Nu-Way Services, Inc. v. Mercantile Trust Co. Nat. Ass'n

• Decision Date: 02 December 1975
• Docket Number: NU-WAY,No. 36242,36242
• Citation: 530 S.W.2d 743
• Parties: 18 UCC Rep.Serv. 748 SERVICES, INC., Plaintiff-Respondent, v. MERCANTILE TRUST COMPANY NATIONAL ASSOCIATION, Defendant-Appellant. . Louis District, Division Three
• Court: Missouri Court of Appeals

Page 743

530 S.W.2d 743

18 UCC Rep.Serv. 748

NU-WAY SERVICES, INC., Plaintiff-Respondent, v. MERCANTILE TRUST COMPANY NATIONAL ASSOCIATION, Defendant-Appellant.

No. 36242.

Missouri Court of Appeals, St. Louis District, Division Three.

Dec. 2, 1975.

Thompson & Mitchell, W. David Wells, Charles A. Newman, Donald B. Dorwart, St. Louis, for defendant-appellant.

Leadlove & Byrne, James M. Byrne, Steven T. Biesanz, St. Louis, for plaintiff-respondent.

GUNN, Judge.

Plaintiff-respondent Nu-Way Services, Inc. (Nu-Way) sued defendant-appellant Mercantile Trust Company National Association (Mercantile) to recover charges against Nu-Way's account made by Mercantile on 43 forged and six altered checks. The jury returned a verdict for $7,903.29 in favor of Nu-Way, and on Mercantile's motion for new trial, the trial court granted a new trial as to damages only. Mercantile has appealed alleging: 1) that under § 400.4--406(3) ¹ of the Uniform Commercial Code, Nu-Way failed to establish lack of ordinary care on the part of Mercantile in paying on the forged and altered checks; 2) that the trial court erred in limiting a new trial to the issue of damages only. For the reasons which follow, we find that Nu-Way is entitled to recover on the altered checks but not on the forgeries. We therefore reverse and remand.

Nu-Way, a truck repair company, maintained a checking account with Mercantile. The signature card for Nu-Way's president, Mariano Costello, was kept on file by the bank. Each month, Nu-Way wrote approximately 175 checks on its account, and Mercantile sent Nu-Way a monthly statement indicating the fluctuating checking account balance as each check was charged against the account with the cancelled checks being returned with the statement.

In an altruistic gesture designed for the rehabilitation of a former convict, Mr. Costello hired James Ussery as night manager for Nu-Way. Part of Ussery's duties entailed obtaining automotive parts from parts companies. Mr. Costello would on occasion date and sign checks and fill in the name of the payee (always a parts company) for payment of parts used by Nu-Way, and the amount of the check would be left blank for Ussery to fill in when the cost of the parts was determined at the time they were picked up by him. On seven such checks which Mr. Costello had signed, Ussery made alterations to substitute his name as payee and cashed the checks for his own benefit. Ussery also had unauthorized access to Nu-Way's checkbook and removed a substantial number of blank checks therefrom. Ussery made use of 43 of the blank checks by forging Mr. Costello's signature on them after making himself the payee. The dates on the altered and forged checks were from July 29, 1971 to January 13, 1972.

Each of the forged checks was returned to Nu-Way by Mercantile along with an itemized statement of account at the end of each month the checks were cashed. And each month Mr. Costello would have a company clerk compare the amount of the checks with the statements. At Mr. Costello's direction the bookkeeping employee merely compared the amount of the checks with the statements looking only for mathematical computation errors by Mercantile. None of the Nu-Way employees, including Mr. Costello, examined any of the checks for forgeries or alterations nor compared the checks with the company checkbook. Ultimately, one of Nu-Way's vendors called Mr. Costello's attention to a check made payable to Ussery, and an investigation revealed the alterations and forgeries. Mercantile was notified of the irregularities and subsequently reimbursed Nu-Way for $231 to cover the amount of the first check altered by Ussery. Nu-Way brought suit to recover the amount paid out on its checking account on the forged and altered checks. The jury awarded Nu-Way $1,438.29 on the altered checks, which included the full amount of the altered checks, less the $231 previously paid by Mercantile, and $6,565 on the forgeries, although the total sum of the 43 forged checks was $10,716.66. The trial court ordered a new trial on the issue of damages only having found that it erroneously omitted a portion of MAI 4.01 in the given instruction. Mercantile's two grounds of appeal are that under § 400.4--406 of the Uniform Commercial Code there should have been no recovery against it and that the trial court was in error in limiting the new trial on the issue of damages only.

