Opinion ID: 2052009
Heading Depth: 1
Heading Rank: 2

Heading: Whether the Bank was a Holder in Due Course.

Text: The district court concluded that the Bank was not a holder in due course under the Iowa UCC because it had been on notice of the restrictions imposed on [Waukon Auto's] account. Consequently, the court ruled that the Bank was not entitled to the protection from claims that comes with this status. The Bank argues that the district court erred regarding this issue. We disagree. The term holder in due course is defined in Iowa Code section 554.3302(1) (1987): A holder in due course is a holder who takes the instrument a. for value; and b. in good faith; and c. without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person. (Emphasis added.) The rights of a holder in due course are set out in section 554.3305, which provides that [t]o the extent that a holder is a holder in due course the holder takes the instrument free from ... all claims to it on the part of any person.  (Emphasis added.) Notice to the purchaser of an instrument is defined in part as follows: The purchaser has notice of a claim against the instrument when the purchaser has knowledge that a fiduciary has negotiated the instrument in payment of or as security for the fiduciary's own debt or in any transaction for the fiduciary's own benefit or otherwise in breach of duty. Iowa Code § 554.3304(2). The Bank disagrees with the district court's conclusion that the Bank had notice of restrictions on Rosendahl's authority to make certain transactions with it. The Bank contends that it was not on notice because Waukon Auto had clothed Rosendahl with apparently unrestricted authority. He was, after all, the manager of the store and had responsibility for depositing customer checks and cash receipts. The Bank points out that the rubber stamp used by Rosendahl contained no restrictions such as For Deposit Only. In addition, Waukon Auto made no specific effort to inform the Bank, with a corporate resolution for example, that Rosendahl had no authority to cash checks. The Bank's contentions boil down to two questions: first, whether Rosendahl had apparent authority to cash customer checks; and second, whether, even in the absence of apparent authority, the Bank had notice of the restrictions on Rosendahl's authority. A. Apparent authority. The Bank argues that Rosendahl had apparent authority to cash customer checks. As one annotation says, the results in cases in which the apparent authority argument is raised depend on the particular facts, and no rules of uniform application can be stated. Annotation, Right of Check Owner to Recover against One Cashing It on Forged or Unauthorized Indorsement and Procuring Payment by Drawee, 100 A.L.R.2d 670, 682 (1965). It appears, however, that in a proper case apparent or ostensible authority may be a valid defense precluding recovery. Id. In Grismore v. Consolidated Products Co., a case cited by the Bank, we said the burden of showing that an agent acted within the scope of the agent's actual or apparent authority is on the party claiming that such authority existed. 232 Iowa 328, 334, 5 N.W.2d 646, 651 (1942). Apparent authority must be determined by what the principal does, rather than by any acts of the agent. Id. at 335, 5 N.W.2d at 651 (emphasis added). For apparent authority to exist, the principal must have acted in such a manner as to lead persons dealing with the agent to believe the agent has authority. Clemens Graf Droste Zu Vischering v. Kading, 368 N.W.2d 702, 711 (Iowa 1985). This determination is a fact question. Grismore, 232 Iowa at 334, 5 N.W.2d at 651. Because it is a fact question, we can reverse only if the district court is wrong as a matter of law. See State v. Lyrek, 385 N.W.2d 248, 250 (Iowa 1986). We do not think that is the case here. The Bank suggests that the lack of a restriction on the rubber stamp was an indication of Rosendahl's apparent authority to present stamped checks for cash. We think that, at best, the lack of a restriction on the stamp showed that Rosendahl's authority was ambiguous and needed to be confirmed by the Bank. This ambiguity is underscored by the fact that the signature card only gave Anderson, not Rosendahl, the authority to withdraw funds from the checking account. Further, although the Bank was aware that the stamp was normally used for Waukon Auto's indorsements, it allowed some of the customer checks to be cashed with only a hand-written indorsement. Given Waukon Auto's usual practice of using the stamp, the handwritten indorsements should have raised the possibility that Rosendahl was acting in breach of his duty as a fiduciary, beyond whatever authority he might have had. See Iowa Code § 554.3304(2) (purchaser of instrument has notice of claims against the instrument when purchaser has knowledge that a fiduciary has negotiated the instrument in breach of fiduciary's duty). One additional piece of evidence militates against the Bank's apparent authority argument. Rosendahl on occasion would send Barr, an employee