Citibanc of Alabama/Fultondale v. Tricor Energies, Inc.

• Decision Date: 09 May 1986
• Citation: 493 So.2d 1344
• Parties: 1 UCC Rep.Serv.2d 1571 CITIBANC OF ALABAMA/FULTONDALE v. TRICOR ENERGIES, INC. TRICOR ENERGIES, INC. v. CITIBANC OF ALABAMA/FULTONDALE. 83-956, 83-992.
• Court: Alabama Supreme Court

Page 1344

493 So.2d 1344

1 UCC Rep.Serv.2d 1571

CITIBANC OF ALABAMA/FULTONDALE v. TRICOR ENERGIES, INC.

TRICOR ENERGIES, INC. v. CITIBANC OF ALABAMA/FULTONDALE.

83-956, 83-992.

Supreme Court of Alabama.

May 9, 1986.

Rehearing Denied July 11, 1986.

Macbeth Wagnon, Jr. of Bradley, Arant, Rose & White, Birmingham, for appellant and cross-appellee.

Richard F. Ogle of Denaburg, Schoel, Meyerson, Ogle, Zarzaur & Max, Birmingham, for appellee and cross-appellant.

ALMON, Justice.

This appeal and the cross-appeal arise from a suit against a bank by its customer for alleged improper handling of checks. The trial court, sitting without a jury, awarded plaintiff $64,893.23. This appeal raises questions involving several provisions of the Alabama version of the Uniform Commercial Code, including the "midnight deadline" rules of Code 1975, §§ 7-4-104(1)(h), -301, and -302.

Tricor Energies, Inc., an Alabama corporation, sued Citibanc of Alabama/Fultondale for the alleged improper payment on October 30, 1978, of a check payable to Tricor. By amendment, Tricor added counts for failure to give timely notice of dishonor of two other checks, one dated November 6, 1978, and the other dated November 8, 1978. Only the October 30 and November 8 checks are at issue in this appeal and cross-appeal, it being conceded that the bank gave timely notice of dishonor of the November 6 check.

At the time of these transactions, Nelson Arnold was a stockholder and director of both Tricor and Citibank. Charles Payne was the other stockholder and director of Tricor, holding 60 per cent of Tricor's stock while Arnold held the other 40 per cent. Payne was president of Tricor and Arnold was vice president.

On October 30, 1978, Arnold presented to Citibank a check drawn by Great Southern Paper Company to the order of Tricor in the amount of $75,992. Instead of depositing the check in Tricor's account, however, Arnold deposited it in his personal account. The check was endorsed as follows:

"Tricor Energies, Inc. (hand printed)

For Deposit Only (hand printed)

Nelson Arnold" (script signature)

On November 6, Arnold deposited in Tricor's account at Citibanc a check drawn on his personal account at Citibanc in the amount of $75,992. On November 7 Citibanc charged this November 6 check back to Tricor's account because of insufficient funds in Arnold's account.

On November 8 Arnold deposited a check in the amount of $80,000 into his account at Citibanc. This check was payable to Nelson Arnold and was drawn on an account in the name of "Crude Reclamation, Inc., T.R. Lankford or Nelson Arnold" at the Jasper County Bank in Heidelberg, Mississippi. On the same day, Arnold drew a check payable to Tricor on his account at Citibanc in the amount of $75,992 and deposited it into Tricor's account. On November 17 Citibanc received the $80,000 check which had been returned by the Jasper County Bank for insufficient funds and improper signature. Upon receipt of this check, Citibanc gave notice to Tricor that it would not honor the check Arnold had deposited in Tricor's account on November 8 and charged $75,992 against Tricor's account.

Tricor's original complaint, filed on May 13, 1981, mentioned only the check deposited by Arnold on October 30, 1978. Count one alleged improper payment without the necessary corporate endorsement, count two alleged improper payment in spite of a restrictive endorsement, count three alleged negligence, and count four alleged conversion. Citibanc filed a motion to dismiss and then, on July 31, 1981, an answer denying the material allegations of the complaint and raising the following affirmative defenses: accord and satisfaction, payment of Tricor's claim, the statute of limitations, and waiver.

Citibanc filed an amended answer on September 8, 1982, alleging that Tricor's contributory negligence precluded it from asserting that the endorsement was not authorized. On April 11, 1983, Tricor filed an amended complaint, adding count five, which recited the deposit of the November 8 check and its dishonor on November 17, and alleged:

"In this transaction, as described, the Defendant Bank was the depository, collecting, and payor bank.

"The Defendant Bank is liable to the Plaintiff in the full amount of the check in question, i.e. $75,992.00, due to the fact that Defendant Bank breached its obligation to either pay or return this item or send notice of dishonor within the time permitted by the law of the State of Alabama."