In its argument that it has no liability to Nu-Way for the payments made on the altered and forged checks, Mercantile relies on § 400.4--406, which in pertinent part provides:

'(1) 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.

'(2) If the bank establishes that the customer failed with respect to an item to comply with the duties imposed on the customer by subsection (1) the customer is precluded from asserting against the bank

(a) 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

(b) 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.

'(3) The preclusion under subsection (2) does not apply if the customer establishes lack of ordinary care on the part of the bank in paying the items.'

Nu-Way concedes that under the facts of this case that § 400.4--406(3) places the burden upon it of proving that Mercantile lacked ordinary care in paying on the altered and forged checks. We find as a matter of law that Nu-Way failed in this case in its proof of lack of ordinary care by Mercantile as to the 43 forged checks but that there was sufficient evidence to uphold the jury verdict of $1,438.29 as to the alterations.

The paucity of Missouri legal rubric touching the issues confronting us in this case requires our reference to decisions in other jurisdictions for guidance. We first consider the question of Mercantile's liability on the 43 forged checks. The fundamental rule in the Uniform Commercial Code regarding unauthorized signatures is stated in § 400.3--404(1) as follows:

'Any unauthorized signature is wholly inoperative as that of the person whose name is signed unless he ratifies it or is precluded from denying it . . ..'

It is accepted that Ussery's forgeries of Mr. Costello's signature were unauthorized and would therefore be 'wholly inoperative' as to Nu-Way unless Nu-Way is 'precluded from denying it.' § 400.4--406 relates directly to the relationship between depositor and bank and affords an apt guide for determining whether a basis exists for precluding Nu-Way's denial of the signatures. Hardex-Steubenville Corp. v. Western Pennsylvania National Bank, 446 Pa. 446, 285 A.2d 874, 877 (1971). ²

Initially, we find that Nu-Way failed to meet its obligation under subparagraph (1) of § 400.4--406, in that it did not 'exercise reasonable care and promptness to examine the statement and items to discover (the) unauthorized signature . . . on an item.' In accordance with Mr. Costello's instructions, the Nu-Way clerk in charge of examining the bank statements examined Mercantile's statements to check the accuracy of the mathematics. The 'items'--the cancelled checks--were not examined at all. Mr. Costello readily admitted that the checks were not scrutinized for forgeries as required by statute nor was reasonable notice given to Mercantile of any wrongdoing after the first check and statement was made available to Nu-Way within the meaning of § 400.4--406(2)(b). Hence, Nu-Way failed in its duties to discover and report the forgeries under § 400.4--406(2) and is precluded from recovering against Mercantile unless it can establish under § 400.4--406(3) lack of ordinary care on the part of Mercantile in paying the forgeries.

Under § 400.4--406(3) the burden of establishing Mercantile's lack of ordinary care rests staunchly on Nu-Way. Westport Bank & Trust Co. v. Lodge, 164 Conn. 604, 325 A.2d 222, 227 (1973); Huber Glass Co. v. First National Bank of Kenosha, 29 Wis.2d 106, 138 N.W.2d 157, 160 (1965). ³ Thus, we examine the evidence to determine whether is was sufficient to present a jury question if there was a lack of ordinary care exercised by Mercantile in paying on the forgeries. The method used by Mercantile for detecting forgeries and alterations was to assign a bank clerk to examine the checks of each of Mercantile's accounts, and the examination was not desultorily performed. The clerk assigned to Nu-Way's account was responsible for approximately 200 accounts and examined all the checks from each account daily. The total number of checks for all accounts examined by the bank clerk totaled between 900--1,000 daily, except on Tuesdays or when another clerk was absent, causing the work load to be substantially increased. Two supervisors were present when the clerk reviewed the checks, but only the clerk in charge of the particular account would actually check for forgeries. Each clerk, including the clerk in charge of the Nu-Way account, had possession of the authorized signature cards for the accounts for which the clerk was responsible and would examine each check on each account. The clerk would look at the signature card while examining the checks until familiarity with the authorized signature was achieved,...