks the warranties and engagements imposed by the original sections 65 and 66 of the Uniform Negotiable Instruments Law and those of section 3-414 and 3-417 of Article 3, with some variations, this section 4-207 is intended to give the effect presently obtained in bank collections by the words `prior endorsements guaranteed' in collection transfers and presentments between banks. The warranties and engagements arise automatically as a part of the bank collection process."

The defendant banks have interposed two defenses. They first allege that the manner in which Guaranty negotiated the loan to Kinsey and the fact that they delivered the cashier's check into his possession for delivery to the purported seller constitute negligence and that such negligence should be a bar to its recovery from these defendants. In support of this claim they rely on 12A O.S.1971, § 3-406 which provides:

"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 and in accordance with reasonable commercial standards of the drawee's or payor's business."

The Court rejects this contention. It would be most difficult for any trier of fact to find that Yukon Bank, with knowledge that the purported endorser was objecting to receipt of the instrument proceeds, acted in a commercially reasonable manner or in accordance with the reasonable commercial standards of its business when it paid the $3,500.00 by its own cashier's check to the one who had made the unauthorized signature and wrongful deposit. There is no evidence in the record to establish what the reasonable commercial standards would be in such a situation. This is an issue which is not necessary to determine on this Motion for Summary Judgment.

Even if we assume that the Yukon Bank is a proper party to assert such a defense, it still lacks merit. Under the uncontroverted facts before the Court, the manner in which Guaranty negotiated the loan with Kinsey and their delivery of an instrument to one not named as payee, are as a matter of law, not negligence which can be held to have substantially contributed to the making of the unauthorized signature in this case. First National Bank of Yukon v. Liberty National Bank and Trust Company, 392 P.2d 747 (Okl.1964); East Gadsden Bank v. First City National Bank of Gadsden, 50 Ala.App. 576, 281 So.2d 431 (1973); Society National Bank of Cleveland v. Capital National Bank, 30 Ohio App.2d 1, 281 N.E.2d 563 (1972); and Birmingham Trust National Bank v. Central Bank and Trust Company, 290 Ala. 362, 275 So.2d 148 (Ala.1973).

Birmingham Trust National Bank v. Central Bank and Trust Co., supra, involves a factual situation much similar to that involved here. There, a Birmingham Trust made a loan to one Boehmer for $5,500.00 on his representation that he was purchasing a boat from A. C. Manufacturing Company. Birmingham Trust issued a cashier's check for $5,500.00, naming as payee both Boehmer and A. C. Manufacturing Company and delivered the check into the possession of Boehmer. Boehmer then endorsed his name on the check and forged that of A. C. Manufacturing Company. He deposited the check in an account which he had with Central Bank and Central Bank sent the check for collection to Birmingham Trust endorsed P.E.G. When Birmingham Trust experienced difficulty in collecting loan payments, it contacted A. C. Manufacturing Company only to learn that Boehmer had never purchased the boat. Birmingham Trust...