C & N Contractors, Inc. v. Community Bancshares, Inc.

• Decision Date: 09 September 1994
• Citation: 646 So.2d 1357
• Parties: 25 UCC Rep.Serv.2d 130, 45 A.L.R.5th 873 C & N CONTRACTORS, INC., and Alabama Siding Construction Company v. COMMUNITY BANCSHARES, INC., d/b/a Community Bank. 1921933.
• Court: Alabama Supreme Court

Page 1357

646 So.2d 1357

25 UCC Rep.Serv.2d 130, 45 A.L.R.5th 873

C & N CONTRACTORS, INC., and Alabama Siding Construction Company v.COMMUNITY BANCSHARES, INC., d/b/a Community Bank.

1921933.

Supreme Court of Alabama.

Sept. 9, 1994.

B. Scott Tyra of Yearout, Myers & Traylor, P.C., Birmingham, for appellants.

Walter W. Kennedy III of Church & Kennedy, P.C., Pell City, Bishop K. Walker, Jr. and Mark O. South, Blountsville, for appellee.

ALMON, Justice.

The plaintiffs, C & N Contractors, Inc., and Alabama Siding Construction Company, appeal from a summary judgment in favor of the defendantCommunity Bancshares, Inc., d/b/a Community Bank ("Community Bancshares").C & N and Alabama Siding (sometimes herein "the plaintiffs") brought this action for damages against Community Bancshares, Mary Bivens, and sundry fictitiously named defendants, alleging conversion, negligence, and wantonness, all in connection with the action of Community Bancshares in cashing, or accepting for deposit, payroll checks on which Bivens forged the indorsements of the payees.The issues are (1) Whether in an action by two drawers, C & N and Alabama Siding, against a depositary bank, Community Bancshares, a genuine issue of fact exists as to whether the bank converted numerous payroll checks that it cashed or accepted for deposit, after an employee of C & N and Alabama Siding forged the indorsements of the payees, and (2) Whether § 7-3-405(1)(c),Ala.Code 1975, displaced the common law claims of negligence and wantonness by C & N and Alabama Siding against Community Bancshares.

C & N and Alabama Siding are construction and general contracting companies.They share the same office in Gardendale, Alabama.In 1988, Bivens was an employee of both corporations and performed various administrative duties for them.

C & N and Alabama Siding perform construction work at job sites throughout the southeastern United States.On Wednesday morning of each week, the foreman at each job site telephoned Bivens and gave her the names of the employees working on the job site and the number of hours they had worked.Bivens then conveyed this information to Automatic Data Processing ("ADP"), whose offices were in Atlanta, Georgia.Under a contract with C & N and Alabama Siding, ADP prepared payroll checks for the two companies.After preparing the payroll checks, based on the information given to it by Bivens, ADP sent the checks to the offices of C & N and Alabama Siding in Gardendale for authorized signatures.Bivens was not an authorized signatory.After the checks were signed, Bivens sent the checks to the job site foreman for delivery to the employees.

In 1991, Bivens began conveying false information to ADP about employees and hours worked.On the basis of this false information, ADP prepared payroll checks payable to persons who were actual employees but had not worked the hours Bivens had indicated.After obtaining authorized signatures from officers of C & N and Alabama Siding, Bivens intercepted the checks, forged the indorsement of the payees, and either cashed the checks at Community Bancshares or deposited them into her checking account at Community Bancshares, often presenting numerous checks at one time.Bivens continued this practice for almost a year, forging over 100 indorsements, until Jimmy Nation, vice president of C & N, discovered the embezzlement after noticing payroll checks payable to employees who had not recently performed services for the corporations.Bivens later admitted to forging the indorsements.

With regard to the claim of conversion, the circuit court, in its summary judgment, held that under the "padded payroll"rule of § 7-3-405(1)(c),Ala.Code 1975, ¹ the forged indorsement of Bivens was effective and that, therefore, the loss caused by the forged indorsements fell on C & N and Alabama Siding.Relying on Continental Bank v. Wa-Ho Truck Brokerage, 122 Ariz. 414, 595 P.2d 206(Ariz.Ct.App.1979), the circuit court also held that § 7-3-405(1)(c) displaced any common-law claim of negligence that the plaintiffs might otherwise have against Community Bancshares.Although it did not so state in its summary judgment, the circuit court presumably reached the same conclusion with regard to the claim of wantonness.

Assuming, without deciding, that either a statutory or a common law cause of action for conversion exists in the circumstances of this case, ²we conclude that § 7-3-405(1) is dispositive of the conversion claim.Section 7-3-405(1)(c) provides in pertinent part:

"(1) An indorsement by any person in the name of a named payee is effective if:

"....

"(c) An agent or employee of the maker or drawer has supplied him with the name of the payee intending the latter to have no [interest in the instrument]."

