Bank of Southern Maryland v. Robertson's Crab House, Inc.

Melvin, J., delivered the opinion of the Court. This appeal is from an order of the Circuit Court for Charles County (Bowling, J.) dated October 5, 1977, granting summary judgment in favor of Robertson’s Crab House, Inc. (appellee) and against the Bank of Southern Maryland (appellant) in the amount of twelve thousand four hundred seventy-four dollars and sixty-six cents ($12,474.66) and costs of the proceeding. 1 The ultimate issue for our determination is, of course, whether summary judgment was properly granted. We think it was, and will affirm the judgment below. Md. Rule 610 d 1 provides that summary judgment “[S]hall be rendered forthwith if the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine dispute as to any material fact and that the moving party is entitled to a judgment as a matter of law.” As noted by the Court of Appeals in Washington Homes, Inc. v. Interstate Land Development Co., 281 Md. 712, 717-18 , 382 A. 2d 555 (1978): “In reviewing the propriety of the trial court’s action on a motion for summary judgment, the appellate court is concerned with whether there was a dispute as to any material fact, and if not, whether the moving party was entitled to judgment as a matter of law.

In considering the matter, the duly shown facts which would be admissible in evidence and all reasonable inferences deducible therefrom must be considered in a light most favorable to the party opposing the motion and against the party making the motion. See Rooney, 265 Md. at 563-564; Shatzer, 261 Md. at 95; Brown, 260 Md. at 255.” ⁷⁰⁹ The pleadings, depositions, admissions and affidavits on file in the instant case establish the following undisputed facts: Robertson’s Crab House, Inc. is a body corporate of the State of Maryland whose principal place of business is at Popes Creek, Newburg, Charles County, Maryland. Its president is Joseph R. Robertson and its vice-president is George W. Robertson (Joseph’s father). Prior to Robertson’s incorporation in 1974, the business was operated as a sole proprietorship by George Robertson.

For approximately 21 years prior to incorporation, George Robertson employed the services of Jennings L. Hanson as the accountant for Robertson’s Crab House. Mr. Hanson’s duties included taking care of books, balance sheets, and quarterly and yearly tax returns for Robertson’s. Mr. Hanson also reconciled the monthly bank statements for the business, and picked up the monthly statements at the bank. In the performance of these duties, Hanson would visit the Bank of Southern Maryland twice a month on Robertson’s behalf: once to pick up the monthly statements, and once to make deposits into the Bank’s tax and loan account for federal withholding and social security taxes. 2 Upon its incorporation in 1974, Robertson’s Crab House, Inc. continued to employ Hanson in essentially the same capacity in which he was employed prior to incorporation.

Hanson continued to visit the Bank twice monthly on Robertson's behalf, and continued to reconcile the monthly statements. After Hanson reconciled the monthly statements, they were given to Joseph Robertson, who kept them in the file cabinet at the corporation office. Neither Robertson nor anyone else checked Hanson’s reconciliations. Joseph Robertson often signed checks in blank, and allowed Hanson to fill in the amounts.

Hanson was never, however, authorized to sign any checks on behalf of Robertson’s Crab House, Inc. ⁷¹⁰ or to make deposits into any account other than the tax and loan account. The officers and employees of the Bank of Southern Maryland were aware that Hanson had no authority to sign checks on behalf of Robertson’s. 3 Between July, 1974 and September, 1975, Hanson presented the eleven checks here involved to the Bank of Southern Maryland. The checks were signed by Joseph Robertson, and were made payable to the Bank of Southern Maryland, as they were intended to be deposits of withholding taxes to the Bank’s tax and loan account. At least one of the eleven checks, and perhaps as many as ten, were signed in blank by Joseph Robertson and filled in by Hanson.

