Starkey Const., Inc. v. Elcon, Inc.

• Decision Date: 15 June 1970
• Docket Number: No. 5--5199,5--5199
• Citation: 457 S.W.2d 509,248 Ark. 958
• Parties: , 248 Ark. 978A, 7 UCC Rep.Serv. 923 STARKEY CONSTRUCTION, INC. and Maryland Casualty Co., Appellants and Cross- Appellees, v. ELCON, INC., First National Bank in Little Rock, First State Bank and Trust Co. of Conway, and Graybar Electric Co., Inc., Appellees and Cross-Appellants.
• Court: Arkansas Supreme Court

Page 509

457 S.W.2d 509

248 Ark. 958, 248 Ark. 978A, 7 UCC

Rep.Serv. 923

STARKEY CONSTRUCTION, INC. and Maryland Casualty Co. Appellants and Cross- Appellees, v. ELCON, INC., First National Bank in Little Rock, First State Bank and Trust Co. of Conway, and Graybar Electric Co., Inc., Appellees and Cross-Appellants.

No. 5--5199.

Supreme Court of Arkansas.

June 15, 1970.

Rehearing Denied Sept. 21, 1970.

Guy Jones and Phil Stratton, Conway, Patten & Brown, Little Rock, for appellants and cross-appellees.

Smith, Williams, Friday & Bowen, by George Pike, Jr., Cockrill, Laser, McGehee, Sharp & Boswell, Little Rock, for appellees and cross-appellants.

HARRIS, Chief Justice.

Starkey Construction, Inc., one of the appellants herein, hereafter called Starkey, was low bidder as general contractor for two Arkansas Power and Light Company projects, one a service center in Arkadelphia and one an office building in Conway. Maryland Casualty Company, Starkey's bondsman, is the other appellant. Elcon, Inc., was given a subcontract on both jobs, being required to furnish labor, electrical, and mechanical materials for the Arkadelphia job, and to furnish electrical and labor for the Conway project. The subcontract for Arkadelphia was let on October 10, 1967, for $79,882.00, plus $114.25 later added; on November 7, 1967, the Conway subcontract for $38,912 was let. Elcon was unable to acquire a payment and performance bond for either contract, having reached its bonding limit on other jobs.

Elcon purchased materials from various companies, and furnished labor for the two jobs, and these materials and labor were to be paid by Elcon, which received periodic progress payments as required by the contract. Each progress payment was computed to pay for 90% of the 'completed work and materials stored on site' as of the 25th of each month. The first progress payment on the Arkadelphia job was received on December 5, and thereafter progress payments were made at approximate intervals of thirty days until June 26, 1968, such payments totalling $96,748.89. All Starkey checks except one for $1,661.00, were joint payee checks i.e., the checks were made out to Elcon and some of the suppliers, some of the checks including as many as six payees, and the rest in varying numbers. Starkey's bank was the First State Bank and Trust Company of Conway, and Elcon's bank was the First National Bank in Little Rock. When the joint payee checks were presented and honored against Starkey's account in the First State Bank, all bore one or more forged endorsements. Relative to the Arkadelphia job, $70,339.25 in Starkey checks bore unauthorized or forged endorsements, and $22,994.00 of total progress payments totalling $26,305.00 on the Conway job bore forged endorsements. When the various progress payments were received by Jerry Lee, General Manager of Elcon at the time of the execution of the contracts, (subsequently elected president in February 1968), he endorsed one or more of the suppliers' names to the checks before taking them to the First National Bank. However, each supplier except Graybar Electric Company was paid the amount due by Elcon. The bank had previously made loans to Elcon for job operating expenses, and had secured said loans by assignment of invoices in most instances. When the progress payment checks were presented at the bank and cashed, Lee would apply part of the proceeds to the indebtedness due the bank by his company. The records reflect that after some of the loans were satisfied in full, additional loans would be made, and these were handled in the same manner. The final check given by Starkey which is involved in this litigation, was a progress payment made on the Conway job and was in the amount of $6,287.00, said check being dated June 26, 1968. This instrument likewise bore a forged signature, that of Mike Matula, and when it was presented to First National, was applied by the latter to indebtedness due it by Elcon. Starkey, who had just found out about the forgeries on the progress payment checks, learning that Matula's name had also been forged, notified his bank, First State Bank and Trust Company of Conway, that he was stopping payment on this check. Following this event, Elcon ceased operations, and the completion of the job was taken over by Starkey (as of July 1, 1968), appellant expending $38,948.60 to complete the Elcon contracts. Of this amount, Starkey would have owed Elcon $22,000 if the latter had completed the job; accordingly Starkey spent $16,948.60 of its own money in the completion.

