Am. Mach. Tool. Dist. v. Nat. Perm. Fed. Sav.

• Decision Date: 27 July 1983
• Docket Number: No. 80-1196.,80-1196.
• Citation: 464 A.2d 907
• Parties: AMERICAN MACHINE TOOL DISTRIBUTORS ASSOCIATION, Appellant, v. NATIONAL PERMANENT FEDERAL SAVINGS AND LOAN ASSOCIATION, Appellee.
• Court: D.C. Court of Appeals

464 A.2d 907

AMERICAN MACHINE TOOL DISTRIBUTORS ASSOCIATION, Appellant, v. NATIONAL PERMANENT FEDERAL SAVINGS AND LOAN ASSOCIATION, Appellee.

No. 80-1196.

District of Columbia Court of Appeals.

Argued September 10, 1981.

Decided July 27, 1983.

John S. Koch, Washington, D.C., with whom Jane H. Chalmers, Washington, D.C., was on the brief, for appellant.

Maurice J. Montaldi, Washington, D.C., with whom George H. Beuchert, Jr., Washington, D.C., was on the brief, for appellee.

Before NEBEKER, MACK and PERREN, Associate Judges.

MACK, Associate Judge:

Appellant, American Machine Tool Distributors Association ("AMTDA"), brought a conversion action against the executor of its deceased employee's estate and against appellee, National Permanent Federal Savings and Loan Association ("National Permanent"), to recover money embezzled by its deceased employee. The trial court denied AMTDA's claim against National Permanent and held that the estate of AMTDA's Administrative Director, I.T. Budlong, Jr., was liable for all funds embezzled by decedent-Budlong.¹ AMTDA appeals the trial court's rejection of the claim against National Permanent and the conclusion that AMTDA's contributory negligence precludes it from asserting its employee's lack of authority in the conversion action against National Permanent. We find that the trial court's conclusion is based upon misapplication of the commercial code and that the evidence developed at trial supports the liability of National Permanent, as a matter of law, for the unauthorized payments. We therefore reverse and remand with directions that the amount of damages be determined and that judgment be entered for AMTDA against National Permanent in the amount commensurate with its conversion liability.

I

AMTDA is a non-profit trade association incorporated in the District of Columbia. During the relevant period, AMTDA had approximately 400 members and an annual operating budget of about $200,000. Its Washington office staff consisted of six employees, including a bookkeeper/Administrative Director, I.T. Budlong, Jr. Over the course of four and one-half years, Budlong embezzled from AMTDA almost $500,000. He executed this scheme by taking advantage of his responsibilities concerning AMTDA members' dues payments and through the use of his individual savings account with National Permanent.

Budlong's duties at AMTDA included invoicing members' dues, logging those dues payments in AMTDA's ledgers and depositing the payments into AMTDA's bank accounts at Riggs National Bank and American Security Bank. He also prepared periodic financial reports for AMTDA's internal use. The amount of dues paid by each AMTDA member was known only to Budlong and AMTDA's Executive Vice President, James Kelley — the only AMTDA employees with access to AMTDA's dues ledgers. The purpose of this arrangement was to keep confidential the gross profit figures of members' businesses, an amount which could be calculated from dues figures. However, the arrangement also contributed to the ease with which Budlong carried out his embezzlement scheme.

In March 1973, Budlong opened an individual savings account, # 601-647-2, at National Permanent in the name I.T. Budlong, Jr. On the signature card, Budlong designated his address as "A.M.T.D.A., 1500 Massachusetts Avenue, N.W., Washington, D.C." From March through July 1973, Budlong deposited checks made payable to him ("I.T. Budlong," "I.T. Budlong, Administrative Director"), which were consistent with the nature of the account, an individual savings account. Beginning in August 1973 and continuing until September 1977, Budlong deposited over 1800 checks, made payable to "American Machine Tool Distributors Association" or to "AMTDA", into his individual savings account. The amount of these checks accounted for over 75% of the total amount of money deposited in this account from March 1973 through September 1977.

A brief description of the manner in which Budlong carried out his embezzlement scheme follows. After the end of each fiscal year (April 30), Budlong sent blank dues invoice forms to each of AMTDA's members. The members were directed to complete the form and to return it, with payment, to "I.T. Budlong, Jr., Director, Administrative Services." No direction was given regarding the manner in which checks were to be made payable. Consequently, checks were made payable in various forms, including "AMTDA", "American Machine Tool Distributors Association", "I.T. Budlong, Jr., Administrative Director", "I.T. Budlong" and "AMTDA, I.T. Budlong."

After receipt of dues payment checks, Budlong endorsed them "For Deposit Only, Credit account 601-647-2, AMTDA"² and deposited them into his individual saving account at National Permanent. The majority of both the deposit and withdrawal slips were completed with "AMTDA, I.T. Budlong, Jr., Director" designated as the account owner. Once dues payment checks were deposited, Budlong then withdrew money from his individual account and deposited these sums into AMTDA's accounts at Riggs National Bank and American Security Bank, while retaining portions of the dues payments in his individual account.

