Inventory Locator Service, Inc. v. Dunn

Decision Date10 May 1989
Citation776 S.W.2d 523,10 UCCRep.Serv.2d 894
Parties10 UCC Rep.Serv.2d 894 INVENTORY LOCATOR SERVICE, INC., Plaintiff-Appellant, v. Walter DUNN and Community Bank of Germantown, Defendants-Appellees.
CourtTennessee Court of Appeals

John J. Heflin, III, Burch, Porter & Johnson, Memphis, for plaintiff-appellant.

Richard L. Winchester, Jr., Winchester Law Firm, Memphis, for defendants-appellees.

HIGHERS, Judge.

On September 22, 1986, Inventory Locator Service, Inc. ("ILS") filed a complaint against Walter Dunn, a former employee, and Community Bank of Germantown ("CBG") in the Chancery Court of Shelby County, Tennessee, after discovering that approximately 125 checks made payable to it had been stolen and deposited by Dunn at CBG. ILS requested an injunction prohibiting the withdrawal of any funds from any accounts opened by Dunn at CBG. The injunction was issued on October 6, 1986, and, as a result, $20,358.52 was frozen in Dunn's account. By subsequent consent order this frozen sum was paid over to ILS, reducing to that extent the damages sought by ILS in its action.

ILS filed an amended complaint on October 24, 1986. ILS sought damages from Dunn and CBG for conversion and for breach of the bank's duty of inquiry owed to the payee of the checks accepted by CBG for deposit into the account opened by Dunn. ILS also sued other parties, including Dunn's wife, seeking to trace the misappropriated funds and have a resulting trust imposed on them.

The Chancery Court severed all claims of ILS against Dunn, his wife, and CBG for conversion of the checks and ordered that all other claims be postponed pending trial of the claims for check conversion. ILS nonsuited its claim against Mrs. Dunn and proceeded to trial against Dunn and CBG.

After a non-jury trial, the court, by order dated April 26, 1988, entered judgment in favor of ILS against Dunn for the total sum of $111,419.13, but found against ILS with respect to its claims against CBG. ILS has appealed from the judgment dismissing its claims against CBG.

Defendant, Walter Dunn, began working in the accounting department of ILS in the spring of 1984. At the time at issue in the case, between March and September of 1986, Dunn's duties at ILS included customer service and operations duties and keeping track of the accounts receivable and the checks that were received. Within the scope of his duties at ILS, Dunn had no authority to endorse and deposit a check made payable to ILS other than to the account designated on ILS's rubber deposit stamp. He had no authority to open a bank account or handwrite an endorsement for ILS. During this time, Dunn was evaluated highly by his supervisors. In March of 1986, however, Dunn began stealing checks payable to ILS.

Dunn deposited his first stolen check at appellee CBG on March 13, 1986. The check for $93 was drawn on the account of the 3-M Corp. payable to "Inventory Locator Service." Dunn endorsed the check "Inventory Locator Service /s/ Walter Dunn, Jr." The entire endorsement was handwritten. Dunn tendered the check for deposit into his own personal account at CBG. Dunn was known at CBG because he did his personal banking there and had handled the deposits of a former employer there. ILS, however, did not have an account with CBG. No one at CBG questioned the authority of Dunn to endorse and deposit into his personal account a check payable to ILS.

On March 21, 1986, Dunn opened a corporate account at CBG in the name of "ILS Rental, Inc." for the purpose of depositing therein the stolen checks. According to the testimony of Dunn, the new accounts clerk did not ask him to fill out the customary corporate resolution form authorizing the opening of the corporate account. Dunn testified that he was never given such a form at any time. He was given and filled out a signature card for the account. No copy of a corporate resolution for the "ILS Rental, Inc." account was ever found in CBG's records. Dunn was provided with printed checks and deposit slips for the account; he was the only authorized signatory on the account.

Over a six-month period, Dunn took approximately 175 checks sent and payable to ILS, using his position at ILS to intercept the checks which totalled $117,117.62. He succeeded in covering up these thefts by taking checks for non-billed items, by issuing unauthorized credit memos against billings, and by never taking so much money that ILS's revenues would fail to increase each month.

Using his printed deposit slips, Dunn deposited the stolen checks into the "ILS Rental, Inc." account at CBG. All of the checks, payable to ILS, were endorsed by hand by Dunn before he took them to CBG for deposit. The majority of the endorsements consisted of two lines, the first line being the alleged endorsement of the payee and the second the endorsement of Dunn for "ILS Rental, Inc." The first line typically read "Inventory Locator Serv."; the style of the second line varied. The checks dating from March and April were primarily endorsed "ILS Rental, Inc."; checks from May and afterwards were primarily endorsed simply "ILS, Inc." There was another discernible difference between earlier and later checks. In the earlier checks--generally those dated before May--Dunn apparently made no effort to make the handwriting of the two endorsements look different, e.g., the capital letters are alike in both lines of writing. In the later checks, however, Dunn generally made an effort to write in cursive the first endorsement and to print the second endorsement. Rowe Belcher, senior vice president in charge of operations at CBG, testified that to his knowledge no teller at CBG ever asked Dunn for any identification or what his authority was to be able to deposit the ILS checks and no representative of CBG made any inquiry regarding Dunn's authority to endorse checks made payable to ILS.

