Summary
holding that if a signature of a copayee is missing, then the check is not properly payable
Summary of this case from First Natl Bank v. Belmont Natl BankOpinion
No. 79-887
Decided July 23, 1980.
Banks and banking — Liability of bank to customer — Item charged not "properly payable."
When a bank charges an item, which is not "properly payable" pursuant to R.C. 1304.24, against a customer's account, the bank is required to recredit the customer's account in the amount of the item.
APPEAL from the Court of Appeals for Summit County.
This cause arises out of two construction contracts entered into in the development of the Rolling Acres Mall in Akron. F.C.E. Construction, Inc. (FCE), was general contractor on the contract (West contract) for the west side of Romig Road. F.C.E.-Dillon, Inc. (Dillon), was general contractor on the contract (East contract) for the development of the east side of Romig Road. B.I.M., Inc. (BIM), was a subcontractor for both FCE and Dillon on the West and East contracts. Allied Pipe Products, Inc. (Allied), was a pipe supplier for BIM under both contracts. Cincinnati Insurance Company, appellant herein, was a surety on the performance bonds for FCE, relating only to the West contract and not to the East contract.
In 1974, Dillon became a successor to FCE for the West contract. In early January 1975, it appeared that BIM was insolvent and owed money to Allied and other creditors. BIM made a demand on Dillon for payment of amounts due under both contracts. Subsequently, on January 31, 1975, Dillon issued a check for $102,823.88 (exhibit 17) payable to BIM, Allied, Village Bank of Aurora and W.W. Williams Company. On February 28, 1975, Dillon issued a check for $23,970.42 (exhibit 19) payable to BIM, Allied and Village Bank of Aurora. Exhibits 17 and 19 were payments for amounts due on the East contract. Also, on February 28, 1975, Dillion issued a check for $9,872.75 (exhibit 18) payable to the same payees as exhibit 17. Exhibit 18 was for an amount due on the West contract. On the back of each of the three checks was a stamped mechanic's lien release.
The three checks at issue were labeled exhibits 17, 18 and 19 by the trial court. They were referred to in the same way in the Court of Appeals' opinion. Thus, in the course of our opinion, we will also refer to the three checks as exhibits 17, 18 and 19.
Allied did not endorse any of the three checks, although it was a payee on all the checks. BIM deposited the three checks into its account at Village Bank of Aurora, which, in turn, forwarded the checks for collection to the payor bank, First National Bank of Akron, which deducted the amounts from Dillon's account. Dillon demanded that the amounts be recredited to its account due to the missing endorsements of Allied, but First National Bank refused to comply with that demand.
"Payor bank" is defined in R.C. 1304.01(A)(13) as "a bank by which an item is payable as drawn or accepted."
Subsequently, Allied filed mechanics' liens for $172,000 on the West contract and for $42,000 on the East contract. Appellant, as surety, settled the West contract claim with Allied for $161,000. As part of its settlement with Dillon, appellant took assignments from Dillon of its rights against First National Bank on all three checks. Miller Excavating Company took over the West contract from BIM and paid Allied's $42,000 claim, resulting in the release of Allied's mechanic's lien on the East contract. Allied assigned to appellant its claims under the West contract with BIM and the mechanic's lien it filed for nonpayment thereon.
Appellant, as assignee of Dillon and Allied, brought an action in the Court of Common Pleas, alleging that the three checks were not properly payable, and, therefore, First National Bank and Village Bank were liable to appellant on the face amount of the three checks. With regard to exhibits 17 and 19, the court directed verdicts for First National Bank and Village Bank, appellees herein, at the close of appellant's case, finding that appellant failed to show any actual loss as a result of the payment of the checks without Allied's endorsement. The court rendered judgment for appellees as to exhibit 18 at the close of all the evidence, finding no loss to appellant in regard to this check.
On appeal, the Court of Appeals affirmed the trial court as to exhibits 17 and 19. With regard to exhibit 18, the court reversed the trial court, finding that appellant had proven by the manifest weight of the evidence that it suffered an actual loss on exhibit 18. Accordingly, judgment was rendered for appellant, awarding the full amount of exhibit 18, $9,872.75, plus interest thereon from December 21, 1976.
