K & K Mfg., Inc. v. Union Bank, 2
| Decision Date | 05 February 1981 |
| Docket Number | No. 2,CA-CIV,2 |
| Citation | 129 Ariz. 7,628 P.2d 44 |
| Court | Arizona Court of Appeals |
| Parties | , 31 UCC Rep.Serv. 177 K & K MANUFACTURING, INC., a corporation, and Bill J. Knight, Plaintiffs/Appellants, v. UNION BANK, a corporation, Defendant/Appellee. 3735. |
In this case we must apply articles three and four of the Uniform Commercial Code to determine who should bear the risk of loss when a dishonest employee forges her employer's name as drawer on a number of checks on his business and personal checking accounts, then appropriates the proceeds for her personal use.
Appellant Bill J. Knight is the president and majority stockholder of both K & K Manufacturing, Inc. and Knight Foundry & Manufacturing, Inc. Knight Foundry employed about 80 people at the time of trial, while K & K Manufacturing, which was formed to accomplish the contracting, buying and selling for the foundry business, employed only two persons when the events which form the basis of this action occurred. These two employees were Knight and a bookkeeper, Eleanor Garza. The bookkeeper's duties at K & K Manufacturing were very broad, including picking up the company mail and Knight's personal mail from a common post office box, preparing checks for Knight's signature to pay both company and personal bills, and making entries in a cash disbursement journal reflecting the expenses for which the checks were written. Most importantly, it was her responsibility to reconcile the monthly statements prepared and sent by appellee Union Bank, where Knight kept both his business and personal checking and savings accounts. No one shared these duties with Miss Garza.
Between March 1977 and January 1978, Miss Garza forged Knight's signature on some 66 separate checks drawn on his personal or business accounts at Union Bank. The majority of these checks were made payable to her. The total amount of the forgeries on the K & K Manufacturing account was $49,859.31. The total on Knight's personal account was $11,350. The bank paid each such check and Miss Garza received or was credited with the proceeds.
We need not concentrate on the details of the fraud, except to comment that it proved to be effective for nearly one year. Miss Garza assured that the disbursement journal balanced by overstating legitimate expenditures, forging checks to herself for the difference, and later showing the forged check as "void." Upon receipt of appellee's monthly statement and cancelled checks, she removed and concealed the bad checks. The proceeds from most of the forgeries were deposited directly into her personal account rather than taken in cash. She usually presented the bad checks to the bank tellers with numerous authorized checks, and spread her banking transactions among several tellers so that no one teller knew the extent of her business.
Eventually, an in-house audit showed the discrepancies in the 1977 disbursements. Appellants brought this action against appellee for breach of contract, seeking repayment of the funds the bank paid out on checks with unauthorized signatures. After a court trial, judgment was entered in favor of appellant Knight for $5,500, representing the amount paid out of his personal account on forged checks from March 28 to May 20, 1977. This figure included eight forged checks paid by the bank prior to the mailing of its monthly statement containing a record of the payments and the checks themselves to Knight on May 6, plus a 14-day period. Since no forged checks on the K & K Manufacturing account were paid prior to May 20, judgment was entered for appellee against it. In addition, the trial court made findings of fact and conclusions of law. Both Knight and K & K Manufacturing have appealed.
Appellants contend that findings 13, 14 and 15 are not supported by the evidence. They argue the record shows their actions were not negligent and that the bank's practices and procedures were negligent as a matter of law. The disputed findings are as follows:
"13. Defendant bank (appellee) paid all the checks in good faith and in accordance with reasonable commercial standards.
14. Defendant bank did not fail to exercise ordinary care in paying the checks.
15. The plaintiffs (appellants) did not exercise reasonable care and promptness to examine the bank statements and cancelled checks in order to discover the forgeries."
Our duty begins and ends with the inquiry of whether the trial court had before it evidence which reasonably supports its actions, viewed in a light most favorable to sustaining its findings. United Bank v. Mesa N. O. Nelson Co., 121 Ariz. 438, 590 P.2d 1384 (1979). We will not weigh conflicting evidence or set aside the trial court's findings unless they are clearly erroneous. Id. The determination of which actions are commercially reasonable and what constitutes ordinary care on the part of the bank, as well as reasonable care and promptness on the part of the depositor, are questions of fact for the trier of fact. See West Penn Administration, Inc. v. Union National Bank, 233 Pa.Super. 311, 335 A.2d 725 (1975).
The concept of which party bears the loss in a forgery situation such as the one presented here is addressed in articles three and four of the Uniform Commercial Code, covering commercial paper and bank deposits and collections. 1 A.R.S. Sec. 44-2543 (U.C.C. § 3-406) provides:
A.R.S. Sec. 44-2632 (U.C.C. § 4-406) provides in part:
"Customer's duty to discover and report unauthorized signature or alteration
A. When a bank sends to its customer a statement of account accompanied by items paid in good faith in support of the debit entries or holds the statement and items pursuant to a request or instructions of its customer or otherwise in a reasonable manner makes the statement and items available to the customer, the customer must exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and must notify the bank promptly after discovery thereof.
B. If the bank establishes that the customer failed with respect to an item to comply with the duties imposed on the customer by subsection A the customer is precluded from asserting against the bank:
1. His unauthorized signature or any alteration on the item if the bank also establishes that it suffered a loss by reason of such failure; and
2. An unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank after the first item and statement was available to the customer for a reasonable period not exceeding fourteen calendar days and before the bank receives notification from the customer of any such unauthorized signature or alteration.
C. The preclusion under subsection B does not apply if the customer establishes lack of ordinary care on the part of the bank in paying the item(s)."
These provisions impose a duty on the depositor to check his monthly statement for unauthorized signatures or alterations on checks. If the depositor fails to do so, after the first forged check and statement relating thereto is sent to him, plus a reasonable period not exceeding 14 days, he is precluded from asserting the unauthorized signature or alteration against the bank. U.C.C. Sec. 4-406, comment 3. The burden of proof of depositor's negligence is on the bank. Even if the bank succeeds in establishing the depositor's negligence, if the customer establishes that the bank failed to exercise ordinary care in paying the bad checks, the preclusion rule of A.R.S. Sec. 44-2632(B) does not apply. U.C.C. Sec. 4-406, comment 4.
We first address the issue of whether appellee met its burden of proof of showing that appellants "substantially contributed" to the forgeries or failed to exercise "reasonable care and promptness" in examining the monthly statements. The record shows that appellants trusted Miss Garza completely with both writing checks and reconciling the monthly...
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