Pargas, Inc. v. Taylor's Estate

• Decision Date: 02 July 1982
• Docket Number: No. 82-74,82-74
• Citation: 416 So.2d 1358
• Court: Court of Appeal of Louisiana — District of US
• Parties: 34 UCC Rep.Serv. 1238 PARGAS, INC., et al., Plaintiffs, Hartford Accident & Indemnity Company, Plaintiff and Appellant, v. ESTATE of Leonard Parvin TAYLOR, et al., Defendants and Appellees.

Page 1358

416 So.2d 1358

34 UCC Rep.Serv. 1238

PARGAS, INC., et al., Plaintiffs, Hartford Accident & Indemnity Company, Plaintiff and Appellant, v. ESTATE of Leonard Parvin TAYLOR, et al., Defendants and Appellees.

No. 82-74.

Court of Appeal of Louisiana, Third Circuit.

July 2, 1982.

Gist, Methvin, Hughes & Munsterman, John W. Munsterman, Alexandria, for plaintiff and appellant.

Gold, Little, Simon, Weems & Bruser, Donald Sharp, Alexandria, for defendants and appellees.

Before FORET, SWIFT and DOUCET, JJ.

DOUCET, Judge.

This is an employee embezzlement--commercial paper case. During the course of his employment as a district manager for Pargas, Inc., Leonard Taylor diverted checks, beginning in April of 1975, with his employer named as payee, into his personal account at Rapides Bank and Trust Co. in Alexandria, Louisiana. He did so by endorsing the checks with a rubber return address stamp, imprinted as follows:

PARGAS

Post Office Box 1887

Alexandria, Louisiana 71301

Some of the checks were also endorsed with his personal signature. Rapides Bank never obtained a corporate resolution authorizing Mr. Taylor to endorse checks on behalf of Pargas nor was there any authorization received for deposit of said checks into Taylor's personal account.

A company audit, conducted in 1977, revealed the embezzlement and Taylor subsequently confessed his embezzlement in the sum of $28,262.59 and agreed to reimburse his employer. Thereafter Taylor died, apparently from the result of suicide.

Pargas was insured against loss by theft or embezzlement by a policy issued by Hartford Accident & Indemnity Co. The claim between insured and insurer was subsequently settled by the payment of $62,000 to Pargas, Inc. and Hartford obtained an assignment and subrogation of the rights of Pargas. Thereafter Hartford brought this action against Rapides Bank & Trust Co. for their wrongful honor of the forged instruments, and against the Estate of Leonard Taylor for his embezzlement. The claim against Rapides Bank involves 64 checks totalling $17,805.59 payable to the order of Pargas, Inc. but deposited to the personal account of Mr. Taylor at the Rapides Bank. As suit was filed on November 28, 1978, appellant correctly concedes that those checks deposited by Mr. Taylor to his personal account prior to November 28, 1975 are not at issue as the three-year statute of limitations set forth in R.S. 10:4-406(4) is applicable thereto.

The trial judge dismissed the claims of Hartford against Rapides Bank on the grounds that Taylor had the implied authority to endorse checks on behalf of Pargas, and there was no evidence that the bank had actual knowledge that the deposit of such funds into Taylor's personal account constituted a breach of his fiduciary duties. The trial judge further noted, that as a matter of equity, the loss should be borne by the party employing the dishonest employee as they were in a superior position to prevent the loss by auditing his activities. From that judgment Hartford appeals.

This appeal requires a determination of the legal rights and responsibilities of two relatively innocent parties who were victimized by the criminal activities of the employee Taylor, who forged the payee's endorsement. (The claims of plaintiff against the Succession of Leonard Taylor are not presently before this court.) The precise question appears to be one of first impression in Louisiana since adoption of the relevant chapters of the Uniform Commercial Code. Accordingly we look to the law of other jurisdictions.

LSA-R.S. 10:3-419(1) provides that "when a person pays an instrument on a forged endorsement, he is liable to the true owner." The measure of the drawee's liability is the face amount of the instrument. R.S. 10:3-419(2). The third paragraph of said section provides that a depository or collecting bank, who is in good faith and in accordance with the reasonable commercial standards applicable to the business of such representative who dealt with an instrument or its proceeds on behalf of one who was not the true owner is not liable to the true owner beyond the amount of any proceeds remaining in his hands.

Defendant contends that it is absolved of liability by virtue of the following provisions of LSA-R.S. 10:3-304:

(2) The purchaser has notice of a claim against the instrument when he has knowledge that a fiduciary has negotiated the instrument in payment of or as security for his own debt or in any transaction for his own benefit or otherwise in breach of duty.