To account for the sums diverted to his own use, Budlong systematically forged dues payment invoices and ledger entries to indicate dues payments at levels lower than those actually paid. In this manner, he accounted for and hid the amounts diverted from dues payments for his own use. In September 1977, shortly before this scheme was uncovered, Budlong committed suicide.

II

The trial court concluded that pursuant to D.C.Code § 28:3-419(1)(c) (1981),³ there was a conversion of checks made payable to AMTDA and deposited into Budlong's individual account at National Permanent. It held that AMTDA was precluded from recovering money from checks made payable to "I.T. Budlong, Jr.," "I.T. Budlong, Administrative Director", and "I.T. Budlong, Administrative Director, AMTDA" since these checks were properly payable to Budlong pursuant to D.C.Code §§ 28:3-111, 3-117(a) and (c) (1981). It further held concerning the remaining checks that AMTDA is precluded from asserting Budlong's lack of authority against National Permanent pursuant to D.C.Code §§ 28:3-404(1), 3-406 (1981). On appeal, AMTDA asserts the following grounds for reversal: (1) that the court wrongfully placed the burden of proving that National Permanent's conduct did not comport with reasonable commercial standards on AMTDA; (2) that even if the court placed the burden on the proper party (National Permanent), its holding that National Permanent's conduct comported with these standards was clearly erroneous and not supported by the record evidence; (3) that the court erred in excluding some of AMTDA's evidence bearing on the reasonable commercial standards issue;⁴ (4) that the evidence does not support the court's conclusion that AMTDA itself was negligent; and (5) that AMTDA can recover, as consequential damages, the amounts of checks, mentioned above, which were properly paid to Budlong.⁵ We agree with AMTDA's first two contentions and, therefore, reverse on those grounds.

III

A. Burden of Proof

Section 3-404(1) reads in part as follows:

Any unauthorized signature is wholly inoperative as that of the person whose name is signed unless he . . . is precluded from denying it. (Emphasis added.)

D.C.Code § 28:3-404(1) (1981). Ordinarily, an unauthorized signature will not bind the person whose name is signed. Official Comment 4 indicates, however, that the underscored words were intended to estop the person whose name is signed from denying the signature when his or her negligence permitted the making of the unauthorized signature. Uniform Commercial Code § 3-404 comment 4, 2 U.L.A. 326 (Master ed. 1977). Thus § 3-404(1) must be read in conjunction with § 3-406. See 2 R. ANDERSON, UNIFORM COMMERCIAL CODE 940, § 3-406:3 (2d ed. 1971).

Section 3-406 reads in relevant part:

Any person who by his negligence substantially contributes . . . to the making of an unauthorized signature is precluded from asserting . . . the lack of authority 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. (Emphasis added.)

D.C.Code § 28:3-406 (1981). This section complements § 3-404(1) and defines the circumstances in which one may be precluded from denying the authority of the one making an unauthorized signature. Section 3-406 sets up a "counter estoppel" or "conditional estoppel" under which a payor⁶ may estop the party's assertion that the instrument was inoperative (i.e., the signature was inoperative) only if that payor has paid the instrument in good faith and in accordance with the reasonable commercial standards of its business.⁷ Hermetic Refrigeration Co., Inc. v. Central Valley National Bank, Inc., 493 F.2d 476, 477 (9th Cir. 1974); J. Gordon Neely Enterprises, Inc. v. American National Bank, 403 So.2d 887, 890 (Ala. 1981); Continental Bank v. Wa-Ho Truck Brokerage, 122 Ariz. 414, 419, 595 P.2d 206, 211 (1979); Cooper v. Union Bank, 9 Cal.3d 371, 385, 107 Cal.Rptr. 1, 12, 507 P.2d 609, 620 (1973) (en banc); Perley v. Glastonbury Bank & Trust Co., 170 Conn. 691, 699, 368 A.2d 149, 153 (1976); Travelers Insurance Co. v. Jefferson National Bank, 404 So.2d 1131, 1133 (Fla.Dist.Ct.App. 1981); Trust Company of Georgia Bank v. Port Terminal & Warehousing Co., 153 Ga.App. 735, 737-40, 266 S.E.2d 254, 257-58 (1980); Empire Moving and Warehouse Corp. v. Hyde Park Bank & Trust Co., 43 Ill.App.3d 991, 997, 2 Ill.Dec. 753, 757, 357 N.E.2d 1196, 1200 (1976); Aetna Casualty & Surety Co. v. Hepler State Bank, 6 Kan.App.2d 543, 630 P.2d 721, 728 (1981); Owensboro National Bank v. Crisp, 608 S.W.2d 51, 53 (Ky. 1980); Bank of Southern Maryland v. Robertson's Crab House, Inc., 39 Md.App. 707, 723, 389 A.2d 388, 397 (1978); First National Bank v. Hovey, 10 Mass.App. 715, ___, 412 N.E.2d...