Am. Founders Bank, Inc. v. Moden Invs., LLC., 2012–CA–001276–MR.

• Decision Date: 09 May 2014
• Docket Number: No. 2012–CA–001276–MR.,2012–CA–001276–MR.
• Citation: 432 S.W.3d 715
• Parties: AMERICAN FOUNDERS BANK, INC., Appellant v. MODEN INVESTMENTS, LLC., Appellees.
• Court: Kentucky Court of Appeals

432 S.W.3d 715

AMERICAN FOUNDERS BANK, INC., Appellant

v.MODEN INVESTMENTS, LLC., Appellees.

No. 2012–CA–001276–MR.

Court of Appeals of Kentucky.

May 9, 2014.

Douglas G. Sharp, Louisville, KY, for appellants.

James T. Gilbert, Richmond, KY, for appellee.

Before ACREE, Chief Judge; DIXON and LAMBERT, Judges.

OPINION

ACREE, Chief Judge:

American Founders Bank (AFB) appeals from a judgment of the Franklin Circuit Court, entered after a bench trial, in favor of Moden Investments, LLC. The judgment holds AFB liable for conversion losses under Kentucky Revised Statutes (KRS) 355.3–420 for having deposited into a third-party's account a cashier's check made payable to Moden bearing a forged endorsement. AFB seeks reversal of the judgment and, contending that Moden's own negligence substantially contributed to the forgery, also demands that we remand the case with instructions to dismiss Moden's complaint in accordance with KRS 355.3–406(1). Having carefully examined the record and considered the arguments and cited authority, we affirm.

FACTS AND PROCEDURE

In March 2007,¹ John Guzman encouraged five investors ² to form Moden Investments, LLC, with each member contributing $20,000 toward an enterprise that would culminate in the construction of an assisted living facility in Richmond, Kentucky. The plan was to deposit the $100,000 investment with AFB; on the strength of that deposit, AFB would extend a line of credit to Moden to finance the construction project.

Guzman prepared Moden's organizational documents and the limited liability company was formed on April 24. The circuit court examined the articles of organization and concluded: Moden's five investors constituted its members; Moden was to be member-managed; and Ranjan Mohanty was identified as the managing member. It does not appear from the record that Guzman was to have any participation whatsoever in Moden.³ On the same day Moden was formed, the members' $100,000 investment was used to acquire a certificate of deposit in that amount in Moden's name at AFB. The signature card associated with the account identified Ranjan Mohanty as the only person authorized to sign documents related to the account.

Just a few days later, Guzman urged the investors to withdraw their deposit because, he said, one of the bank's vice presidents had gotten into trouble. ⁴ Moden closed its AFB deposit account on May 7, and AFB issued a cashier's check for $100,185.92 made payable to Moden. Guzman told the members he would hold the cashier's check until he could secure similar financing at a different bank; once that occurred, he would deposit the check in the new bank. Guzman thusly came into possession of the check. Precisely how this occurred is not clear from the briefs, but, for purposes of our review, it is sufficient to say that Moden entrusted Guzman with the check.

Guzman did not hold the check as planned. On May 10, someone attempted to deposit the cashier's check into a business account at AFB in the name of Housing Innovations. Guzman controlled this account. The cashier's check was returned because it bore an improper endorsement; it was not signed by a member of Moden. Shortly thereafter, the cashier's check was again presented to AFB for deposit into the Housing Innovations account. This time, it bore the forged signature of Moden member Chad Gordon, not the signature of the only authorized signatory, Ranjan Mohanty. An internal investigation conducted by AFB would later reveal that the forged signature was in Guzman's handwriting. Moden members denied they authorized Guzman to endorse the cashier's check or to receive the proceeds.

Once Moden had exhausted its attempts to recover the money from Guzman and AFB, Moden brought suit asserting AFB was liable for conversion losses under KRS 355.3–420. That statute authorizes a claim for conversion when “a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment.” KRS 355.3–420(1).

After an appropriate period of discovery and briefing, the circuit court conducted a bench trial. In compliance with Kentucky Rules of Civil Procedure (CR) 52.01, the circuit court entered Findings of Fact, Conclusions of Law, and Judgment that “[w]hen AFB permitted Guzman to negotiate the check that was not payable to him, the bank became liable for the conversion losses. KRS 355.3–420.” AFB was ordered to pay Moden $100,185.92, plus prejudgment and post-judgment interest. AFB appeals that judgment.