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(4) Knowledge of the following facts does not of itself give the purchaser notice of a defense or claim. (emphasis added)

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(e) that any person negotiating the instrument is or was a fiduciary.

In support thereof the bank contends the above provisions require actual knowledge of the fiduciary's breach of duty before it can be held liable. The remaining defense, related thereto, is that Taylor had either apparent or implied authority to endorse the checks.

We find that the purchaser Rapides Bank had knowledge, either actual or implied, that Taylor was negotiating the instrument for his personal benefit.

The Uniform Fiduciaries Act did away with the payee's liability for negligence in failing to investigate the use to which the fiduciary was putting the funds, and substituted a new test: For the payee to become liable under this Act it must be found either that it had actual knowledge of the misappropriation or that it acted in bad faith. Colby v. Riggs National Bank, 67 App.D.C. 259, 92 F.2d 183, 114 A.L.R. 1065 (1937); Maryland Casualty Company v. Bank of Charlotte, 340 F.2d 550 (U.S.App. 4th Cir. 1965). In the latter aforementioned case it was held that the payee bank was liable to the corporation's surety due to its application of checks, payable to the bank and drawn on the corporation's accounts in other banks, to the secretary's personal account and outstanding loans, notwithstanding the existence of a corporate resolution protecting the bank from liability for assisting a fiduciary in misappropriation.

We take judicial notice of the fact that checks payable to a corporation are not normally endorsed in blank by use of a return address stamp and delivered to third parties. The collecting bank should have inquired as to the reason and authority for the deposits of corporate checks into Taylor's personal account. However, the evidence clearly shows that Rapides Bank never obtained a corporate resolution authorizing Mr. Taylor to endorse checks on behalf of Pargas nor was there any authorization received for deposit of corporate checks into Taylor's personal account. Indeed, Rapides Bank made no inquiry whatsoever. Not only does such conduct fall below reasonable commercial standards, but it also violates defendant's internal procedures which the record discloses to require bank employees to obtain a resolution from the principal prior to acceptance of such checks. Mr. John Leavines, a senior vice-president and long-time employee of the Rapides Bank testified that it was the standard operating procedure of the Rapides Bank to obtain a resolution authorizing someone to execute checks on behalf of the corporation when opening a corporate account. However none was obtained from Pargas, Inc. It was commercially unacceptable for the bank to remain passive, disregard and refuse to learn facts readily available. They cannot now seek refuge under the fiduciary proviso of R.S. 10:3-304(4)(e).

Defendant Rapides Bank also contends that Taylor had the apparent authority to conduct the banking transactions involved on behalf of Pargas. In support thereof Rapides Bank emphasizes Taylor's managerial status, with its accompanying duties, and his use of the rubber stamp. However, it is well established that the mere fact that an employee has managerial status and is in charge of a company's office does not entitle third persons to assume that he has authority to execute or endorse negotiable paper belonging to his employer. Guillory v. Braswell Motor Freight Lines, Inc., 256 So.2d 646 (La.App. 2nd Cir. 1972), writ ref. 260 La. 1134, 258 So.2d 381 (1972); Massey-Ferguson, Inc. v. Fargo National Bank, 270 F.Supp. 227 (N.D.1967), aff'd. 400 F.2d 223 (8th Cir. 1968); Mott Grain Co. v. First National Bank & Trust Co., 259 N.W.2d 667 (N.D.1977). If mere employment furnished apparent authority to endorse checks no business would be safe. There was no apparent authority to justify the actions of Rapides Bank.

The judicially created doctrine of apparent authority has two requirements: (1) the principal must make some form of manifestation to an innocent third party; and (2) the third party must rely reasonably on purported authority of the agent as a result of the principal's manifestations. Lilliedahl & Mitchell, Inc. v. Avoyelles Trust and Savings, 352 So.2d 781 (La.App. 3rd Cir. 1977). Here, assuming defendant can rightly be considered an innocent party entitled to the doctrine's protection, there was no manifestation whatsoever by the principal. The furnishing of a rubber stamp bearing the name and address of the principal, a commonplace occurrence, did not cloak Taylor with apparent authority to endorse corporate checks and receive payment for them. Whatever appearance of authority the stamp created arose from the actions of Taylor himself and not Pargas. Furthermore, the reliance of Rapides on the authority of Taylor to apply corporate checks to his personal benefit was not reasonable under the circumstances presented.

As stated in Lilliedahl, supra, "Banks stand in a peculiarly unique place in the business world. They are entrusted with huge sums of money by their depositors and must proceed cautiously when dealing with deposited sums. We also note that it is axiomatic that a corporation can only act through individuals and these individuals must be given legal power to act on behalf of a corporation." These principles apply with equal...