Dominion Const., Inc. v. First Nat. Bank of Maryland

• Decision Date: 07 February 1974
• Docket Number: No. 177,177
• Citation: Dominion Const., Inc. v. First Nat. Bank of Maryland, 315 A.2d 69, 271 Md. 154 (Md. 1974)
• Parties: , 14 UCC Rep.Serv. 129 DOMINION CONSTRUCTION, INC. v. FIRST NATIONAL BANK OF MARYLAND.
• Court: Maryland Supreme Court

Page 154

271 Md. 154

315 A.2d 69, 14 UCC Rep.Serv. 129

DOMINION CONSTRUCTION, INC. v. FIRST NATIONAL BANK OF MARYLAND.

No. 177.

Court of Appeals of Maryland.

Feb. 7, 1974.

John F. Fader, II, Towson (Theodore J. Potthast, Jr., Towson, on the brief), for appellant.

Christopher A. Hansen, Baltimore (Jesse Slingluff, Baltimore, on the brief), for appellee.

Argued before MURPHY, C. J., and BARNES, SMITH, DIGGES, LEVINE and ELDRIDGE, JJ.

LEVINE, Judge.

Having been unsuccessful in its district court suit against First National Bank of Maryland (First National), Dominion Construction, Inc. (Dominion), appealed to the Circuit Court for Baltimore County (Jenifer, J.) which affirmed the judgment of the lower court. Dominion then filed a Petition for Writ of Certiorari to this Court. We granted the writ so that we might consider the question this case presents under the Uniform Commercial Code (UCC), which requires an interpretation of Maryland Code (1957, 1964 Repl.Vol.) Art. 95B, § 3-406.

In 1971, Dominion entered into a contract with the Baltimore County Board of Education to construct the Randallstown Elementary School. It then entered into a subcontract with 'Town & Country Decorating, Inc.' (Town & Country) for the performance of the tile work on that project. Town & Country purchased materials for the job from Conwed Corporation (Conwed). On June 22, 1971, the three corporations entered into what the parties here have labeled a 'joint pay agreement.' Actually, the arrangement merely consisted of a letter from Conwed (Corporation) to Dominion requesting the latter to 'enter into a joint pay agreement with Town & Country Decorating, Inc.,' and notifying Dominion of the charges then due from Town & Country to Conwed for materials furnished on the school project.

Each of the companies apparently understood that a 'joint pay agreement' connoted payment of Town & Country's account, under its subcontract, by a check from Dominion payable jointly to Town & Country (the subcontractor) and Conwed (the materialman). Such arrangements-designed to protect the general contractor and materialman-are not uncommon in the construction industry.

On July 27, 1971, Dominion issued a check drawn upon First National in the amount of $3,933.20-the amount which it then owed Town & Country-payable to 'Town & Country Decorating and Conwed.' First National was not advised of the 'joint pay agreement.' The check was delivered to one Charles Gabriszeski (Gabriszeski), an employee of Town & Country assigned to the project. On the same day, Gabriszeski, without authorization, took the check to a suburban branch office of First National, where he opened a business checking account in the name of 'Charles Gabriszeski T/A Town & Country Decorating & Conwed.' The check was deposited in that account. He indicated on the signature card that he was a self-employed accoustical tile contractor; he also furnished addressess and telephone numbers for both 'home' and 'business,' a bank reference and his social security number.

At the trial, the assistant branch manager who handled the transaction stated:

'When I took the check from Mr. Gabriszeski, I read the name and said this is a most unusual name why do you use this. And he said because I use the products of Conwed and I like the name.'

She also testified that when a check is made payable to two persons, the endorsement of each is required. When asked whether this check put her 'on notice of the fact that maybe it was payable to different people,' she replied 'absolutely not.'

The bank employee explained that she did not call Dominion because 'I accepted the check from Mr. Gabriszeski for deposit. If I would attempt to call everyone that gives me a check for deposit, I'd be all day.' She also testified, 'Town & Country and Decorating (sic) could be a trading as name. I took it as such. Conwed itself is an unusual name but not to have two names in a title.'

Another bank representative testified that when it was brought to his attention by Dominion that the check had been accepted on July 27 without a personal endorsement, he called Gabriszeski who returned on September 21, 1971, and placed his personal signature below the 'trade name.' He also testified:

'He signed it and I said this is a trading as account and he said it is. I questioned him what is Town & Country Decorating and Conwed and he said I use the name of Conwed to let my clients know that I use this product.'

