The matter of the
altered check in the Stephen’s Boats/East Dade Bank/Harold stolen check
scenario seems relatively straightforward on its face: Harold stole Jerry’s $850.00 paycheck; raised
it to $8,500; crossed out Jerry’s restrictive indorsement; forged Jerry’s
signature and received $8,500.00. As
discussed in the memorandum [October 15, 2015 post], East Dade, as the
depository bank must see that the proceeds from the check are ‘received by the indorser or applied
consistently with the indorsement per Section 3-206(c)(2). Neither happened, and hence the East Dade is
liable for conversion.
The bank’s liability for conversion
however, does not end the inquiry. Section 3-406 provides an opportunity for
the bank to produce evidence showing that Stephen or Jerry ‘failed to exercise
ordinary care’ which contributed to the alteration. If proven, Section 3-406(a)
can be used to preclude the culpable party from asserting the alteration. That section states as follows:
(a) A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is
precluded from asserting the alteration or the forgery against a person who,
in good faith, pays the instrument or takes it for value or for collection.
Ordinary care’ is a defined
term:
"Ordinary care" in the case of a person
engaged in business means observance of reasonable commercial standards,
prevailing in the area in which the person is located, with respect to the
business in which the person is engaged. In the case of a bank that takes an instrument for processing for collection or payment by automated means,
reasonable commercial standards do not require the bank to examine the
instrument if the failure to examine does not violate the bank's prescribed
procedures and the bank's procedures do not vary unreasonably from general
banking usage not disapproved by this Article or Article 4. Section 3-103(a)(9).
The first sentence to
Section 3-103(a)(9) explicitly requires ‘the observance of reasonable
commercial standards’. However, it is
also explicitly clear that these standards are not universal; rather, they are
to be judged by business practices ‘prevailing in the area in which the person
is located’. Therefore, what might be
required to satisfy ‘reasonable commercial standards’ in San Francisco might be
substantially different than those required in Bakersfield.
The second sentence
to Section 3-109(a)(3) excuses a bank from examining an instrument if three criteria
are met:
1. The bank is processing checks via
electronic means [automated];
2. The processing of the item in question,
through automated means, does not violate the prescribed procedures of the
bank;
3. The procedures utilized by the bank ‘do not vary unreasonably from
general banking usage’ and are not disapproved by Article3 or Article 4.
In order for a person to
invoke Section 3-406, it must be prepared to demonstrate that it took the
instrument for value. In good faith, and in accordance with reasonable
commercial standards [per Sections 3-406(a) and 3-103(a)(9). If activated, and the bank does not meet that
burden, it will not be entitled to assert the defense of Section 3-406(a)
against any person who was negligent within that section, regardless of a
‘substantial contribution’ or lack thereof.
The
question of ‘commercially reasonable behavior’ by a person who pays the
instrument or who takes it for value or for collection can arise in a variety
of ways. On the one hand, it could be something as narrow as the procedures
used in cashing a check over the counter.
On the other continuum, it might involve a requirement by the bank to
undertake an affirmative duty to follow the terms of a customer/bank agreement.
Or, as indicated by the court, it might involve a requirement to inquire
further which has been activated by the particular facts of the case. Such was the situation in Apcoa, Inc. v. Fidelity National Bank
506 F.2d 158 (11th Cir., 1990) 12 UCC Reptr. 158 (1990).
Before
presenting the summary of the facts, I would like bring up a point concerning
human behavior, and questions often raised by students. I believe that you will see that commercial
behavior of certain bank personnel in Apcoa
is so far out of line with commercial reasonableness, that you might
ask ‘How can this happen?’ It happens
because all of the scenarios are played out by humans. For example, personal relationships may form
that, consciously or unconsciously, eliminate the scrutiny which should
accompany every transaction.
Institutionally, the bank failed by not having appropriate procedures in
place which would have made the embezzlements far less likely.
In
Apcoa , plaintiff was in the business of managing parking
facilities throughout the United States.
