Oswald Machine & Equipment, Inc. v. Yip, A054111

• Decision Date: 05 November 1992
• Docket Number: No. A054111,A054111
• Citation: 10 Cal.App.4th 1238,13 Cal.Rptr.2d 193
• Court: California Court of Appeals Court of Appeals
• Parties: , 18 UCC Rep.Serv.2d 1196 OSWALD MACHINE & EQUIPMENT, INC., et al., Plaintiffs and Appellants, v. Jonathan D. YIP et al., Defendants and Respondents.

Page 193

13 Cal.Rptr.2d 193

10 Cal.App.4th 1238, 18 UCC Rep.Serv.2d 1196

OSWALD MACHINE & EQUIPMENT, INC., et al., Plaintiffs and Appellants, v. Jonathan D. YIP et al., Defendants and Respondents.

No. A054111.

Court of Appeal, First District, Division 3, California.

Nov. 5, 1992.

Certified for Partial Publication. ^*

As Modified on Denial of Rehearing Dec. 4, 1992.

Robert L. Bianco, Lawrence A. Mercer, Bianco, Brandi & Jones, San Francisco, for plaintiffs and appellants.

David J. Rapson, Buchalter, Nemer, Fields & Younger, San Francisco, for defendants and respondents.

WERDEGAR, Associate Justice.

In this case of first impression, we consider the ramifications of an employer's delegation to an employee of the authority to endorse checks made out to the employer for deposit to the employer's account. If the employee, so authorized, instead embezzles his employer's funds by endorsing the checks for deposit to accounts opened in fictitious names, are those endorsements within the scope of his actual authority? Applying the California Uniform Commercial Code and relevant principles of agency law to the facts at hand, we conclude the trial court erred in ruling the endorsements to the sham accounts here were authorized as a matter of law. We accordingly reverse the grant of summary judgment and remand for further proceedings.

BACKGROUND

Plaintiffs and appellants Oswald Machine & Equipment, Inc. (Oswald) and Charles Oswald, Jr., brought this action against a number of defendants on a variety of theories arising from frauds allegedly perpetrated against the company by a former employee, Jonathan Yip. ¹ In the portion of the suit now before the court, Oswald seeks to recover from defendants and respondents Bank of America National Trust and Savings Association (Bank of America) and The Hibernia Bank (Hibernia) the value of numerous checks misappropriated by Yip. Oswald alleges that the defendant banks wrongfully converted those instruments under California Uniform Commercial Code section 3419, subdivision (1)(c) by accepting them for deposit over unauthorized endorsements.

Oswald is a small, closely held corporation engaged in the business of selling and repairing industrial and marine diesel and gas engines and related equipment. Yip was hired as Oswald's bookkeeper and clerical assistant on August 1, 1983, and within a few months was elected secretary/treasurer of the corporation. As part of his responsibility for overseeing the company's accounts receivable, Yip was authorized to endorse checks payable to Oswald for deposit into Oswald's various commercial bank accounts. To that end, Yip was authorized to use certain deposit-endorsement stamps furnished by Wells Fargo Bank and Bank of America to make deposits to the company's accounts.

Scarcely more than a week after he was hired, Yip embarked upon what was to be a long-lasting course of fraud. On August 9, 1983, he opened a commercial checking account at Hibernia (the Hibernia account) in the name of "Oswalds Machine Equipment Co.," identifying himself as sole proprietor Yip procured a deposit-endorsement stamp bearing the name "Oswald Machine & Equipment" and the number of the Hibernia account. Over the course of the next 43 months, Yip used that stamp to endorse and deposit into the Hibernia account checks payable to Oswald totalling close to $1 million. ² There is apparently no dispute that Oswald has recovered little, if any, of this sum.

of the company. The record evidences at least some question as to whether bank personnel obtained any sort of corporate documentation or authorization from Yip before opening the account. However, three months after [10 Cal.App.4th 1242] opening the account, Yip provided Hibernia with a forged "corporate resolution" purportedly authorizing the account.

In March 1987, Yip opened a second account in the name of "Oswold Equipment" at Bank of America (the Bank of America account), signing the signature card used to open the account as president of the company. ³ Again, Yip procured a deposit-endorsement stamp, this time in the name of "Oswold Equipment," and over the next four months used it to deposit customer checks made payable to Oswald and to variations of Oswald's name into the Bank of America account. (See fn. 2, ante.) Bank of America claims that Yip siphoned approximately $51,000 into that account before Oswald discovered and alerted bank officials to the fraud in July 1987, by which time Yip had withdrawn all but approximately $5,000.

