Opinion ID: 1288552
Heading Depth: 1
Heading Rank: 6

Heading: Commercial Reasonableness of the Defendant Bank's Conduct

Text: In its most crucial conclusions of law, the circuit court found the defendant acted in good faith, and in accordance with reasonable commercial standards applicable to the business of the bank. On the other hand, the circuit court found the plaintiff was negligent in exercising reasonable control and supervision over its employee, failing in a timely manner to review its statements of account with the defendant, and failing to promptly notify the bank when it first became aware of the breach by one of its employees and its potential claim against the bank. Thus, the defendant argues the plaintiff is barred by its own negligence from pursuing its claim. [8] W. Va.Code § 46-3-406 (1963), states: Any person who by his negligence substantially contributes to a material alteration of the instrument or 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. W. Va.Code § 46-3-406 sets up an estoppel and counter-estoppel situation. A person is barred or precluded from asserting that a signature on an instrument was unauthorized, if by his or her negligence he or she has substantially contributed to the unauthorized signature. However, in order to use this defense, a bank must establish that it acted according to the reasonable commercial standards of the banking business when it allowed the corporate checks to be deposited in an individual account. In re Lou Levy & Sons Fashions, Inc., 988 F.2d 311, 314 (2nd Cir.1993); Am. Mach. Tool Distribs. Ass'n v. Nat'l Permanent Fed. Sav. & Loan Ass'n, 464 A.2d 907, 911-12 (1983). Official Comment 6 to W. Va.Code § 46-3-406 sheds light on what is meant by reasonable commercial standards: [A]ny bank which takes or pays an altered check which ordinary banking standards would require it to refuse cannot take advantage of the estoppel. Thus, in order to determine whether the bank may assert the affirmative defense of negligence on the part of the plaintiff, we must consider whether ordinary banking standards would require the defendant to refuse to deposit the checks in question to Mr. Kampanos's personal checking account. The defendant contends it was commercially reasonable to accept the checks for deposit because Jim Kampanos had authority to cash them for two reasons: (1) They were payable in the alternative to either Public Citizen or Jim Kampanos, and (2) Jim Kampanos was clothed with authority to act on behalf of Public Citizen with respect to the Tucker Anthony account. The checks were made out to Public Citizen, Inc. Attn Jim Kampanos. The defendant argues that the language of the checks is ambiguous and, therefore, they were payable in the alternative. The defendant erroneously relies on the 1993 amendment to W. Va.Code § 46-3-110(d) (1993) which states, in part: If an instrument payable to two or more persons is ambiguous as to whether it is payable to the persons alternatively, the instrument is payable to the persons alternatively. As we stated, because the transactions forming the basis for this case occurred in 1989, we must analyze the claim under the statute as it was before the 1993 revisions. Under the pre-1993 U.C.C., it is only when the check clearly identifies alternative payees that either payee may endorse and negotiate the check. [9] See Midwest Indus. Funding v. First Nat'l Bank, 973 F.2d 534, 537 (7th Cir.1992) (when a check names two payees, they are joint payees unless it is expressly stated that they are payees in the alternative); Peoples Nat'l Bank v. Am. Fidelity Fire Ins. Co., 39 Md.App. 614, 386 A.2d 1254 (1978) (check which was made payable to two payees without including the words and or or between the payees' names was made payable to both and could be negotiated only with the endorsements of both payees); C.H. Sanders Const. Co. v. Bankers Trust Co., 123 A.D.2d 251, 506 N.Y.S.2d 58 (1986) (when a check is ambiguous as to whether payees are joint or alternative, it will be construed as payable jointly in order to give each payee the maximum protection by requiring the endorsement of both payees to negotiate the paper). The plaintiff argues that because this case is governed by the pre-1993 statute, the circuit court's finding of ambiguity supports the position that the checks were not payable in the alternative. We agree. We find that under the U.C.C. as it existed prior to the 1993 revision, the checks were payable jointly and, therefore, required the signatures of both parties in order to be negotiated. The defendant next argues that it