Exchange Bank & Trust Co. v. Kidwell Const. Co., 507

• Decision Date: 21 January 1971
• Docket Number: No. 507,507
• Citation: Exchange Bank & Trust Co. v. Kidwell Const. Co., 8 UCCRep.Serv. 1079, 463 S.W.2d 465 (Tex. Ct. App. 1971)
• Parties: 8 UCC Rep.Serv. 1079 EXCHANGE BANK & TRUST COMPANY, Appellant, v. KIDWELL CONSTRUCTION COMPANY, Inc., Appellee.
• Court: Texas Civil Court of Appeals

Page 465

463 S.W.2d 465

8 UCC Rep.Serv. 1079

EXCHANGE BANK & TRUST COMPANY, Appellant, v. KIDWELL CONSTRUCTION COMPANY, Inc., Appellee.

No. 507.

Court of Civil Appeals of Texas Tyler.

Jan. 21, 1971.

Rehearing Denied Feb. 25, 1971.

Akin, Vial, Hamilton, Koch & Tubb, James A. Knox, Charles J. McGuire, Dallas, for appellant.

Rain, Harrell, Emery, Young & Doke, Stan McMurry, Dallas, for appellee.

MOORE, Justice.

Plaintiff Kidwell Construction Co., Inc., (hereinafter referred to as 'Kidwell'), sued Exchange Bank & Trust Co., (hereinafter referred to as 'the bank'), and Virginia Beavers Denman to recover funds deposited with the bank and paid out upon forged checks, alleged to have been forged by Virginia Beavers Denman, the corporate secretary of Kidwell.

The bank specially pleaded that the failure on the part of Kidwell to have other employees examine the cancelled checks and monthly bank statements containing the forged checks constituted negligence on the part of Kidwell directly contributing and proximately causing the loss; that as a result of such negligence, the alleged forger was able to carry on her unauthorized act for a period of time exceeding three years, from November 10, 1964 through December 14, 1967, and that by reason of Kidwell's negligence, it should be held to have been estopped from seeking a recovery. The bank also specially pleaded as a special defense Sec. 4.406 of the Uniform Commercial Code, V.A.T.S., providing that the customer is precluded from recovering upon a forgery where the bank supplies the customer with a statement accompanied with the items paid and the customer fails to use reasonable care in discovering the forger or reporting same to the bank within 14 days.

After a trial before the court, sitting without a jury, the trial court entered judgment awarding Kidwell a joint and several judgment against both the bank and Mrs. Denman for $25,725.88 and also awarded Kidwell an additional judgment against Virginia Beavers Denman and husband for $26,652.84. From this judgment, only the bank has appealed, seeking a review only of that portion of the judgment affecting it.

The facts are basically without dispute. Appellee, Kidwell Construction Co., Inc., was a depositor with appellant, Exchange Bank & Trust Co., and maintained a rather large deposit at all times material hereto. Graber Kidwell, President of Kidwell Construction, was authorized to draw checks upon the account in question. Virginia Beavers Denman had been employed by Kidwell for many years as a bookkeeper and was ultimately made corporate secretary for Kidwell Construction. Between November 10, 1964 and December 14, 1967, Mrs. Denman forged Graber Kidwell's signature upon 65 checks made payable to her totaling the sum of $63,038.55. The record shows that she forged several checks each and every month except for the month of October, 1966. Before the case was brought to trial, Kidwell was able to obtain partial restitution from Mrs. Denman and her husband so that at the time of trial Kidwell sought to recover only the unreimbursed portion of its loss which amounted to $52,378.72. Kidwell, recognizing the provisions of Article 342--711, Vernon's Ann.Civ.St., and also Sec. 4 .406(d) of the Uniform Commercial Code, supra, providing for an absolute bar of all forged checks paid by the bank prior to one year from the date of the time the depositor discovered the forgeries and reported the same to the bank, admitted that the bank's maximum liability consisted of only the forgeries occurring within one year prior to Kidwell's notice to the bank of the forgeries which amount to $25,725.88, which explains the reason why the trial court entered judgment against the bank only for such amount.

