Hydroflo Corp. v. First Nat. Bank of Omaha

• Decision Date: 20 April 1984
• Docket Number: No. 83-123,83-123
• Citation: 217 Neb. 20,349 N.W.2d 615
• Parties: , 49 A.L.R.4th 873, 38 UCC Rep.Serv. 932 HYDROFLO CORPORATION, a Pennsylvania Corporation, Appellant, v. FIRST NATIONAL BANK OF OMAHA, Appellee.
• Court: Nebraska Supreme Court

Page 615

349 N.W.2d 615

217 Neb. 20, 49 A.L.R.4th 873, 38 UCC Rep.Serv. 932

HYDROFLO CORPORATION, a Pennsylvania Corporation, Appellant, v. FIRST NATIONAL BANK OF OMAHA, Appellee.

No. 83-123.

Supreme Court of Nebraska.

April 20, 1984.

Syllabus by the Court

1. Uniform Commercial Code: Banks and Banking: Words and Phrases. The language of Neb.U.C.C. § 3-419(3) (Reissue 1980), "a representative, including a depositary or collecting bank," does include depositary and collecting banks when engaged in the normal business of paying or collecting ordinary checks.

2. Uniform Commercial Code: Banks and Banking: Conversion: Negotiable Instruments. In an action brought under Neb. U.C.C. § 3-419 (Reissue 1980) by a payee to recover in conversion for payment on a forged endorsement, it is incumbent on a depositary bank seeking immunity under subsection (3) to plead and prove as affirmative defenses that it acted in good faith and in accordance with reasonable commercial standards.

3. Uniform Commercial Code: Banks and Banking. Whether a bank has acted in a commercially reasonable manner is a question of fact.

4. Evidence. Where reasonable minds may differ as to the conclusions or inferences to be drawn from the evidence, such issues must be submitted to the jury or the trier of facts.

5. Evidence: Negligence. The failure to abide by custom or ordinary practice is competent evidence of negligence.

6. Evidence: Proximate Cause. Where evidence is conflicting on the question of proximate cause, the question is ordinarily one for the trier of facts.

7. Negligence: Proximate Cause. Generally, the question of whether there has been an intervening cause eliminating negligence of a defendant as a proximate cause is for the trier of facts.

8. Uniform Commercial Code: Banks and Banking: Actions: Claims. A claim for money had and received has not been eliminated by the Uniform Commercial Code. However, it is subject to the defenses of "good faith" and "reasonable commercial standards" as provided for by Neb. U.C.C. § 419(3) (Reissue 1980).

9. Banks and Banking: Consumer Protection Act: Words and Phrases. Because Neb.Rev.Stat. § 8-103 (Reissue 1977) of the Banking Act requires the director of the Department of Banking and Finance to "constructively aid banks in maintaining proper banking standards and efficiency," a bank is exempt from suit under the Nebraska Consumer Protection Act, Neb.Rev.Stat. §§ 59-1601 et seq. (Reissue 1978), by reason of its failure to follow customary and standard banking practices.

C.L. Robinson of Fitzgerald, Brown, Leahy, Strom, Schorr & Barmettler, Omaha, for appellant.

Thomas J. Culhane of Erickson, Sederstrom, Leigh, Eisenstatt, Johnson, Kinnamon, Koukol & Fortune, P.C., Omaha, for appellee.

KRIVOSHA, C.J., and BOSLAUGH, WHITE, HASTINGS, CAPORALE, SHANAHAN, and GRANT, JJ.

HASTINGS, Justice.

Hydroflo Corporation, named as payee on a number of checks, brought this action against the First National Bank of Omaha as a collecting or depositary bank, to recover the amounts paid on those checks to a bank customer who had wrongfully endorsed the checks and had the proceeds deposited to his account.

The district court sustained the bank's demurrer to the third cause of action, money had and received, and directed verdicts in favor of the bank, at the close of plaintiff's case, upon the first (conversion), second (negligence), and fourth (Consumer Protection Act) causes of action, and dismissed the petition in its entirety. We affirm as to the Consumer Protection action, and reverse and remand for trial as to the other three causes of action.

Hydroflo, a small Pennsylvania corporation, in the fall of 1978 hired John L. Hearn as a sales manager to sell specialized pumps and feed systems which it manufactured. Hearn was allowed to obtain a telephone listing and a post office box in Omaha in the name of the company. His job was to solicit orders for pumps throughout the Midwest and forward the orders to Pennsylvania for acceptance. Later, he had control of an inventory of up to approximately 180 pumps, which he kept in his garage.

