Rhode Island Hosp. Trust Nat. Bank v. Zapata Corp.

• Citation: 848 F.2d 291
• Decision Date: 04 February 1988
• Docket Number: No. 87-1890,87-1890
• Parties: 6 UCC Rep.Serv.2d 1 RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, Plaintiff, Appellee, v. ZAPATA CORPORATION, et al., Defendants, Appellees. Zapata Gulf Crews, Inc., Defendant, Appellant. . Heard
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 291

848 F.2d 291

6 UCC Rep.Serv.2d 1

RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, Plaintiff, Appellee, v. ZAPATA CORPORATION, et al., Defendants, Appellees.

Zapata Gulf Crews, Inc., Defendant, Appellant.

No. 87-1890.

United States Court of Appeals, First Circuit.

Heard Feb. 4, 1988.

Decided June 1, 1988.

James T. Murphy, with whom Matthew T. Oliverio and Hanson, Curran & Parks, Providence, R.I., were on brief, for defendant, appellant.

Barbara S. Cohen, with whom Anthony F. Muri and Licht & Semonoff, Providence, R.I., were on brief, for plaintiff, appellee Rhode Island Hosp. Trust Nat. Bank.

Before COFFIN, Circuit Judge, ALDRICH, Senior Circuit Judge, and BREYER, Circuit Judge.

BREYER, Circuit Judge.

The issue that this appeal presents is whether Zapata Corporation has shown that the system used by Rhode Island Hospital Trust National Bank for detecting forged checks--a system used by a majority of American banks--lacks the "ordinary care" that a bank must exercise under the Uniform Commercial Code Sec. 4-406(3) (1977), embodied here in Rhode Island General Laws, Sec. 6A-4-406(3) (1985). The question arises out of the following district court determinations, all of which are adequately supported by the record and by Rhode Island law.

1. In early 1985, a Zapata employee stole some blank checks from Zapata. She wrote a large number of forged checks, almost all in amounts of $150 to $800 each, on Zapata's accounts at Rhode Island Hospital Trust National Bank. The Bank, from March through July 1985, received and paid them.

2. Bank statements that the Bank regularly sent Zapata first began to reflect the forged checks in early April 1985. Zapata failed to examine its statements closely until July 1985, when it found the forgeries. It immediately notified the Bank, which then stopped clearing the checks. The Bank had already processed and paid forged checks totaling $109,247.16.

3. The Bank will (and legally must) reimburse Zapata in respect to all checks it cleared before April 25, 1985 (or for at least two weeks after Zapata received the statement that reflected the forgeries). See U.C.C. Secs. 3-401(1), 4-406(2) (1977).

4. In respect to checks cleared on and after April 25, the Bank need not reimburse Zapata because Zapata failed to "exercise reasonable care and promptness to examine the [bank] statement." U.C.C. Sec. 4-406(1) (1977).

The question before us is whether this last-mentioned conclusion is correct or whether Zapata can recover for the post-April 24 checks on the theory that, even if it was negligent, so was the Bank.

To understand the question, one must examine U.C.C. Sec. 4-406, R.I.Gen.Laws Sec. 6A-4-406. Ordinarily a bank must reimburse an innocent customer for forgeries that it honors, Sec. 6A-3-401(1) (1985), but Sec. 6A-4-406 makes an important exception to the liability rule. The exception operates in respect to a series of forged checks, and it applies once a customer has had a chance to catch the forgeries by examining his bank statements and notifying the bank but has failed to do so.

The statute, in relevant part, reads as follows:

(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 (14) calendar days and before the bank receives notification from the customer of any such unauthorized signature or alteration.

Sec. 6A-4-406(1)-(2) (emphasis added).

The statute goes on to specify an important exception to the exception. It says:

(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 item(s).

Sec. 6A-4-406(3). Zapata's specific claim, on this appeal, is that it falls within this "exception to the exception"--that the bank's treatment of the post-April 24 checks lacked "ordinary care."