acted in accordance with commercially reasonable standards when it accepted the checks because Mr. Kampanos had been clothed with authority to act on behalf of Public Citizen, Inc. with respect to the Tucker Anthony account. In support of this contention, the defendant introduced into evidence letters written between Jim Kampanos and a representative of Tucker Anthony regarding Public Citizen's investment accounts with Tucker Anthony. However, these letters could not have influenced the bank's actions with respect to the checks because the defendant was not aware of these letters until it received them as a product of discovery during litigation. The defendant also cites the fact that Public Citizen named Jim Kampanos as treasurer in December, 1989. That argument also fails because the transactions took place between July and September, 1989, well before Mr. Kampanos was appointed treasurer. The circuit court found the bank employees believed Mr. Kampanos had authority to deposit the checks in his account. However, subjective belief is not enough. The defendant was obligated to take steps to inquire as to Mr. Kampanos's authority. One who deals with an individual purporting to be an agent of another is bound at his own peril to know the authority of such alleged agency. John W. Lohr Funeral Home, Inc. v. Hess & Eisenhardt Co., 152 W.Va. 723, 731, 166 S.E.2d 141, 146 (1969). William Goodrich, corporate representative for the defendant, testified in a deposition that the defendant depended on the words Attn Jim Kampanos to conclude that Mr. Kampanos had authority to endorse and deposit the checks; that the bank did not have anything on file indicating Jim Kampanos and Public Citizen, Inc. were one and the same; and that bank employees did not know who Public Citizen, Inc. was at the time the checks were accepted for deposit. Rebecca Corder, the teller who accepted the $14,582.00 check endorsed by Jim Kampanos with both his name and Public Citizen, Inc., testified that she did not inquire as to Jim Kampanos's authority to deposit the check into his personal account because he was a known customer. Ms. Corder also testified that she would not have accepted the other check (for $12,225.00) because it did not have an endorsement for Public Citizen, Inc. [10] Thus, according to representatives for the defendant, the defendant merely assumed Mr. Kampanos had authority to deposit a corporate check to his personal account and did not take any steps to ascertain his authority. In addition, Ms. Corder indicated that it was against proper banking policy to accept the check which did not contain an endorsement for Public Citizen. Several courts have held as a matter of law that it is commercially unreasonable for a bank to accept for deposit in an individual account a check made payable to a corporation, without first ascertaining, or at least inquiring as to, the authority of the depositor/endorser. [Citations omitted.] Other courts have taken judicial notice that a bank is required to at least inquire as to the reason and authority for depositing a check with a corporate payee into a third party's account. Am. Mach. Tool Distribs. Ass'n, 464 A.2d at 913-14 (allowing employer's administrative director to deposit checks in his own personal account where checks were payable to employer was not in accord with reasonable commercial standards). See also In re Lou Levy & Sons, 988 F.2d at 311; Nat'l Bank of Georgia v. Refrigerated Transport Co., 147 Ga.App. 240, 244, 248 S.E.2d 496, 500 (1978) (bank is not relieved of duty to inquire even when depositor of check is customer of bank). The checks deposited to Mr. Kampanos's account were not payable in the alternative. Mr. Kampanos did not have the authority to sign the checks on behalf of Public Citizen, Inc., nor did the defendant inquire as to his authority to do so. The defendant's representatives accepted for deposit into Mr. Kampanos's personal account corporate checks without inquiring as to Mr. Kampanos's authority to deposit the checks to his personal account. One of the checks held a forged corporate endorsement, and the other was missing the corporate endorsement. Therefore, the defendant conducted itself in a commercially unreasonable manner as a matter of law. Because the defendant has failed to prove that it dealt with the checks in a commercially reasonable manner, it is not entitled to the affirmative defense of negligence in W. Va.Code § 46-3-406. Therefore, we need not determine whether the plaintiff was contributorily negligent, as any negligence by the plaintiff would be irrelevant.