Court Opinion

ID: 3020115
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:22:16.037116+00
Date Added: 2024-06-11T18:02:56.214050
License: Public Domain

United States Court of Appeals
                          FOR THE EIGHTH CIRCUIT
                                _____________

                                No. 97-1616NE
                                _____________

In re Western Iowa Farms Co.,          *
                                       *
               Debtor,                 *
                                       *
       -----------------------         *
                                       *   On Appeal from the United
Western Iowa Farms Co.,                *   States District Court
                                       *   for the District of
               Appellant,              *   Nebraska.
                                       *
       v.                              *
                                       *
                                       *
First Savings Bank, Manhattan, Kansas, *
                                       *
               Appellee.               *

                                 ___________

                            Submitted: October 24, 1997
                                Filed: February 11, 1998
                                 ___________

Before RICHARD S. ARNOLD, Chief Judge, LOKEN and HANSEN, Circuit Judges.
                            ___________

RICHARD S. ARNOLD, Chief Judge.

      This case is about checks drawn on the account of Western Iowa Farms Co., a
bankruptcy debtor, in a Montana bank. The person who signed the checks had
Western Iowa’s authority, generally speaking, to do so, but the checks were made to
payees who never knew anything about them. The signers of the checks forged the
payees’ endorsements and then had the checks deposited to the signers’ own accounts
in a Kansas bank. That bank, in turn, had the checks presented for payment to the
drawee bank, which paid them and charged Western Iowa’s account. In this action,
Western Iowa seeks to recover the amount of the checks from the Kansas bank, on the
theory that paying the checks on forged endorsements was a conversion. See Kan.
Stat. Ann. § 84-3-419(1)(c) (1983).1

       The Bankruptcy Court2 held for the Kansas bank (First Savings Bank of
Manhattan, Kansas) after a trial. The Court found as a fact that the Kansas bank had
acted in a commercially reasonable manner in handling the checks. The District Court3
affirmed, and so do we. We hold that the Bankruptcy Court’s finding is not clearly
erroneous, and that, accordingly, the bank has a defense to this conversion action under
Kan. Stat. Ann. § 84-3-419(3).

                                           I.

       Western Iowa was a Nebraska corporation engaged in the livestock business.
It provided various clearing services to livestock buyers, including Leonard and Mike
Russell, who were independent livestock buyers. The Russells were authorized to
write checks drawn on Western Iowa’s bank account at Norwest Bank in Butte,
Montana. As a matter of course, the Russells would purchase livestock, using a

      1
       The parties agree that Kansas law, as it existed at the time when the checks
were deposited, governs. The Kansas version of the Uniform Commercial Code was
revised in 1992, but the law in effect before that time applies to this case.
      2
        The Hon. Timothy J. Mahoney, Chief Judge, United States Bankruptcy Court
for the District of Nebraska.
      3
      The Hon. Lyle E. Strom, United States District Judge for the District of
Nebraska.

                                          -2-
Western Iowa check, and resell the livestock to a third party. Once the Russells had
been paid by the third party, they would then repay Western Iowa the amount of the
original check plus a fee.

       In late 1989 and early 1990, the Russells wrote ten checks totaling almost
$275,000,4 but the checks did not represent actual cattle purchases. The Russells wrote
the checks to three different payees, none of whom was aware of the existence of the
checks, and Brad Russell (Leonard’s son and Mike’s brother) forged the payees’
endorsements and deposited the proceeds into the Russells’ accounts at First Savings
Bank of Manhattan, Kansas. On the reverse side of each check, Brad Russell forged
the signature of the payee, and below that wrote a restrictive endorsement (“for deposit
only”) and one of two different account numbers representing accounts controlled by
the Russells at First Savings.

       First Savings accepted each of the ten checks for deposit into the Russells’
accounts and presented each check for payment, through normal banking channels and
the Federal Reserve Bank, to Western Iowa’s bank in Montana. Western Iowa’s bank
paid the checks and charged the amount of the checks against Western Iowa’s account.