Zapata says as a preliminary matter, that the district court failed to make a finding on this "ordinary care" question. We do not think that is so. The court, while considering a different, but related, issue, found that the bank's practices met "reasonable commercial standards." The word "reasonable" implies that use of those standards was not by itself negligent or lacking in ordinary care. See Vending Chattanooga, Inc. v. American National Bank and Trust Co., 730 S.W.2d 624, 628 (Tenn.Sup.Ct.1987) (equating "ordinary care" with compliance with "reasonable commercial standards" of banking industry); Medford Irrigation District v. Western Bank, 66 Or.App. 589, 592-94, 676 P.2d 329, 332 (1984) (similar); see also Perley v. Glastonbury Bank and Trust Co., 170 Conn. 691, 699, 368 A.2d 149, 153 (1976) (approving equation of "reasonable care" required by Sec. 3-406 with care of "ordinarily prudent person under the circumstances"); Fidelity and Casualty Co. of New York v. Constitution National Bank, 167 Conn. 478, 483, 356 A.2d 117, 121 (1975) (similar); Coleman v. Brotherhood State Bank, 3 Kan.App.2d 162, 166-67, 592 P.2d 103, 109 (1979) (approving instruction giving weight to "banking customs" in formulation of standard for "reasonable care" or "ordinary care"); Transamerica Insurance Co. v. United States National Bank, 276 Or. 945, 952-54, 558 P.2d 328, 333-34 (1976) (equating "reasonable care," "reasonable banking standards," and "ordinary care" in state version of U.C.C. Sec. 3-406 and Sec. 4-406).

Whether or not the district court made an explicit finding, however, we should, and do, affirm the district court's judgment in the bank's favor. Our examination of the statute reveals that the statute places the burden of proof on Zapata. Our examination of the record reveals that Zapata failed to shoulder that burden; and, given the record, no reasonable person could find the contrary.

a. The statute places the burden of proof on Zapata. It says that strict bank liability terminates fourteen days after the customer receives the bank's statement unless "the customer establishes lack of ordinary care." Sec. 6A-4-406(3) (emphasis added); see, e.g., Vending Chattanooga, 730 S.W.2d at 628. And, the U.C.C. commentary makes clear that the statute means what it says. The commentators explain the purpose of the statutory section as follows:

One of the most serious consequences of failure of the customer ... [to examine his statement and notify the bank promptly of an unauthorized signature] ... is the opportunity presented to the wrongdoer to repeat his misdeeds. Conversely, one of the best ways to keep down losses in this type of situation is for the customer to promptly examine his statement and notify the bank ... so that the bank will be alerted to stop paying further items.

U.C.C. Sec. 4-406 comment 3. The Commentary goes on to say:

[E]ven if the bank succeeds in establishing that the customer has failed to exercise ordinary care, if in turn the customer succeeds in establishing that the bank failed to exercise ordinary care in paying the items[,] the preclusion rule does not apply. This distribution of the burden of establishing between the customer and the bank provides reasonable equality of treatment and requires each person asserting the negligence to establish such negligence rather than requiring either person to establish that his entire course of conduct constituted ordinary care.

Id. comment 4 (emphasis added).

b. The record convinces us that Zapata failed to carry its burden of establishing "lack of ordinary care" on the part of the Bank. First, the Bank described its ordinary practices as follows: The Bank examines all signatures on checks for more than $1,000. It examines signatures on checks between $100 and $1,000 (those at issue here) if it has reason to suspect a problem, e.g., if a customer has warned it of a possible forgery or if the check was drawn on an account with insufficient funds. It examines the signatures of a randomly chosen one percent of all other checks between $100 and $1,000. But, it does not examine the signatures on other checks between $100 and $1,000. Through expert testimony, the Bank also established that most other banks in the nation follow this practice and that banking industry experts recommend it. Indeed, Trust National Bank's practices are conservative in this regard, as most banks set $2500 or more, not $1,000, as the limit beneath which they will not examine each signature.

This testimony made out a prima facie case of "ordinary care." U.C.C. Sec. 4-103(3) (1977); R.I.Gen.Laws Sec. 6A-4-103(3) (1985) ("[a]ction or nonaction ... consistent with ... a general banking usage not disapproved by this [Article or] chapter, prima facie constitutes the exercise of ordinary care"); see Vending Chattanooga, 730 S.W.2d at 628-29 (Sec. 4-103(3) indicates that "ordinary care" exercised if practice accords with "reasonable commercial standards"); Coleman, 3 Kan.App.2d at 166-67, 592 P.2d at 109. Of course, Zapata might still try to show that the entire industry's practice is unreasonable, that it reflects lack of "ordinary care."...