Federal Ins. Co. v. NCNB Nat. Bank of North Carolina

• Decision Date: 24 April 1992
• Docket Number: No. 90-5975,90-5975
• Citation: 958 F.2d 1544
• Parties: 17 UCC Rep.Serv.2d 497 FEDERAL INSURANCE COMPANY, Plaintiff-Appellant, Cross-Appellee, v. NCNB NATIONAL BANK OF NORTH CAROLINA, Defendant-Appellee, Cross-Appellant, NCNB National Bank of Florida, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1544

958 F.2d 1544

17 UCC Rep.Serv.2d 497

FEDERAL INSURANCE COMPANY, Plaintiff-Appellant, Cross-Appellee, v. NCNB NATIONAL BANK OF NORTH CAROLINA, Defendant-Appellee,

Cross-Appellant,

NCNB National Bank of Florida, Defendant-Appellant.

No. 90-5975.

United States Court of Appeals, Eleventh Circuit.

April 24, 1992.

Robert G. Post, Miami, Fla., for Federal Ins. Co.

Frank J. Sinagra, Ronald G. Englert, Ft. Lauderdale, Fla., for NCNB Nat. Bank of North Carolina.

Appeals from the United States District Court for the Southern District of Florida.

Before COX, Circuit Judge, DYER and FRIEDMAN ^*, Senior Circuit Judges.

FRIEDMAN, Senior Circuit Judge:

This diversity damage suit grew out of a scheme by which a corporate employee embezzled substantial amounts from her employer by obtaining payment of corporate checks that had not been properly signed, and converting the proceeds. After the embezzlement was discovered, and the banks denied liability for the payments, the employer's insurance company paid the losses. The insurance company as the subrogee and assignee of the employer then brought this suit against the banks. The district court held that the banks were negligent in paying the checks, but that because the employer also was negligent, it was responsible for 50 percent of its losses. Both the insurance company and the banks have appealed. We uphold the district court's determination that the banks are liable, but reverse the 50 percent reduction in the damages.

I.

A. In late 1985 and early 1986, Computer Products, Inc. (Computer), a Florida corporation, opened two accounts with NCNB National Bank of North Carolina (NC Bank), for one of its operating units. Computer's corporate resolutions authorizing these accounts, submitted on forms that NC Bank furnished, provided that checks for up to $500.00 required one signature by hand or facsimile, that checks between $500.00 and $10,000.00 required one hand and one facsimile signature, and that checks of more than $10,000.00 required "two signatures by hand." The resolutions stated that they "shall remain in full force and effect until written notice of their amendment or rescission shall have been received by [NC Bank]."

Computer also submitted to the bank a signature card for each account listing the persons (and showing their signatures) authorized to sign checks on the account. Elizabeth Johnson, the comptroller of the unit for which these accounts were opened, had substantial responsibility with respect to the preparation, approval, and issuance of checks drawn on several Computer accounts, and supervised these two. She was one of the Computer personnel authorized to sign checks on the two accounts.

The first forty-six checks for more than $10,000.00 drawn on these accounts contained the required two handwritten signatures. In early 1986, a check for more than $60,000.00 for a legitimate corporate expenditure, but containing one hand and one facsimile signature, was presented to NC Bank for payment. A clerk at the bank, Kimberly Clayton, telephoned Computer about the check. She spoke to Elizabeth Johnson, who instructed her to pay the check and told her to expect to pay, in the future, many more checks exceeding $10,000.00 that would have one hand and one facsimile signature.

Clayton testified that she based her decision to pay that check, and all subsequent checks, solely on what Johnson told her on the telephone that day. The record shows no other contact between Computer and NC Bank regarding authorization to pay checks lacking the required signatures. NC Bank subsequently paid numerous checks for more than $10,000.00 drawn on the two accounts, even though they had one hand and one facsimile signature.

At about the same time, Elizabeth Johnson began to implement a plan to embezzle funds from her employer. Before the scheme was discovered, Johnson submitted nine checks, each for more than $10,000.00, the proceeds of which she converted. During the intervening three weeks she also drew a number of checks for valid corporate purposes. All the checks had one hand and one facsimile signature. NC Bank paid the checks as they were presented, apparently in reliance on the prior telephone conversation between Johnson and Clayton.

Five of the checks for more than $10,000.00 with only one handwritten signature were payable to "NCNB." Those checks were presented to NCNB National Bank of Florida (Fla. Bank), which exchanged them for its own cashiers checks payable to various individuals, including two payable to Elizabeth Johnson's husband (whose last name was not Johnson).