In September of 1979 Hearn opened a corporate checking account in the name of Hydroflo but without its knowledge, and furnished the bank with a signature card containing his signature. Although the bank requested a corporate resolution authorizing the account, none was ever received. According to bank procedure, a corporate resolution is not required in an instance such as this, although it is the bank's practice to request the resolution. During the next 11 months, a total of $23,773.37 in checks payable to Hydroflo was deposited by Hearn into and withdrawn from this account before it was closed on August 22, 1980.

Hydroflo first learned of the secret account when a bank statement was forwarded to the corporation after Hearn terminated employment in July of 1980. In the meantime, Hearn had incorporated Hydroflo Corporation of Nebraska on April 15, 1980, and furnished the bank a copy of those articles of incorporation after the plaintiff requested a freeze on the corporate account on August 13, 1980.

Hydroflo assigns as error the dismissal of each cause of action. We will address each cause in the order presented by the plaintiff's petition.

At the outset, the bank insists that there is no competent proof that Hearn was not the intended payee and that Hydroflo did not have the necessary possession of the forged instruments to authorize it to bring this action. On the basis of the record and the inferences to be drawn from it, there is no merit to either contention.

The first cause of action alleged in the second amended petition was conversion. The bank in its amended answer alleged as its only defense that it had acted in good faith and in accordance with reasonable commercial standards. The bank's defense of reasonable commercial standards is essentially Neb. U.C.C. § 3-419(3) (Reissue 1980), a statutory defense which the code apparently recognized to limit the conversion liability of depositary and collecting banks.

Hydroflo argues at length in its brief that that particular subsection was never intended to and did not apply to collecting and depositary banks when cashing checks in the normal course of business. Section 3-419(3) provides as follows:

Subject to the provisions of this act concerning restrictive indorsements a representative, including a depositary or collecting bank, who has in good faith and in accordance with the reasonable commercial standards applicable to the business of such representative dealt with an instrument or its proceeds on behalf of one who was not the true owner is not liable in conversion or otherwise to the true owner beyond the amount of any proceeds remaining in his hands.

Following is a portion of the language of the Comment to the above section:

Subsection (3), which is new, is intended to adopt the rule of decisions which has held that a representative, such as a broker or depositary bank, who deals with a negotiable instrument for his principal in good faith is not liable to the true owner for conversion of the instrument or otherwise, except that he may be compelled to turn over to the true owner the instrument itself or any proceeds of the instrument remaining in his hands.

The bank does not address this issue in its brief.

This question has generated substantial controversy among the courts and commentators who have addressed it and who are often in agreement in their conclusions that there is neither commercial nor rational justification for construing § 3-419(3) as being applicable to depositary and collecting banks engaged in the normal check collection business. As a result, this subsection of § 3-419 has been simply ignored at times, applied reluctantly in a few cases, and most often evaded on a variety of theories.

In Tubin v. Rabin, 389 F.Supp. 787, 789-90 (N.D.Tex.1974), we find this language:

In my opinion Section 3-419(3), when it refers to the representative having "dealt with an instrument or its proceeds on behalf of one not the true owner," is concerned with an entirely different transaction than the typical "honoring a check" transaction. See, Ervin v. Dauphin Deposit Trust Co., 3 UCC Rept.Serv. 31 (Penn.Common Pleas Court, 1965). As one case reasoned, the U.C.C. comments to this section refer to a line of cases primarily involving defendants that had acted as investment brokers and had marketed negotiable securities, remitting the consideration to their customers. The relationship in those cases between the representative and their customers typified the true agency type, and therefore differed substantially from the impersonal debtor-creditor relationship established in the banking world.... Thus, it is this true agency situation rather than the typical bank transaction involved in this case that 3-419(3) appears to be addressed.

In Ervin v. Dauphin Deposit Trust Co., 38 Pa.D. & C.2d 473, 482-83 (1965), 3 U.C.C.Rep.Serv. 311, 318-19 (Callaghan 1967), this ingenious argument is used:

It is true that it is provided that "representative" shall include a depository or collecting bank, but the clear meaning is to include them when acting as "representatives". The code, at section 1-201(35) defines "representative" as follows:

" 'Representative' includes an agent, an officer of a corporation or an association, and a trustee, executor or administrator of an estate, or any other person empowered to act for another".

The entire subsection speaks of something other than the negotiating or the honoring of a check when it refers to the representative having "dealt with an instrument or its proceeds on behalf of one who was not the true owner". (Italics supplied).

In determining the intent of the legislative [sic] in adopting this subsection, we must assume that the legislature intended a reasonable result, and it would seem to be unreasonable to construe this subsection, as defendant would have us do,...