Amer. Airlines Empl Fed Credit Union v. Martin

• Decision Date: 07 September 2000
• Docket Number: No. 99-0320,99-0320
• Citation: 29 S.W.3d 86
• Parties: (Tex. 2000) American Airlines Employees Federal Credit Union, Petitioner v. Tim Martin, Respondent
• Court: Texas Supreme Court

Page 86

29 S.W.3d 86 (Tex. 2000)

American Airlines Employees Federal Credit Union, Petitioner v. Tim Martin, Respondent

No. 99-0320

IN THE SUPREME COURT OF TEXAS

Argued January 26, 2000

Decided September 7, 2000

On Petition for Review from the Court of Appeals for the Second District of Texas

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Justice Enoch delivered the opinion of the Court, in which Justice Hecht, Justice Owen, Justice Baker, Justice Hankinson, Justice O'Neill, and Justice Gonzales join.

We must decide whether former Section 4.406(d) of the Texas Business and Commerce Code,¹ which requires a bank customer to discover and report an unauthorized signature on an item to the bank within one year, can be modified by agreement to sixty days. We hold that it can. We further conclude that, because the parties here entered into an enforceable agreement, the credit union customer failed to give the credit union the required notice for ten of the fourteen transactions at issue. We therefore reverse in part and affirm in part the court of appeals' judgment.

I. Background

Petitioner American Airlines Employees Federal Credit Union ("Credit Union") is a federal credit union whose members are primarily employees of American Airlines and certain related entities, and their spouses and families. Respondent Tim Martin is an American Airlines employee.

In 1990, Martin opened a savings account (called a "share account") at the Credit Union. To open the account, he completed and signed a Credit Union membership application, which provided that his account would be "subject to any and all rules, regulations, bylaws and policies of the Credit Union and its Board of Directors now in effect and as changed, amended or adopted hereafter." Thereafter, he received quarterly account statements.

In May 1994, the Credit Union adopted a Deposit Account Agreement and Disclosures (the "Deposit Agreement").

The Deposit Agreement contained the following paragraph:

1. Account Statements. You are responsible for promptly examining each account statement. Any objection that you may have respecting any item shown on a statement will be waived unless made in writing to us, and received on or before the sixtieth (60th) day following the date the statement is mailed, subject to applicable law. You agree that we will not be liable for any forged or altered item drawn on or deposited to your account if you fail to notify us within that sixty-day period . . . .

The Credit Union notified its members about this Deposit Agreement through its newsletter and account statements. As well, the Credit Union specifically noted on the account statements that any errors on the statement were to be reported to the Credit Union within sixty days. Although the Credit Union did not mail out copies of the Deposit Agreement to all its members, it notified them that copies could be picked up at any of its branches, and that they could call the Credit Union to request a copy. In May 1994, Martin neither picked up a copy of the Deposit Agreement nor requested one.

On June 10, 1995, the Credit Union received a Membership Account Change Card in the mail, adding Molly Blair to Martin's account as a joint owner. Blair was Martin's girlfriend and also a member of the Credit Union. She had recently added Martin's name to her own account. The change card contained a signature purporting to be Martin's. The Credit Union changed the ownership status of the account after verifying the personal and account information on the card and comparing Martin's purported signature on the change card to his original signature card. Martin's signature on the change card turned out to be a forgery.

Between June 12 and November 16 of 1995, Blair transferred a total of $49,800 from Martin's account to her own. She made fourteen transfers altogether -- twelve by telephone and two in person. To execute a telephone transfer, Blair would call the Credit Union and speak to a teller, who would verify Blair's identity by confirming certain personal and account information. The teller would complete the transaction by preparing and signing a "journal voucher" that identified the date of the transaction, the amount of the transfer, and the accounts involved. These journal vouchers were then mailed to Martin's address, on the day of the transaction or the next day. The Credit Union also prepared journal vouchers for those transfers that Blair requested in person; these vouchers were given to Blair directly.

