Ed Stinn Chevrolet, Inc. v. National City Bank

• Decision Date: 30 December 1986
• Docket Number: No. 86-205,86-205
• Citation: 28 Ohio St.3d 221,503 N.E.2d 524,28 OBR 305
• Parties: , 28 O.B.R. 305, 2 UCC Rep.Serv.2d 1565 ED STINN CHEVROLET, INC., Appellee, v. NATIONAL CITY BANK, Appellant.
• Court: Ohio Supreme Court

Page 221

28 Ohio St.3d 221

503 N.E.2d 524, 28 O.B.R. 305, 2 UCC Rep.Serv.2d 1565

ED STINN CHEVROLET, INC., Appellee, v. NATIONAL CITY BANK, Appellant.

No. 86-205.

Supreme Court of Ohio.

Dec. 30, 1986.

Rehearing Granted Feb. 4, 1987.

Appellee, Ed Stinn Chevrolet, Inc. ("Stinn"), was a checking account customer of appellant, National City Bank ("National City"). Each check drawn on the Stinn account was required to have two drawers' signatures.

Stinn's assistant office manager and bookkeeper, Julie Hajjar, was one of several Stinn employees authorized to sign checks drawn on the business account. Among other things, she also maintained the dealership's cash box, wrote the business checks, and reconciled the National City account each month. These responsibilities, combined with lax accounting controls on Stinn's behalf (i.e., no independent audit of cancelled checks, no separation of duties, etc.), provided fertile ground for a thief. Hajjar contrived and implemented an embezzlement-forgery scheme whereby she removed money from the company cash box and replaced the funds with checks drawn on the Stinn checking account--that is, the daily receipts of customer payments comported with the combined cash and checks in the box. The forged Stinn business checks were routinely deposited into the same Stinn account they were drawn on. Because Hajjar reconciled the bank statement each month, with little or no supervision from her employer, her artful embezzlement of cash went undetected.

Since Stinn's business checks required two drawers' signatures as well as proper endorsement by the payee and/or holder, Hajjar used her own valid drawer's signature together with (1) a forged second drawer's signature; or (2) a real drawer's signature (she would deceive the other signator); and/or (3) a forged endorsement (for example, often the check would be made payable to a Stinn employee or fictitious person and then the payee's endorsement would be forged); and/or (4) Stinn's business rubber-stamp deposit endorsement.

Over a period of several years until discovery of the thefts, Hajjar's stratagem netted her approximately $284,000. Stinn recovered what it could from Hajjar (approximately $108,000) and then commenced this action against National City alleging improper payment of forged instruments.

Stinn's evidence sought to demonstrate that the bank's system for detecting forgeries was inadequate, commercially unreasonable, and had failed to detect blatant, obvious forgeries. The bank countered, in part, that Stinn's negligence occasioned the loss, i.e., by first allowing the embezzlement to happen and then by not promptly examining the cancelled checks and reporting the unauthorized signatures.

Over Stinn's objection, the trial court turned to Ohio's comparative negligence law (R.C. 2315.19) and instructed the jury accordingly. The jury reported that the $176,000 loss was a result of Stinn's negligence of eighty-five percent and the bank's negligence of fifteen percent. Because Stinn's negligence exceeded the defendant bank's, the court entered judgment favorable to National City pursuant to R.C. 2315.19(C).

Stinn raised two broad issues on appeal: first, that judgment should have been entered in its favor by the court once the bank's failure to exercise ordinary care was proven; second, that the trial court erred in applying the law of comparative negligence because the Uniform Commercial Code governs the cause. National City raised one error on cross-appeal: That the trial court erred in admitting into evidence checks which had been returned to the customer more than a year before being reported as a forgery.

The court of appeals sustained all three errors, recomputed Stinn's loss attributable to forgery not detected by National City, deducted the loss for those checks exceeding the statutory one-year notice (see R.C. 1304.29[D] ), and awarded final judgment to Stinn in the amount of $176,000.

The essence of the appellate court's decision is that the trial court erred in applying Ohio's comparative negligence law because the action sounds in contract, not tort. ¹ As such, the contractual relationship of the parties is governed by the Uniform Commercial Code ("UCC"), R.C. Chapters 1301-1309. Under the UCC, the forged items were not "properly payable," see R.C. 1304.24(A), and the bank's payment of those items was a breach of contract.

However, the court continued by observing that R.C. 1304.29(A) requires the customer to exercise reasonable care in the discovery and reporting of unauthorized signatures. Subsection (B) provides that the customer's failure in this regard will shift the loss from the bank to the customer for subsequent checks altered by the same wrongdoer, except that subsection (C) makes subsection (B)'s preclusion inapplicable " * * * if the customer establishes lack of ordinary care on the part of the bank in paying the * * * [forgery]."

