Rutherford v. Darwin

• Decision Date: 24 June 1980
• Docket Number: No. 4108,4108
• Parties: , 29 UCC Rep.Serv. 899 George A. RUTHERFORD, Harold V. Larkin and Rancho Village Partners, a New Mexico General Partnership, Plaintiffs-Appellees, v. Tom DARWIN, The Settlement, Ltd., First National Bank in Albuquerque, and John C. Boydston, Defendant-Appellant. BOMUR TELEPHONE INTERCONNECT COMPANY, Third-Party Plaintiff, v. GEORGE A. RUTHERFORD, INC., Third-Party Defendant.
• Court: Court of Appeals of New Mexico

Page 245

622 P.2d 245

95 N.M. 340, 29 UCC Rep.Serv. 899

George A. RUTHERFORD, Harold V. Larkin and Rancho Village

Partners, a New Mexico General Partnership, Plaintiffs-Appellees, v. Tom DARWIN, The Settlement, Ltd., First National Bank in

Albuquerque, and John C. Boydston,

Defendant-Appellant.

BOMUR TELEPHONE INTERCONNECT COMPANY, Third-Party Plaintiff, v. GEORGE A. RUTHERFORD, INC., Third-Party Defendant.

No. 4108.

Court of Appeals of New Mexico.

June 24, 1980.

William A. Sloan, Stanley N. Hatch, Rodey, Dickason, Sloan, Akin & Robb, P. A., Albuquerque, for defendant-appellant

Susan L. Edwards, Knight & Sullivan, Albuquerque, for plaintiffs-appellees.

OPINION

ANDREWS, Judge.

Tom Darwin was a general partner of both Rancho Village Partners and The Settlement, Ltd., which are New Mexico limited partnerships. He had full authority to manage the funds of both entities with his signature alone.

On May 17, 1977, Darwin made a $300,000 draw against a construction loan made by Albuquerque National Bank (ANB) to Rancho Village Partners. He received the money in the form of a money order payable to "Rancho Village Partnership, Ltd." He endorsed the money order with "Deposit to the account of Rancho Village Partners, Ltd.", and took it to the First National Bank in Albuquerque [FNBIA], where both Rancho Village Partners and The Settlement had accounts. Darwin gave the money order to the teller with a pre-printed deposit slip for the account of The Settlement, and the teller wrote out the account number of The Settlement on the reverse side of the money order, below the endorsement. The teller then deposited the money order to the account of The Settlement, notwithstanding the endorsement, which directed otherwise.

Darwin intended that the deposit be made into The Settlement account. He then withdrew the bulk of the $300,000 within two weeks of the deposit of the money order, and the account was almost entirely depleted before any of the other members of the Rancho Village partnership learned of the draw seven months later. The embezzlement of Darwin was not earlier discovered because the construction loan on which the draw was made was not monitored by monthly statements which would normally be sent in conjunction with monthly billings of interest. It was unusual for a loan of that size not to be so monitored and was a deviation from the usual ANB practice with regard to such loans. Rancho Village Partners acted promptly to notify FNBIA and to protect its interest after the other members of the partnership learned of Darwin's action.

Rancho Village Partners brought suit against Darwin, The Settlement, and FNBIA to recover the $300,000. A stipulated judgment was entered against Darwin and The Settlement, and the trial court entered summary judgment against the bank. FNBIA appeals from this summary judgment.

The words "Deposit to the account of Rancho Village Partnership, Ltd." clearly constitute a restrictive endorsement under § 55-3-205, N.M.S.A.1978. Section 55-3-206 imposes upon FNBIA the duty to pay consistently with the restrictive endorsement, and this duty gives rise to liability for the bank if it fails to do so. Underpinning & Foundation Constructors, Inc. v. Chase Manhattan, 46 N.Y.2d 459, 386 N.E.2d 1319, 414 N.Y.S.2d 298 (1979).

FNBIA contends that Darwin "waived" the restrictive endorsement, and thus released it from its duty to pay as directed by the endorsement. We conclude, however, that New Mexico does not recognize any doctrine of the waiver of restrictive endorsements, and thus we cannot accept FNBIA's theory. There has never been a case recognizing a doctrine of waiver of restrictive endorsements in New Mexico, but several cases decided in other jurisdictions under the Uniform Negotiable Instruments Law (NIL) suggest that the doctrine was once generally recognized. See, e. g., Glens Falls Indemnity Co. v. Palmetto Bank, 104 F.2d 671 (4th Cir. 1939). We are aware of no case decided since the Uniform Commercial Code (UCC) superseding the NIL as the law governing negotiable instruments which has recognized the doctrine, and thus the dispositive issue is whether the doctrine survives as part of the common law under the UCC.