The trial court filed extensive findings of fact and conclusions of law. In substance the trial court found that although the bank mailed Kidwell statements of its account each month accompanied by the items paid, Kidwell was not guilty of negligence nor did Kidwell fail to exercise reasonable care and promptness in examining the statement and discovering the unauthorized signature. The trial court further found that by the exercise of proper care and skill the bank could have detected the forgeries prior to charging the same against Kidwell's account and that the bank was negligent in failing to detect the forgery which was a proximate cause of the loss.

The bank has brought forward nine points of error. In substance, the bank contends that the trial court erred in rendering judgment for the depositor Kidwell because it says the evidence shows as a matter of law that Kidwell was negligent in failing to detect the forgeries, and that the evidence likewise shows as a matter of law that there was no negligence or lack of good faith on the part of the bank in paying the forged checks. In the alternative, the bank asserts that the judgment in favor of the depositor is not supported by the evidence and is against the overwhelming weight and preponderance of the evidence. The principal contention of the bank is that Kidwell should not be permitted to recover because of its negligence which consisted, as claimed by the bank, of employment of an unfaithful agent. Thus the bank says Kidwell failed to exercise reasonable care in discovering and reporting promptly the forgeries claimed after the checks had been returned. Because of such negligence, it is claimed, Kidwell should be estopped from asserting liability against the bank.

Some of the checks involved in this litigation were drawn and cashed prior to July 1, 1966, when the Uniform Commercial Code became effective in this State. However, in view of the fact that Kidwell does not seek to recover upon any of the checks uttered prior to the effective date of the Uniform Commercial Code, but seeks recovery only upon the checks uttered within the one year period prior to notifying the bank in December, 1967, all of the checks involved in this litigation would be controlled by the provisions of the Uniform Commercial Code. Jackson v. First National Bank of Memphis, Inc., 55 Tenn.App. 545, 403 S.W.2d 109. The provisions of these uniform laws applicable to the transaction here involved are as follows:

Sec. 3.406, V.A.T.S.

'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. (59th Legis., Ch. 721, Sec. 3--406.). Acts 1967, 60th Leg., vol. 2, p. 2343, ch. 785, sec. 1.'

Sec. 4.406, V.A.T.S.

'(a) When a bank sends to its customer a statement of account accompanied by items paid in good faith in support of the debit entries or holds the statement and items pursuant to a request or instructions of its customer or otherwise in a reasonable manner makes the statement and items available to the customer, the customer must exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and must notify the bank promptly after discovery thereof.

'(b) If the bank establishes that the customer failed with respect to an item to comply with the duties imposed on the customer by Subsection (a) the customer is precluded from asserting against the bank

'(1) his unauthorized signature or any alteration on the item if the bank also establishes that it suffered a loss by reason of such failure; and

'(2) an unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank after the first item and statement was available to the customer for a reasonable period not exceeding fourteen calendar days and before the bank receives notification from the customer of any such unauthorized signature or alteration.

'(c) The preclusion under Subsection (b) does not apply if the customer establishes lack of ordinary care on the part of the bank in paying the item(s).

'(d) Without regard to care or lack of care of either the customer or the bank a customer who does not within one year from the time the statement and items are made available to the customer (Subsection (a)) discover and report his unauthorized signature or any alteration on the face or back of the item or does not within three years from that time discover and report any unauthorized indorsement is precluded from asserting against the bank such unauthorized signature or indorsement or such alteration.'

In discussing the foregoing provisions of the code, the writer at 18 A.L.R.3rd, p. 1400, makes these observations:

'Generally, a drawer can insist that the drawee recredit his account with the amount of any unauthorized payment, such as the payment of a check on which the drawer's name is forged, but a bank customer must exercise...