The appellate court ruled that tort theories of proximate causation are not pertinent to this UCC contract analysis. Rather, the bank's failure to exercise "ordinary care" as required by the UCC constituted a breach of its statutorily imposed duties which made it liable to Stinn for the forgery loss irrespective of the customer's contributory negligence.

Nevertheless, Stinn failed to identify and notify the bank of some checks containing a forged maker's signature within the absolute notification limit of one year as set forth in R.C. 1304.29(D). Accordingly, the appellate court held that Stinn was precluded from recovering damages related to those instruments.

The cause is now before this court pursuant to the allowance of a motion to certify the record.

Berkman, Gordon, Murray & Palda, J. Michael Murray and Lorraine R. Baumgardner, Cleveland, for appellee.

Jones, Day, Reavis & Pogue, Robert J. Hoerner, Kathleen B. Burke and Jon A. Christensen, Cleveland, for appellant.

Roger Blair, urging reversal for amicus curiae, First Community Bank.

Jane Hils Shea, Cincinnati, urging reversal for amicus curiae, Fifth Third Bank.

Jeffrey D. Quayle, Columbus, urging reversal for amicus curiae, Ohio Bankers Assn.

PER CURIAM.

The central problem presented by this action is which of two innocent parties should bear the loss of this embezzlement-check forgery scheme--the thief's employer or the employer's bank. To facilitate consideration of this devilishly complex appeal, we will first outline the various legal arguments presented. The second part of our opinion will then apply the controlling state law to the curious facts at hand.

I

In its appeal to this court, appellant National City challenges the appellate ruling in two broad propositions of law. In the first, appellant argues that the court of appeals erred in applying the "properly payable" provisions of R.C. 1304.24(A). Appellant reasons that it did not make a payment because, in actuality, a "wash" transaction occurred. This thesis is premised on the UCC's "final payment rule" which is interpreted by appellant as providing that " 'when the same person is the drawer and the payee, he cannot assert a right against the drawee bank based on UCC § 4-213 [R.C. 1304.19].' " In this regard, the bank theorizes that the drawer-payee-customer (Stinn) has not parted with anything of value insofar as the banking transaction is concerned since the funds were first debited and then credited to the same account in an in-and-out process.

Appellant also contends that Stinn, in fact, received the money drawn by the check because the funds were paid into its account. In cases where the customer actually receives the funds at issue, appellant alleges that the customer cannot later maintain an action for wrongful payment. This is because any liability was extinguished when the bank credited Stinn's account. The bank reasons that "recredit," as used in this court's decision in Cincinnati Ins. Co. v. First Natl. Bank (1980), 63 Ohio St.2d 220, 407 N.E.2d 519 , was neither necessary nor feasible since Stinn already had the funds. Further, appellee is barred from recovery because even if the initial payment was wrongful, Stinn has already received, as payee, the payment proceeds.

Appellant further asserts that its payments were not in fact unauthorized because Stinn's rubber-stamped endorsement on the back of the check constitutes the customer's direction to pay the check.

Lastly, appellant advises that appellee breached its endorsement warranty that the payee signatures were not forged; that is, that appellee had "good title." See R.C. 1304.13(A)(1). Similarly, under R.C. 1304.13(A)(2), Stinn warranted that it had no "knowledge" of a bogus drawer signature. Because Stinn should be charged with the forger-agent's (i.e., bookkeeper Hajjar's) knowledge of the drawer signature forgeries, this warranty was breached as well. Accordingly, Stinn's presentation of instruments with forgeries is a breach of its presentment warranty which precludes its recovery of the funds.

Appellant's second proposition of law concerns only those checks containing two valid drawers' signatures, but forged endorsements. National City essentially argues that, pursuant to R.C. 1303.41, there can be no action against a drawee (bank) where the drawer's (customer's) agent-embezzler has drawn the check, or ordered it drawn, with an intent that the named payee (fictitious or otherwise) will have no interest in the instrument. In such cases, the forged endorsement is effective and precludes a "properly payable" claim by reason of such forged endorsement. In this case, appellant points out that it is beyond dispute that the "person signing" (R.C. 1303.41[A] ) or the "agent or employee" (R.C. 1303.41[A] ) of Stinn (i.e., Hajjar) never intended the named payee to have an interest.

Appellee Stinn raises several theories to both refute appellant's contentions and to justify the court of appeals' decision.

In its first argument, appellee contends that appella...