Consolidated Public Water Supply Dist. No. C-1 v. Farmers Bank
| Decision Date | 15 January 1985 |
| Docket Number | P,C-1,No. 47457,47457 |
| Citation | 686 S.W.2d 844 |
| Parties | 40 UCC Rep.Serv. 955 CONSOLIDATED PUBLIC WATER SUPPLY DISTRICT NO.laintiff-Respondent, v. FARMERS BANK, Defendant-Appellant. |
| Court | Missouri Court of Appeals |
Richard D. Shewmaker, Clayton, for defendant-appellant.
Roland A. Wegmann, Mark T. Stoll, Hillsboro, for plaintiff-respondent.
Defendant Farmers Bank appeals from a judgment entered on a jury verdict for $207,108.07 in favor of plaintiff Consolidated Public Water Supply District No. C-1 on its claim that the Bank improperly charged the Water District's account for checks paid over forged endorsements. §§ 3-404, 4-401 U.C.C. 1
The Bank relied on two defenses: first, the "padded payroll" or imposter section of the U.C.C., § 3-405; second, the negligence of the Water District in conducting its business so that an employee could, by forging endorsements, cash checks made out to the Water District's suppliers, § 3-406. The judgment is affirmed in part and reversed and remanded in part.
Bank contends the trial court erred in: (1) overruling its motion for directed verdict; (2) instructing the jury on the definition of good faith; (3) requiring the Bank to follow "reasonable commercial standards" in its instruction on the defense under § 3-405, U.C.C., the imposter section; (4) in instructing the jury on the applicability of § 400.4-406 U.C.C. relating to the time limit on recovery by the Water District for checks with unauthorized endorsements; (5) in refusing to withdraw from the jury's consideration evidence of the Bank's failure to obtain the endorsements of the Water District's manager or other person when he cashed the checks in question, and overruling objections to closing argument relating to Bank's failure to obtain the endorsements; (6) in refusing instructions which stated the effect of Bank's negligence; and (7) in refusing an instruction regarding a Water District employee's apparent and inherent authority to cash checks on behalf of Water District.
The Water District's motion to dismiss the appeal because Bank's brief fails to comply with Rule 84.04(d) was denied, although appellant Bank's brief was indeed defective under the rule. See Thummel v. King, 570 S.W.2d 679 (Mo. banc 1978).
The Bank, however, has filed a motion under Rule 84.08(a), taken with the case, to excuse its partial failure to comply with Rule 84.04(d) and to supplement its brief. The supplement sufficiently corrects the original brief by at least stating specifically what trial court rulings are asserted as error. The Bank's motion to excuse and to supplement its brief is granted.
The facts are essentially undisputed. The Water District is a public consolidated water supply district serving part of Jefferson County. It is a consolidation of Public Water Supply District No. 4 and Public Water Supply District No. 9. The consolidation took place in late 1977.
Floyd E. Sutterfield became the manager of District No. 9 when it was organized in 1966 and he subsequently managed District No. 4, in addition to District No. 9, for a fee, under an agreement between the two districts, which were consolidated in 1977 as Consolidated Public Water Supply District No. C-1. Mr. Sutterfield continued to manage the consolidated district until early 1980.
The Water District was governed by a five member board of directors which met once a month. The manager, through the employees of the Water District, carried on the day-to-day operations including the ordering of supplies and materials and the paying of the bills.
The Water District maintained checking accounts at the Bank.
Authorization to pay Water District bills came from the board of directors through ordinances which were passed at the monthly meetings. The ordinances were submitted to the board of directors in folders which contained the invoices from creditor suppliers, and the checks made out in payment of the invoices.
The practice was for the manager to make out the check stubs showing to whom the check should be made out and the purpose, such as meter supplies, insurance premiums, engineering services or other supplies. The women in the office, referring to the check stubs, would then type up the ordinances and the checks which were presented to the board of directors at the monthly meetings.
After the ordinances were passed, the chairman and the treasurer would sign the checks which were then turned over to the manager for mailing, or as it developed in some cases, for cashing.
The manager of Water District denied it at trial, but someone submitted for the Board's approval ordinances for the payment of bills supported by duplicates of invoices which had already been paid or were to be paid on future ordinances, and sometimes even supported by purported bills from creditors typed on Water District stationery. The evidence, except for the manager's testimony, was that the manager took the ordinance folders to the board meetings and presented them to the directors in nearly all cases.
