Continental Bank v. Wa-Ho Truck Brokerage

Decision Date15 March 1979
Docket NumberWA-HO,No. 1,CA-CIV,1
Citation122 Ariz. 414,595 P.2d 206
Parties, 26 UCC Rep.Serv. 101 CONTINENTAL BANK, an Arizona Corporation, Appellant, v.TRUCK BROKERAGE, an Arizona Corporation, and Richard E. Stahl, d/b/a Stahl Trucking, Appellees. 3866.
CourtArizona Court of Appeals
Robbins, Green, O'Grady & Abbuhl by Edmund F. Richardson, John D. Lyons, Jr., Victor W. Riches, Phoenix, for appellant


After the smoke has cleared, this appeal narrows to the question of whether the Bank's handling of checks bearing unauthorized signatures was, as a matter of law, not in accordance with reasonable commercial standards.

This litigation was instituted by plaintiffs-appellees, Wa-Ho Truck Brokerage and Richard Stahl, dba Stahl Trucking (plaintiffs) against defendant-appellant, Continental Bank (Bank) for conversion and breach of warranty, involving the misappropriation of 114 checks belonging to plaintiffs. On cross-motions for summary judgment, the trial court granted judgment in favor of the plaintiffs and against the Bank for $32,928.42. The Bank has appealed.

The relevant facts are that the plaintiffs are affiliated and share office space, together with a company known as Alpine Truck Rental, in the business of brokering transportation of merchandise and of securing loads for certain trucking companies. During the periods pertinent to this litigation, all three companies were managed by a single individual.

In 1973, plaintiffs employed Charles Randall Waghorn as a bookkeeper. Shortly after he was hired, Waghorn's duties expanded to include duties of writing and endorsing checks, making deposits, reconciling bank statements, making all entries in the plaintiffs' books, including accounts payable and receivable and paying accounts payable. Taking the facts in a light most favorable to the party opposing the motion for summary judgment, we conclude for the purposes of this appeal only, that Waghorn's duties were performed without internal controls, review or supervision.

In August, 1973, Waghorn opened a checking account at the Bank in the name of "Wag's Drivers Service, Waghorn, C. R. DBA." On the signature card for this account, Waghorn listed his occupation as "Wa-Ho Truck Brokerage and Alpine Truck Rental DBA" and "C. R. Waghorn" as owner. To this account Waghorn deposited his salary checks drawn on Wa-Ho's and Alpine Truck Rental's accounts and made payable to Wag's Drivers Service.

In October, 1973, Waghorn began diverting checks made payable to the plaintiffs to his own account at the Bank. This was accomplished by using the rubber stamp endorsement entrusted to him by plaintiffs, endorsing checks made payable to the plaintiffs with the appropriate stamp and depositing the check in his Wag's Drivers Service account. In this fashion, one hundred and one checks of this type (designated by the parties as "incoming checks"), in the total face amount of $29,650.62, were diverted to his account with the Bank.

In addition, Waghorn deposited to the Wag's Drivers Service account thirteen checks in the face amount of $3,277.80 which were drawn upon the plaintiffs' checking accounts at First National Bank and were made payable to third persons (designated as "outgoing checks" by the parties). This was accomplished by Waghorn presenting to his employers checks payable to persons to whom the plaintiffs had previously owed money, but who had been paid. The duplicate check was then endorsed by Waghorn by forging the signature of the payee and then stamping each check with the nonrestrictive endorsement, "Wag's Drivers Service." At the time that suit was brought, Waghorn's account at the Bank had a zero balance.

Plaintiffs' complaint against the Bank was in two counts. Count One covered the "incoming checks" and the liability of the Bank on this count was predicated upon a conversion theory. Count Two covered the "outgoing checks" and the liability of the Bank on this count was based upon a theory of breach of warranty. The Bank's answer to the complaint basically admitted the factual allegations concerning Waghorn's defalcations, but denied liability and raised the defense of "contributory negligence."

Extensive discovery followed, including the plaintiffs' serving requests for admissions on the Bank. In response to these requests, the Bank again basically admitted the modus operandi of Waghorn and in addition admitted that the signatures of the payees on the outgoing checks were forgeries and that the endorsements on the incoming checks were unauthorized. The Bank further admitted that prior to being informed of Waghorn's defalcations, the Bank had not investigated the endorsements or other signatures on the checks deposited to Waghorn's account, nor had the Bank investigated any of the business relationships reflected on Waghorn's signature card.

