Husker News Co. v. Mahaska State Bank

• Decision Date: 19 September 1990
• Docket Number: No. 89-808,89-808
• Citation: 460 N.W.2d 476
• Parties: 13 UCC Rep.Serv.2d 46 HUSKER NEWS COMPANY, Appellant, v. MAHASKA STATE BANK, Oskaloosa, Iowa, Appellee, and South Ottumwa Savings Bank, Ottumwa, Iowa; Pella National Bank, Pella, Iowa; Iowa Trust and Savings Bank, Oskaloosa, Iowa; Doran H. Taylor d/b/a Cal's Jack & Jill, Ottumwa, Iowa; William Bainbridge d/b/a Wigg's Country Store, Oskaloosa, Iowa; and Hy-Vee Food Stores, Inc., Chariton, Iowa, Defendants.
• Court: Iowa Supreme Court

Page 476

460 N.W.2d 476

13 UCC Rep.Serv.2d 46

HUSKER NEWS COMPANY, Appellant, v. MAHASKA STATE BANK, Oskaloosa, Iowa, Appellee, and South Ottumwa Savings Bank, Ottumwa, Iowa; Pella National Bank, Pella, Iowa; Iowa Trust and Savings Bank, Oskaloosa, Iowa; Doran H. Taylor d/b/a Cal's Jack & Jill, Ottumwa, Iowa; William Bainbridge d/b/a Wigg's Country Store, Oskaloosa, Iowa; and Hy-Vee Food Stores, Inc., Chariton, Iowa, Defendants.

No. 89-808.

Supreme Court of Iowa.

Sept. 19, 1990.

Richard C. Bauerle and Gregory G. Milani of Keith, Orsborn, Bauerle & Milani, Ottumwa, for appellant.

Robert K. Clements and James M. Hansen of Clements, Blomgren, Pothoven, Pabst & Stravers, Oskaloosa, for appellee.

Considered en banc.

NEUMAN, Justice.

The question on this appeal is whether the trial court erred as a matter of law when it refused to apply the "discovery rule" to a conversion action based on a forged endorsement under section 554.3419 of the Iowa Uniform Commercial Code. Finding no error, we affirm.

I. Plaintiff Husker News Company is a wholesale distributor of magazines and paperback books. One of its employees, Walter Hopf, collected payments from customers, forged Husker's endorsement on the checks, and deposited the funds in his personal account. Because the checks were routed to the various banks upon which they were drawn, Husker never saw the checks with the forged endorsements. Hopf concealed his embezzlement from Husker by juggling the accounts of several retailers who apparently never questioned the improper credits they were given for returned books and magazines. Husker claims it did not become aware of Hopf's wrongdoing until August 1988.

The case before us involves checks written by Wigg's Country Store on its account with defendant Mahaska State Bank. Husker sued the bank pursuant to Iowa Code section 554.3419(1)(c) (1987) for conversion through payment on Hopf's forged endorsements. ¹ Mahaska answered by asserting that Husker's claim was barred by the five-year statute of limitations for "injuries to property" under Iowa Code section 614.1(4). ² Husker then interposed its claim that, but for Hopf's fraudulent concealment, it would have timely discovered the forged endorsements.

Upon the bank's motion for summary judgment, the district court found Husker's suit untimely. The court noted that "plaintiff could have discovered Mr. Hopf's scam much earlier with a little diligence, [and] it appears that there is no reason to apply the discovery rule to this commercial conversion case." It is from this ruling that Husker has appealed.

II. At the outset, Husker contends that this case is not appropriate for summary judgment because its inability to discover the embezzlement within the limitation period raises a genuine issue of material fact on the reasonableness of its business practices. The threshold question as we see it, however, is not whether Husker could prevail under some factual circumstances but whether it may prevail under any circumstances where its petition is filed more than five years after payment is made on the forged endorsement.

When a controversy concerns only the legal consequences flowing from undisputed facts, entry of summary judgment is proper. Farm Bureau Mut. Ins. Co. v. Milne, 424 N.W.2d 422, 423 (Iowa 1988). Our review is for the correction of errors at law.

III. The district court found, and it is without dispute, that the last check made payable to Husker by Wigg's Country Store was paid by the Mahaska State Bank on Hopf's forged endorsement more than five years prior to the filing of this suit. To overcome the five-year statute of limitation for "injury to property," Husker seeks to apply the discovery rule to the law of commercial paper. The district court declined to do so and, we think, correctly so.