The NIL was silent on the key issue of this case; both the bank's duty to pay as directed by a restrictive endorsement and the waiver exception to that rule were matters of common law under the NIL. With the adoption of the UCC, the rule as to the duty of the bank was codified in § 55-3-206.

Courts have frequently given effect to common law limitations and exceptions to newly codified common law rules. For example, many jurisdictions have held that a murderer may not take from the estate of his victim even where the general law of descent and distribution of the jurisdiction has been codified without the inclusion of that sensible and time honored common law limitation. See, e. g., Budwit v. Herr, 339 Mich. 265, 63 N.W.2d 841 (1954). However, the general rule is that:

general and comprehensive legislation, prescribing minutely a course of conduct to be pursued and the parties and things affected, and specifically describing limitations and exceptions, is indicative of a legislative intent that the statute should totally supersede and replace the common law dealing with the subject matter.

2A Sutherland, Statutory Construction § 50.05 (Rev.3d Ed.1972).

This idea was applied in Tietzel v. Southwestern Const. Co., 43 N.M. 435, 94 P.2d 972 (1939), where it was held that a statute empowering a trial judge to refer certain enumerated sorts of cases to a special master over the objection of the parties abrogated his common law power to do so in any other kind of case which sounded in equity.

We hold that the codification of the law of restrictive endorsements contained in the UCC is sufficiently comprehensive and detailed to exclude common law exceptions which are not mentioned. Section 55-3-206, which is entitled "Effect of restrictive endorsement", sets forth with particularity when and by whom restrictive endorsements must be observed; it must be inferred that if the legislature had intended that restrictive endorsements would become ineffective for some other reason, such a direction would have been included in this section or elsewhere in the UCC.

The official comment to this section, which is persuasive authority of the meaning of the section even though it is not binding on this Court, First State Bank v. Clark, 91 N.M. 117, 570 P.2d 1144 (1977), gives a further indication that the section was not to be encumbered with the common law accessories of the NIL. The comment describes the changes made by the new section as "completely revised" from the prior provision under the NIL. FNBIA argues that waiver of a restrictive endorsement as recognized prior to the UCC should be allowed because § 55-1-103 of the UCC provides for the continued effect of common law principles unless displaced by particular provisions of the UCC. However, as discussed above, we believe that § 55-3-206 displaces the preexisting law in the entire area of the effect of restrictive endorsements. Section 55-1-103 does not preserve common law principles in an area which is thoroughly covered by the UCC simply because they are not expressly excluded. Alaska Airlines, Inc. v. Lockheed Aircraft Corp., 430 F.Supp. 134 (D.Alaska 1977).

FNBIA further argues the endorser of an instrument should be allowed to waive the endorsement by analogy to § 55-3-208, which states that one who reacquires an instrument may cancel any endorsement which is not necessary to his title. While the presence of this section cuts against any notion of the "sanctity" of restrictive endorsements, it very specifically suggests that it was not the intention of its drafters to make such endorsements freely negatable. The section is not applicable because the instrument was not reacquired and because Darwin did not strike the restrictive endorsement.

This second distinction is particularly important. The presence of an uncancelled restrictive endorsement on a negotiable instrument creates the legitimate expectation that it was negotiated in accordance with the restriction, and thus it would, at least in some cases, tend to conceal embezzlement or misappropriation to allow such endorsements to be waived without being physically struck from the instrument.

This contention relies upon an analogy to § 55-4-406 of the UCC, in which it is stated that the customer of a bank has an obligation to examine his bank statements and to report unauthorized signatures or alterations in his drafts. Subsection 2 of § 55-4-406 releases the bank from liability for wrongful payment such as forgery or alteration in some instances.

The principle set forth in § 55-4-406 is entirely inapplicable to the present situation. Section 55-4-406 was intended to mitigate the effect of the rather harsh rule that the bank is liable for paying drafts which contain unobvious forgery. The effect is to give the bank timely notice of the action so that it may attempt to recoup its losses from the forger, and all that is asked of the customer is that he examine the bank's documentation of transactions concerning his account.

It is certainly not the intention of § 55-4-406 to allow the bank to be insulated from the effect of its own negligence; Subsection 3 expressly limits the action of the section to cases in which the bank has used ordinary care. Even if this Court were to extend the operation of § 55-4-406 by analogy to the case at hand, and even if we were willing to impose upon the customer the obligation to structure his relationship with a third party so as to discover the improper payment the trial court would have had to believe FNBIA exercised ordinary care in its handling of the money order. The trial court did not so find.

The circumstances of the transaction cry out for attention on the part of the bank. We hold, as a matter of law, that the bank had a...