Opinion ID: 2052009
Heading Depth: 1
Heading Rank: 3

Heading: Whether the Bank Acted in Accordance with Reasonable Commercial Standards.

Text: The district court also found that the Bank was not protected from liability for conversion under the Iowa UCC because it had not acted in accordance with reasonable commercial standards. The court said that the Bank did not act under a reasonable commercial standard because at no time did it ever examine its own records to determine what was the authority of the manager in handling the account. The Bank asserts that this conclusion was erroneous. We again disagree. Iowa Code section 554.3419(3) provides that [s]ubject to the provisions of this chapter 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 that representative's hands. (Emphasis added.) The Bank characterizes its acts as commercially reasonable and claims it should be protected from liability under section 554.3419(3). According to the Bank, nothing in its records indicated whether Rosendahl had authority to cash customer checks, and the indorsements on some of the checks were made with a stamp containing no restriction. In addition, Rosendahl offered a plausible explanation for his need for cash: making C.O.D. purchases for Waukon Auto. The Bank contends that in light of these facts, it was commercially reasonable for the Bank to cash checks for Rosendahl. We have never addressed the issue of commercial reasonableness under the Iowa UCC. But other courts looking at this issue have generally held that a payee could recover for conversion where there has been some circumstance ... which should have alerted the bank to the possibility of an unauthorized indorsement, but the bank failed to make any inquiry. Annotation, Payee's Right of Recovery, in Conversion under UCC § 3-419(1)(c), for Money Paid on Unauthorized Indorsement, 23 A.L.R.4th 855, 859 (1983). An example of a circumstance that should put a bank on inquiry notice is presentment by an individual of a check payable to a corporation but indorsed by the individual for deposit to his own account. Id. Conversely, in the absence of such circumstances, courts have concluded that the bank acted reasonably and thus that the payee failed to establish a right to recover. Id. The question, then, is whether any circumstances would have alerted a bank acting in a commercially reasonable manner that Rosendahl's authority to cash checks was in doubt, thus giving rise to a duty to inquire. According to one court, the test to be applied when resolving this fact question is whether a reasonable [person] in accordance with reasonable commercial standards would be put on notice of some impropriety appearing either from the form of the instrument and its indorsements or from knowledge of facts outside the instrument itself. Trust Co. of Ga. v. Port Terminal & Warehousing Co., 153 Ga.App. 735, 740, 266 S.E.2d 254, 258 (1980) (citing 2 Anderson, Uniform Commercial Code § 3-406:5, at 941 (2d ed. 1971)). Another court, addressing the issue of what a reasonable commercial standard would be when an agent attempted to cash a check payable to the principal, said that it has been judicially recognized in many adjudicated cases that one who cashes a check indorsed by an agent has the duty to inquire as to the agent's authority to make the indorsement.... [T]he duty to inquire is not absolute; the payor may rely upon the apparent authority of the agent.... Gresham State Bank v. O & K Constr. Co., 231 Or. 106, 120-21, 370 P.2d 726, 733 (1962). The form of the instruments should have suggested to the Bank that more investigation was needed before cashing checks for Rosendahl. Here, the instruments in question were in the form of customer checks payable to Waukon Auto. Such a form clearly indicates that Rosendahl's authority over the checks was to be defined by Waukon Auto's owner. If the Bank felt that Anderson, the owner, had not clearly defined that authority, for example by corporate resolution, it should have inquired. It was not commercially reasonable to simply assume that Rosendahl had authority to cash checks, when such an assumption was completely inconsistent with Anderson's expressed intent regarding Rosendahl's authority over the checking account. The form of the indorsements on some of the checks should also have given the Bank pause. Some indorsements were handwritten, which should have looked odd for any business check, especially when the business in question was known to indorse its checks normally with a rubber stamp. Finally, Rosendahl's practice of sending Barr, an employee without managerial responsibilities, to cash customer checks certainly should have raised some suspicion on the part of the Bank, especially because Barr had signed her own name on the checks. In summary, we think that enough ambiguity existed regarding Rosendahl's authority to give rise to a duty to inquire. The district court was correct in concluding that the Bank acted unreasonably in failing to make such an inquiry. The Bank also argues that Waukon Auto failed to present evidence showing that the Bank acted in a commercially unreasonable manner. We reject this argument for two reasons. First, the Bank cites no authority for the proposition that Waukon Auto has the burden of presenting such evidence. Second, as Waukon Auto points out, the district court can properly take judicial notice of reasonable commercial standards, which Waukon Auto asked it to do here. Cf. Gresham State Bank, 231 Or. at 120-21, 370 P.2d at 733 (it has been judicially recognized in many adjudicated cases that one who cashes a check indorsed by an agent has the duty to inquire as to the agent's authority to make the indorsement). Significantly, the only evidence of commercial standards presented by the Bank was the testimony of one of its officers, which was predictably self-serving. No written standards were cited.