Based upon this state of the record, plaintiffs moved for summary judgment, contending that as a matter of law the Bank was liable for conversion on the incoming checks and was liable for breach of warranty as to the outgoing checks. The Bank filed a response in opposition to the motion and its own cross-motion for summary judgment. The basis of the response was that it was not liable in conversion on the incoming checks as it acted in good faith and in accordance with reasonable commercial standards of the banking business (called the "commercial reasonableness" defense); and that there were no warranties running from the Bank to the plaintiffs with respect to the thirteen outgoing checks, and in addition it was protected as to the outgoing checks by the "padded payroll" doctrine embraced in A.R.S. § 44-2542(A)(3). (U.C.C. § 3-405(1)). The Bank further contended that it was entitled to summary judgment because plaintiffs were negligent in maintaining their financial books, records and accounts (called the "substantial contribution" defense). The plaintiffs countered these defenses by contending that the defenses of commercial reasonableness and substantial contribution are affirmative defenses which were not pled; that the Bank's conduct as admitted on the record was not commercially reasonable as a matter of law; that the issue of plaintiffs' negligence was a fact question for the jury; and that as to the outgoing checks, they were holders and the padded payroll defense was not available to the Bank.

The Bank responded by contending that the defenses raised were not affirmative defenses, but if they were, it requested leave to amend its answer to specifically plead these defenses. In addition, the Bank submitted three affidavits from admitted experts in the banking business that they had reviewed the records and procedures followed by the Bank in handling Waghorn's account and that in their opinion the procedures followed by the Bank comported with reasonable commercial standards of the banking industry.

With these various contentions before it, the trial court granted plaintiffs' motion for summary judgment.

On appeal, the Bank urges the following contentions:

(1) That the Bank's actions complied with reasonable commercial standards and thus the trial court erred in granting summary judgment on the incoming checks;

(2) That the endorsements on the incoming checks were in fact authorized under the Uniform Commercial Code and therefore no liability attaches;

(3) That the plaintiffs have no direct cause of action against the Bank on the outgoing checks; and

(4) That by reason of the negligence of the plaintiffs and the padded payroll doctrine, the Bank is relieved of liability.

The plaintiffs on appeal contend:

(1) That the defense of commercial reasonableness was not pled in the trial court and thus the Bank has waived this defense;

(2) That the affidavits attempting to establish commercial reasonableness do not comply with Rule 56, Arizona Rules of Civil Procedure, and therefore the trial court properly disregarded them;

(3) That in any event, as a matter of law, the Bank's action did not comport with commercial reasonableness;

(4) That the issue of the endorsements on the incoming checks being authorized was not raised in the trial court, and the Bank in fact admitted they were unauthorized; and

(5) That as to the outgoing checks, they became "holders" entitling them to have a direct cause of action against the Bank and the padded payroll defense is not available to the Bank.

Before we reach the law in relation to the Bank's liability and its defenses, we will deal with the parties' procedural contentions.

First, the plaintiffs contend that the Bank has waived its commercial reasonableness defense by failing to affirmatively plead it. If we assume that the commercial reasonableness defense is one of the affirmative defenses required to be specifically pled by Rule 8(d), Arizona Rules of Civil Procedure, the fact that this defense was presented to the trial court supported by affidavits in connection with the motions for summary judgments sufficiently raised the issue in the trial court so as to be reviewable here. The rule is stated in 6 Moore's Federal Practice P 56.11(3), at 56-252 and 253 (2d ed. 1976):

"Now consider the question as to whether a defendant may, subsequent to answer, support a motion for summary judgment by raising defenses in affidavits, particularly affirmative defenses, which were not raised in the answer. Rule 8(b), relative to denials, is the rule generally governing negative defenses; Rule 8(c) (in Arizona, Rule 8(d)) requires affirmative defenses to be set forth affirmatively; and Rule 12(h) (in Arizona, Rule 12(i)) provides generally that defenses not presented by a pre-pleading motion or by answer (or reply) are waived. There is authority that defenses not pleaded in defendant's answer may not be raised by affidavits on his ...

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