Trust Co. of Georgia Bank of Savannah, N. A. v. Port Terminal & Warehousing Co.

• Citation: 266 S.E.2d 254,153 Ga.App. 735
• Decision Date: 10 April 1980
• Docket Number: No. 59081,59081
• Court: United States Court of Appeals (Georgia)
• Parties: , 29 UCC Rep.Serv. 587 TRUST COMPANY OF GEORGIA BANK OF SAVANNAH, N. A. v. PORT TERMINAL & WAREHOUSING COMPANY.

Page 254

266 S.E.2d 254

153 Ga.App. 735, 29 UCC Rep.Serv. 587

TRUST COMPANY OF GEORGIA BANK OF SAVANNAH, N. A. v. PORT TERMINAL & WAREHOUSING COMPANY.

No. 59081.

Court of Appeals of Georgia.

Argued Jan. 7, 1980.

Decided Feb. 20, 1980.

Rehearing Denied March 6, 1980.

Certiorari Denied April 10, 1980.

John M. Tatum, Savannah, for appellant.

W. Brooks Stillwell, III, Savannah, for appellee.

CARLEY, Judge.

Appellee-Port Terminal instituted this action against the appellant-bank, alleging a conversion of some eighty-eight checks on which it was the named payee. Code Ann. § 109A-3 419(1)(c). The bank appeals the grant of summary judgment to Port Terminal.

Prior to the events giving rise to the instant action for conversion, Port Terminal had in its employ one Maxine McElveen. Port Terminal discovered that Mrs. McElveen was stealing money and she was arrested. Port Terminal lost approximately $18,000 in Mrs. McElveen's scheme which involved manipulation of the company's bank deposits and forging its checks for deposit to her personal account. When Mrs. McElveen subsequently reimbursed her employer the criminal charges were dismissed. Approximately three years later Port Terminal reemployed Mrs. McElveen. Her duties upon reemployment included picking up the mail, opening the envelopes and distributing the contents, including checks payable to the company, to the appropriate persons in the office. Port Terminal did not maintain an accounts receivable ledger. When payment from its customers was received, Port Terminal employees, including Mrs. McElveen, would stamp the office copy of an invoice as "Paid" and place it in a file. Beginning a short time after her reemployment and continuing for a two-year period, Mrs. McElveen gained possession of some eighty-eight checks payable to Port Terminal, forged the company's endorsement and that of its president, added her own endorsement and then deposited them into her personal checking account with the bank. The bank accepted these checks without questioning the validity of the endorsements and credited Mrs. McElveen's account accordingly. She would then mark the appropriate Port Terminal invoice "Paid" and transfer it to the "Paid Invoice" file.

Port Terminal had its checking account at another bank and received from it a monthly statement. The company had prepared each month an adding machine tape from the "Paid Invoice" file and this tape, check stubs and bank statements were furnished to the bookkeeper on a monthly basis. However, Mrs. McElveen somehow avoided detection until a copy of an invoice was found to be missing and the resulting inquiry exposed her.

After suit for conversion of the checks was filed and discovery made, Port Terminal moved for summary judgment. Its motion was originally denied but upon reconsideration, the trial court, relying on National Bank of Ga. v. Refrigerated Transport Co., 147 Ga.App. 240, 248 S.E.2d 496 (1978), granted the motion.

1. "An instrument is converted when . . . it is paid on a forged indorsement." Code Ann. § 109A-3 419(1)(c). The bank does not contend that the checks were not converted within the meaning of the Code. It did raise, however, certain defenses to the suit and the bank urges on appeal that, even though it would have the burden of proving those defenses at trial, on summary judgment the burden of piercing the defenses was on Port Terminal and that that burden was not met. Kennedy v. Brand Banking Co., 152 Ga.App. 47, 262 S.E.2d 183 (1979).