When Hanson presented these checks to the Bank, the Bank permitted him on eight occasions to deposit a portion of the check proceeds to the credit of Robertson’s tax and loan account number and the remainder to either Hanson’s personal accounts, or to the credit of tax and loan account numbers of other businesses for whom Hanson was also bookkeeper. On two occasions, the entire amount of the checks was deposited to Hanson’s personal account, and on one occasion, the Bank allowed Hanson to purchase a cashier’s check (in the amount of $2,500.00 by adding $75.00 in cash to the $2,425.00 amount of the check made payable to the order of the Bank), made payable to a designee of Hanson. 4 On none of these eleven occasions did the Bank require Hanson to endorse the check or make inquiry to Robertson’s Crab House, Inc. of Hanson’s authority to so make use of Robertson’s funds. The total amount of the funds diverted by Hanson was $12,474.66 — the exact amount for which summary judgment was entered against the Bank. In January of 1976, Joseph Robertson did check Hanson’s reconciliations, and eventually discovered that something was amiss.

Robertson noticed that the amounts on certain checks ⁷¹¹ and the corresponding check stubs were different; that certain checks and stubs were missing; that certain checks were altered; and that certain of the stubs had ledger numbers on them indicating the account into which Hanson had diverted the funds. No check was made on Hanson prior to January of 1976 because Robertson trusted Hanson completely. On October 27, 1976, Robertson’s Crab House, Inc. filed a declaration against the Bank alleging breach of contract and negligence in the Bank’s payment of these eleven checks. On November 16,1976, the Bank filed a general issue plea, and also pleaded limitations.

A hearing was held on Robertson’s motion for summary judgment on January 27, 1977, after which the motion was granted. A timely appeal was noted to this Court. In an effort to demonstrate that summary judgment was improperly granted, the Bank presents three questions for our consideration: “I. Did not the Bank conduct Robertson’s transactions in a manner which was consistent with its duties to its customer as established by the course of conduct between them?

II

Did not Robertson’s negligence prior to the transaction facilitate the fraud and preclude recovery?

III

Did not Robertson’s negligence subsequent to each check transaction bar its recovery?” We will consider each of these questions, but will discuss questions two and three together. As previously noted, however, we think Judge Bowling properly granted the motion for summary judgment. I. Appellant first contends that it conducted Robertson’s transactions in a manner which was consistent with its duties to its customer as established by the course of conduct between them. Simply stated, the Bank contends that it was not negligent in dealing with Robertson’s funds.

We disagree. ⁷¹² In Taylor v. Equitable Trust Co., 269 Md. 149, 155-56 , 304 A. 2d 838 (1973) the Court of Appeals set out the relationship between a bank and its depositor: “The relation between a bank and its depositor is a legal one. It is broadly defined as being that of debtor and creditor. Keller v. Fredericktown Sav. Institution, 193 Md. 292, 296 , 66 A. 2d 924 (1949), the rights of the depositor and the liability of the bank being contractual, Pritchard v. Myers, 174 Md. 66, 76 , 197 A. 620 (1938), but see Note, Negotiable Instruments: Payment of Materially Altered Checks: Bank Not Liable to Depositor in Tort, 40 Cornell L. Q. 795 (1955).

Unless modified by the parties the contract is that implied in a banking relationship, Magness v. Equitable Trust Co., 176 Md. 528, 531 , 6 A. 2d 241 (1939). For a breach of this contract, an action in tort will lie, Siegman v. Equitable Trust Co., 267 Md. 309, 313 , 297 A. 2d 758 (1972), following in the venerable footsteps of Rolin v. Steward, 14 C. B. 595, 139 Eng. Repr. 245 (1854) and Marzetti v. Williams, 1 B & AD 415, 109 Eng. Repr. 842 (1830).