A forged indorsement is ordinarily ineffective to pass title to an instrument to a collecting bank, ³§ 7-3-404(1),Ala.Code 1975("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");§ 7-1-201(43),Ala.Code 1975("unauthorized signature" includes a forgery);Peerless Ins. Co. v. Texas Commerce Bank--New Braunfels, N.A., 791 F.2d 1177(5th Cir.1986);Western Casualty & Sur. Co. v. Citizens Bank, 676 F.2d 1344, 1345(10th Cir.1982);seeBrighton, Inc. v. Colonial First Nat'l Bank, 176 N.J.Super. 101, 422 A.2d 433(1980), affm'd 86 N.J. 259, 430 A.2d 902(N.J.1981);Fidelity & Cas. Co. v. First City Bank of Dallas, 675 S.W.2d 316, 317(Tex.App.1984), or, generally, to authorize a drawee bank to pay the instrument, § 7-4-401(1),Ala.Code 1975;Western Cas. & Sur. Co., 676 F.2d at 1345;Shearson Lehman Bros, Inc. v. Wasatch Bank, 788 F.Supp. 1184, 1189(D.Utah1992).See generally1 James J. White & Robert S. Summers, Uniform Commercial Code, §§ 15-3, at 751 and 16-4, at 793 (3d ed. 1988).Section 7-3-405(1) creates a limited exception to these general rules.

Although § 7-3-405(1) does not explicitly impose liability on the drawer for the loss caused by the payment of a forged instrument, it has the general legal effect of shifting liability to the drawer from the party who took from the forger.Comment 4, § 7-3-405, Ala.Code 1975.By making effective an otherwise ineffective indorsement in the special circumstances provided in § 7-3-405(1)(a), (b), and (c),§ 7-3-405(1) generally precludes the liability of a drawee bank to a drawer under § 7-4-401 and the liability of a collecting bank to a drawee/payor bank under § 7-4-207.E.g., Clinton Weilbacher Builder, Inc. v. Kirby State Bank, 643 S.W.2d 473, 476(Tex.App.1982).

Under § 7-4-207, each party who obtains payment from the drawee and each prior transferor of a check warrants to the party who pays the check that he has good title to the instrument.⁴This warranty is breached when the check has a forged or unauthorized signature.If in good faith and in accordance with commercially reasonable standards, a depositary or collecting bank accepts a check with a forged indorsement and then presents it for payment to the drawee/payor bank and if the drawee/payor bank pays the check, the drawee/payor bank is generally liable to the drawer under § 7-4-401 because it did not properly pay the check to the drawer's order.⁵After recrediting the drawer's account, the drawee/payor bank may seek indemnification by proceeding against the collecting bank that made presentment under § 7-4-207, alleging breach of warranty of good title.Liability on the basis of breach of warranty travels backward through the chain of collection and is ultimately placed on the party who took the check from the forger.Western Cas. & Sur. Co. v. Citizens Bank, 676 F.2d 1344, 1345(10th Cir.1982)("Ultimately the loss is generally borne by the person who forged the indorsement or the party who took the instrument from the forger");Dominion Bank, N.A. v. Household Bank, F.S.B., 827 F.Supp. 463(S.D.Ohio1993);Shearson Lehman Bros., Inc. v. Wasatch Bank, 788 F.Supp. 1184, 1189(D.Utah1992);McCarthy, Kenney, & Reidy, P.C. v. First Nat'l Bank, 402 Mass. 630, 524 N.E.2d 390, 392(1988);Kraftsman Container Corp. v. United Counties Trust Co., 169 N.J.Super. 488, 404 A.2d 1288, 1291(1979);Fidelity & Casualty Co. v. First City Bank, 675 S.W.2d 316, 317(Tex.App.1984).Thus, when a depositary bank accepts a forged instrument, it is generally liable for the amount of the check paid by the payor.The rationale for this system of allocating liability is that the party who took from the forger should be liable for the loss because that party is in the best position to prevent such fraud by checking the authenticity of indorsements.E.g., E.S.P., Inc. v. Midway Nat'l Bank of St. Paul, 447 N.W.2d 882(Minn.1989);Stapleton v. First Security Bank, 207 Mont. 248, 675 P.2d 83, 86(1983), appeal after remand on other grounds, 219 Mont. 323, 711 P.2d 1364(1985).

Section 7-3-405(1) is a narrow exception to this general system of allocating loss.Because this section makes an indorsement on a forged signature effective, the drawee/payor bank is authorized to pay the instrument and is generally not liable, therefore, to the drawer under § 7-4-401.Further, because this section makes an indorsement on a forged signature effective, title to the instrument passes, as though there had been no forgery, and a collecting bank is entitled to payment from parties liable on the instrument.Western Cas. & Sur. Co. v. Citizens Bank, 676 F.2d 1344(10th Cir.1982);General Accident Fire & Life Assurance Corp. v. Citizens Fidelity Bank & Trust Co., 519 S.W.2d 817(Ky.1975);Continental Bank v. Wa-Ho Truck Brokerage, 122 Ariz. 414, 595 P.2d 206, 213(Ariz.App.1979).Thus, no conversion action by the drawer against either the drawee or the depositary bank will lie where § 7-3-405(1)(c) controls.The official comment to § 7-3-405 states the rationale for allocating liability to the drawer in the circumstances covered by §...