Medford Irr. Dist. v. Western Bank

• Decision Date: 25 January 1984
• Docket Number: No. 81-1914-J-1,81-1914-J-1
• Citation: 676 P.2d 329,66 Or.App. 589
• Parties: , 38 UCC Rep.Serv. 411 MEDFORD IRRIGATION DISTRICT and Oregon Automobile Insurance Company, Respondents, v. WESTERN BANK, an Oregon banking corporation, Third Party Plaintiff--Appellant, v. CENTRAL POINT STATE BANK, an Oregon banking corporation, Third Party Defendant. ; A26603.
• Court: Oregon Court of Appeals

Page 329

676 P.2d 329

66 Or.App. 589, 38 UCC Rep.Serv. 411

MEDFORD IRRIGATION DISTRICT and Oregon Automobile Insurance

Company, Respondents, v. WESTERN BANK, an Oregon banking corporation, Third Party Plaintiff--Appellant, v. CENTRAL POINT STATE BANK, an Oregon banking corporation,

Third Party Defendant.

No. 81-1914-J-1; A26603.

Court of Appeals of Oregon.

Argued and Submitted June 15, 1983.

Decided Jan. 25, 1984.

G. Jefferson Campbell, Jr., Coos Bay, argued the cause and filed the briefs for appellant.

H. Dewey Wilson, Medford, argued the cause for respondents. With him on the brief were Douglass H. Schmor, Brophy Wilson & Duhaime, Medford, and Ronald E. Rhodes, Portland.

Before RICHARDSON, P.J., and VAN HOOMISSEN and NEWMAN, JJ.

RICHARDSON, Presiding Judge.

Defendant Western Bank (Western) appeals from a summary judgment in favor of plaintiffs Medford Irrigation District and Oregon Automobile Insurance Company. The issue is whether there is any genuine issue of material fact between the parties. We affirm. ¹

The record shows that between September 25 and October 17, 1980, the District's bookkeeper forged the name of its manager on several checks drawn on its account with Western. Western paid the checks and debited the District's account. Later, the District sought recovery of the face value of the checks, interest, costs and attorney fees.

It is conceded for purposes of the summary judgment motion that plaintiff was negligent in not supervising the bookkeeper and in not auditing the accounts and reviewing the bank statements. It is also conceded that plaintiff's negligence substantially contributed to the forgeries. ORS 73.4060. Plaintiff argues that Western did not follow reasonable commercial banking standards, ORS 73.4060, and failed to exercise ordinary care, ORS 74.4060, in paying the forged checks.

Ordinarily the law places the risk of loss from forgeries on the bank. Any unauthorized signature is generally "wholly inoperative as that of the person whose name is signed." ORS 73.4040. Because a forged signature is wholly inoperative, a forged check is not "properly payable," ORS 74.4010, and a bank cannot debit the depositor's account. If, however, the depositor's negligence substantially contributes to the forgery, the depositor is precluded from asserting the improper payment against a bank which pays the check in good faith and in accordance with reasonable commercial standards of the banking industry. ORS 73.4060. Also, if the depositor fails to exercise reasonable care in examining its bank statement and promptly reporting any unauthorized debits to the bank, the depositor is precluded from asserting the unauthorized payment unless it establishes lack of ordinary care on the part of the bank in paying the check. ORS 74.4060.

Western submitted affidavits and depositions in opposition to plaintiffs' motion for summary judgment. It argues that there is a genuine issue of material fact as to whether it exercised ordinary care and whether its procedures comported with reasonable commercial banking standards. Western utilizes a computer check payment system. Checks for a face amount under $5,000 are paid without human intervention or "sight review" of the signatures. Checks are received for payment at Western's data processing center in Portland, and, unless there is a "hold" or a "stop payment" order for a check, it is paid automatically by computer. The cancelled checks are ultimately forwarded to the customers along with the bank statement. The computer is programmed to "kick out" checks with a face amount of $5,000 or more. Absent specific instructions from a customer, only checks of $5,000 or more are individually reviewed for authorized signatures or alterations.

Western's affidavits disclose that, before the events involved in this case, it concluded that the cost of reviewing checks for unauthorized signatures greatly exceeded the benefits. In essence, the affidavits show that a small number of forgeries was detected by individual review of checks, while the cost of that review was approximately $200,000 per year. Western contends that the procedure it utilizes is in conformity with methods used by most banks of its size throughout the United States. It argues that it is a fact question whether its procedures comport with reasonable commercial standards and whether it exercised ordinary care. Western agrees that both standards express essentially the same duty.

