Fidelity & Cas. Co. of New York v. Constitution Nat. Bank

• Decision Date: 21 January 1975
• Citation: Fidelity & Cas. Co. of New York v. Constitution Nat. Bank, 356 A.2d 117, 167 Conn. 478 (Conn. 1975)
• Court: Connecticut Supreme Court
• Parties: , 16 UCC Rep.Serv. 439 The FIDELITY AND CASUALTY COMPANY OF NEW YORK v. CONSTITUTION NATIONAL BANK.

Page 117

356 A.2d 117

167 Conn. 478, 16 UCC Rep.Serv. 439

The FIDELITY AND CASUALTY COMPANY OF NEW YORK v. CONSTITUTION NATIONAL BANK.

Supreme Court of Connecticut.

Jan. 21, 1975.

Elmer W. Beasley, Hartford, for appellant (defendant).

Albert Zakarian, Hartford, for appellee (plaintiff).

Before HOUSE, C.J., and COTTER, SHAPIRO, LOISELLE and BOGDANSKI, JJ.

COTTER, Associate Justice.

This action alleging a breach of contract was brought by The Fidelity and Casualty Company of New York (hereinafter referred to as Fidelity) as subrogee, assignee and successor in interest of a depositor, the Easy Finance Company (hereinafter referred to as the finance company), against the depositor's bank, Constitution National Bank (hereinafter referred to as the bank). The Court of Common Pleas rendered judgment for Fidelity to recover of the bank $8,678.44, with costs, from which the bank has appealed.

In 1967 the finance company opened a commercial checking account with the bank in which it made deposits and against which it drew checks under the customary and ordinary rules and restraints applicable to banking institutions. Under the provisions of the account, the bank agreed to credit the finance company's account with all amounts deposited therein and to charge its account with amounts paid out in accordance with and on proper orders issued by the finance company.

During August and September, 1967, the finance company maintained a credit balance in its account with the bank sufficient to pay all checks drawn by the finance company on that account during these months. At that time, Richard C. Bissette the finance company's manager, was authorized to sign and issue checks on its behalf.

At various times during August and September, 1967, an automobile dealer in Chicopee Falls, Massachusetts, telephoned in loan applications to the finance company's office. Douglas McPheters, who at the time was a salesman for a Chicopee Falls automobile dealer, then submitted to the finance company loan applications and promissory notes allegedly signed by nine individuals. The finance company then gave Douglas McPheters contracts, payment books and checks made payable to and to be given to these individuals, in amounts altogether totalling $8,678.44. McPheters had formerly been a salesman in the Hartford area who had helped customers finance purchases through the finance company.

In drawing and issuing the nine checks, the finance company ordered the bank to pay the payees named thereon or to pay in accordance with the order of the named payees. Instead of delivering the checks as instructed, however, McPheters and an accomplice signed each of the checks in the name of the named payee, so that the resulting endorsements were forgeries, for none of the named payees had authorized anyone to sign his name. The nine checks were then cashed by either the Safe Deposit Bank and Trust Company of Springfield, Massachusetts or by the Chicopee Bank and Trust Company of Chicopee. The defendant bank thereafter paid each of the checks as it was presented for payment by the intermediary banks; at the time, it had no notice or knowledge of the facts and circumstances surrounding the issuance of the checks by the finance company, and nothing appeared on the checks themselves to indicate unauthorized endorsements, or any infirmity of title. The defendant bank then charged the amounts of the checks paid to the finance company's account. None of the named payees ever received the checks or the proceeds from the checks.

On discovering the forgery, the finance company notified Fidelity, on or about October 9, 1967, and then informed the banks through which the checks had passed of the forged endorsements. On October 17 the finance company notified the defendant bank of the forgeries; the bank, however, refused to recredit the finance company's account in the amount of the nine checks ($8,678.44).

Pursuant to the forgery provisions of the small loan companies' blanket bond it had previously executed, Fidelity paid the finance company's loss for the nine checks in their total amount. By reason of this payment, the finance company specifically assigned all its rights against the defendant bank to Fidelity, which became the subrogee, assignee and successor in interest of the finance company. Fidelity brought this action to recover damages including the aggregate amount of the checks drawn by the finance company, paid by the defendant bank and charged to the finance company's account.

The bank has assigned error in several of the trial court's findings and conclusions involving the application of § 42a-3-406 of the General Statutes (§ 3-406 of the Uniform Commercial Code), 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 supplied.)

