Citizens Bank of Maryland v. Maryland Indus. Finishing Co. Inc.

• Decision Date: 01 September 1994
• Docket Number: No. 103,103
• Citation: 338 Md. 448,659 A.2d 313
• Parties: , 26 UCC Rep.Serv.2d 1009 CITIZENS BANK OF MARYLAND v. MARYLAND INDUSTRIAL FINISHING CO., INC. ,
• Court: Maryland Court of Appeals

Page 448

338 Md. 448

659 A.2d 313, 26 UCC Rep.Serv.2d 1009

CITIZENS BANK OF MARYLAND v. MARYLAND INDUSTRIAL FINISHING CO., INC.

No. 103, Sept. Term, 1994.

Court of Appeals of Maryland.

June 8, 1995.

Steven J. Parrott (Nancy E. Leibowitz, Hartman and Parrott, all on brief), Annapolis, for petitioner.

William O. Lockwood, Greenbelt, for respondent.

Argued before MURPHY, C.J., ELDRIDGE, CHASANOW, KARWACKI, BELL and RAKER, JJ., and JOHN F. McAULIFFE, Judge (retired) Specially Assigned.

MURPHY, Chief Judge.

In this case we must decide whether, for the purposes of a conversion action under Maryland Code (1975, 1992 Repl.Vol.), § 3-419 of the Commercial Law Article, ¹ an agent's indorsements on checks payable to the agent's principal were unauthorized (1) when the agent indorsed the checks with an improper motive or later misappropriated the checks, or (2) when the agent omitted restrictive language required by the principal to be part of the indorsement.

I.

Section 3-419(1) provides: "An instrument is converted when ... [i]t is paid on a forged indorsement." Official comment 3 explains that this "adopts the prevailing view of decisions holding that payment on a forged indorsement is not an acceptance, but that even though made in good faith it is an exercise of dominion and control over the instrument inconsistent with the rights of the owner, and results in liability for conversion." ² See Mid-Atl. Tennis Cts. v. Citizens Bank &amp Trust Co., 658 F.Supp. 140, 143 (D.Md.1987) ("It is axiomatic that an item is converted when it is paid on a forged [i]ndorsement, because the payment is made to one who has no good title."). Section 3-419(1), therefore, "imposes strict liability where a party pays an instrument over a forged indorsement." Menichini v. Grant, 995 F.2d 1224, 1232 (3rd Cir.1993). See also Equitable Life Assur. Soc. of U.S. v. Okey, 812 F.2d 906, 910 (4th Cir.1987) (stating that § 3-419 imposes "absolute liability"). The exposure created by this strict or absolute liability is somewhat mitigated by § 3-419(3), which limits the liability of a bank to the proceeds that remain in the bank's hands, if the bank establishes (1) that it acted in good faith and (2) that it acted "in accordance with the reasonable commercial standards applicable to the business." ³

II.

Pauline Pagani was an employee of Maryland Industrial Finishing Company, Inc. (MIFCO) from April 13, 1989 through February 23, 1990. In June of 1989, Pagani began embezzling funds by depositing some of MIFCO's checks into her own account at Citizens Bank of Maryland (Citizens), rather than depositing the checks into MIFCO's account at Citizens. She continued this practice until February of 1990, when Brenda Alexander, one of the owners of MIFCO, discovered the embezzlement. MIFCO later sued Citizens to recover the funds that were deposited into Pagani's personal account. ⁴ MIFCO alleged, among other things, that Citizens converted the checks under § 3-419(1)(c) of the Commercial Law Article and that Citizens was negligent.

At trial in the Circuit Court for Prince George's County, Brenda Alexander testified that MIFCO is a small company with seven employees and that it has had an account with Citizens since 1976. She explained that MIFCO billed its customers by sending two copies of its invoice to the customer. MIFCO retained and filed a single pink copy of each invoice. Alexander testified that she instructed Pagani that when MIFCO received a check from a customer, she should retrieve the pink invoice from the file, mark it paid, and write on it the check number, the date of the check, the date the check was received, and the amount of the check. Pagani was instructed to then put the paid invoices in a "paid file." Pagani was also instructed, Alexander testified, to indorse the check by stamping the back with two stamps--one with the name and address of MIFCO and the other containing the words, "for deposit only." Pagani was then directed to deposit the indorsed checks into MIFCO's account at Citizens Bank and file a copy of the deposit slip in MIFCO's files.