The reasonableness of commercial banking standards must be analyzed in the context of a bank's duty in relation to the depositor's account. Although a procedure may be common throughout the banking industry, it is not, by that fact alone, a reasonable procedure. Implied in the relationship between a bank and its checking account depositors is a contractual undertaking on the part of the bank that it will only discharge its obligation to a depositor on an authorized signature. ORS 73.4040 specifies that an unauthorized signature is wholly inoperative, and a check with an unauthorized signature is not properly payable by the bank. ORS 74.4010. The responsibility of the bank is to use ordinary care in paying only checks with authorized signatures. Thus, the procedure utilized must reasonably meet that responsibility to be considered due care or reasonable commercial banking standards in the context of ORS 73.4060 or 74.4060.

The Uniform Commercial Code does not set out particular procedures or standards that the banking industry must follow or attempt to define what ordinary care or reasonable commercial standards are. The Official Comment to UCC § 4-103 (ORS 74.1030) provides that a bank is liable for losses caused by its failure to exercise ordinary care.

" * * * In view of the technical complexity of the field of bank collections, the enormous number of items handled by banks, the certainty that there will be variations from the normal in each day's work in each bank, the certainty of changing conditions and the possibility of developing improved methods of collection to speed the process, it would be unwise to freeze present methods of operation by mandatory statutory rules." Uniform Commercial Code, Official Edition, 360 (1957).

We do not hold that a bank must adopt a particular procedure, such as "sight review," in order to comply with the statutory mandate. We do hold that the procedure used must reasonably relate to the detection of unauthorized signatures in order to be considered an exercise of ordinary care or reasonable commercial banking standards. Western's approach is automatically to pay all checks under $5,000 without any procedure to detect unauthorized signatures on those items. While that approach, based on considerations of cost and efficiency, may be a prudent business decision and followed by most banks, it does not meet the bank's responsibility under the statutes.

In Perley v. Glastonbury Bank & Trust Co., 170 Conn. 691, 368 A.2d 149 (1976), the plaintiff sought to recover the amount paid by the defendant banks on forged checks. Regarding the banks' claim that they had exercised ordinary care and followed reasonable commercial banking standards, the court said:

" * * * An officer of one of the defendant banks testified that it was customary bank procedure to accept such a check as presented without authenticating the endorsements and to rely on its ability to charge the account of the payee if the endorsements proved invalid. Such procedure may well be common among banks, but the defendants failed to show that such conduct is reasonable. An examination of signature cards to determine the genuineness of endorsements may not be entirely practical under modern banking methods, but we do not feel that that necessarily relieves banks of the risk of loss from payment on forged checks. * * * " 170 Conn. at 702, 368 A.2d 149.

See also Hanover Ins. Companies v. Brotherhood State Bank, 482 F.Supp. 501 (D.Kan.1979); Jackson v. First Nat'l Bank, Memphis, 55 Tenn.App. 545, 403 S.W.2d 109 (1966). We hold as a matter of law that the bank failed to exercise ordinary care and that the procedures adopted are not reasonable commercial practices.

Western contends that, if it is determined that it did not exercise due care or follow reasonable commercial practices, there remain issues of fact as to causation and damages. This argument is premised on ORS 74.1030(5):

"The measure of damages for failure to exercise ordinary care in handling an item is the amount of the item reduced by an amount which could not have been realized by the use of ordinary care, and where there is bad faith it includes other damages, if any, suffered by the party as a proximate consequence."

Western presented the affidavit of one of its officers to the effect that he had reviewed the checks in issue and had concluded that the forgeries were so well done that they would not have been detected by individual scrutiny. Western argues that it is entitled to a fact determination whether an exercise of ordinary care would have resulted in rejection of the checks. It contends that a fact finder could conclude that some or all of the checks would have been paid even with the use of sight review and that therefore it would not be liable for those checks under ORS 74.1030(5).

The structure of the Uniform Commercial Code creates a contractual arrangement between a bank and a depositor to the effect that the bank will pay only items which are properly payable. ORS 74.4010. An item with an unauthorized signature is not properly payable. If the customer's negligence substantially contributes to the making of the unauthorized signature, it cannot assert that the item is not properly payable unless the bank is also negligent. If it is determined that the bank is negligent, the defense of the customer's negligence is not available, and the bank is strictly liable for improperly debiting the customer's account. There is thus no issue as to the...