In November, 1968, after notice of an intent to file liens on Arkansas Power & Light Company properties by Graybar, Starkey instituted suit in the Faulkner County Chancery Court naming Elcon, both banks, and all known possible unpaid labor and material suppliers of Elcon, seeking an accounting and adjudication of rights between all parties.

Consent judgments were entered for all materialmen except Loren Cook Co., ¹ and Graybar, and these judgments were satisfied by Starkey. After the filing of numerous pleadings, the court heard evidence on behalf of all parties, and entered its decree on June 4, 1969, findings pertinent to the appeal now before us, being as follows;

'It is, therefore, considered, ordered and decreed that: (1) That the pleadings are amended to conform to the proof. (2) Graybar Electric Company have judgment against Starkey Construction, Inc., and Maryland Casualty Company in the sum of $19,648.17 together with interest thereon at 6% per annum from August 1, 1968 until paid: (3) Starkey Construction Company have judgment against the First State Bank in Conway in the amount of $7,244.18: (4) that First State Bank, Conway, have judgment against the First National Bank in Little Rock for $7,244.18: (5) that the First National Bank in Little Rock have judgment against Starkey Construction, Inc. in the amount of $5,428.52: (6) all other claims among Starkey Construction, Graybar, First State Bank and First National are dismissed: (7) That Starkey Construction, Inc. have judgment against Elcon, Inc. in the amount of $23,827.40, and upon payment by Starkey Construction, Inc. or Maryland Casualty Co. of the judgment awarded Graybar Electric Company herein, jurisdiction is retained for judgment over against Elcon, Inc. for the sums paid:'

Each of the judgments bore interest at the rate of 6% per annum from the date of decree and the court ordered that costs be borne equally by Graybar, Starkey and First National Bank. From the decree so entered, appellants bring this appeal. The two banks have cross-appealed from the judgments entered against them respectively. For reversal, appellants assert four points, as follows:

I

The Court erred in not awarding Starkey judgment against First State Bank for $93,337.89.

II

Alternatively, the court erred in not declaring First National Bank to be constructive trustee for $31,604.29 for payment of materialmen.

III

The court erred in awarding Graybar Electric Company judgment for $19,648.17 against Appellants.

IV

The court erred in holding First National Bank to be a holder in due course of the June 26, 1968, check of $6,287.00.

The cross-appeal relates to point three, the banks contending the Court erred in awarding Starkey a judgment against them for $6,814.41, this judgment being based upon checks wherein Graybar was a payee. We proceed to a discussion of each point.

I

This contention is based upon the provisions of Ark.Stat.Ann. 85--3--419 (1961 Addendum). Subsection (1)(c) provides that an instrument is converted when it is paid on a forged endorsement. Subsection (2) provides that in an action against a drawee, the measure of the drawee's liability is the face amount of the instrument. Appellants point out the comment on these two subsections, as follows:

'3. Subsection (1)(c) is new. It adopts the prevailing view of decisions holding that payment on a forged indorsement is not an acceptance, but that even though made in good faith it is an exercise of dominion and control over the instrument inconsistent with the rights of the owner, and results in liability for conversion.

'4. Subsection (2) is new. It adopts the rule generally applied to the conversion of negotiable instruments, that the obligation of any party on the instrument is presumed, in the sense that the term is defined in this Act (Section 1--201), to be worth its face value. Evidence is admissible to show that for any reason such as insolvency or the existence of a defense the obligation is in fact worth less, or even that it is without value. In the case of the drawee, however, the presumption is replaced by a rule of absolute liability.' ²

It is thus appellants' argument that the forged endorsements of one or more payees upon Starkey's checks (totaling $93,337.89) destroyed their negotiability, and the drawee-payor bank wrongfully debited Starkey's account. We find no merit in this contention, for it is agreed that all of the suppliers whose names were forged on the checks, except Graybar, were paid the money due them from the proceeds of each progress payment, notwithstanding the fact that they did not themselves endorse the checks.

Lee testified that he endorsed the names of various payees only in order to expedite the cashing of the checks; for instance, on checks in excess of $500.00, where Graybar was a payee, it would have been necessary to obtain the endorsement from the St. Louis office.

We cannot believe that it was the intent of the General Assembly to hold a drawee (the bank) liable where the money actually reached the parties intended by the drawer of the check.

The Chancery holding which denied Starkey recovery against the bank to the extent the money actually reached the payees appears to be the general rule in this country, and is so stated in 10 Am.Jur.2d, Banks § 625, as follows:

'It is generally held that a drawer will be precluded from recovering from the drawee bank...