Equitable Life Assur. Soc. of U.S. v. Okey, s. 86-3512

CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)
Citation812 F.2d 906,3 UCC Rep.Serv.2d 1035
Docket Number86-3519,Nos. 86-3512,s. 86-3512
Parties3 UCC Rep.Serv.2d 1035 EQUITABLE LIFE ASSURANCE SOCIETY OF the UNITED STATES, Appellee, v. Charles L. OKEY, III; First Citizens Bank & Trust Company of South Carolina; National Bank of South Carolina; Rock Hill National Bank; Citizens & Southern National Bank of South Carolina; Bankers Trust of South Carolina and Southern Bank & Trust Company, Defendants, and First National Bank of South Carolina, Appellant. EQUITABLE LIFE ASSURANCE SOCIETY OF the UNITED STATES, Appellant, v. Charles L. OKEY, III; First Citizens Bank & Trust Company of South Carolina; National Bank of South Carolina; Rock Hill National Bank; Citizens & Southern National Bank of South Carolina; Bankers Trust of South Carolina and Southern Bank & Trust Company, Defendants, and First National Bank of South Carolina, Appellee.
Decision Date04 March 1987

Elizabeth A. Carpenter (Manton M. Grier, Boyd, Knowlton, Tate & Finlay, P.A., L. Henry McKellar, S.C. Nat. Bank, on brief), for appellant.

Michael S. Church, W. Duvall Spruill (Turner, Padget, Graham & Laney, on brief), for appellee.

Before PHILLIPS and SPROUSE, Circuit Judges, and BOYLE, United States District Judge for the Eastern District of North Carolina, sitting by designation.


Equitable Life Assurance Society (Equitable) brought U.C.C. conversion and common law negligence claims against First National Bank of South Carolina (First National), based on First National's acceptance for deposit of checks made payable to Equitable, upon the unauthorized indorsement of Equitable agent Charles Okey. On the same basis, Equitable asserted U.C.C. conversion claims against six banks on which the checks were drawn and against Okey and, as subrogee of the drawers' claims, asserted that the drawee banks were liable for improperly charging the drawers' accounts. A jury returned special verdicts finding First National liable to Equitable in negligence but not in code conversion and the drawee banks not liable on the code conversion or improper charging claims. The district court ordered a new trial on Equitable's code conversion claim against First National, presumably on the basis of inconsistency in the jury verdicts on the conversion and negligence claims, and entered judgment for the drawee banks and in favor of Equitable against First National on the negligence claim. First National appealed from the judgment against it on the negligence claim, and Equitable cross-appealed from the court's refusal to award prejudgment interest or to allow the jury to award punitive damages. We vacate the judgment against First National on Equitable's common law negligence claim, concluding that that cause of action has been displaced by the code conversion claim; in all other respects we find the assigned errors mooted, observing that Equitable's code conversion claim against First National remains for re-trial on the district court's unappealable order to that effect.


Charles L. Okey, III, an Equitable agent, received customer checks made payable to Equitable for insurance premiums and equity investments, but instead of forwarding the checks to Equitable, he personally indorsed them and deposited them in his personal account at First National. First National, as depositary bank, indorsed the checks and presented them to the drawee banks, which in turn paid the items and returned the checks to the customers in their monthly statements. Okey remitted to Equitable only part of the amount of the customer payments, sending either his personal checks or cashiers' checks, and embezzled the balance. The total of his embezzlement amounted to approximately $1.4 million.

Because bank policy requires written authorization from the payee before an individual may deposit a corporate check into a personal account, two of First National's officers sought written and oral confirmation that Okey had the requisite authority. They telephoned Equitable's Rock Hill office and received oral assurance by a woman who answered the telephone that Okey was authorized to deposit Equitable's checks into his account. The woman promised to send written authorization, and in a few days the bank received a copy of Okey's district manager's contract which included the following provision with the emphasized language underlined in red:

when authorized in writing by the Society [the manager] shall audit the accounts of agents and aid in collecting premiums and other moneys due to the Society from agents and policyowners and in general do all in his power to promote the Society's interest.