without managerial responsibilities, to the Bank to cash customer checks. According to Barr's testimony, Rosendahl instructed her to sign her own name on the checks. No inquiry was ever made regarding Barr's reason for cashing the checks. B. Notice. We have never addressed the question of notice under the Iowa UCC. But pre-UCC cases with similar facts support the district court's decision here. We note that the official comment to Iowa Code section 554.3304(2) says that this subsection is generally in accord with prior Iowa law, thus indicating that the pre-UCC cases are still persuasive authority. In one of those cases, Wormhoudt Lumber Co. v. Union Bank & Trust Co., 231 Iowa 928, 2 N.W.2d 267 (1942), a co-payee indorsed checks in the names of both himself and the other payee without the other's authority. When the indorser absconded with the funds, the writer of the checks sued the drawee bank. We said, [i]t must be remembered that the primary duty to determine the genuineness of indorsements rests upon the drawee bank which has obligated itself to pay out the money of its depositor only to those authorized to receive it. Id. at 935, 2 N.W.2d at 271. The implication of this statement seems to be that banks are generally on notice that the genuineness of indorsements must be confirmed. Courts in other states have dealt with similar factual scenarios under their versions of the UCC. For example, in Mott Grain Co. v. First National Bank and Trust Co., 259 N.W.2d 667, 670 (N.D.1977), a bank accepted a third-party check payable to a business from the manager of the business, who was also known to be a stockholder. The checks in question had been indorsed by hand and were presented for deposit into the manager's personal account. The North Dakota supreme court held that the bank was not a holder in due course because it had allowed the manager to deposit the checks for his own benefit, thus giving the bank notice of claims against the checks. These cases each contain facts that we think are also significant here. In Wormhoudt Lumber and Mott, as here, customer checks bearing indorsements of a questionable nature were presented at a bank. Both Mott and the present case involved handwritten indorsements in particular, which are unusual in a business context. While Rosendahl, unlike the manager in Mott, was not depositing the checks into a personal account, the cash Rosendahl obtained was certainly more susceptible to personal use than funds in a personal account. Given these facts, we think that the Bank had notice of possible problems with Rosendahl's transactions and that it should have made inquiries about his authority to cash customer checks. The Bank raises two other arguments that bear on this issue, neither of which we find meritorious. One of the Bank's contentions is that the district court accorded undue significance to the signature card as a record the Bank should have checked. The district court found that the signature card for Waukon Auto's checking account clearly show[ed] that only Mr. Anderson had authority to handle this account, except for deposits. The court then concluded that the Bank was not a holder in due course because it was on notice of the restrictions imposed on [the] account, and that the Bank had not acted in a commercially reasonable manner 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 points out, rightly, that Rosendahl never attempted to draw on the account itself. Therefore, the Bank argues, the existence of a signature card and a signature thereon is irrelevant. The district court, however, did not rely completely on the signature card to support its conclusion. Several other facts were also probative. Besides the signature card, the court mentioned the Bank's failure to ask about Rosendahl's authority. This inquiry was necessary because the Bank knew that Rosendahl was only an employee of Waukon Auto. Further, the court said the Bank should have been aware that businesses such as Waukon Auto generally do not pay creditors with cash, which was Rosendahl's explanation for cashing the checks. In addition, we note there is no dispute that the checks being cashed were payable to Waukon Auto, not to Rosendahl. We think these facts by themselves provide ample support for the district court's conclusion. It was unnecessary for the court to consider the signature card. The Bank also argues that it had no duty to inquire about Rosendahl's authority because he was presenting properly indorsed bearer paper. We reject this argument because in fact the checks were not properly indorsed. Rosendahl did not have authority to indorse checks for cash; he only had authority to indorse them for deposit. Further, the circumstances surrounding Rosendahl's transactionscustomer checks payable to a corporate payee being presented by an employee for cash, some with only handwritten indorsementsshould have raised the possibility for the Bank that the checks were not properly indorsed bearer paper. In summary, we think the district court correctly decided this issue.