STANDARD OF REVIEW

When we review a judgment after a bench trial that is compliant with CR 52.01, we adhere to the following rules. “Findings of fact, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of the witnesses.” CR 52.01. Legal determinations, including those regarding the construction and application of statutes, are reviewed de novo. Wheeler & Clevenger Oil Co. v. Washburn, 127 S.W.3d 609, 612 (Ky.2004).

ANALYSIS

AFB states “the only issues [before the Court of Appeals] are the failure of the [Circuit] Court to apply the provisions of KRS 355.3–406 and the failure of the [Circuit] Court to credit the $50,000.00 paid to Moden by Guzman.”

We will address both arguments. However, our analysis is frustrated by the requirement that we also address a variety of procedural issues.

Circuit court's failure to apply KRS 355.3–406 was not error

AFB states it “is aware of its liability under the provisions of KRS 355.3–420, absent the defenses raised herein.” (Appellant's Brief, p. 4). The first defense AFB asserts that should bar Moden's recovery is that Moden's own negligence “substantially contribute[d] to ... the making of a forged signature on” the cashier's check. KRS 355.3–406(1). AFB claims the circuit court's “fail[ure] to address, in any way, the negligence of Moden ... is a fundamental error.” (Appellant's Brief, p. 9). We disagree.

The parties cite more than thirty (30) cases and a dozen other authorities intended to illuminate our understanding of KRS 355.3–406. Many of these authorities were authored when the statute's prior version was in effect. To understand KRS 355.3–406, and the role of the fact-finder applying it, a short history of the statute is necessary.

The original version of KRS 355.3–406, enacted in 1958 and effective July 1960, stated:

Negligence contributing to alteration or unauthorized signature.—

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 the reasonable commercial standards of the drawee's or payor's business.

KRS 355.3–406 (1960 and 1980 Supp.). Our Supreme Court said that version of the statute was “designed for the benefit of the bank [.]” Owensboro Nat. Bank v. Crisp, 608 S.W.2d 51, 53 (Ky.1980). In Crisp, because the bank's customer was negligent in handling his own account, the bank argued the trial court should have applied the statute and entered a directed verdict in its favor. However, the Supreme Court disagreed, stating:

[E]ven though the drawer of the check (Crisp) may have been negligent in substantially contributing to a material alteration or to the making of an unauthorized signature, the bank may still be responsible if it does not act in good faith and in accordance with the reasonable commercial standards of the banking industry. Although Crisp was negligent, his negligence may be overcome by the negligence of the bank in cashing the check. This was a question of fact which properly was submitted to the jury.

Id. This common law analysis of the statute was conducted when contributory negligence principles still prevailed in Kentucky. Therefore, the fact-finder in Crisp was faced with an all-or-nothing question of fact—did the bank's negligence overcome Crisp's? If yes, then Crisp could recover in full; if no, Crisp would recover nothing. The jury in Crisp found against the bank. Id. at 52.

But the law has substantially changed. Many of the numerous authorities cited by both parties to this appeal provide far less help under the current statute and, frankly, they are largely unnecessary. We begin by considering the impact on the statute of Kentucky's adoption of the tort doctrine of comparative fault.

Our Supreme Court replaced contributory negligence concepts with the doctrine of comparative fault in Hilen v. Hays, 673 S.W.2d 713, 720 (Ky.1984), an automobile negligence action. The author, Justice Leibson, wrote a concurring opinion to his own majority in which he said, “I would provide guidelines for application of the new rule to other situations that will be affected by the change to comparative negligence.” Id. (Liebson, J., concurring). One such “other situation” was a bank's liability under the Uniform Commercial Code (UCC). Consciously or not, the Kentucky legislature embraced Justice Leibson's advice when it amended KRS 355.3–406 as part of its adoption of the Revised Article 3 of the Code.

In 1990, the National Conference of Commissioners on Uniform State Laws promulgated Revised Article 3 to the UCC. Sarah Howard Jenkins, Revised Article 3: “[Revise] It Again, Sam,” 36 Hous. L.Rev. 883, 884 (Fall 1999). Kentucky was among the first states to adopt the revised article, and it did so without modification. Unif. Laws Annot., Unif. Commercial Code Refs & Annos. (“Kentucky. Adopted Revised Article 3 and amendments conforming other sections of the Code to Revised Article 3 by L.1996, c. 130, effective January 1, 1997.”).

Adoption of the revised article had the effect of incorporating much of Kentucky's common law touching upon these issues, including Crisp (the relative negligence of bank and customer is a question of fact)...