Confederate Welding and Safety Supply, Inc. v. Bank of the Mid-South

• Decision Date: 31 October 1984
• Docket Number: MID-SOUT,D,No. 16502-CA,16502-CA
• Citation: 458 So.2d 1370
• Parties: 40 UCC Rep.Serv. 979 CONFEDERATE WELDING AND SAFETY SUPPLY, INC., Plaintiff-Appellee, v. BANK OF THEefendant-Appellant.
• Court: Court of Appeal of Louisiana — District of US

Page 1370

458 So.2d 1370

40 UCC Rep.Serv. 979

CONFEDERATE WELDING AND SAFETY SUPPLY, INC., Plaintiff-Appellee, v. BANK OF THE MID-SOUTH, Defendant-Appellant.

No. 16502-CA.

Court of Appeal of Louisiana,

Second Circuit.

Oct. 31, 1984.

Rehearing Denied Nov. 29, 1984.

Bodenheimer, Jones, Klotz & Simmons by F. John Reeks, Shreveport, for plaintiff-appellee.

Rogers & Harlow by Graham W. Rogers, Bossier City, for defendant-appellant.

Before HALL, FRED W. JONES, J. and SEXTON, JJ.

SEXTON, Judge.

Confederate Welding and Safety Supply, Inc. instituted suit against the Bank of the Mid-South to recover the proceeds of two checks on which Confederate is the payee. Bank of the Mid-South appeals an adverse judgment. We affirm.

Plaintiff Confederate Welding was at the time of the receipt of the checks a corporation whose stock was owned equally by two shareholders, Jerry Wayne Johnson, Sr. and Robert L. Armstrong. Johnson, who was secretary-treasurer of the corporation, was employed by the corporation as a salesman and worked out of the office much of the time. Armstrong was the office manager and bookkeeper. Additionally, he was president of the corporation. The corporate bank account was with Commercial National Bank. Armstrong had his personal bank account with Bank of the Mid-South.

On October 28, 1981, Armstrong went to Bank of the Mid-South and deposited into his personal banking account a check in the amount of $26,065.26, made payable to "Confederate Welding and Safety" and drawn on the account of Amerigas. Shortly thereafter, on November 4, 1981, Armstrong deposited a second check made payable to "Confederate Welding and Safety Supply" into his personal checking account. This check, in the amount of $3,539.24, was drawn on the account of Sawyer Drilling and Service, Inc. In each instance, Armstrong endorsed the check in his handwriting exactly as the check was made payable, then signed his name, R.L. Armstrong. On both occasions when the check was presented the same vice-president of the Bank of the Mid-South was contacted for approval of the deposits.

Armstrong subsequently depleted his personal checking account to the amount of $404.44. Confederate sought recovery against the depository bank, Bank of the Mid-South, claiming that the bank paid the instrument over an unauthorized endorsement, and as such was liable to Confederate, the true owner of the proceeds. The bank resisted, claiming that Confederate was precluded from asserting this claim because they were negligent in a manner which substantially contributed to the making of the unauthorized endorsement. The bank further alleged the affirmative defenses of laches, estoppel, and satisfaction of the debt. The bank additionally claims that the makers of the checks, Amerigas and Sawyer Drilling, are indispensable parties to this litigation.

LSA-R.S. 10:3-419, in pertinent part provides:

Sec. 3-419. Willful refusal to accept or pay; payment on a forgery; innocent representation

(1) When a drawee to whom an instrument is delivered for acceptance refuses to return it on demand; or when a person to whom an instrument is delivered for payment refuses on demand either to pay or to return it; or when a person pays an instrument on a forged indorsement, he is liable to the true owner.

(2) In an action against a drawee under subsection (1) the measure of the drawee's liability is the face amount of the instrument. In any other action under subsection (1) the measure of liability is presumed to be the face amount of the instrument.

In this instance, plaintiff makes no claim that the signature was forged but claims that Armstrong's endorsement for deposit into his personal checking account was outside the scope of his authority as an agent of the corporation. We must determine then whether a forged endorsement for purposes of LSA-R.S. 10:3-419 encompasses an unauthorized endorsement.

