First Nat. Bank of Arizona v. Continental Bank

• Decision Date: 20 September 1983
• Docket Number: CA-CIV,No. 1,1
• Citation: First Nat. Bank of Arizona v. Continental Bank, 673 P.2d 938, 138 Ariz. 194 (Ariz. App. 1983)
• Parties: , 37 UCC Rep.Serv. 523 FIRST NATIONAL BANK OF ARIZONA, a national banking association, Plaintiff-Appellee, v. CONTINENTAL BANK, an Arizona corporation, Defendant-Appellant. 5966.
• Court: Arizona Court of Appeals

Page 938

673 P.2d 938

138 Ariz. 194, 37 UCC Rep.Serv. 523

FIRST NATIONAL BANK OF ARIZONA, a national banking association, Plaintiff-Appellee, v. CONTINENTAL BANK, an Arizona corporation, Defendant-Appellant.

No. 1 CA-CIV 5966.

Court of Appeals of Arizona Division 1, Department A.

Sept. 20, 1983.

Review Denied Nov. 15, 1983.

Streich, Lang, Weeks & Cardon by William S. Hawgood II, Barbara Richmond Berman, Phoenix, for plaintiff-appellee.

Filler, Paytas, Shannon & Fleming and Earl Terman by Henry R. Paytas, Scottsdale, for defendant-appellant.

OPINION

CONTRERAS, Acting Presiding Judge.

Three issues are presented in this appeal from the granting of a summary judgment in a case regarding the rights of a payor bank against the collecting bank for an item paid on unauthorized endorsements:

(1) Whether a payor bank can revoke payment of a check to a collecting bank based upon a stop payment order received from its customer four months after the check was paid when it is subsequently discovered that at the time payment was made the check contained unauthorized endorsements.

(2) Whether the collecting bank's supplying of proper endorsements in place of unauthorized endorsements constitutes a ratification sufficient to remedy the collecting bank's previous breach of presentment warranties.

(3) Whether the award of attorney's fees by the trial court was proper.

We believe the trial court correctly resolved the substantive issues in favor of the collecting bank and that its award of attorney's fees was proper. We affirm the judgment.

THE UNDISPUTED MATERIAL FACTS

The material facts are not in dispute. Joseph Construction Co. (Joseph) maintained a checking account with the appellant Continental Bank (Continental). Joseph issued a check jointly payable to its subcontractor, R & S Enterprises (R & S), and three of R & S' materialmen, Central Distributing Division (Central), The Harlan Company (Harlan), and Amfac Electric Supply Co. (Amfac). R & S endorsed the item for itself, and, without authorization, typed in endorsements for the other three payees. The check was deposited on or about April 20, 1978, with appellee First National Bank (First National), was forwarded by First National through the Phoenix Clearing House, and First National received provisional credit for the item.

Nothing further occurred until August 9, 1978, when Joseph, the drawer notified Continental that the endorsements of the three materialmen payees were unauthorized. Continental sent the check back to First National, along with Central's affidavit of forgery, ¹ through the Phoenix Clearing House as an "entry" item, receiving credit for the item to its Clearing House account. Continental recredited Joseph's account for the amount of the item and permitted withdrawals based on the recrediting.

First National then obtained a written ratification of the challenged endorsement from Central and returned the check to Continental. Continental refused to recredit First National's account and returned the items with an affidavit of forged endorsement by Amfac. First National then obtained written ratifications of the endorsements from Amfac and Harlan and returned the item on September 8, 1978, to Continental. Before the item was returned to Continental, Joseph had issued a stop-payment order which Continental received on September 6, 1978. On September 12, 1978, Continental again returned the check to First National because of the stop payment order and refused to recredit First National's account with the Phoenix Clearing House.

First National filed a complaint on March 29, 1979, to recover the amount of the item, plus attorney's fees, costs, and interest. The parties filed cross-motions for summary judgment. The court granted First National's motion, denied Continental's, and entered a formal judgment. Continental timely appealed from the judgment.

EFFECT OF STOP PAYMENT ORDER ON PREVIOUS PAYMENT

The first issue presented is whether the drawer's stop payment order was effective despite previous payment by Continental. Continental argues that by transferring a check to it with a forged endorsement, First National violated its presentment warranty, so that payment was not final under A.R.S. § 44-2626 (U.C.C. § 4-303), and left intact Joseph's right to stop payment. Although the issue presents a close question with no authority precisely on point, we disagree with appellant's analysis.