The chairman and the treasurer signed the checks after the ordinances were passed and gave the files to the manager. The manager or some other person then forged the endorsements of the payees and received cash for the checks at the Bank, where the tellers did not require the manager or other person to endorse the checks. The person cashing the checks routinely asked for large bills. The checks varied in amounts from less than $200 to as much as $2,400, increasing in amounts as the scheme continued. In short, this case presents the classic "fictitious payee" or "padded payroll" case. See UCC § 3-405, Comments. The procedure was the same for all three districts.
The Bank's first contention is that the trial court erred in denying its motion for a directed verdict because the evidence established Bank's defenses based upon §§ 3-405, 3-406, and 4-406.
In deciding whether the trial court erred in overruling a motion for a directed verdict the evidence is viewed most favorably to the party opposing the motion. Green v. Crunden Martin Mfg. Co., 575 S.W.2d 930, 932 (Mo.App.1978). One who has the burden of proof on an issue ordinarily is not entitled to a directed verdict where his proof rests on oral testimony. Where the opponent in his pleadings or by counsel admits the issue, however, or by his evidence also establishes the first party's claim, or where there is no real dispute about the basic facts, supported by uncontradicted testimony, essential to a claim or affirmative defense, the party with the burden of proof may be entitled to a directed verdict. Rogers v. Thompson, 364 Mo. 605, 265 S.W.2d 282, 286-287 (1954).
A drawee bank may debit its customer's account only for checks which are "properly payable." § 4-401(1) UCC. Checks paid over forged endorsements are not ordinarily properly payable because § 3-404 renders a forged endorsement wholly inoperative as the signature of the actual payee. Western Cas. and Sur. Co. v. Citizens Bank of Las Cruces, 676 F.2d 1344, 1345 (10 Cir.1982); Kraftsman Container Corp. v. United Counties Trust Co., 169 N.J.Super. 488, 404 A.2d 1288, 1290 (1979).
The Bank paid the checks drawn on the Water District's account over forged endorsements. Unless another provision of the Uniform Commercial Code shifts the risk of the forged endorsements, the Bank is liable to the Water District for the amounts it paid on the checks. The Bank relies on either § 3-405, the "padded payroll" section, or § 3-406, the negligence section, for its defense.
"An endorsement by any person in the name of a named payee is effective if ... an agent or employee of the maker or drawer has supplied him with the name of the payee intending the latter to have no such interest." § 3-405(1)(c) UCC. Official Comment 4 to § 3-405 makes it clear that in the so-called padded payroll cases, the risk of loss shifts from the drawee, here the Bank, who would ordinarily bear the loss under §§ 4-401 and 3-404(1), to the drawer, the Water District:
Paragraph (c) is new. It extends the rule of the original Subsection 9(3) to include the padded payroll cases, where the drawer's agent or employee prepares the check for signature or otherwise furnishes the signing officer with the name of the payee. The principle followed is that the loss should fall upon the employer as a risk of his business enterprise rather than upon the subsequent holder or drawee. The reasons are that the employer is normally in a better position to prevent such forgeries by reasonable care in the selection or supervision of his employees, or, if he is not, is at least in a better position to cover the loss by fidelity insurance; and that the cost of such insurance is properly an expense of his business rather than of the business of the holder or drawee.
The present case fits within § 3-405(1)(c). The Water District's employee supplied it with the names of creditors, who had already been paid, or who would in the future be paid on another ordinance, not intending that the creditors would actually have any interest as payees. After the checks were written out, the employee took them, forged the endorsements and cashed the checks. This, according to the testimony of the tellers, although the manager denied it. Cf. Clinton Weilbacher Builder, Inc. v. Kirby State Bank, 643 S.W.2d 473 (Tex.App.1982).
The Water District argues that § 3-405 is inapplicable because the forged endorsements were not in the name of the named payee. For § 3-405 to be applicable the forged endorsements must be exactly the same as the named payees. Twellman v. Lindell Trust Co., 534 S.W.2d 83, 92-93[13, 14] (Mo.App.1976).
This court has examined the checks upon which Water District brought suit and has...
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