       Western Iowa sued First Savings. Western Iowa claimed that First Savings
converted Western Iowa’s property when the bank accepted the deposit of checks
bearing forged endorsements and presented them to Western Iowa’s bank for payment.
Western Iowa relied on Kan. Stat. Ann. § 84-3-419(1)(c) (1983), which provides that
“[a]n instrument is converted when it is paid on a forged endorsement.” In defense,
First Savings, among other things, asserted that it had acted with ordinary care and in
a commercially reasonable manner. It cited Kan. Stat. Ann. § 84-3-419(3), which reads
as follows:

      4
       Leonard Russell wrote eight checks amounting to $228,484.65. Mike Russell
wrote two checks amounting to $46,507.23

                                          -3-
             Subject to the provisions of this Act concerning restrictive
             endorsements 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 his hands.

Kan. St. Ann. § 84-3-419(3).5

       The Bankruptcy Court agreed with this argument and found as a fact that
reasonable commercial standards had been followed. Accordingly, judgment was
entered in favor of First Savings. As we have already noted, the District Court affirmed
this judgment.

                                            II.

       This case turns on the law of Kansas, and not even the current law of that state.
It depends on an interpretation of the Kansas version of the Uniform Commercial Code
as it existed before 1992. On this subject the final authority is the Supreme Court of
Kansas, not this Court. In addition, the case is now before us on its second appeal as
of right. Bankruptcy cases are almost unique in the federal system in this respect. In
most cases, including the most important civil and criminal litigation, litigants have only
one appeal as of right, from a district court to a court of appeals. In bankruptcy
proceedings, however, Congress has provided for two appeals as of right. The case has
already gone through one full appellate cycle, and both the Bankruptcy Court and the
District Court have written full opinions.

      5
      By the time this action was brought, none of the proceeds of the checks
remained in the hands of First Savings.

                                           -4-
      For these reasons, we content ourselves with a fairly summary discussion. The
back of the checks in question look like this:

                               Forged name of payee
                                  For deposit only
                             Account numbers of Russells

First Savings did exactly what the endorsement told it to do. It deposited the checks
in the numbered accounts indicated underneath the words “for deposit only.” An
endorsement “for deposit only” is a restrictive endorsement, in the sense that the
checks must be handled in accordance with the endorsement. That was done here. The
endorsement was not irregular on its face. A payee has every right to endorse a check
and specify that the proceeds be deposited in somebody else’s account. Indeed, in this
particular case, the endorsement by the payees (we should say the apparent
endorsement, because the endorsement was forged) was in blank. The endorsement
consisted simply of the name of the payee. This sort of endorsement turns the check
into bearer paper. Anyone who comes into possession of it can assert ownership, and
persons dealing with the instrument in good faith and without reasonable suspicion can
deal with that person as the true owner.

       Nor was there anything here to put the bank tellers who accepted the checks for
deposit to the Russells’ accounts on notice that anything was amiss or required
investigation. There is no evidence that the tellers were familiar with the payees or had
reason to believe that the endorsements were forged. On the contrary, the Russells had
done a good deal of business with the bank, depositing large items over a substantial
period of time, and there was no reason to suspect that they could not have made the
checks good if the necessity had arisen. (In the ordinary course, when the drawee bank
discovered that the endorsements had been forged, it would report the fact to the
depositary bank, here First Savings, and that bank, in turn, would have recouped the

                                          -5-
amount out of the Russells’ accounts. That was not possible here because those
accounts had been depleted.)

       Persons familiar with banking practices in Kansas testified on both sides of the
issue. The Bankruptcy Court found the testimony favorable to First Savings Bank more
persuasive. We have no conviction, firm or otherwise, that this finding was mistaken.
Speed and ease of handling are important in the handling of checks. The law should
not superimpose procedures that would unreasonably slow the payment, deposit, and
handling of such items. Even small banks handle thousands of items a day. It simply
is not practical to demand of bank tellers more than was done in the present case, or
at least the Bankruptcy Court could properly have so found.

       First Savings also argues that it has an absolute defense under Kan. Stat. Ann.
§ 83-3-405 (1983), which provides that “an endorsement by any person in the name of
a named payee is effective if . . . (b) a person signing as or on behalf of a maker or
drawer intends the payee to have no interest in the instrument; or (c) an agent or
employee of the maker or drawer has supplied him with the name of the payee
intending the latter to have no such interest.” Under this language, if literally read, the
forged endorsements in the instant case would be effective, and First Savings would
have a defense regardless of whether it acted in a commercially reasonable fashion.
We find it unnecessary to address this argument. First Savings did in fact act
commercially reasonably, and that is all that needs to be said to affirm this judgment.

      Affirmed.

                                           -6-
A true copy.

      Attest:

               CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT

                              -7-