Al Sarena Mines, Inc. v. SouthTrust Bank of Mobile

Decision Date16 June 1989
Citation548 So.2d 1356
Parties9 UCC Rep.Serv.2d 1290 AL SARENA MINES, INC. v. SOUTHTRUST BANK OF MOBILE, et al. 87-208.
CourtAlabama Supreme Court

ALMON, Justice.

The opinion originally issued in this case is withdrawn and the following is substituted in its place.

This appeal principally involves the liability of a depositary bank for accepting, over a forged indorsement, a check payable to a corporate payee for deposit into an individual's account, without inquiring as to the authority and reason for such a deposit. The appeal is from a judgment as to two cross-claim defendants. The original claim and other cross-claims are not at issue here, but it will be necessary to set them out to convey an understanding of the case.

Harry L. Severson brought an action against Ken Stanton, alleging that Stanton had, by fraud and undue influence, obtained his signature, or forged his signature, to three checks totalling $62,314 drawn on his savings account at SouthTrust Bank of Mobile ("SouthTrust"). Severson amended his complaint, adding Al Sarena Mines, Inc. ("Al Sarena") and Merrill Lynch, Pierce, Fenner & Smith ("Merrill Lynch") as defendants. Severson alleged that one of the checks fraudulently obtained by Stanton from him was deposited into a Merrill Lynch account maintained by Al Sarena. The trial court granted a preliminary injunction freezing Severson's funds, totalling $27,314, that had been deposited into Al Sarena's account at Merrill Lynch.

With its answer to Severson's complaint, Al Sarena filed cross-claims against Stanton and Merrill Lynch, alleging that Stanton had forged Al Sarena's indorsement on some checks issued by Merrill Lynch and made payable to Al Sarena. Severson amended his complaint again to add SouthTrust as a defendant, alleging that SouthTrust had breached its contract by honoring the three checks drawn on his account that allegedly bore the forged signature of Severson. Al Sarena amended to add a cross-claim against SouthTrust alleging conversion of checks made payable to Al Sarena and bearing forged indorsements purporting to be Al Sarena's.

The case was tried before a jury. At the close of the evidence, the trial court granted Merrill Lynch's motion for directed verdict as to Al Sarena's cross-claim against it, on the grounds that Al Sarena was a non-qualified foreign corporation doing business in Alabama.

The case then went to the jury, which rendered a verdict in favor of Severson as to the $27,314, which Merrill Lynch had paid into the court. The jury also rendered a verdict in favor of Al Sarena for $1,000, the amount of the first check paid over Stanton's forged indorsement, on its cross-claim against SouthTrust. The trial court entered judgment on the verdict. Al Sarena filed a motion for judgment notwithstanding the verdict or, in the alternative, for new trial on its cross-claims against SouthTrust and Merrill Lynch. The trial court denied those motions, and Al Sarena appeals.

In 1980, Charles McDonald and Dr. Herbert McDonald opened an investment account with Merrill Lynch for Al Sarena, an Oregon corporation of which they were the principal officers and shareholders. Al Sarena was at all times material to this case an inactive mining corporation, its assets consisting essentially of the cash deposited in the Merrill Lynch account in 1980. The McDonalds handled Al Sarena's affairs from an office over a garage behind their residence in Mobile. At the time the account was opened with Merrill Lynch, the McDonalds instructed Merrill Lynch to reinvest all earnings or dividends in other securities. Only the McDonalds had signature authority on the account.

In the early 1980's, the McDonalds engaged Stanton to handle the accounting affairs relating to Al Sarena. At first, Stanton's job consisted of preparing tax returns. Later, he began doing essentially all of the bookkeeping for Al Sarena, including the review and reconciliation of the monthly statements received from Merrill Lynch and from an Oregon bank where Al Sarena's checking account was held.

In April 1983, Stanton began taking advantage of his responsibilities by requesting checks payable to Al Sarena from the Merrill Lynch account, forging Al Sarena's indorsement in blank on the checks, indorsing the checks in his name, and depositing them into his personal checking account with SouthTrust. He also deposited some of the checks into a corporate account that he had established in the name of Tab Sales of Alabama/Mississippi, Inc., a corporation of which he was the principal shareholder. This conduct continued until September 1985 and involved 23 checks totalling $58,424.