At the outset we note that it has long been established in this state that '(a) conclusion of negligence is ordinarily one of mixed law and fact, involving the determination of the applicable standard of care, which is a question of law, and its application to the facts of the particular case which is a question of fact. Faille v Hollett, 152 Conn. 720, 721, 211 A.2d 701; Marley v. New England Transportation Co., 133 Conn. 586, 591, 53 A.2d 296; see 2 Harper and James, Torts § 15.3, p. 880.' Smith v. Leuthner, 156 Conn. 422, 424, 242 A.2d 728. Neither § 42a-3-406 nor any other part of title 42a of the General Statutes (Uniform Commercial Code) defines 'negligence.' Noting this lack of statutory guidance, two commentators on the code have stated that '(t) he acts sufficient 'substantially to contribute' to a material alteration or the making of an unauthorized signature are limited only by the limits of man's capacity for conducting slovenly business transactions.' White & Summers, Uniform Commercial Code § 16-6. Nonetheless, courts which have interpreted this section of the code have held that 'negligence' therein means the failure to exercise 'reasonable' or 'ordinary' care. Dominion Construction, Inc. v. First National Bank of Md., 271 Md. 154, 315 A.2d 69; Terry v. Puget Sound National Bank, 80 Wash.2d 157, 160, 492 P.2d 534; Exchange Bank & Trust Co. v. Kidwell Construction Co., 463 S.W.2d 465, 469 (Tex.Civ.App.). By 'reasonable care' in cases involving a question of negligence we mean the care which 'the ordinarily prudent person under the circumstances' would exercise. Steinhaus v. Steinhaus, 145 Conn. 95, 97, 139 A.2d 55, 57. Failure to exercise such care amounts to negligence. Id. The duty of reasonable care imposed upon the drawer under § 42a-3-406 is owed, furthermore, to the drawee, inter alia, to protect him from material alterations on the instrument or from the making of unauthorized signatures thereon. See Fidelity and Deposit Co. of Md. v. Chemical Bank N. Y. Trust Co., 65 Misc.2d 619. 621, 318 N.Y.S.2d 957, aff'd, 39 App.Div.2d 1019, 333 N.Y.S.2d 726; 19 Connecticut General Statutes, Annotated (West Ed.) comment 4(B). It is for this reason that no distinction is made under this code provision as to whether the signature which is forged is the signature of the negligent person. See 2 Anderson, Uniform Commercial Code, p. 945. Thus the provision applies where the drawer is deemed negligent in permitting a situation to arise in which the wrongdoer forges an endorsement of the payee'sname. Ibid.; see also Society National Bank v. Capital National Bank, 30 Ohio App.2d 1, 7, 281 N.E.2d 563. The test of conduct amounting to 'negligence' within the meaning of § 42a-3-406 appropriate to the facts of this case was whether a prudent person in the position of the finance company's manager, Bissette, having at his disposal only that amount of information and experience Bissette had concerning the purported loan applications, would have foreseen the danger of subsequent forgery by McPheters and his accomplice involved in making the purported loans and drawing and issuing checks the way Bissette did; if a prudent person would have foreseen such a danger, then the drawer, the finance company, acting through Bissette, cannot be said to have properly exercised its duty of ordinary care to the bank as required by the statute in so making the purported loans and in so drawing and issuing the checks. Connecticut Savings Bank v. First National Bank & Trust Co., 138 Conn. 298, 304, 84 A.2d 267.

To support its claim that Bissette's conduct on behalf of the finance company constituted negligence within the meaning of § 42a-3-406, the bank introduced evidence that the finance company undertook no credit investigation, which would have revealed that the purported loan applicants had never in fact applied for loans from the finance company. In recent years, courts in other jurisdictions when ruling on the issue of the drawer's negligence under this section of the code have been inclined to hold that the failure to verify information on reports prior to drawing and issuing checks pursuant thereto amounts to negligent business conduct, either as a matter of fact; Thompson Maple Products, Inc. v. Citizens National Bank, 211 Pa.Supper. 42, 47, 50, 234 A.2d 32, cited with approval, In re Royal Electrotype Corp., 485 F.2d 394 (3d Cir.); or as a matter of law; Fidelity & Deposit Co. of Md. v. Chemical Bank N. Y. Trust Co., supra; cf. Prudential Ins. Co. of Am. v. Marine Nat. Exch. Bank, 55 F.R.D. 436, 438 (E.D.Wis.). ¹

In so holding, the courts have adhered to the principle of construction embodied in the code of the effect that the statute's provisions should be 'liberally construed and applied to promote its underlying purposes and...