Aetna Cas. and Sur. Co. v. Hepler State Bank

Decision Date02 July 1981
Docket NumberNo. 52090,52090
Citation23 A.L.R.4th 841,630 P.2d 721,6 Kan.App.2d 543
Parties, 23 A.L.R.4th 841, 32 UCC Rep.Serv. 187 AETNA CASUALTY AND SURETY COMPANY, Plaintiff-Appellant, v. HEPLER STATE BANK, Defendant-Appellee-Cross Appellant.
CourtKansas Court of Appeals

Syllabus by the Court

1. K.S.A. 84-3-419(1)(c ) provides that an instrument is converted when it is paid on a forged indorsement.

2. K.S.A.1980 Supp. 84-1-201(43) provides that an authorized signature or indorsement is one made without authority (actual, implied or apparent) and includes a forgery.

3. There is no substantial difference between an unauthorized indorsement and a forged indorsement, the result being the same insofar as concerns the passing of title.

4. The use of the words "forged indorsement" as constituting a conversion under K.S.A. 84-3-419(1) does not preclude the finding of conversion where the unauthorized signature does not constitute a forgery in the strict sense.

5. Authority in an agent to sell goods for his principal does not of itself empower him to indorse checks payable to the principal, and a bank which collects checks on such indorsements will be liable to the principal if the agent misappropriates the proceeds. Neither does authority in an agent to make collections for his principal include authority to indorse checks payable to the principal.

6. If payment of an instrument is not in accordance with reasonable commercial standards, contributory negligence is no defense.

7. Under K.S.A. 84-3-419(3), recovery for conversion is limited to the amount of any proceeds remaining in the hands of a representative if the representative dealt with the instrument "in good faith and in accordance with the reasonable commercial standards" of the representative's business.

8. Whether or not a bank acted in a commercially reasonable manner is a question of fact.

9. Barring exceptional circumstances, the general rule is that failure of a bank to inquire when an individual cashes a check made payable to a corporate payee and puts the money in his personal account is an unreasonable commercial banking practice as a matter of law.

10. In actions in the nature of trover for the conversion of personal property, the measure of damages is ordinarily the value of the property at the time of the conversion, with interest thereon to the date of the verdict.

11. The fact that the value of converted property is contested, i. e., "unliquidated," and is determined only at trial does not prevent the award of interest on the value as finally determined.

12. In cases of conversion interest is allowed by way of damages; the allowance is not dependent on statute nor on whether the claim is liquidated or unliquidated, but is simply designed to make the plaintiff whole.

13. If a debtor owes a creditor more than one debt, in the absence of a direction from the debtor to the creditor as to how a payment is to be applied, the creditor may elect to apply it to any debt he chooses.

14. In an action for conversion of a series of checks paid on unauthorized indorsements, it is held : (a) The trial court did not err in finding the defendant bank liable; and (b) the court erred in denying prejudgment interest at the legal rate and in allowing defendant a setoff for moneys collected from the indorser by plaintiff and applied by it to other indebtedness owed by the indorser to plaintiff.

A. J. Wachter, of Wilbert, Towner, Lassman, Toburen, Fleming & Wachter, Pittsburg, for plaintiff-appellant.

Vernon D. Grassie, Girard, for defendant-appellee-cross appellant.

Before FOTH, C. J., and SPENCER and PARKS, JJ.

FOTH, Chief Judge:

This action was brought against the defendant Hepler State Bank for conversion effected through its payment of a series of checks each bearing the unauthorized indorsement of the payee.

Plaintiff Aetna Casualty and Surety Company issued an employees' fidelity bond to Columbian Hog and Cattle Powder Company. From 1973 to about July 15, 1977, Columbian employed one Ted Orton as a commission salesman to sell feed to farmers in southeastern Kansas. Orton also bought feed for his own account for use in his own livestock operations. Orton's employment agreement with Columbian called for him to make collections from customers, with all checks from customers to be made payable to Columbian. To facilitate this arrangement Columbian furnished Orton a rubber stamp reading "Columbian Hog and Cattle Powder Company," to be used to insert the payee's name on checks from customers who might not wish to write so much.

All went well until mid-1977, when Columbian discovered that from April through June, 1977, Orton had made off with money due his employer in the amount of $5,976.96. Aetna paid this amount to Columbian, less $500 deductible under its policy, and brought this action both as subrogee of Columbian and for Columbian's $500.