The issues raised on appeal concern only Al Sarena, SouthTrust, and Merrill Lynch. Al Sarena argues that SouthTrust is liable for the face amount of the checks paid on forged indorsements, less reimbursements made to Al Sarena.

Ala.Code (1975), § 7-3-419, reads, in pertinent part:

"(1) An instrument is converted when: ...

"....

"(c) It is paid over a forged indorsement.

"(2) In an action against a drawee under subsection (1) the measure of the drawee's liability is the face amount of the instrument. In any other action under subsection (1) the measure of liability is presumed to be the face amount of the instrument.

"(3) Subject to the provisions of this title concerning restrictive indorsements 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."

There is no dispute that the indorsements of Al Sarena on the checks were forged. The parties tried the case under the theory that § 7-3-419(1)(c) governs these facts. It does not, however, because SouthTrust did not "pay" the check within the meaning of the commercial code. See Strickland v. Kafko Mfg., Inc., 512 So.2d 714 (Ala.1987); 6 R. Anderson, Uniform Commercial Code, § 3-419.5 (3d ed. 1984). However, it is true that Al Sarena has a cause of action against SouthTrust for conversion. "The payee may bring a conversion action against the depositary bank in which the forger has his own account in which he deposited the check after forging the payee's name." Id., § 3-419.57 (citations omitted). Such a conversion action lies under the common law through the commercial code's retention of principles of law not specifically displaced. Ala.Code 1975, § 7-1-103; Strickland, supra; 1 R. Anderson, supra, § 1-103.25 (3d ed. 1981). Therefore, absent a legitimate defense, SouthTrust is liable for paying the checks over the forged indorsements.

SouthTrust's asserted defenses hinge upon the question of whether it acted in a commercially reasonable manner in accepting the checks payable to Al Sarena for deposit into Stanton's personal account or into the Tab Sales account. This element of commercial reasonableness appears not only in § 7-3-419(3), quoted above, but also in § 7-3-406, which reads:

"Any person who by his negligence substantially contributes to a material alteration of the instrument or to the making of an unauthorized signature is precluded from asserting the alteration or lack of authority against a holder in due course or against a drawee or other payor who pays the instrument in good faith and in accordance with the reasonable commercial standards of the drawee's or payor's business."

See J. Gordon Neely Enterprises, Inc. v. American National Bank of Huntsville, 403 So.2d 887 (Ala.1981).

In argument to the trial court as to how the jury should be charged, Al Sarena contended that, unless SouthTrust acted reasonably, it could not assert the defense that Al Sarena, through its negligence, substantially contributed to the forgeries and thus is liable for the face amount of the checks deposited with Stanton's forged indorsements.

We note that there is some question as to whether the last clause of § 7-3-406, beginning with "or against a drawee or other payor," applies to SouthTrust at all. SouthTrust is not a "payor bank" as defined in § 7-4-105(b), nor is it a drawee. Although "drawee" is not defined in the commercial code, the drawee is the bank where the account on which the check is drawn is maintained. See, e.g., §§ 7-4-105(b); 7-3-409(1); 7-3-410(1); 7-3-502(1)(b). There is some authority, however, for the proposition that the term "payor" in § 7-3-406 is broader than the term "payor bank." For example, the official comments to that section include the statement, in comment 2, that "The section extends the above principle to the protection [of] a holder in due course and of payors who may not technically be drawees." See also 6 R. Anderson, Uniform Commercial Code, § 3-406:19 (3d ed. 1984); East Gadsden Bank v. First City Nat. Bank of Gadsden, 50 Ala.App. 576, 281 So.2d 431 (1973).

Of course, if SouthTrust is not a "payor" within the meaning of § 7-3-406, it would have to prove itself to be a holder in due course in order to avail itself of the defense of § 7-3-406. In that case, the requirement that it took the checks "[w]ithout notice ... of any defense against" them, § 7-3-302(1)(c), would entail an analysis very similar to that below, in which we discuss the question of whether acceptance of a check to a corporate payee for deposit into a personal account without inquiry is commercially unreasonable as a matter or law. Because the...

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