Winkie, Inc. v. Heritage Bank of Whitefish Bay, 77-404

• Decision Date: 13 December 1979
• Docket Number: No. 77-404,77-404
• Citation: 285 N.W.2d 899,92 Wis.2d 784
• Parties: , 28 UCC Rep.Serv. 145 WINKIE, INC., Plaintiff-Appellant, v. HERITAGE BANK OF WHITEFISH BAY, Defendant-Respondent.
• Court: Wisconsin Court of Appeals

Page 899

285 N.W.2d 899

92 Wis.2d 784, 28 UCC Rep.Serv. 145

WINKIE, INC., Plaintiff-Appellant, v. HERITAGE BANK OF WHITEFISH BAY, Defendant-Respondent.

No. 77-404.

Court of Appeals of Wisconsin.

Argued Jan. 24, 1979.

Opinion Released Oct. 12, 1979.

Opinion Filed Oct. 12, 1979.

Review Granted Dec. 13, 1979.

James C. Schalow, Milwaukee, for plaintiff-appellant.

Gregory Gramling, Jr., Milwaukee, for defendant-respondent.

Before DECKER, C. J., and ROBERT W. HANSEN and LEWIS J. CHARLES, Reserve Judges.

DECKER, Chief Judge.

The plaintiff, Winkie, Inc., is a commercial enterprise and Wilbur J. Winkie, Jr., is its president. Winkie, Inc., maintained a checking account in the Heritage Bank of Whitefish Bay. Although several persons were authorized to sign checks, W. J. Winkie Jr., was the only person who ever signed checks drawn upon the account.

Doris Britton, a secretarial employee of Winkie, Inc., recorded invoices for supplies and services rendered to the company, and presented the invoices and checks drawn upon the account in payment of the invoices to W. J. Winkie, Jr., for review of the invoices and execution of the checks. In the years 1965 to 1973, Doris Britton forged the signature of W. J. Winkie, Jr., to hundreds of checks totaling $148,171.30 drawn upon the Winkie, Inc., account. In addition to forging the signature of W. J. Winkie, Jr., Doris Britton forged the indorsements of the payee on many of the checks.

None of the payees of the checks supplied services or materials to Winkie, Inc., for which the forged checks were payment, and Winkie, Inc. neither intended payment nor received benefit of any kind by reason of the issuance of the checks. Doris Britton directly or indirectly received all of the proceeds of the forged checks.

In 1973, after approximately eight years of repeated forgeries, W. J. Winkie, Jr., discovered a forged check and immediately notified the bank. During the eight-year period, W. J. Winkie, Jr., did not personally examine the Winkie, Inc., checks nor reconcile the bank statements of the account. Another Winkie, Inc. employee, not alleged to be involved in the systematic forgeries, was assigned those duties. Winkie, Inc., utilized the services of a certified public accountant, but such services did not expressly include bank statement reconciliation or an audit. Thus, the bank account examination and reconciliation was left to a single unsupervised Winkie, Inc. employee.

The trial court, in an exhaustive opinion in which it detailed the evidence adduced at trial, found that Winkie, Inc., was negligent because of its obvious failure to examine the checks drawn on the bank account. In arriving at that conclusion which was supported by overwhelming and virtually undisputed evidence, the trial court properly relied upon the duty expressed in Wussow v. Badger State Bank, 204 Wis. 467, 471, 234 N.W. 720, 721 (1931) that a depositor is obligated to "examine his checks and the statement and discover whether the balance stated was correct and whether any forgeries were included and report any discrepancies in balance and any forgeries to the bank at once." Our supreme court again indorsed the view that the "duty (to examine the bank checks and statement) is violated when (the depositor) neglects to do those things dictated by ordinary business customs and which, if done, would have prevented the wrongdoing." Huber Glass Co. v. First Nat. Bank of Kenosha, 29 Wis.2d 106, 111, 138 N.W.2d 157, 160 (1965). ¹ (Footnote omitted.)

In a case similar to this, Huber noted that "(m)odern business practice dictates at least some semblance of internal control" ² and criticized "blind reliance on a single employee." ³ Winkie, Inc., disputes the trial court's negligence finding and contends that assigning the bank statement reconciliation to another employee and the employment of the C.P.A. was the kind of internal control that was absent in the Huber case. We disagree because the C.P.A. was not assigned those duties and for the further reason that the "other employee" was the sole employee to which internal control was assigned. Although there was misplaced reliance upon Doris Britton, that reliance was solely upon the honest performance of her duties in presenting invoices and preparing checks in payment of appropriate invoices. She was not relied upon to exercise internal control over disbursements from the bank account to comply with the duty of Winkie, Inc., to its bank.