Orton's method of operation was simply to stamp in Columbian's name as payee, turn the check over, stamp Columbian's name as first indorser, and then indorse the check "for deposit only, Ted Orton." The check was then deposited in Orton's personal account in the defendant bank and the proceeds used for Orton's own purposes. Checks were drawn by Orton on his account to Columbian from time to time, but no correlation was shown between those payments, the deposits of Columbian's checks, and Orton's own account with Columbian for feed purchased by him.

Aetna's original claim was based on the supposition that Columbian's entire loss had been occasioned by checks wrongfully paid by the defendant bank. At trial to the court Aetna could only show seven checks paid by defendant bank totalling $3,145.83. The result was a judgment in Aetna's favor for that amount, based on factual findings that Orton's indorsement of Columbian's name was "unauthorized" and that the bank's acceptance and payment of the checks "was not in accordance with reasonable commercial standards applicable to the banking business."

While this action was pending Aetna also attempted with some success to recoup its loss from Orton. By agreement with plaintiff's counsel Orton made periodic payments which amounted to $1,100 by the time of trial; counsel was holding that amount in his trust account. On the assumption the bank would be liable for the entire loss of almost $6,000 plaintiff agreed to offset the $1,100 against the bank's liability. When it developed the bank's liability would be only a little more than half that amount plaintiff withdrew its offer of offset and elected to apply the $1,100 solely to the debt to it from Orton. The court nevertheless at first ordered the full $1,100 to be offset. Later, on plaintiff's motion to alter or amend, it amended the judgment to allow only a pro rata offset of plaintiff's recoupment from Orton, less assumed attorney fees. Its finding was:

"On this contention, the Court finds that the judgment should be modified to reflect that attorney for plaintiff is entitled to an attorney fee of $366.00 for collection of said amount, leaving a balance of $734.00. The Court finds that plaintiff's total loss occasioned by Orton was $5,476.96, of which amount Hepler State Bank was liable for $3,145.83, or approximately 57 percent of the amount of loss sustained by plaintiff. Therefore plaintiff is entitled to an offset of 57 percent of $734.00, or $418.38, leaving a net judgment of $2,727.45."

It also denied Aetna's claim for prejudgment interest.

Plaintiff appeals from the disallowance of interest and the allowance of the setoff. Defendant cross-appeals, contesting liability on several theories. Because they go to the heart of the lawsuit we take up defendant's points first, although not in the order presented.

I. "Forgery" v. "Unauthorized Signature"

The bank contends Orton did not "forge" the instruments because he signed his own name after stamping the payee's, thus negating the intent to defraud which is an element of the criminal offense of forgery. It relies on K.S.A.1980 Supp. 84-1-201(43) defining an " 'unauthorized' signature or indorsement" as "one made without actual, implied or apparent authority and includes a forgery." From this it argues that the Uniform Commercial Code distinguishes between a forgery and an unauthorized signature, and that without a "forgery" there can be no conversion under 84-3-419(1):

"(1) An instrument is converted when

....

(c ) it is paid on a forged indorsement. " (Emphasis added.)

Courts which have faced this argument have rejected it. Equipment Distrib. v. Charter Oak Bank, Etc., 34 Conn.Supp. 606, 379 A.2d 682 (1977), citing Hartford Accident & Indemnity Co. v. S. Windsor Bank & Trust Co., 171 Conn. 63, 368 A.2d 76 (1976); Salsman v. National Community Bank of Rutherford, 102 N.J.Super. 482, 246 A.2d 162 (1968), aff'd 105 N.J.Super. 164, 251 A.2d 460 (1969). Their reasoning is that the three listed conversions in 84-3-419 were not intended to be exclusive. See, Commercial Credit Corp. v. University Nat. Bank, Etc., 590 F.2d 849, 851-52, and footnote 4 at 852 (10th Cir. 1979), and cases cited therein.

The New Jersey court, referring to the sections of the New Jersey version of the Uniform Commercial Code corresponding to our own, explained the rationale:

"Receiving the funds without a proper indorsement and crediting the funds to one not entitled thereto constitutes a conversion of the funds. A holder is one who receives an instrument which is indorsed to his order or in blank. N.J.S. 12A :1-201(20). The bank cannot be a holder, or a holder in due course (N.J.S. 12A :3-302), without a valid indorsement of this check by the estate of Arthur J. Odgers (the indorsee of the converted check). (Citation omitted.) N.J.S. 12A :3-419(1)(c ) provides that an instrument is converted when it is paid on a forged indorsement. N.J.S. 12A :1-201(43) provides that an unauthorized signature or indorsement is one made without authority (actual, implied or apparent) and includes a forgery. See (...

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