Opinion ID: 1262818
Heading Depth: 1
Heading Rank: 3

Heading: Did Schoenfelder Fail to Fulfill the Statutory Duties of a Customer?

Text: As a cross-issue in its response to the petition for review, the Bank asks us to address whether Schoenfelder should be precluded from summary judgment because he failed to meet the statutory duties of a customer. The trial court implicitly resolved this issue by granting summary judgment in favor of Schoenfelder, but the court of appeals did not address it because of its threshold determination that Schoenfelder was not a customer. This issue has been properly preserved for review pursuant to rule 23(i)(3), Arizona Rules of Civil Appellate Procedure. Although we could remand this matter to the court of appeals for determination of the cross-issue in view of our reversal of its previous holding, see rule 23, we will, in our discretion, address the issue in the interest of judicial economy. The rule is well established that a bank is strictly liable to its customer for payment of forged checks unless it raises and establishes an affirmative defense that would preclude the customer from asserting the unauthorized signature. See generally 2A Hart & Willier, Bender's Uniform Commercial Code Service § 14.11[1] at 14-62 (1990); Cumis Ins. Soc'y, Inc. v. Girard Bank, 522 F. Supp. 414 (E.D.Pa. 1981). Whether a customer is precluded by such a defense is usually a question of fact not appropriately decided by summary judgment, because this issue generally involves a determination of what constitutes reasonable care and promptness on the part of the customer and what constitutes reasonable care and commercial reasonableness on the part of the bank. See Exchange Bank v. Kidwell Constr. Co., 472 S.W.2d 117 (Tex. 1971); see generally K & K Mf'g, Inc. v. Union Bank, 129 Ariz. 7, 628 P.2d 44 (App. 1981). The Bank argued on appeal that, even if Schoenfelder was its customer, the record contains evidence that would raise a triable fact issue about whether the Bank had viable defenses that preclude Schoenfelder's recovery. First, the Bank argued that it had a defense under A.R.S. § 47-3406, which provides: 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 ... drawee ... who pays the instrument in good faith and in accordance with the reasonable commercial standards of the drawee's or payor's business. To successfully assert this defense, the Bank must prove that the customer's negligent conduct substantially contributed to the forgery, and must present evidence that it acted in conformity with commercially reasonable banking standards. First Bank v. Vaccari, 288 Ark. 233, 703 S.W.2d 867 (1986); see also U.C.C. § 3-406, Official Comment, Paragraph 6, 2 U.L.A. 349 (1977). [6] Schoenfelder points out that the Bank did not raise this defense in either its answer or in its response to the motion for partial summary judgment or cross-motion. Our review of the trial court record compels us to agree that the defense of A.R.S. § 47-3406 was not presented to the trial court, but was raised for the first time on appeal. The Bank's only reference to § 47-3406 in the trial court was in the context of a quote from K & K Mf'g, Inc. v. Union Bank . [7] The Bank's exclusive defense argument to the trial court was its assertion that Schoenfelder failed to timely examine the monthly bank statements and promptly notify the Bank of the forgeries. This argument, however, was relevant only to the Bank's asserted defense under A.R.S. § 47-4406, discussed infra. Furthermore, we find that the Bank presented no evidence in the trial court that Schoenfelder either substantially contributed to the actual forgeries, or that the Bank acted in accordance with reasonable commercial standards. As a general rule, we will not review an issue on appeal that was not argued or factually established in the trial court. Continental Bank v. Wa-Ho Truck Brokerage, 122 Ariz. 414, 595 P.2d 206 (App. 1979). Cf. Dombey v. Phoenix Newspapers, Inc., 150 Ariz. 476, 482, 724 P.2d 562, 568 (1986) (issue not raised in court of appeals may be addressed on review if raised and fully argued in the trial court); see also note 7, infra. We therefore hold that, because the Bank failed to properly raise this defense, Schoenfelder was not precluded in the trial court by § 47-3406 from asserting the forgeries against the bank. The Bank also argued on appeal that it offered sufficient evidence in the trial court to raise a triable issue of fact about whether Schoenfelder was precluded by the Bank's defense under A.R.S. § 47-4406, which provides, in part: A. When a bank sends to its customer a statement of account accompanied by items paid in good faith in support of the debit entries or holds the statement and items pursuant to a request or instructions of its customer or otherwise in a reasonable manner makes the statement and items available to the customer, the customer must exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and must notify the bank promptly after discovery thereof. B. If the bank establishes that the customer failed with respect to an item to comply with the duties imposed on the customer by subsection A the customer is precluded from asserting against the bank: 1. His unauthorized signature or any alteration on the item if the bank also establishes that it