J. Gordon Neely Enterprises, Inc. v. American Nat. Bank of Huntsville

• Decision Date: 07 August 1981
• Parties: 32 UCC Rep.Serv. 1525 J. GORDON NEELY ENTERPRISES, INC. v. AMERICAN NATIONAL BANK OF HUNTSVILLE, A National Banking Corporation. 79-914.
• Court: Alabama Supreme Court

Page 887

403 So.2d 887

32 UCC Rep.Serv. 1525

J. GORDON NEELY ENTERPRISES, INC. v. AMERICAN NATIONAL BANK OF HUNTSVILLE, A National Banking Corporation.

79-914.

Supreme Court of Alabama.

Aug. 7, 1981.

David H. Culver of Culver & Miller, Huntsville, for appellant.

S. Dagnal Rowe of Cleary, Lee, Porter, Evans & Rowe, Huntsville, for appellee.

ADAMS, Justice.

This is an appeal from a judgment of the Circuit Court of Madison County, entered after a nonjury trial, finding that American National Bank of Huntsville (American National), defendant below, was not liable in conversion to J. Gordon Neely Enterprises, d/b/a Midas Muffler (Neely), plaintiff below. The conversion count was based upon a total of 21 checks drawn by Neely, 19 made payable to American National and two made payable to B. Louise Bradshaw. The amount on each of twelve checks was raised and nine checks were unaltered, and all were illegally cashed or deposited by Bradshaw, a former part-time bookkeeper for Neely. The lower court found that American National acted within commercially reasonable standards when it cashed or deposited these checks for Bradshaw, and that Neely's negligence substantially contributed to the material alterations. Furthermore, American National properly paid out on the unaltered checks, since they were bearer paper and were validly negotiated upon delivery. Accordingly, it held in favor of American National. We affirm.

Mr. and Mrs. Neely, the owners and operators of J. Gordon Neely Enterprises, became acquainted with Bradshaw in 1976 when, as a Kelly Girl, she was hired by the company's stockholder accountant to assist him with their account. Mrs. Neely became friendly with Bradshaw and hired her part-time to teach her how to keep the corporate books. Since 1960, Mrs. Neely had performed all of the in-house bookkeeping duties by herself.

The corporate bank account was maintained at First Alabama Bank of Huntsville, N.A. (First Alabama), but Neely accepted Bradshaw's recommendation that the company open a second checking account at American National for personal expenditures and for the corporate payroll. She explained that checks could be drawn on the First Alabama account to fund the second account at American National. Bradshaw also kept her personal checking account at American National. Mr. and Mrs. Neely signed the bank signature card and the corporate resolution, which stated, among other things, that American National was authorized to pay out funds, on either bearer or order paper, to any of the signatories. Bradshaw was entrusted with these documents to return them to the bank, and without the knowledge or authorization of the Neelys, signed the signature card and added her name in a noticeably different type.

The following incidents complained of took place between February 25, 1977, and January 27, 1978. Bradshaw filled out checks drawn on the First Alabama account, except for two drawn on the American National Account, made payable to American National and with a large space to the left of the amount written on the designated lines. Mrs. Neely signed these checks being fully aware of these large gaps. She admitted that she never left spaces like that on her personal or corporate checks because it could facilitate alterations, but Mrs. Neely never questioned Bradshaw's practice of doing so because she yielded to Bradshaw's superior knowledge.

Bradshaw altered the checks either by adding a digit or two to the left of the original amount, or by raising the first digit after using liquid erasure. She then made a split deposit by depositing the original amount into Neely's American National payroll account, and depositing to her account the difference between the original and altered amounts. On some occasions she took the difference in cash without depositing it to her account. On those checks that were not raised, she either cashed them and kept the money, or deposited them to her account, or deposited part of the check into the Neely account and kept the rest.

Prior to Bradshaw's employment, Neely's bank statements were mailed to it. But afterwards, Bradshaw arranged with both banks to allow her to pick them up. After a while, Mrs. Neely complained to the banks about this, and eventually the statements were mailed. After Bradshaw picked up the monthly statements and items, she realtered them to reflect the original amounts by using liquid erasure. Together, the two women reconciled the statements with Mrs. Neely calling out the information from her journal entry and with Bradshaw responding from the bank statements and items. Consequently, Mrs. Neely never saw the altered checks or the statements. Even when the statements were mailed, Mrs. Neely never opened them and she never reconciled the statements without Bradshaw. A new accountant hired in the latter part of 1977 discovered the defalcations, totalling $17,005.18.

Neely filed a complaint against Bradshaw and American National for conversion, and the trial court severed the claims. A consent judgment was entered against Bradshaw for $8,000.00. Neely withdrew its jury demand, and the allegations against American National were heard without a jury. The trial court entered a judgment in favor of American National from which Neely appeals.

The issue is whether the lower court erred in holding American National not liable in conversion to Neely when it paid out proceeds to one not named as a payee and when it remitted proceeds on altered checks.

First, Neely contends that the bank converted its funds because it paid out proceeds to Bradshaw when she was not named as payee. We disagree. The checks at issue were made payable to the order of American National as opposed to being drawn to J. Gordon Neely Enterprises, and none of them was endorsed restrictively "For Deposit Only" into Neely's specially designated and numbered account. The bank's expert witnesses testified that a check drawn payable to the order of a bank is recognized in the banking profession as equivalent to a check made payable to the order of cash. Legally, therefore, the instrument becomes bearer paper, Code 1975, § 7-3-111, and is properly negotiated by delivery alone, Code 1975, § 7-3-202(1). Since these checks were bearer paper and were validly negotiated when Bradshaw delivered them for presentment, American National is not liable for paying to her the proceeds even though she was not named as payee.

Neely also relies heavily upon the proposition that

It is generally held that a check or draft drawn to the order of a bank precludes the diversion of the proceeds of it to a use other than that of the drawer, and that such diversion can be justified only by proof of authority from drawer.

10 Am.Jur.2d Banks § 560 (1963).

However, overlooked by Neely, cited within the same paragraph from which it quotes, is the following:

(B)ut ... if the drawer has clothed his agent with apparent authority to receive the proceeds of such check, the bank is not negligent in, and is not liable to the drawer for, paying, in reliance upon such apparent authority, the proceeds of such check to such agent contrary to his actual authority, if the agent...