The bank first urges that the applicability of Code Ann. § 109A-3 404(1) to the facts of the instant case required the denial of Port Terminal's motion for summary judgment. "Any unauthorized signature is wholly inoperative as that of the person whose name is signed unless he ratifies it or is precluded from denying it . . ." The bank argues that even though the forged endorsements on the checks are clearly "unauthorized signatures" (Code Ann. § 109A-1 201(43)) Port Terminal would be "precluded" from denying that its endorsements were authorized. The basis for this argument is that Port Terminal's negligence in rehiring Mrs. McElveen after she had previously stolen checks and money from the company would estop it to deny the forged endorsements. The bank asserts that this defense is available to it under Code Ann. § 109A-3 404(1) and is separate and distinct from the provisions of Code Ann. § 109A-3 406: "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." (Emphasis supplied.) In short, the bank urges that it may assert the negligence of Port Terminal in fostering Mrs. McElveen's forgery scheme as a defense under Code Ann. § 109A-3 404(1) without reference to its own "reasonable commercial standards" in accepting the checks under Code Ann. § 109A-3 406. We do not agree with the bank's interpretation of these two Code sections.

Code Ann. § 109A-3 404 does not, by its own terms, define what is meant by a "preclusion to deny" an unauthorized signature. It is clear, however, that within its meaning the pre-Uniform Commercial Code law of estoppel is operative. Code Ann. § 109A-1 103. Clearly, one's negligence may under the circumstances be a sufficient basis for estopping him to assert certain matters. Brown v. Western Union Tel. Co., 39 Ga.App. 152, 147 S.E. 151 (1928). However, even though the UCC as adopted in Georgia preserves the pre-Code law of estoppel and negligence may be the basis for asserting an estoppel, we are of the opinion that the legislature has modified the doctrine of estoppel by negligence in the commercial paper context through enactment of Code Ann. § 109A-3 406. Thus, when one who has paid an instrument asserts that another is estopped by his negligence from denying that an unauthorized signature on an instrument operates as his own, Code Ann. § 109A-3 404(1), the payor himself must have paid in good faith and in accordance with the reasonable commercial standards of his business. Code Ann. § 109A-3 406. Absent this demonstration of the payor's good faith and adherence to reasonable commercial standards, the payor may not assert that another's negligence substantially contributed to the making of his unauthorized signature and that he is thereby precluded from denying that the signature does not operate as his own. In short, Code Ann. § 109A-3 404(1) does not establish a separate and distinct estoppel by negligence defense for a payor who pays an instrument over a forged endorsement. "The concept of 'precluded' (under Code Ann. § 109A-3 404(1)) embraces both estoppel to deny the agency (of the endorser) and liability based upon neglect as governed by Code (Ann. § 109A-3 406 )." (Emphasis supplied.) 2 Anderson, Uniform Commercial Code 922, § 3-404:4 (2d Ed. 1971). When a payor seeks to estop or preclude another from asserting that his signature on an instrument is forged under Code Ann. § 109A-3 404(1) and the basis for asserting this estoppel or preclusion is the neglect of the one whose "signature" appears, Code Ann. § 109A-3 406 controls. Thompson Maple Pro., Inc. v. Citizens Nat. Bank, 211 Pa.Super. 42, 234 A.2d 32 (1967).

Having determined that Code Ann. §§ 109A-3 404(1) and 109A-3 406 must be read together, we turn to the more difficult question of whether Port Terminal has "pierced" the bank's defense based thereon. Port Terminal argues that it has done so by demonstrating that the bank did not, as a matter of law, pay the checks in question in accordance with the reasonable commercial standards of its business. On this basis, Port Terminal urges that the bank's defense that the company's negligence substantially contributed to the forging of its endorsements is not available. It is clear that Code Ann. § 109A-3 406 provides for such counter-estoppels 2 Anderson, Uniform Commercial Code 941, § 3-406:5 (2d Ed. 1971), and if the evidence demonstrates the bank's lack of adherence to reasonable commercial standards in paying the checks, Port Terminal's negligence may not be asserted by the bank. In concluding that this defense was not available to the bank, Port Terminal and the trial court relied on National Bank of Ga. v. Refrigerated Transport Co., 147 Ga.App. 240, 248 S.E.2d 496, supra. In that case, this court, reviewing the grant of judgment n. o. v. to the payee of checks which were deposited to the account of the payee's agent, held: " 'The indorsements were irregular enough on their face to raise some question as to their validity; and certainly when the checks were offered for deposit into the general corporate checking account of one not the payee, (the bank) had a duty to inquire to ascertain...