While this line of cases dealt primarily with wrongful dishonor of a depositor’s checks, we see no reason why the same general principles are not equally applicable to a wrongful disbursement of funds belonging to a depositor. See General Apparel Sales Corp. v. Chase Manhattan Bank, NA, 321 F. Supp. 891 (S.D.N.Y. 1970), where recovery was allowed when the bank accepted deposits of General Apparel’s funds after the account had been closed. See also Note, 40 Cornell L. Q., supra at 801; Comment, Bank Not Liable in Tort to Depositor for Honoring Forged or Altered Check, 6 Syracuse L. Rev. 365 , 367-68 (1955).” (Footnote omitted). See also University National Bank v. Wolfe, 279 Md. 512, 514-15 , 369 A. 2d 570 (1977); Gillen v. Maryland National Bank, 274 Md. 96, 101-102 , 333 A. 2d 329 (1975). ⁷¹³ That a bank must use ordinary care in disbursing a depositor’s funds was made clear in Taylor v. Equitable Trust Co., supra at 155 [quoting from a Comment in 2 Bender’s U.C.C. Service, Hart and Willier § 12.35, at 128-29 (1972)]: “ ‘Nowhere in the Code does it say in so many words that a bank, whether a collecting bank or payor bank, is liable for negligently paying an item.

Hints, however, abound. They start with Section 1-103, providing that common-law rules of negligence still apply. Section 3-419(3) limits recovery against collecting banks for conversion only if they acted in good faith and followed ‘reasonable commercial standards.’ Section 3-406 precludes assertion of a material alteration or unauthorized signature against the party whose negligence substantially contributed to the wrongdoing, but only if the payor is a holder in due course or paid ‘in good faith and in accordance with the reasonable commercial standards of the drawee’s or payor’s business.’ A bank is prohibited from disclaiming ‘responsibility for its own lack of good faith or failure to exercise ordinary care’ under Section 4-103(1), apparently upon the assumption that such duties exist. Finally, a bank’s lack of care shifts the burden for paying over a forged signature or a materially altered item from its customer who was negligent in discovering the wrongdoing, back to the bank under Section 4-406(3).’ ” And, in Gillen v. Maryland National Bank, supra at 101-102 the Court of Appeals stated: “The relationship between a savings bank and a depositor is a contractual one, of which the rules and regulations of the passbook are a part.

Hileman v. Hulver, 243 Md. 527 , 221 A. 2d 693 (1966); Savings Bank v. Appler, 151 Md. 571 , 135 A. 373 (1926). Implicit in the contract is the duty of the bank to use ordinary care in disbursing the depositor’s funds. Commonwealth Bank v. Goodman, 128 Md. 452 , 97 ⁷¹⁴ A. 1005 (1916). The duty cannot be abrogated by agreement.

Code (1964 Repl. Yol.) Art. 95B, §§ 1-102 (3), 4-103.[ 5 ] Thus, a depositor may sue in an action for breach of contract to enforce the bank’s contractual obligation to use ordinary care. Commonwealth Bank v. Goodman, supra. See also Taylor v. Equitable Trust Co., 269 Md. 149 , 304 A. 2d 838 (1973).” The question of whether a bank was negligent in paying an item, that is, whether the bank paid the item in accordance with reasonable commercial standards, see Md. Ann. Code, Comm.

L. Art., §§ 3-406 and 4-406 (1975), is one which must be decided upon the facts of each particular case. Dominion Construction, Inc. v. First National Bank of Maryland, 271 Md. 154, 166 , 315 A. 2d 69 (1974). See also Gillen v. Maryland National Bank, supra; Taylor v. Equitable Trust Co., supra; Gresham State Bank v. O & K Construction Co., 231 Or. 106 , 370 P. 2d 726 , 100 A.L.R. 2d 654 (1962), opinion clarified, rehearing denied, 231 Or. 106 , 372 P. 2d 187 (1962); Whaley, Negligence and Negotiable Instruments, 53 N.C.L. Rev. 1, 15 (1974) ; Note, Forgeries and Material Alterations: Allocation of Risks Under the Uniform Commercial Code, 50 Boston ⁷¹⁵ Univ. L. Rev. 536, 547 (1970).