suffered a loss by reason of such failure; and 2. An unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank after the first item and statement was available to the customer for a reasonable period not exceeding fourteen calendar days and before the bank receives notification from the customer of any such unauthorized signature or alteration. C. The preclusion under subsection B does not apply if the customer establishes lack of ordinary care on the part of the bank in paying the item or items. The Bank did assert this defense in the trial court in its cross-motion for summary judgment, therefore properly raising and preserving it for appellate review. See Continental Bank, 122 Ariz. at 417, 595 P.2d at 209 (bank may raise affirmative defense against forgeries in connection with motions for summary judgment even if not pleaded in answer). We agree with the Bank that the record indicates factual issues about whether the Bank made monthly statements reasonably available to Schoenfelder and about whether Schoenfelder's delay in notifying the Bank of the forgeries constituted reasonable care under the circumstances. Normally, such factual issues would preclude summary judgment on this defense. See, e.g., Flagship Bank v. Complete Interiors, Inc., 450 So.2d 337, 340 (Fla.App. 1984). Additionally, whether the Bank exercised ordinary care also would be a fact issue normally precluding summary judgment. See Cook v. Great Western Bank, 141 Ariz. 80, 685 P.2d 145 (App. 1984). However, in this case, the Bank failed to provide any evidence to establish an essential element of the defense under § 47-4406 that would entitle it to preclude summary judgment in Schoenfelder's favor: namely, the Bank has failed to indicate how Schoenfelder's delay in reviewing the statements and notifying the Bank of the forgeries caused the loss. To assert a defense of customer negligence under § 47-4406(B)(1), the Bank must affirmatively establish that the customer's negligence in inspecting the statements or giving notice of the forgeries caused the loss. See U.C.C. § 4-406(2)(a); Oak Cliff Bank v. Aetna Casualty & Surety Co., 436 S.W.2d 165, 169 (Tex.Civ. App. 1968); Comment, Casualty & Surety Check Forgeries: Variations of Rules of Liability Based on Fault  U.C.C. Defense Sections 3-406 and 4-406, 12 Ariz.L.Rev. 417, 424 n. 39 (1970) (A prerequisite to the bank's assertion of these defenses is that the bank show it suffered a loss by reason of the customer's failure to notify (emphasis in original)). Normally, the bank can establish this causation when multiple forgeries by the same wrongdoer occur over a period of time involving several bank statements. The following excerpt from a UCC treatise gives an example of how the defense works: If a statement and checks that are returned contains an unauthorized signature or material alteration, and if the customer fails to discover this and report it to the bank within a reasonable period not to exceed 14 days, and if the same person who was responsible for the unauthorized signature or alteration once again signs the customer's name without authority to a new check or materially alters a check thereafter, then the customer is precluded from raising the new unauthorized signature or alteration. Hart & Willier, supra, § 14-11[2] at 14-66. In this case, the record clearly indicates that all 4 forged checks were paid in one statement period, and appeared in a single monthly bank statement. The Bank presented no evidence to the trial court that the Bank could have avoided the loss if Schoenfelder had reviewed the statement within 14 days and notified it of the forgeries. Thus, the Bank failed to show evidence of how Schoenfelder's delay in reviewing the June 1986 statement until September 1986 resulted in the loss from the forged checks paid prior to that statement. Under these circumstances, where all forged instruments appeared on the same bank statement, and no further forgeries occurred, we believe that the defense under § 47-4406(B)(2) simply does not apply. Indeed, even in K & K Mf'g, where the trial court precluded the customer from recovering on forgeries that occurred over a period of one year because the customer did not timely notify the bank of the forgeries, the trial court still allowed judgment for the customer on the 8 forged checks paid by the bank prior to the mailing of the first monthly statement indicating the forgeries were occurring. 129 Ariz. at 9, 628 P.2d at 46. Finally, we reject the Bank's contention that if Schoenfelder had reviewed the previous month's statement showing the check with a valid signature but an altered payee, he could have alerted the Bank somehow to avoid paying the subsequent forged checks. The record indicates that the Bank did not make this argument before the trial court to create a fact issue precluding summary judgment on this basis. On appeal from summary judgment, we will not consider new factual theories raised in an attempt to secure reversal of the trial court's determinations of law. [8] Fendler v. Phoenix Newspapers, Inc., 130 Ariz. 475, 478 n. 2, 636 P.2d 1257, 1260 n. 2 (App. 1981); see also Prairie State Bank, 155 Ariz. at 221 n. 1A, 745 P.2d at 968 n. 1A (party opposing motion cannot raise new factual theories after trial court has ruled in favor of summary judgment).