On the appeal before this court, only exhibits 17 and 19 are before us. Appellant was granted full relief on exhibit 18 in the Court of Appeals and that determination was not appealed.
The cause is now before this court upon the allowance of a motion to certify the record.
Messrs. McNamara McNamara and Mr. Dennis D. Liston, for appellant. Brouse McDowell Co., L.P.A., and Mr. John A. Schwemler, for appellee First National Bank.
Messrs. Calfee, Halter Griswold, Mr. Frederick W. Assini and Mr. Michael E. Brittain, for appellee Village Bank.
The primary issue raised in this cause concerns an interpretation of the Ohio Uniform Commercial Code as it applies to the facts of this case. This interpretation revolves around a reading of R.C. 1304.24(A), which provides: "As against its customer, a bank may charge against his account any item which is otherwise properly payable from that account even though the charge creates an overdraft." All the parties agree, as did the Court of Appeals, that the three checks were not "properly payable" since they were not endorsed by one of the named payees, Allied. This conclusion is mandated by R.C. 1303.15, which provides, in part:
"An instrument payable to the order of two or more persons:
"***
"(B) if not in the alternative is payable to all of them and may be negotiated, discharged, or enforced only by all of them."
R.C. 1303.01(A)(2) defines an "order" as "a direction to pay and must be more than an authorization or request. It must identify the person to pay with reasonable certainty. It may be addressed to one or more such persons jointly or in the alternative but not in succession."
The Court of Appeals determined, however, that, even though the items were not "properly payable," actual damages, pursuant to the standard set out in R.C. 1304.03(E), must be proven prior to granting any relief.
R.C. 1304.03(E) provides: "The measure of damages for failure to exercise ordinary care in handling an item is the amount of the item reduced by an amount which could not have been realized by the use of ordinary care, and where there is bad faith it includes other damages, if any, suffered by the party as a proximate consequence."
Our analysis begins with the settled premise that the relationship between bank and customer is that of debtor and creditor, based upon a contractual undertaking. Speroff v. First-Central Trust Co. (1948), 149 Ohio St. 415. We agree with the following statement, regarding the result of this relationship, by the Utah Supreme Court:
"***The nature of a check is an order by its maker to his banker or depository that the face amount be paid to the payees he designates, and it is notice to anyone accepting the check that the signatures of all payees are required. This requirement is just as binding on the drawee bank as upon anyone else." Pacific Metals Co. v. Tracy-Collins Bank Trust Co. (1968), 21 Utah 2d 400, 403, 446 P.2d 303. Accord, University National Bank v. Wolfe (1977), 279 Md. 512, 369 A.2d 570; see 9 Ohio Jurisprudence 3d 180-181, Banks, Section 233.
This contractual relationship between bank and customer remained unchanged with the adoption of the Uniform Commercial Code in Ohio. See R.C. 1301.03; Stone Webster Engineering Corp. v. First National Bank Trust Co. of Greenfield (1962), 345 Mass. 1, 184 N.E.2d 358. R.C. 1304.24, in essence, codifies this relationship by requiring the bank to obey the explicit orders of its customer prior to making payment on an item. Thus, if appellees had examined the checks to verify that each of the named payees had appropriately endorsed the checks, the banks would have known that the checks were not "properly payable" under R.C. 1304.24. Since appellees failed in this regard, they breached the contract with their customer. Thus, by the clear implication of R.C. 1304.24, if the item is not "properly payable," the bank is required to recredit the customer's account. This approach is one recognized by authorities on the Uniform Commercial Code, as well as case law from other jurisdictions. White Summers, Uniform Commercial Code, 558, Section 17-3; W.R. Grimshaw Co. v. First National Bank Trust Co. of Tulsa (Okla.App. 1976), 18 U.C.C. Rep. 734; Ford Motor Credit Co. v. United Services Automobile Assn. (N.Y. Civ. Ct. 1972), 11 U.C.C. Rep. 361; Wiley v. Manufacturers' Hanover Trust Co. (N.Y.Sup.Ct. 1969), 6 U.C.C. Rep. 1083; Feldman Construction Co. v. Union Bank (1972), 28 Cal.App.3d 731, 104 Cal.Rptr. 912.