Citibanc filed no response to this amended complaint. On August 23, 1983, Tricor filed another amended complaint, adding count six, which recited the deposit of the November 6 check and alleged the failure to make timely settlement of the check, using the same language as the last paragraph quoted above. On August 26, 1983, Citibanc filed an amended answer, admitting some allegations of count six and denying others. This amended answer added affirmative defenses, alleging that "Count Six, and all other claims asserted by plaintiff, are barred by the applicable statute of limitations, the doctrine of account stated, the doctrine of ratification."

The case went to trial and the court, after hearing ore tenus evidence, entered judgment for Tricor. Citibanc appeals from the judgment, and Tricor cross-appeals from the failure of the trial court to award damages in the full amount of $75,992 plus interest.

We first address Citibanc's argument that the trial court erred in failing to sustain Citibanc's defenses to all counts except count four because the other counts were barred by the statute of limitations. Citibanc argues that counts one, two, and three are actions for simple negligence and thus are barred by the one-year limitation of Code 1975, § 6-2-39(a)(5) ¹ and that counts five and six are barred by the one-year limitation on actions for "a penalty given by statute to the party aggrieved," Code 1975, § 6-2-39(a)(3).

Citibanc concedes that an action for conversion may be brought within six years under Code 1975, § 6-2-34(3). Count four alleges a conversion of the October 30 check. The allegations of the original complaint raise the inference that Citibanc converted the October 30 check by allowing Arnold to deposit it to his account instead of to Tricor's. The allegations of improper payment in counts one and two set forth Tricor's contentions regarding the alleged conversion. Thus, the court properly considered the allegations regarding the October 30 check on their merits.

We need not consider whether count six was barred by the statute of limitations, because, as noted above, Tricor concedes that the proof showed no liability in regard to the matters alleged in count six.

The allegations of count five are somewhat more problematic. Count five was in effect a suit for violation of the midnight deadline rule. The question of whether a suit for violation of the midnight deadline rule is a suit for conversion is a complex one, so we reserve the question of whether count five is barred by the statute of limitations for discussion on the merits, below.

On the merits of the claims, we address first the counts based on the October 30 check. Various provisions of the Alabama Uniform Commercial Code address the form in which indorsements are to be made. Code 1975, § 7-3-205, states that an indorsement which includes the words "for deposit" is restrictive, and § 7-3-206 sets forth the effect of a restrictive indorsement. Section 7-3-403 relates to signatures in a representative capacity. Tricor contends that Citibanc improperly allowed Arnold to deposit the October 30 check to his account (1) in spite of the fact that it was made payable to Tricor and indorsed "for deposit only," and (2) over his signature which did not indicate a representative capacity.

Even assuming Citibanc could be liable for the alleged improper payment, the record shows that Tricor ratified the acts of Arnold in depositing the check to his own account. Section 7-3-404(2) states: "Any unauthorized signature may be ratified for all purposes of this article. Such ratification does not of itself affect any rights of the person ratifying against the actual signer."

Citibanc's dishonor of the November 8 check on November 17 caused an overdraft in Tricor's account. The president of Citibanc telephoned Charles Payne, the president of Tricor, and explained these transactions, including the diversion of the Great Southern Paper check. Payne made no demand on Citibanc for the alleged mishandling of the check until April of 1981. Instead, Payne caused Tricor to cover the overdraft and continue banking with Citibanc.

Payne set up an account on Tricor's books designated "Notes Receivable, Other," and entered the amount of the Great Southern Paper check. Arnold gave Tricor a $10,000 cashier's check on November 17 and this amount was entered on the notes receivable account. Arnold later repaid another $30,000. Tricor's financial statement for December 31, 1978, lists the account as reflecting an asset of $35,992.

In short, Tricor treated the October 30 diversion of the Great Southern Paper check as a loan to Arnold and thereby ratified the October 30 deposit of the Great Southern Paper check into Arnold's account. Under Uniform Commercial Code provisions similar to those at issue here, courts have held that ratification precluded findings of liability against defendant banks for mishandling checks. Thermo Contracting Corp. v. Bank of New Jersey, 69 N.J. 352, 354 A.2d 291 (1976); Fulka v. Florida Commercial Banks, Inc., 371 So.2d 521 (Fla.Dist.Ct.App.1979); and Eutsler v. First National Bank, 639 P.2d 1245 (Okla.1982); but see Atlas Building Supply Co. v. First Independent Bank of Vancouver, 15 Wash.App. 367, 550 P.2d 26 (1976).

The November 17 dishonor of Arnold's November 8 check presents a different question. Code 1975, § 7-4-302, bears the title "Payor bank's responsibility for late return of item," and reads in pertinent part:

"In the...