Prior to the time of the thefts, Dunn had rather extensive legal problems. He had owned an egg farm which had been destroyed by fire in 1980. This incident was under investigation for arson by state and federal officials. ILS was made aware by Dunn of this investigation before it hired him. Dunn was eventually charged with the federal crime of mail fraud for filing proof of losses with insurance companies for mortgage holders. The jury trial in spring of 1985 resulted in a verdict of guilty which was appealed. The Sixth Circuit reversed and remanded for a new trial based on the admission of improper evidence. Dunn, facing a potential charge on the bail reform act for the ILS thefts committed while he was out on bail, eventually entered into a plea bargain agreement with the federal government whereby he plead guilty to the mail fraud charge without admitting guilt.

Throughout these legal problems, Dunn continued to profess his innocence to his employer, most specifically in a July 8, 1986 memorandum requested by Fred Myers, president of ILS. Although ILS was kept apprised of developments by Dunn, no representative ever attended the trial or reviewed the trial transcript. According to the testimony of Dunn and Myers, no restrictions were put on Dunn's work duties during this period of legal activity; he was free to perform his duties as before.

Dunn's thefts were discovered in September of 1986 when service was cut off to an ILS client for non-payment of services. The client faxed ILS a copy of its cancelled check. Suspicions were raised at ILS because of the handwritten endorsements. An investigation was begun which resulted in the discovery of the thefts. ILS responded to the discovery with the legal actions noted earlier.

In deciding in favor of CBG, the trial court ruled that while its behavior was not perfect, CBG acted in accordance with reasonable banking practices. It also ruled that ILS was negligent in the way it had handled Dunn and his employment duties in light of his previous criminal conviction. Appellant ILS appeals from these rulings.

The ultimate issue as to both rulings is whether CBG acted in good faith and in a commercially reasonable manner pursuant to T.C.A. §§ 47-3-406 and 47-3-419, in dealing with stolen, forged checks deposited in a phony corporate account opened at its main branch by defendant Walter Dunn. If it did act in such a manner, CBG would not be liable to ILS for conversion of any proceeds beyond those which remained in its hands at the initiation of this action.

We look first to the provisions of T.C.A. § 47-3-419 (1979) which states in part:

(1) An instrument is converted when:

* * * * * *

(c) it is paid on a forged endorsement.

* * * * * *

(3) Subject to the provisions of chapters 1 through 9 of this title concerning restrictive endorsements 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 is not the true owner is not liable in conversion or otherwise to the true owner beyond the amount of any proceeds remaining in its hands.

Because the statute makes commercial reasonableness an affirmative defense, the...

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8 cases
  • Roman v. Sage Title Grp., LLC
    • United States
    • Court of Special Appeals of Maryland
    • September 27, 2016
    ...failure to act in accordance with reasonable commercial standards.” Id . at 290, 973 A.2d 841 (quoting Inventory Locator Serv., Inc. v. Dunn , 776 S.W.2d 523, 526–27 (Tenn.Ct.App.1989) ). Accordingly, we held that the issue of whether the bank violated a standard of care because it failed t......
  • Saxon Mortgage Services, Inc. v. Harrison, 891 September Term, 2008.
    • United States
    • Court of Special Appeals of Maryland
    • June 11, 2009
    ...a payee should endorse its name exactly as it appears on the front of the check. See generally Inventory Locator Service, Inc. v. Dunn, 776 S.W.2d 523, 526-27 (Tenn.Ct. App.1989) (addressing "reasonable commercial standards" as part of the affirmative defense to conversion actions provided ......
  • Schultz v. Bank of America
    • United States
    • Court of Special Appeals of Maryland
    • March 12, 2010
    ...industry because a bank's own standards may be more or less strict than the industry standard. See Inventory Locator Service, Inc. v. Dunn, 776 S.W.2d 523, 527 (Tenn.Ct.App.1989) (explaining that although a bank's failure to obey its own procedures may be indicative of negligence, those pro......
  • Allied Ins. Center, Inc. v. Wauwatosa Sav. and Loan Ass'n
    • United States
    • Wisconsin Court of Appeals
    • February 27, 1996
    ...Martin Glennon, Inc. v. First Fidelity Bank, N.A., 279 N.J.Super. 48, 652 A.2d 199, 203-206 (1995); Inventory Locator Serv., Inc. v. Dunn, 776 S.W.2d 523, 527 (Tenn.Ct.App.1989); see also 6 RONALD A. ANDERSON, ANDERSON ON THE UNIFORM COMMERCIAL CODE § 3-406:41 (1993 rev. ed.). Thus, the aut......
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