By the time Computer received its bank statements from NC Bank listing the fraudulent checks, all but one of them had already been paid. The remaining invalid check was paid a few days after Computer received the statements.

B. When the embezzlement was discovered, NC Bank refused to restore to Computer's account the amount it had paid on the fraudulent checks. The appellant Federal Insurance Company (Federal), a New Jersey company which insured Computer against such losses, paid Computer for the losses.

Federal then filed the present suit in the United States District Court for the Southern District of Florida against NC Bank and Fla. Bank. Suing as the assignee and subrogee of Computer, Federal sought damages for the amounts it had paid Computer to cover Computer's losses on seven of the fraudulent checks. Federal asserted that NC Bank had breached its contract with its depositor Computer and negligently had paid the checks that had only one hand signature, and that Fla. Bank negligently had exchanged the checks with only one hand signature for its own cashier's checks without properly inquiring into the propriety of the exchange.

After a bench trial, the district court held that the banks had been negligent in paying and exchanging the checks. The court found that NC Bank "disregarded the provisions of the corporate resolution and signature card requiring two handwritten signatures on all checks in excess of $10,000," and that Fla. Bank "failed to properly inquire where the proceeds of five corporate checks payable to NCNB should be distributed and breached its duty of inquiry." The court further found that Computer "was negligent in failing to employ reasonable auditing procedures and in failing to check procedures for disbursements, including signature requirements" and "also ignored its own corporate resolution and signature requirements." The court found that the banks and Computer "are equally guilty of the same amount of negligence," and that Computer and "the issuing bank are equally responsible for the embezzlement by Elizabeth Johnson."

In its conclusions of law, the court stated that "[a]ll of Plaintiff's claims should fall except for negligence," and that "[o]n the issue of negligence, Plaintiff and Defendants bear equal responsibility and Defendants should pay 50% of all damages incurred."

II.

In a joint pretrial stipulation, Federal and the banks agreed that the "dispute is governed by Florida law." We think that the "Florida law" to which the parties referred was solely Florida substantive law, and did not include Florida choice of law rules. Indeed, since this is a diversity case, the stipulation would be unnecessary if it included the latter rules. See Klaxon Co. v. Stentor Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021-22, 85 L.Ed. 1477 (1941).

Though we are not bound by it, Tomlinson v. Orange County, Fla., 785 F.2d 933, 935 n. 2 (11th Cir.1986), we see no reason to disregard the stipulation. Florida had significant contacts with the transaction. Although NC Bank is a national bank whose principal place of business is in North Carolina, Computer is a Florida corporation with its principal place of business in Florida. The accounts were opened in Florida and the checks containing only one hand signature presumably were executed there. In the circumstances, "this is a 'reasonable stipulation[ ] of choice of law,' and it will be honored." Marmon Group, Inc. v. Rexnord, Inc., 822 F.2d 31, 34, n. 2 (7th Cir.1987) (quoting Lloyd v. Loeffler, 694 F.2d 489, 495 (7th Cir.1982)). See also Montana Power Co. v. Public Utility District No. 2, 587 F.2d 1019, 1021-1022 n. 1 (9th Cir.1978). Accordingly, we shall apply Florida substantive law to resolve the legal issues in this case.

III.

A. The district court correctly held that NC Bank was negligent in paying the fraudulent checks for more than $10,000.00 that had one hand and one facsimile signature. The bank's duty not to pay those checks was created and defined by the contractual arrangements that the bank and Computer entered into when the accounts were opened.

The resolution of Computer's board of directors designated the NC Bank for the opening of an account, imposed the two-hand-signature requirement for checks of more than $10,000.00, and authorized the bank "to pay all instruments signed in accordance with the foregoing resolution." The clear implication was that the bank was not authorized to pay any check not signed in accordance with the resolution. "[T]he relationship between a bank and its depositing customer is contractual." MJZ Corp. v. Gulfstream First Bank & Trust, 420 So.2d 396, 397 (Fla.Dist.Ct.App.1981) (citing McCrory Stores Corp. v. Tunnicliffe, 104 Fla. 683, 140 So. 806 (1932)). Section 401 of the Uniform Commercial Code (UCC) (Fla.Stat. § 674.401(1)) similarly contemplates that a bank will pay only in accordance with its contractual obligations to its customers. It provides: "As against its customer, a bank may charge against his account any item which is otherwise properly payable...." A check bearing an unauthorized signature is not properly payable. See Medford Irrigation Dist. v. Western Bank, 66 Or.App. 589, 676 P.2d 329, 333 (1984).

When NC Bank paid the seven fraudulent checks involved in this case that had only one hand signature, it acted negligently because it violated the...