Although R.C. 1304.24 speaks of a "bank," the official comment to the section makes clear that the section refers to the payor bank.
This result may appear harsh since the bank has the initial loss while the customer enjoys a windfall gain when his account is recredited. We are cognizant, however, that the Uniform Commercial Code is a sophisticated legislative enactment which, when properly invoked, shifts the ultimate loss to the proper party or parties.
For example, R.C. 1304.30 grants subrogation rights to the payor bank "***to prevent unjust enrichment and only to the extent necessary to prevent loss to the bank by reason of its payment of the item***." R.C. 1304.30 can be invoked by a bank when a customer complains that a payment of an item was not "properly payable." White Summers, Uniform Commercial Code, 580, Section 17-6.
Who must bear or share this ultimate loss is not before us in this cause. The matter must be remanded for a determination of various cross-claims and counterclaims which may shift the loss from the payor bank.
R.C. 1301.06(A), which governs construction of the entire Uniform Commercial Code, provides: "The remedies provided***shall be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed***." Our holding, that R.C. 1304.24 requires the bank to recredit the customer's account if an item is not "properly payable," carries out the mandate of R.C. 1301.06. If the bank had obeyed the orders of Dillon, the checks would not have been paid without Allied's endorsement. We are now putting appellant, as assignee of the drawer, in the position it would have been in if the bank had fully performed.
The trial court's and Court of Appeals' reliance on R.C. 1304.03(E) was misplaced. That section's specific reference to "ordinary care" manifests an intent that it relate only to a negligence-type action and not one based on the duty imposed upon the bank under R.C. 1304.24 to only pay "properly payable" items of its customer.
Thus, appellant, as assignee of the drawer-customer, Dillon, is entitled to relief under R.C. 1304.24, since the checks (exhibits 17 and 19) were not "properly payable" pursuant to the orders of Dillon, due to the missing endorsements of a payee.
Appellant contends that it is also entitled to relief as assignee of Allied as payee of the checks. The record demonstrates, however, that the assignment from Allied to appellant clearly applied only to the West contract and not to the East contract. Exhibit 18 is the only check that dealt with the West contract. Appellant was granted full relief on that check in the Court of Appeals. Thus, we need not decide whether appellant may recover as an assignee of a payee.
Besides the questions regarding the Uniform Commercial Code, appellant raises several other propositions of law. First, appellant contends that the courts below erred in the characterization of the testimony of its witness, Alden D. Jenkins. Appellant argues that Jenkins' testimony was for the purpose of explaining ambiguous terms of a writing and, therefore, was admissible in that it involved the parol evidence rule. We agree with the Court of Appeals' determination that the testimony in question dealt with facts not in the witness' area of knowledge. This determination does not bring into play the parol evidence rule, and, therefore, this proposition of law is rejected.
The Court of Appeals awarded interest to appellant on exhibit 18 from December 21, 1976. Appellant argues that interest should have been granted from the date on which the funds were improperly deducted from the drawer's account. Generally, an award of interest is in the sound discretion of the court. Hobson v. Eaton (N.D. Ohio, 1970), 327 F. Supp. 74, 77. Finding no abuse of that discretion, we affirm the Court of Appeals on this issue.
Appellant contends further that a bank may not earn and retain profits on funds which it improperly deducts from a customer's account. Since the banks were not guilty of any willful act in paying the checks, appellant's proposition is not well taken. See Tracy v. Athens Pomeroy Coal Land Co. (1926), 115 Ohio St. 298.
Lastly, appellant requests attorney fees. There is no specific statutory provision sanctioning the award of attorney fees in this matter, nor was there any malice on the part of the banks in this cause. See Sorin v. Bd. of Edn. (1976), 46 Ohio St.2d 177. Thus, an award of attorney fees is improper in this action.
For the foregoing reasons, the judgment of the Court of Appeals is reversed in part and affirmed in part. The cause is remanded for further proceedings upon counterclaims and cross-claims preserved in the trial court pending appeal.
Judgment accordingly.
CELEBREZZE, C.J., HERBERT, W. BROWN, P. BROWN, SWEENEY and HOLMES, JJ., concur.