The drawer's right to stop payment derives from A.R.S. § 44-2629 (U.C.C. § 4-403) which provides that the bank may disregard the stop payment order unless the order, "is received by the bank in such time and in such manner as to afford the bank a reasonable opportunity to act on it prior to the happening of any of the events described in § 44-2626." In this regard A.R.S. § 44-2626(A) (U.C.C. § 4-303(1)) provides that:

A. Any knowledge, notice or stop-order received by, legal process served upon or setoff exercised by a payor bank, whether or not effective under other rules of law to terminate, suspend or modify the bank's right or duty to pay an item or to charge its customer's account for the item, comes too late to so terminate, suspend or modify such right or duty if the knowledge, notice, stop-order or legal process is received or served and a reasonable time for the bank to act thereon expires or the setoff is exercised after the bank has done any of the following:

1. Accepted or certified the item;

2. Paid the item in cash;

3. Settled for the item without reserving a right to revoke the settlement and without having such right under statute, clearing house rule or agreement;

4. Completed the process of posting the item to the indicated account of the drawer, maker or other person to be charged therewith or otherwise has evidenced by examination of such indicated account and by action its decision to pay the item; or

5. Become accountable for the amount of the item under paragraph 4, subsection A of § 44-2622 and § 44-2625 dealing with the payor bank's responsibility for late return of items. (emphasis supplied).

A.R.S. § 44-2622 (U.C.C. § 4-213) provides in relevant part:

(A) An item is finally paid by a payor bank when the bank has done any of the following, whichever happens first:

................................................................................

* * *

4. Made a provisional settlement for the item and failed to revoke the settlement in the time and manner permitted by statute, clearing house rule or agreement.

The Uniform Commercial Code has thus established a scheme "to determine what might be termed the winner of a race ... for the amount of the item." H. Bailey, Brady on Bank Checks, § 14.22 at 14-59 (5th ed. 1979). In this case, the "race" is between final payment and the stop payment order. The first matter then is to determine whether there was a final payment under A.R.S. § 44-2626. It is clear that the item was provisionally credited to First National, on April 20, 1978, which settlement was not revoked by Continental within the Code's midnight deadline, A.R.S. § 44-2604(A)(8) (U.C.C. 4-104(1)(h)), or the deadline established by the rules of the Phoenix Clearing House Association.

First National argues that because Continental did not timely revoke the provisional settlement, the payment became final. Its argument continues that because, pursuant to A.R.S. § 44-2629(A), ² the customer's right to stop payment ends upon the happening of any of the events described in § 44-2624 (U.C.C. § 4-301), including failure to timely revoke provisional settlement, Joseph Construction Co. had no right to stop payment at the time it attempted to do so, and that Continental erred in giving effect to the stop payment request.

Continental argues, however, that a check paid on a forged endorsement is an exception to the final payment scheme set forth in A.R.S. § 44-2626 (U.C.C. § 4-303), and therefore the customer retains the right to stop payment where his check has been paid on a forged endorsement. We believe that there is an exception only to the extent that the final payment rule does not bar the payor bank from seeking a recovery against the depository bank for breach of presentment warranties. See A.R.S. § 44-2616 (U.C.C. § 4-207). We do not believe, however, that the payor bank's presentment warranty rights undo or preclude the final payment made by Continental under § 44-2626 (U.C.C. § 4-303). To adopt appellant's argument would be to introduce a great amount of uncertainty to the finality of payment rule in any case where the endorsements are questioned.

The case most closely on point is Maddox v. First Westroads Bank, 199 Neb. 81, 256 N.W.2d 647 (1977). In that case, a check was paid on a forged endorsement. The customers sued their bank, the payor bank, for improperly charging their accounts, and the collecting bank for paying on the forged endorsement. The collecting bank, answering a cross-claim filed by the payor bank, argued that the U.C.C. finality of payment rules precluded the payor bank's claim for breach of presentment warranty under U.C.C. § 4-207. The court disagreed:

[12, 13] This contention is clearly erroneous. Sections 3-418 and 4-213, U.C.C., establish when payment on a negotiable instrument or check becomes final in favor of a holder in due course, but Center Bank in this case is not a holder in due course. A bank is not a holder as defined in section 1-201, U.C.C., and therefore not a holder in due course as defined under section 3-302, U.C.C., when it receives a check bearing a forged endorsement. See, Tubin v. Rabin, 533 F.2d 255 (5th Cir., 1976); Riggs Nat. Bank of Washington D.C. v. Security Bank N.A., 10 U.C.C.Rptr.Serv. 460 (D.C.Super., 1972); Salsman v. National Community Bank of Rutherford, 102 N.J.Super. 482, 246 A.2d 162 (1968), affirmed, 105 N.J.Super. 164, 251 A.2d 460; Brady on Bank Checks, § 5.1, p. 87. When a collecting bank receives a check bearing a forged endorsement and processes it...