Another part of this contract provided that "[t]he Manager shall not receive any monies due or to become due to the Society, unless authorized in writing." Not completely satisfied with this authorization, the officers again called Equitable's Rock Hill office and spoke with the same woman, who was asked whether Equitable had any other written authorization more specifically addressed to depositing checks. The woman told Lane that the district manager's contract she sent to him was the authorization used for that purpose.

The two bank officers conferred. One of them knew of Okey through a highly respected member of the Florence, South Carolina, community and also knew of Okey's good reputation as a top Equitable agent. Based on this knowledge of Okey's character, the district manager's contract, and the two phone calls to Equitable's Rock Hill office, the officers decided to accept the checks. It is this conduct in the ascertainment of Okey's authority that Equitable asserts constituted negligence.

In answers to special interrogatories, the jury found First National liable in negligence but not in conversion. The jury also found in favor of the drawee banks on the conversion and improper charging claims against them. Presumably to reconcile inconsistency in the jury's finding of negligence but not conversion against First National, the district court ordered a new trial on the conversion claim and entered judgment against First National in negligence, after denying First National's motion for judgment n.o.v.

These appeals followed.

On its appeal, First National contends that it should have been awarded judgment n.o.v. on the negligence claim on the basis that as a matter of law Okey had either express, implied, or apparent authority; Equitable ratified Okey's conduct; First National was not negligent; Equitable was contributorily negligent; and on the further basis that as a matter of law Equitable's claim was barred by laches, limitations, estoppel and the compensated surety defense.

On its cross-appeal, Equitable assigns as error the district court's refusal to award it prejudgment interest on its negligence judgment and its refusal to allow the jury to consider an award of punitive damages.

We take the appeal and cross-appeal in that order.


Because we consider it dispositive of First National's appeal of the judgment entered on the negligence verdict, we consider first First National's contention that the common law negligence claim in respect of payment on an unauthorized indorsement has been displaced by the code conversion claim under S.C. Code Sec. 36-3-419 (1977). We agree with First National.

Under Sec. 36-3-419 of the South Carolina Commercial Code, an action for conversion lies when an instrument is paid on a forged indorsement. An unauthorized indorsement receives the same treatment as a forgery. Anderson, Uniform Commercial Code Sec. 3-419.4 (3d ed. 1981). Although styled a "conversion," an action under Sec. 36-3-419 effectively subsumes both conversion and negligence claims based on payment over a forged or unauthorized indorsement in that Sec. 36-3-419(3) encompasses the element of due care that is a key issue under a negligence theory. Section 36-3-419(3) provides that

a representative, including a depositary or collecting bank, who has in good faith and in accordance with the reasonable commercial standards applicable to the business of such representative dealt with an instrument or its proceeds on behalf of one who was not the true owner is not liable in conversion or otherwise to the true owner beyond the amount of any proceeds remaining in his hands.

The "reasonable commercial standards" that limit a collecting or depositary bank's liability under Sec. 36-3-419(3) has been interpreted to be the same "due care" that provides the standard of care in a negligence action. Anderson, supra Sec. 3-419.35 (the Code language in Sec. 3-419(3) is identified with the common law concept of negligence). The allocation of the burden of proving due care under Sec. 3-419(3), however, differs from the allocation of that burden in a negligence action and to that extent conflicts with the common law. Section 36-3-419(3) makes reasonable conduct an affirmative defense to be proved by the defendant collecting or depositary bank. National Bank of Georgia v. Refrigerated Transport Co., 147 Ga.App. 240, 248 S.E.2d 496, 499 (1978) (quoting Berkheimers, Inc. v. Citizens Valley Bank, 270 Or. 807, 529 P.2d 903 (1984)). In a common law action for negligence, on the other hand, the plaintiff has the burden of establishing a lack of due care as one of the essential elements of his claim.

In deciding whether the common law action for negligence is displaced by the Sec. 36-3-419 conversion claim, the first authority to consider is Sec. 36-1-103, which sets the general standard for displacement of the common law by the Code:

Unless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions.

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