See generally Annot., Construction and Effect of UCC Art. 4, Dealing with Bank Deposits and Collections, 18 A.L.R. 3d 1376 , 1400-1402 (1968); Annot., Construction and Effect of UCC Art. 3, Dealing with Commercial Paper, 23 A.L.R. 3d 932 , 1000 and 1004 (1969). The reasonableness of the bank’s conduct may, of course, be assessed in light of the plaintiff’s conduct. Transamerica Insurance Co. v. United States National Bank, 276 Or. 945 , 558 P. 2d 328, 335 (1976). Our starting point for determining whether the Bank was negligent as a matter of law in paying Hanson all or part of the proceeds of the eleven checks is with the general proposition that: “Where a check is drawn to the order of a bank to which the drawer is not indebted, the bank is authorized to pay the proceeds only to persons specified by the drawer; it takes the risk in treating such a check as payable to bearer and is placed on inquiry as to the authority of the drawer’s agent to receive payment.” (Footnotes omitted). 9 C.J.S., Banks and Banking § 340 at 683.

See also 10 Am. Jur. 2d, Banks § 560 at 529-30; 5A Michie, Banks and Banking § 183 at 495-96 (1973); Sun’n Sand, Inc. v. United California Bank, 57 C.A. 3d 125, 129 Cal. Rptr. 861 , 869 (1976); Martin v. First National Bank, 358 Mo. 1199 , 219 S.W.2d 312 (1949); Robbins v. Passaic National Bank & Trust Co., 109 N.J.L. 250 , 160 A. 418 , 82 A.L.R. 1368 (1932). See generally Annot., Liability of Bank Which Diverts Checks or Drafts Drawn to its Order to a Use Other Than That of the Drawer, 82 A.L.R. 1372 (1933) and Annot., Duty and Liability of Bank in Respect of a Depositor’s Check Drawn Upon and Payable to the Bank, 138 A.L.R. 853 (1942), and cases cited therein.

This rule has not been displaced by the Uniform Commercial Code. Transamerica Insurance Co. v. United States National Bank, supra, 558 P. 2d at 333 . There is, however, a corollary to the general rule that a drawee bank acts at its own risk in paying to a third person the proceeds of a check payable to the bank’s order, and that ⁷¹⁶ is that “the drawer acts at its risk in clothing its agent with apparent authority to receive the proceeds of such a check [made payable to the bank’s order] in cash.” 5A Michie, Banks and Banking, supra at 495. See also 10 Am.

Jur. 2d, Banks, supra at 530; Mayo Bros. Chemical Corp. v. Capital National Bank, 192 Miss. 293 , 5 So. 2d 220, 222 (1941). Thus, if the drawer clothes an agent with apparent authority to receive the proceeds of a check made payable to the bank’s order, the bank is not negligent in (and, therefore, not liable to the drawer for) paying the proceeds of the check to the agent or appropriating the proceeds in a manner directed by the agent contrary to his actual authority. 10 Am. Jur. 2d, Banks, supra at 530.

In the instant case, it is clear that Hanson had no actual or apparent authority to receive the proceeds of the eleven checks here involved. Actual authority is “the power of an agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent to him.” Restatement (Second) of Agency § 7 (1958). It is undisputed that neither Joseph Robertson nor any other officer of Robertson’s Crab House, Inc. ever gave Hanson any authority to use the proceeds of the eleven checks for other than deposits to the tax and loan account. As noted also by the Restatement (Second) of Agency at § 8: “Apparent authority is the power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from and in accordance with the other’s manifestations to such third persons.” See also Medical Mutual Liability Insurance Society v. Mutual Fire, Marine and Inland Insurance Co., 37 Md. App. 706, 720-21 , 379 A. 2d 739 (1977).

In the instant case, neither Joseph Robertson nor any other officer of Robertson’s Crab House, Inc. made any manifestations to the Bank that would indicate Hanson had any authority to divert the proceeds of the eleven checks to his own use. See Atlantic Trust Co. v. Subscribers, etc., 150 ⁷¹⁷ Md. 470, 475-77, 133 A. 319 (1926). Compare Mayo Brothers Chemical Corporation v. Capital National Bank, supra, 5 So. 2d at 221 . But see Senate Motors, Inc. v. Industrial Bank of Washington, 9 UCC Rept.

Serv. 387 (1971). Apparent authority cannot be founded on statements or conduct by the agent alone. Taylor v. Equitable Trust Co., supra at 161-62. We find particularly apposite here a series of quotations relative to apparent authority in circumstances not unlike those in the case sub