An "unauthorized" signature or endorsement means one made without actual, implied or apparent authority and includes a forgery. LSA-R.S. 10:1-201. The Third Circuit has indicated in dictum that the definition contained in LSA-R.S. 10:1-201 indicates that an unauthorized signature should be encompassed by the term forgery for purposes of LSA-R.S. 10:3-419. Top Crop Seed and Supply Co., Inc. v. Bank of Southwest Louisiana, 392 So.2d 738 (La.App. 3d Cir.1980). Such a finding is implicit in their ruling in Pargas v. Estate of Taylor, 416 So.2d 1358 (La.App. 3rd Cir.1982), discussed infra. Other jurisdictions have held that Section 3-419(1) applies to a situation where the signature is not forged but is instead a signature by one who exceeded his authority by so endorsing. The argument that the Uniform Commercial Code distinguishes between a forgery and an unauthorized signature and that without a "forgery" there can be no action under 3-419(1) has been rejected. See generally, Aetna Casualty and Surety Co. v. Hepler State Bank, 6 Kan.App.2d 543, 630 P.2d 721 (1981); Equipment Distrib. v. Charter Oak Bank, etc., 34 Conn.Supp. 606, 379 A.2d 682 (1977); Hartford Accident and Indemnity Co. v. S. Windsor Bank and Trust Co., 171 Conn. 63, 368 A.2d 76 (1976); Salsman v. National Community Bank of Rutherford, 102 N.J.Super. 482, 246 A.2d 162 (1968), affirmed 105 N.J.Super. 164, 251 A.2d 460 (1969). We find the reasoning of these cases to be persuasive on this point and conclude that Sec. 3-419 is available in the case of an unauthorized endorsement.

The bank argues that Armstrong had the requisite authority to endorse corporate checks. It claims that if an inquiry as to his authority had been made by the officer who approved the transaction, this authority would have been revealed.

Robert L. Armstrong was authorized by corporate resolution to endorse checks for deposit into the corporate banking account. However, the resolution on file at Commercial National Bank, as well as the resolution contained in the corporate minute book, make it abundantly clear that Armstrong was only authorized to endorse corporate checks for deposit into the corporate account at Commercial National Bank. ¹ We therefore conclude that Armstrong did not have actual authority to endorse corporate checks for deposit into his personal account.

Neither are we able, under the facts of this case, to find that Armstrong had implied authority which would justify the actions of Bank of the Mid-South. Apparent authority is a doctrine created by the courts to protect persons dealing in good faith with corporate officials where the corporation has taken such action or inaction as to justify a belief that the official has acted with authority. The doctrine has two requirements: (1) the principal must make some form of manifestation to an innocent third party; and (2) the third party must rely reasonably on the proported authority of the agent as a result of the principal's manifestations. Lilliedahl & Mitchel v. Avoyelles Trust and Savings, 352 So.2d 781 (La.App. 3rd Cir.1977); Krautkramer Ultrasonics, Inc. v. Port Allen Marine Service, Inc., 248 So.2d 336 (La.App. 4th Cir.1971).

The bank officer who authorized the deposits in question testified that he had known Armstrong for approximately three to four years on a casual, social basis during which time he played golf with Armstrong two to three times a month. He stated that he was unaware of the legal status of Confederate Welding, i.e., whether it was a corporation, sole proprietorship, or partnership. He stated that Armstrong had given him the impression that he "ran the show" at Confederate Welding and had the authority to conduct the entity's financial affairs. The officer further testified that he did not have any dealings with any other officers, members of the board of directors, or shareholders of Confederate Welding who indicated that Armstrong had authority to deposit corporate checks into his personal bank account. Considering this testimony, it is obvious that Confederate Welding, Armstrong's principal, made no manifestation of Armstrong's authority to Bank of the Mid-South. It is equally obvious that any appearance of Armstrong's authority came solely from Armstrong himself. Thus, the bank officer's reliance on this appearance of authority was unreasonable. It is well-established that the mere fact that an employee has managerial status and is in charge of a company's office does not entitle third persons to assume that he had the authority to execute or endorse negotiable paper belonging to his employer. Guillory v. Braswell Motor Freight Lines, Inc., 256 So.2d 646 (La.App.2d Cir.1972), writ denied, 260 La. 1134, 258 So.2d 381 (1972). Thus, we conclude that Armstrong had neither actual nor apparent authority to conduct this transaction. His signature on the check was therefore unauthorized. Bank of the Mid-South is consequently liable to Confederate for the face value of the checks under LSA-R.S. 10:3-419 unless Confederate Welding is estopped from asserting the unauthorized nature of Armstrong's signature.

The defendant bank claims that Confederate was negligent in failing to supervise the lax bookkeeping practices by Armstrong which allowed him to embezzle funds from the corporation. All corporate checks required the signatures of both Mr. Johnson and Mr. Armstrong. However, Mr. Armstrong was in charge of paying the bills and on many occasions Mr. Johnson would sign ten to fifteen checks in blank in order for Mr. Armstrong to do so. This was one of the methods used by Mr. Armstrong to embezzle money from the corporation, which amounted to approximately $130,000.00 over a one year period.

Any person who by his negligence substantially contributes to a material alteration of the instrument or to the making of an unauthorized signature is precluded from asserting the alteration or lack of authority against a holder in due course or against a drawee or other payor who pays the instrument in good faith and in accordance with reasonable commercial...