It is true that we have applied the discovery rule in a wide variety of cases, including breach of warranty, Brown v. Ellison, 304 N.W.2d 197, 200 (Iowa 1981); professional malpractice, Chrischilles v. Griswold, 260 Iowa 453, 463, 150 N.W.2d 94, 100 (1967); workers' compensation, Orr v. Lewis Cent. School Dist., 298 N.W.2d 256, 262 (Iowa 1980); and tortious interference with a contract, Stoller Fisheries, Inc. v. American Title Ins. Co., 258 N.W.2d 336, 341 (Iowa 1977). The rule is designed to mitigate the harsh results which might otherwise flow from strict adherence to the statute of limitations when an injured party "is wholly unaware of the nature of his injury and the cause of it." Chrischilles, 260 Iowa at 461, 150 N.W.2d at 100. For the reasons that follow, however, we believe application of the doctrine to section 554.3419(1)(c) would be inconsistent with fundamental policies underlying the Uniform Commercial Code.

We begin with the premise that when interpreting any provision of the Uniform Commercial Code, we bear in mind its overriding purposes and objectives. Tipton v. Woodbury, 616 F.2d 170, 177 (5th Cir.1980) ("the text of each section should be read in light of the purpose and policy of the Code as a whole"). These objectives include the uniform application of commercial law among the states and the presumption in favor of predictability and finality of commercial transactions. See Iowa Code § 554.1102(2)(c) (uniformity); Mark Prods. U.S., Inc. v. Interfirst Bank Houston, 737 S.W.2d 389, 393 (Tex.App.1987) (predictability of commercial transactions is underlying purpose of Code); Fuscellaro v. Industrial Nat'l Corp., 117 R.I. 558, 563, 368 A.2d 1227, 1231 (1977) (finality of transactions is essential to law of commercial paper).

Although application of the discovery rule to a conversion case is one of first impression in Iowa, the other states that have considered the question are nearly unanimous in their refusal to apply the doctrine in this context. We find their decisions persuasive and note that such authority is "entitled to even greater deference where consistency and uniformity of application are essential elements of a comprehensive statutory scheme like ... the Uniform Commercial Code." Commonwealth v. National Bank & Trust Co. of Cent. Pa., 469 Pa. 188, 194, 364 A.2d 1331, 1335 (1976); see also Yamaha Motor Corp. v. Tri-City Motors & Sports, Inc., 171 Mich.App. 260, 429 N.W.2d 871, 876 (1988) (decisions of other states given great weight in construing uniform laws such as U.C.C.); Needle v. Lasco Indus., Inc., 10 Cal.App.3d 1105, 1107, 89 Cal.Rptr. 593, 595 (1970) (decisions of other states are "compelling authority" due to U.C.C.'s goal of uniformity). Joining the majority rule would, of course, advance the U.C.C.'s overarching goal of "mak[ing] uniform the law among the various jurisdictions." Iowa Code § 554.1102(2)(c).

The two reasons most frequently cited by jurisdictions which have rejected the discovery rule in commercial conversion cases are (1) the need for finality in transactions involving negotiable instruments, and (2) the presumption that property owners know where their property is located. The South Dakota Supreme Court, for example, recently summed up this rationale as follows:

Because of the necessity to have finality involving matters dealing with negotiable instruments in the commercial world and the fact it is presumed that a property owner knows what and where his property is, we hold that in a conversion of property case involving an instrument with a forged endorsement, the statute of limitations commences to run from the date a defendant wrongfully exercises dominion over the property, regardless of the plaintiff's ignorance.

Wang v. Farmers State Bank of Winner, 447 N.W.2d 516, 518 (S.D.1989).

The Rhode Island Supreme Court has similarly refused to apply the discovery rule because "[t]he finality of transactions promoted by an ascertainable definite period of liability is essential to the free negotiability of instruments on which commercial welfare so heavily depends." Fuscellaro, 117 R.I. at 563, 368 A.2d at 1231. Decisions of other courts echo the same sentiment. See Kuwait Airways Corp. v. American Sec. Bank, N.A., 890 F.2d 456, 461-62 (D.C.Cir.1989) (refusing to extend discovery rule to conversion cases); Insurance Co. of N. Am. v. Manufacturers Bank of Southfield, N.A., 127 Mich.App. 278, 338 N.W.2d 214, 216 (1983) (discovery rule inapplicable because it "would frustrate the strong public policy of finality in commercial transactions"); Southwest Bank & Trust Co. v. Bankers Commercial Life Ins. Co., 563 S.W.2d 329, 332 (Tex.Civ.App.1978) (holding that "the 'discovery rule' does not apply to toll the statute of limitations where a bank is sued for conversion on a forged endorsement"); Continental Cas. Co. v. Huron Valley Nat'l Bank, 85 Mich.App. 319, 271 N.W.2d 218, 221 (1978) (rejecting discovery rule in commercial conversion action); Gerber v. Manufacturers Hanover Trust Co., 64 Misc.2d 687, 688-89, 315 N.Y.S.2d 601, 603 (1970) (statutory period in 3-419(1)(c) actions "begins to run from the time of the wrong even though the injured party had no knowledge of its existence").

We think the considerations of finality and predictability represented...