Alexander testified that she specifically required Pagani to use the "for deposit only" stamp when indorsing checks and that she did not consider the MIFCO stamp to be an indorsement if it was used without the "for deposit only" stamp. She never knew of anyone at MIFCO using the MIFCO stamp as an indorsement without also using the "for deposit only" stamp; she admitted, though, that she was not always present to observe how the stamps were used and later learned, after she discovered the embezzlement, that Pagani had not always used the "for deposit only" stamp. Alexander admitted that she never notified Citizens that the MIFCO stamp without the "for deposit only" stamp was not considered an indorsement.

Alexander testified that in October or November of 1989, several months after the embezzlement began, she was looking through the invoice files and discovered that there were "paid" invoices for which she could not find corresponding deposit slips. She made a list of these invoices and she later confronted Pagani about the problem. Pagani suggested that they begin stapling the deposit slips to the corresponding invoices. A few days later, Alexander stated, she checked if Pagani had complied with this suggestion and found that deposit slips were stapled to invoices. She investigated no further at that time.

Alexander related that in February of 1990 she was sorting through some papers and found the list she had made of invoices without corresponding deposit slips. When she looked for the invoices on the list, she could not find any of them. Alexander then called some of their customers in an attempt to verify that MIFCO had received all the checks that its customers had sent, and some of the customers faxed MIFCO copies of some checks. Alexander then called Pat Fowler at Citizens and asked her to verify that the checks had been deposited into MIFCO's account. After Alexander delivered the copies of the checks to the bank, Fowler researched Citizens' records. Alexander testified that a day or two later Fowler told her that the checks were deposited into Pagani's personal account. The next day, Alexander met with Fowler and an investigator from the bank to discuss the details of the scheme, and the investigator gave Alexander copies of checks that Pagani had deposited into her personal account. MIFCO's attorney also introduced copies of Pagani's bank statements and copies of the actual deposit slips Pagani allegedly used to deposit the checks into her personal account.

Alexander stated that after the meeting at the bank, she went back to MIFCO's offices, with the copies of the checks in hand, and confronted Pagani. Alexander asked Pagani if she had taken any paperwork from the office. Pagani responded that she had, and Alexander followed Pagani home to retrieve the papers. Pagani gave them several invoices, of which Alexander made a list.

Alexander acknowledged that Pagani had been the employee charged with reconciling MIFCO's monthly bank statements and that she did not always check Pagani's work. She said that she could have detected the embezzlement by totaling the invoices marked paid for the month and comparing that number to the total amount of the deposits on the bank statement (at least until Pagani started taking some of the invoices). She did check the bank statements against the deposit slips in MIFCO's files, but this failed to detect the problem because Pagani did not put her personal deposit slips into the files. Alexander also explained that MIFCO had never had any prior problems with employees stealing money from the company.

Called by MIFCO to testify, Pagani largely corroborated Alexander's testimony concerning her duties and confirmed that Alexander instructed her to indorse checks by stamping the back with both the MIFCO stamp and the "for deposit only" stamp. MIFCO's attorney read from Pagani's deposition in which she stated that she had deposited the checks in her personal account by filling out a blank deposit slip with MIFCO's name and her personal account number. The deposition also revealed that she appropriated the pink invoices that corresponded to the checks she deposited in her own account, that she never took cash back at the time of the deposit, and that she always used the drive-up window for these transactions. Pagani explained in her testimony that MIFCO's deposit slips were pre-printed while the deposit slips she used to deposit checks into her personal account were the blank slips available at the bank. She also testified that she did not always use the "for deposit only" stamp, even on some of the checks she deposited in MIFCO's account. She further testified that Alexander was only at MIFCO once or twice a week and that she never remembered Alexander comparing the invoices to the deposit slips or the bank statements. Pagani also stated that the bank never questioned the indorsements made without the "for deposit only" stamp. She admitted that she had no authorization to deposit the checks into her own account.

MIFCO then requested that Citizens produce a representative to testify to its banking procedures. Deborah Funkhouser, an assistant vice president in charge of documenting policies and procedures for the bank, was questioned about these procedures and relevant portions of Citizens' procedural manual. No questions were asked of Funkhouser to elicit the procedures of the banking business in general or the standard of care followed in that business.

At the close of MIFCO's case, Citizens moved for judgment and the circuit court granted the motion. The court found that the indorsements were actually authorized, and were therefore not forgeries. It specifically rejected MIFCO's argument that Pagani's indorsements were unauthorized because she failed to stamp the checks "for deposit only." The court stated:

"We're talking about simply...