Only after Yip's fraudulent activities came to light did Oswald learn that Yip had served a six-month term in federal prison for bank larceny in 1977 and that same year had pleaded guilty to misdemeanor grand theft after an arrest for grand theft, conspiracy, and receiving stolen property. Ironically, Oswald hired Yip shortly after it discovered its prior bookkeeper had embezzled over $1 million from the company between 1972 and 1982. ⁴

This action against Yip, respondents and others followed Oswald's discovery of Yip's fraudulent activities. The 11th and 13th causes of action of plaintiffs' second amended complaint alleged that Yip forged Oswald's endorsement on the misappropriated checks and, consequently, that Hibernia and Bank of America were liable for converting those instruments under section 3419 of the California Uniform Commercial Code. ⁵

Hibernia and Bank of America moved for summary judgment. Asserting that Oswald had expressly authorized Yip to endorse checks made payable to Oswald, they argued that an authorized endorsement cannot be a "forgery" for purposes of the conversion statute; hence, the banks could not be held liable under the statute for having honored a forgery. The trial court granted the summary judgment motions, concluding there was no triable issue of material fact as to whether the endorsements stamped on the misappropriated checks were "forgeries" within the meaning of the code. This appeal followed entries of final judgment in favor of the banks.

DISCUSSION

A. The Standard of Review

Summary judgment is proper only if there is no triable issue of material fact and the moving party is entitled to judgment as a matter of law. (Code Civ.Proc § 437c.) In reviewing a grant of summary judgment, the task of this court is to determine whether the facts shown by the parties give rise to a triable issue of material fact. In making that determination, we construe the moving party's papers strictly and those of the opposing party liberally. (Howell v. State Farm Fire & Casualty Co. (1990) 218 Cal.App.3d 1446, 1448, 267 Cal.Rptr. 708.) Since the trial court's ruling on a motion for summary judgment is one of law based upon the papers submitted, the reviewing court must make its own independent determination whether the evidence submitted raises a triable issue of material fact. (Wilkerson v. Wells Fargo Bank (1989) 212 Cal.App.3d 1217, 1224-1225, 261 Cal.Rptr. 185; Larsen v. Johannes (1970) 7 Cal.App.3d 491, 496, 86 Cal.Rptr. 744.)

B. Conversion Under Section 3419

Our analysis begins with the relevant provisions of the California Uniform Commercial Code. The code permits a direct action against a depositary or collecting bank that accepts an instrument bearing a forged endorsement. ⁶ In relevant part, section 3419 provides: "(1) An instrument is converted when ... [p ] (c) It is paid on a forged [e]ndorsement.... [p ] (3) Subject to the provisions of this code concerning restrictive [e]ndorsements 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 was not the true owner is not liable in conversion or otherwise to the true owner beyond the amount of any proceeds remaining in his hands." (Emphasis added.)

Although the code does not define forgery, it does provide that an unauthorized endorsement includes a forgery. ( § 1201, subd. (43) [" 'Unauthorized' signature or [e]ndorsement means one made without actual, implied or apparent authority and includes a forgery."].) Conversely, numerous other jurisdictions have determined the term "forgery" in their equivalent of section 3419 applies to unauthorized endorsements, as well as to forgeries in the strict sense of the word. ⁷ (See generally Confederate Welding v. Bank of the Mid-South (La.Cir.Ct.App.1984) 458 So.2d 1370, 1373-1374; Aetna Cas. & Sur. Co. v. Hepler State Bank (1981) 6 Kan.App.2d 543, 630 P.2d 721, 725; Equipment Distrib. v. Charter Oak Bank, etc. (1977) 34 Conn.Supp. 606, 379 A.2d 682, 684; Salsman v. National Community Bank of Rutherford (1968) 102 N.J.Super. 482, 246 A.2d 162, 167-168, affd. (1969) 105 N.J.Super. 164, 251 A.2d 460; Annot., Payee's Right of Recovery, in Conversion Under UCC § 3-419(1)(c), for Money Paid on Unauthorized Indorsement (1983) 23 A.L.R.4th 855, 858, fn. 8 [noting unanimity of holdings].)

We agree. As explained by one court, " 'There is no substantial difference between an unauthorized endorsement and a forged endorsement, the result being the same in so far as concerns the passing of title.' " (Salsman v. National Community Bank of Rutherford, supra, 246 A.2d at pp. 167-168.) As with a forgery, if a bank pays an instrument on an unauthorized endorsement, then it has exercised "dominion and control over the instrument inconsistent with the rights of the owner, and [resulting] in liability for conversion." (2A West's U.Laws Ann. (1991) U.Com.Code, Off. com. 3 to § 3-419, p. 341.) Conversely, a signature that is authorized cannot be a forgery. ⁸ (Matco Tools Corp. v Pontiac State Bank (E.D.Mich.1985) 614 F.Supp. 1059, 1062.)

C. The Trial Court Erred in Concluding the Endorsements Were Authorized as a Matter of Law

In granting summary judgment, the trial court based its analysis on an opinion of the Pennsylvania Supreme Court, Jones v. Van Norman (1987) ...