Apcoa’s home office was in Cleveland Ohio with field offices in
Atlanta. Primary payment activities,
such as payroll, were conducted through the main office in Cleveland and the Cleveland
banks. Banking arrangements were
maintained with several Atlanta banks as well, with the primary purpose of
these arrangements to facilitate the transfer of funds from Atlanta to the home
office. Payroll and other business
expenses were paid from the Cleveland banks.
In
the summer of 1982, Apcoa’s regional manager and vice president decided to
change banks due to dissatisfaction with C
& S Bank of Atlanta and changed Apcoa's Atlanta banking accounts to
Fidelity National Bank. In June of 1982, an account was opened at Fidelity
which was to be used for petty cash expenses in the Atlanta offices. In August of 1982, two more accounts were
opened, the purpose of which were to act as depositories for proceeds from the
business.
In
connection with the opening of these accounts, corporate resolution papers,
including a Designation and Authorization Form, were sent from Apcoa to
Fidelity. Among other things, the
Designation and Authorization form stated under what circumstances items could
be properly withdrawn from the Apcoa account, and the procedure to be followed
for opening Apcoa accounts. All
authorized signatures were individuals who were located at the Cleveland
office.
Despite
the foregoing, probably fired Doris Moore, opened an account at Fidelity
entitled: ‘Apcoa—Special Account’. in September of 1982. In May of 1983, another account was opened
by the embezzler Dolly Ison entitled:
Dolly Ison for Apcoa. Before it
ended, Dolly had netted about $260,000. Doris
allowed Dolly to deposit parking lot revenues into the two illegal accounts,
despite knowing that this was in contravention of the agreement between
Fidelity and Apcoa.
At the
trial court, Fidelity attempted to use Section 3-406 [pre-2002 amendment, but
identical for the point being raised here], apparently asserting negligence on
the part of Apcoa in allowing the scheme to take place. Before entertaining any theories against
Apcoa, the court addressed the behavior of the bank. If that behavior was not commercially reasonable, the inquiry ends there.
The
trial court concluded that the behavior of Fidelity was commercially
unreasonable as a matter of law. In affirming
the trial court, the 11th Circuit Court of Appeals stated as
follows:
Fidelity first asserts that the district court erred in finding their
conduct commercially unreasonable as a matter of law. Applying the general
principles associated with the defense of commercial reasonableness, this Court
must disagree. After careful consideration of the undisputed facts and
circumstances that occurred in connection with the two accounts used for the
embezzlement, we hold that Fidelity cannot avail itself of this defense as a
matter of law. The district court correctly noted that Fidelity was responsible
for three acts which provided the system for the embezzlement scheme: (1) the
opening of the unauthorized accounts, (2) the deposit of checks payable to Apcoa
into these accounts, (3) the acceptance of checks written on these accounts on
the single signature of Dolly Ison.6Additionally the district court noted that if Fidelity had prevented any
of the above acts, the embezzlement scheme would have been stopped.
Fidelity's conduct was not in accordance with reasonable commercial
standards where a reasonable person would have been on notice of some
impropriety appearing from the form of the instrument and its endorsements or
from knowledge of the facts outside the instrument itself. Trust Company Bank,
266 S.E.2d at 258.
The
case is important for several reasons.
First, it underscores the importance of the agreement between the bank
and the customer, particularly in the commercial context. This in turn activates Section 4-103 which
deals with agreements between a bank and its customer. Both of which activate everything discussed
in connection with the definition of ‘Agreement’ under Article 1
Second, and in
connection with the foregoing, it underscores the need to have procedures in
place which make the execution of the scheme much less likely to get
launched. If for example, Doris had been
required to execute a check list, and one of the terms was a directive to
follow all agreements between the bank and the customer, it might have been
enough to show Doris there was a downside in opening accounts like the ones in
Apcoa.
Third, the final
comment of the court quoted above indicates that bank employees are accountable
for facts ‘outside the instrument itself.’
This language opens many possibilities, particularly in discovery. How far ‘outside’ the instrument can one
go? Are the outside facts limited to
commercial matters? Could this include personal matters which might be
interfering with a person’s ability to perform? A creative advocate could use
the court’s language very effectively.
No comments:
Post a Comment