In addition to the twelve journal vouchers, the Credit Union also mailed two quarterly statements to Martin during the period that Blair made her withdrawals. The first was mailed between July 8 and July 20, 1995, and the second was mailed between October 6 and October 18, 1995. These statements documented ten of Blair's transfers (the other four being made after the period covered by the second statement). The first quarterly statement listed Blair as a joint owner of the account, and disclosed that she had made two withdrawals totaling $8,000. The second quarterly statement again listed Blair as a joint owner and revealed that she had made eight more withdrawals, totaling $36,500. Martin denies receiving these statements or the journal vouchers, although there is no dispute that they were mailed to the correct address. In any event, he did not contact the Credit Union to request either quarterly statement.

On December 20, 1995, Martin went to the Credit Union to make a deposit and discovered that the balance in his account was not what he expected it to be. He immediately notified the Credit Union of the discrepancy.

Ultimately, Martin sued the Credit Union to recover the $49,800 transferred from his account. He alleged breach of contract, negligence, and breach of the Credit Union's duties to him under Articles 3 and 4 of the Uniform Commercial Code.² The Credit Union defended principally on the basis of Texas Business and Commerce Code section 4.406, which requires a bank customer to discover and report his unauthorized signature on an item within a year after the item and the account statement documenting the transaction are made available to the customer.³ If the customer does not do so, he is precluded from asserting his unauthorized signature against the bank.⁴

The Credit Union further maintained that the Deposit Agreement reduced the one-year period set out in section 4.406(d) to sixty days, and that Martin had failed to notify it of the majority of Blair's unauthorized withdrawals within that time period. Additionally, the Credit Union claimed the protection of other defenses contained in section 4.406(b).⁵

Following a bench trial, the trial court rendered judgment in Martin's favor for $49,800, plus interest and attorney's fees. The Credit Union appealed, and the court of appeals affirmed.⁶ The court of appeals agreed with the trial court's conclusion that section 4.406 did not apply because Blair did not use any "unauthorized signatures" to make withdrawals from Martin's account.⁷ The court of appeals also agreed with the trial court that the sixty-day notice provision in the Deposit Agreement was vague, ambiguous and inconspicuous, and that Martin did not intentionally and knowingly relinquish the right to a year to give notice contained in section 4.406(d).⁸ Finally, the court of appeals concluded that sufficient evidence supported the trial court's findings that the Credit Union had breached its contract with Martin and had been negligent in accepting the Account Change Card adding Blair to Martin's account.⁹

II. UCC Section 4.406

Whether section 4.406 applies is a conclusion of law, which we review de novo.¹⁰ Article 4 of the UCC, of which section 4.406 is a part, establishes the rights and duties between banks and their customers regarding deposits and collections.¹¹ Under Article 4's liability scheme, a bank is liable to its customer if it charges the customer's account for an item that is not properly payable from that account.¹² An item with an unauthorized signature is not properly payable.¹³

Section 4.406 specifies the customer's corresponding obligation concerning items with unauthorized signatures:

(a) When a bank sends to its customer a statement of account accompanied by items paid in good faith in support of the debit entries or . . . otherwise in a reasonable manner makes the statement and items available to the customer, the customer must exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and must notify the bank promptly after discovery thereof.¹⁴

Section 4.406 also provides the bank with certain defenses when the customer fails to comply with this obligation. The Credit Union here relied on two of these defenses. First, the customer cannot assert his unauthorized signature against the bank when one wrongdoer makes a series of unauthorized transactions on the same account if the customer fails to discover and report the first unauthorized transaction within fourteen days.¹⁵ This defense is not available when the bank has failed to exercise ordinary care in paying the items.¹⁶

Second, and the defense on which the Credit Union places the most emphasis, the customer is absolutely precluded from asserting his unauthorized signature on an item against the bank if the customer fails to discover and report the unauthorized signature within a year after the bank makes available the item and the account statement showing the transaction:

(d) Without regard to care or lack of care of either the customer or the bank a customer who does not within one year from the time the statement and items are made available to the customer . . . discover and report his unauthorized signature or any alteration on the face or back of the item . . . is precluded from asserting against the bank such unauthorized signature or . . . such alteration.¹⁷

This...