W. J. Winkie, Jr., testified that Britton's forgery of his signature was so skillful that he could not be certain whether or not he signed the check, identified as Exhibit 4. We find no merit in the contention of Winkie, Inc., that failure to examine the checks was inconsequential because the forged signature was undetectable. The forger's skill in executing the purported drawer's signature on one check or even many checks is but one aspect of the "semblance of internal control" that will aid in the detection of forgeries, and not the sole form of negligent conduct of a depositor.

The second dispositive finding by the trial court was that the Heritage Bank of Whitefish Bay was not negligent in paying the forged checks and charging them to the account of Winkie, Inc.

Winkie, Inc., contends that the bank was negligent for failing to inquire about the circumstances concerning the issuance of several of the forged checks in which the Heritage Bank of Whitefish Bay was the payee and the check proceeds were applied to Doris Britton's indebtedness to that bank. In its contention, Winkie, Inc. relies upon the responsibility of a bank to inquire when a fiduciary makes withdrawals by check from his fiduciary account in a bank and applies them directly to his personal indebtedness to the bank. Schneider Fuel v. West Allis State Bank, 70 Wis.2d 1041, 236 N.W.2d 266 (1975). Reliance upon Schneider is misplaced because Doris Britton was not a fiduciary, and if she were, it was not known by, or apparent to, the bank.

Another Winkie, Inc., contention is that the bank was negligent in not properly examining the forged checks to ascertain the payee and whether there was alteration of the instruments. Our review of the record leads us to conclude that the evidence supports the trial court's conclusion that the bank fulfilled its duty under secs. 403.102(1)(b) and 403.110(1), Stats., to properly ascertain the payee and the payment order without negligence on its part.

The last and most complex of the contentions of Winkie, Inc., that the bank was demonstrably negligent, is grounded upon the evidence that the bank, in posting the presented checks to the account of Winkie, Inc., failed to examine those checks to ascertain whether the checks were properly indorsed. The evidence establishes that one of the forged checks was paid by the bank, although there was no indorsement by the payee. Additionally, an employee of the bank testified that it was the bank's policy not to examine a check to ascertain the existence of a proper indorsement unless the check was for $1,000 or more.

There is a multifaceted significance to this contention and its relationship to the other issues that we have addressed. First, if Winkie, Inc., was not negligent in its failure to discover the forged checks then the bank would bear the liability for paying the forged checks because it honored unauthorized payments from the depositor's account. That result is commanded by the common-law doctrine established in Price v. Neal ⁴ and codified successively in the Negotiable Instruments Law ⁵ and the Uniform Commercial Code. ⁶ Second, if Winkie, Inc., was negligent, as determined by the trial court and confirmed by this court, such negligence does not bar its recovery from the bank if the latter was also negligent. ⁷ Third, if Winkie, Inc., can recover because the bank is also negligent, the appropriate application of the "twin" statute of limitations ⁸ is presented. Section 404.406(4) Stats., prescribes a one-year statute of limitations on recovery by a depositor from a bank for an improper charge against its account arising from the forgery of the drawer's signature, and also prescribes a three-year statute of limitations on recovery from the bank by reason of its negligence in failing to discover forged indorsements. Because of the different limitation periods, further complications appear to be presented. For example, are the limitation periods in the case of "double forgeries" ⁹ mutually exclusive or inclusive? Are the periods of limitation to be "tacked"? In a double-check forgery, is the failure of the bank to ascertain whether the check is appropriately indorsed relevant to whether the loss should be borne by the depositor or the bank?

We were troubled by the applicable limitations period and the loss-causation questions which were not discussed in the parties' original briefs. Consequently, we ordered briefing of those questions. Our research has led us to the conclusion that the loss-causation rationale resolves the concluding issue of this case.

Although the trial court found that the bank was not negligent in failing to examine the forged checks for proper indorsements, we, nonetheless, assume for the purposes of this case, that systematic failure to examine checks in amounts under $1,000 for proper indorsements constituted a negligent breach of its duty to ascertain whether the checks were "properly payable" and therefore, chargeable against the depositor's account pursuant to sec. 404.401(1), Stats. In this respect we detect a perceptible shift in the thrust of the argument made to us from that addressed in the trial court's opinion. The evidentiary thrust at trial on this issue was directed to alterations to the checks. Upon the basis of the evidence, the trial court rejected the position of Winkie, Inc. The latter's contention now under consideration is framed in terms of negligence as a matter of law for failure to examine the checks for...