Bank of Hoven v. Rausch

• Decision Date: 13 January 1986
• Docket Number: No. 14966,14966
• Parties: 42 UCC Rep.Serv. 1359 BANK OF HOVEN, A Banking Corporation, Plaintiff and Appellee, v. William RAUSCH, Defendant and Appellant. . Considered on Briefs
• Court: South Dakota Supreme Court

Page 39

382 N.W.2d 39

42 UCC Rep.Serv. 1359

BANK OF HOVEN, A Banking Corporation, Plaintiff and Appellee, v. William RAUSCH, Defendant and Appellant.

No. 14966.

Supreme Court of South Dakota.

Considered on Briefs Jan. 13, 1986.

Decided Feb. 19, 1986.

Clark W. Bormann of Bormann, Buckmeier & Bormann, Mobridge, for plaintiff and appellee.

Max A. Gors of Gors, Braun, Carlon, Smith & Zastrow, Pierre, and Jarvis Brown, Faulkton, for defendant and appellant; Laurence J. Zastrow of Gors, Braun, Carlon, Smith & Zastrow, Pierre, on brief.

WUEST, Justice.

This is an appeal from a judgment in a trial before the court granting recovery on a promissory note. We reverse.

In early April of 1978, Harlan Rausch (Harlan) asked appellee, Bank of Hoven (Bank), to lend him $75,000 for his farming operation. Bank informed Harlan that his credit was not sufficient to acquire the loan unless his father, William Rausch (William), cosigned the promissory note. On April 18, 1978, a note was executed and Harlan received the loan he requested. At trial, a promissory note bearing William's signature was admitted as evidence of the loan. William testified that it was not the note he signed, since it did not also bear his son Harlan's signature. William did, however, acknowledge signing a promissory note for $75,000 on April 18, 1978, but contended that he signed merely as a co-signer or guarantor and that his obligation was short-term, existing only until his son received a loan from the Farmers Home Administration.

On May 1, 1979, the promissory note was cancelled by Bank and another note was issued in its place. This promissory note was for the same principal amount of $75,000, although at a higher interest rate, and contained a signature purported to be William's. Harlan testified, however, that he placed William's signature on the instrument without William's knowledge. This process occurred on three more occasions, the last being July 28, 1982. Although expert testimony as to the authenticity of the signatures on the promissory notes was conflicting, the trial court found that Harlan did, in fact, sign his father's name to the instruments.

Bank brought suit on the 1982 note and William argued that his legal obligation was terminated when the original promissory note was cancelled in 1979. The trial court disagreed and held in its memorandum opinion that William was a participant in the continuing credit transactions between his son and Bank. The court determined this on the basis of testimony given by Bank's handwriting expert, that the signature on a financial statement allegedly signed in 1980 at the time of a note renewal, and the signature on a security agreement signed at Bank in 1981, were both William's signatures. The court held the expert's findings were substantiated by the testimony of two bank employees, Charles Simon (Simon) and Royce Hackl (Hackl). Simon testified that on July 9, 1980, Harlan and William came into Bank and discussed the renewal of the $75,000 note with him. Simon stated he prepared a financial statement and note, handing them across the desk to William for his signature. Simon said he did not recall actually seeing William sign the documents, but just assumed that he had. William testified he signed neither document. According to Hackl, William signed a security agreement while in the bank in 1981.

The trial court found the testimony of these witnesses dispositive, concluding

that primarily from [appellant] William Rausch's involvement in the 1980 note renewal, but to some degree also his involvement in the signing of the 1981 security agreement, that he had at that time a continuing knowledge of the transaction of the note renewal. This obligated him for the $75,000 credit to his son Harlan because the same was obtained by his appearance at the bank and his signing of the financial statement. His name appears on the note that Mr. Simon testified was handed to him for his signature. Even if his son had signed his name on it, under the circumstances of the case, he is bound thereby.

It is argued the statute controlling this action is SDCL 57A-3-404(1), which was taken verbatim from the Uniform Commercial Code section 3-404, and states in pertinent part: "Any unauthorized signature is wholly inoperative as that of the person whose name is signed unless he ratifies it or is precluded from denying it [.]" (Emphasis added). Liability under this statute is restricted to negotiable instruments as defined in SDCL 57A-3-102(1)(e) and SDCL 57A-3-104. Promissory notes are included under SDCL 57A-3-104(2)(d). An "unauthorized" signature is "one made without actual, implied or apparent authority and includes a forgery." SDCL 57A-1-201(43).

For the purposes of negotiable instruments law, the meaning of ratification is not dissimilar from its general meaning in the law of agency. "Ratification" is defined in Restatement (Second) of Agency Sec. 82 (1958) as follows:

Ratification is the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account, whereby the act, as to some or all persons, is given effect as if originally authorized by him.

The affirmance required to establish ratification may be either express or implied from conduct showing an election to treat an unauthorized act as authorized, or by conduct which can be explained only if there was such an election. Rakestraw v. Rodrigues, 8 Cal.3d 67, 104 Cal.Rptr. 57, 500 P.2d 1401 (1972); Thermo Contracting Corp. v. Bank of New Jersey, 69 N.J. 352, 354 A.2d 291 (1976); Eutsler v. First Nat. Bank of Pawhuska, 639 P.2d 1245 (Okla.1982); Restatement (Second) of Agency Sec. 83 (1958); White and Summers, Uniform Commercial Code 402 (1972). Ratification requires intent to ratify plus full knowledge of the material facts. Thermo Contracting Corp., supra; United Bank v. Mesa N.O. Nelson Co., 121 Ariz. 438, 590 P.2d 1384 (1979); Pargas, Inc. v. Estate of Taylor, 416 So.2d 1358 (La.App.1982); 6 Anderson, Uniform Commercial Code Sec. 3-404:21 p. 154 (1984). "Where a principal accepts the benefits of the agent's transaction with knowledge of all material facts there is a ratification so that the agent-made signature of the principal on commercial paper is binding upon the principal." Id. at Sec. 3-404:21 pp. 154-155.

Under SDCL 57A-3-404, even if a party does not ratify the unauthorized signature, he may still be "precluded from denying it." The Uniform Commercial Code comment to this section adds the following explanation:

The words "or is precluded from denying it" are retained in subsection (1) to recognize the possibility of an estoppel against the person whose name is signed, as where he expressly or tacitly represents to an innocent purchaser that the signature is genuine; and to recognize the negligence which precludes a denial of the signature.

U.C.C. Sec. 3-404 comment 4. As explained in White and Summers, at 402:

Several Code sections give content to the notion of "preclusion." For example, 3-406 provides that "Any person who by his negligence substantially contributes to ... the making of an unauthorized signature is precluded from asserting the ... lack of authority against [certain persons]...." Similarly, 3-405 outlines three situations where "An indorsement by any person in the name of the named payee is effective...."

The preclusion language of U.C.C. Sec. 3-404 authorizes an equitable estoppel to avoid an unconscionable result. Cooper...