Suffice it to say that by the time Gabriszeski returned on September 21 to personally endorse the check, there were no longer any funds remaining in the recently opened account. The result of these events was that Conwed did not receive the amount then owed to it by Town & Country-$2,908.84. Hence, it made a claim in that sum against a performance bond which had been issued to Dominion.

Having reimbursed Conwed for this loss, Dominion brought suit against First National for the $2,908.84, alleging that the latter has breached its duty 'not to cash or pass such a check except for the endorsement of the designated payees.' The case came on for trial before Judge Buzzell of the District Court of Maryland for District 8 (Baltimore County) who found in favor of First National. He held that Dominion had been guilty of negligence which 'contributed substantially' to the making of an unauthorized signature by Gabriszeski and the resulting payment of the proceeds to him. On appeal to the circuit court, the district court decision was affirmed by Judge Jenifer who also held that Dominion's manner of drawing the check constituted negligence which 'substantially contributed to the negotiation of the instrument by Gabriszeski.'

The single question presented therefore is whether the two courts below correctly interpreted and applied § 3-406 of Art. 95B, the UCC, which provides:

'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 the reasonable commercial standards of the drawee's or payor's business.' (emphasis added).

We think the decisions reached by both the circuit court and the district court were correct; hence, we affirm.

Three questions arise in the application of § 3-406 to this case:

(1) Did the actions of Dominion, in drawing the checks as it did, constitute negligence?

(2) Did the negligence of Dominion, if any, substantially contribute to the unauthorized signatures by Gabriszeski?

(3) If the first two issues are answered affirmatively, did First National pay the check 'in accordance with . . . reasonable commercial standards of (its) business'?

Although a drawee in such circumstances is required to act 'in good faith,' that element of § 3-406 is not an issue here.

(1)

In attacking the trial judge's finding of negligence, Dominion contends that its failure to designate the payees correctly on the check may have been a 'technical' error, but rose no higher than 'mere laxity,' and therefore was not 'negligence' within the meaning of § 3-406.

Since neither § 3-406 nor any other part of the UCC defines 'negligence,' we look to the Official Comment for guidance. At the very outset, it points out that § 3-406 has no statutory antecedent. Comment 3 states that:

'No attempt is made to define negligence which will contribute to an alteration. The question is left to the court or the jury upon the circumstances of the particular cases. . . .'

Comment 7 states:

'The section applies the same rule to negligence which contributes to a forgery or other unauthorized signature, as defined in this Act (Section 1-201). . . . As in the case of alteration, no attempt is made to specify what is negligence, and the question is one for the court or the jury on the facts of the particular case.'

While § 3-406 itself is a creature of the UCC, the question whether under given circumstances one has negligently brought about an alteration or unauthorized signature is not wholly without precedent in Maryland. See Martin Co. v. Fidelity Bank, 218 Md. 28, 145 A.2d 267 (1958), where we were concerned with the application of Section 23 of the Negotiable Instruments Law (§ 3-404 of the UCC). In that case, the Martin Company had conducted business relationships with two companies bearing the same names. A group of six checks was drawn payable to the wrong one; even the address of the wrong company appeared on the face of each check. They were then mailed to the wrong payee which obtained payment by forged endorsements.

On being sued by the drawer, the bank contended that the former was precluded from asserting the forgeries because of its negligence. The finding of the trial court that the drawer was negligent in drawing and in mailing the checks to the wrong payee was affirmed on appeal to this Court. While we did not expressly so state, that we there applied the standard of ordinary care is implicit in our decision.

It is no longer open to question that the term, 'negligence,' as used in § 3-406, means the failure to exercise ordinary care. Gast v. American Casualty Company of Reading, Pa., 99 N.J.Super. 538, 240 A.2d 682, 685 (1968); Exchange Bank & Trust Co. v. Kidwell Constr. Co., 463 S.W.2d 465, 469 (Tex.Civ.App.1971), aff'd 472 S.W.2d 117 (Tex.1971); Terry v. Puget Sound National Bank, 80 Wash.2d 157, 492 P.2d 534, 535 (1972); see Bagby v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 348 F.Supp. 969, 977 (W.D.Mo.1972). But see National Bank & Tr. Co. of Cent. Pa. v. Commonwealth, 9 Pa.Cmwlth. 358, 305 A.2d 769 (1973), where a sharply divided Court rejected the standard of ordinary care in applying § 3-406, concluding 'that a finding of more than ordinary negligence is necessary under the language of § 3-406 before that section operates to preclude...