MARYLAND INDUSTRIAL FINISHING CO. v. Citizens Bank

ALPERT, Judge. This case of first impression requires us to construe § 3-419 of the Annotated Code of Maryland, Commercial Law Article (1992 & Supp.1993) (hereinafter “CL”) and decide whether an unauthorized endorsement is a “forged indorsement” within CL § 3-419(l)(c). Appellant, Maryland Industrial Finishing Co., Inc., (MIF-CO) is a Maryland corporation and maintains its principal place of business in Prince George’s County. 1 MIFCO maintained two bank accounts with Citizens Bank of Maryland (“Citizens”). 2 Pauline Pagani (“Mrs. Pagani”) was employed by MIFCO as a bookkeeper beginning April 13, 1989, through February 23, 1990. Mrs. Pagani’s job description included preparing time cards, filing, invoicing, answering the phone, and doing the bank deposits.

Specifically, Ms. Alexander ⁶⁷⁴ testified that Mrs. Pagani was instructed to “pull the pink paper [MIFCO’s copy of the invoice] ... mark it paid with the check number, and the date on it, then stamp the back of the check with the Maryland Industrial Finishing stamp, with the address and phone number, and also to use the for deposit only [stamp], and make up the deposit slip.” 3 Beginning around June 23, 1989, Mrs. Pagani started depositing checks made out to MIFCO into checking account number 353-7219 at Citizens (this account was titled in both Mr. and Mrs. Pagani’s names). At trial, Mrs. Pagani noted that almost “90 percent” of the time she used a drive-thru window to make the deposits. Mrs. Pagani undertook this deception by first typing “MIFCO” onto a blank deposit slip upon which she wrote her own account number. She then endorsed the checks with MIFCO’s stamp and submitted the “MIFCO” deposit slip with the check for deposit to her account with Citizens.

Apparently, Citizens failed to detect this scheme. Mrs. Pagani along with her husband, Michael Pagani, allegedly utilized the embezzled funds to pay for their household, automobile, insurance expenses, and a vacation to Florida. Ms. Alexander discovered the defalcation sometime in February, 1990. MIFCO then brought an action against Citizens and Mr. and Mrs. Pagani alleging negligence, conversion, unjust enrichment, and constructive trust.

Judgment was entered against Mrs. Pagani in the amount of $35,683.70 in compensatory damages and $10,000.00 in punitive damages. 4 Citizens made a motion for judgment, which the trial court granted. On appeal, MIFCO asks us the following questions: 1. Did the trial court err in not finding a conversion? 2. Did the trial court err in requiring expert testimony from the plaintiff? ⁶⁷⁵ 3.

Should the trial court have awarded pre-judgment interest? Scope of Review In the instant case, Citizens’ motion for judgment was granted at the conclusion of the appellant’s case. In Pahanish v. Western Trails, Inc., 69 Md.App. 342, 353 , 517 A.2d 1122 (1986), we stated that [i]n a non-jury trial, when a party has moved for judgment, the court is allowed as trier of fact to determine the facts and render judgment thereon. The trial judge is not compelled to make any evidentiary inferences whatsoever in favor of the party against whom the motion for judgment is made.

(Emphasis in the original). See Md. Rule 2-519(b) (1994). In the case sub judice, however, the trial court granted the motion for judgment because it did not agree with MIFCO’s assertion that Mrs. Pagani’s unauthorized indorsement was the functional equivalent of a “forged indorsement” under CL § 3-419(l)(c). Accordingly, we review the trial court’s judgment to ascertain whether it was legally correct. 1.

Conversion Issue Appellant asserts that the trial court erred in granting Citizens’ motion for judgment because an “unauthorized indorsement is a forged indorsement.” Citizens agrees with the proposition that to sustain a claim for conversion, it must be demonstrated that it paid checks with “forged indorsements.” See CL § 3—419(l)(c). Citizens, however, posits that we do not need to address the issue of whether an instrument is converted when it is paid on an unauthorized endorsement because Mrs. Pagani had the authority to endorse the instruments. a. Background It is axiomatic that a payee whose signature is forged can successfully maintain a conversion action against the drawee (bank) for paying funds upon that forged endorsement. ⁶⁷⁶ Mid-Atlantic Tennis Cts. v. Citizens Bank & Trust Co., 658 F.Supp. 140, 143 (D.Md.1987). We, thus, clarify that this is not a contract action.

Our analysis is focused solely on the tort of conversion. See Levin v. Union Nat'l Bank, 224 Md. 603, 607 , 168 A.2d 889 (1961) (“The cases also recognize that the payee whose signature is forged would have a conversion action against the drawee, but not a contract action, for paying funds upon an instrument bearing his forged indorsement.”) The Court of Appeals explained the tort of conversion in National Union Bank v. Miller Rubber Co., 148 Md. 449, 457 , 129 A. 688 (1925) as follows: “If a negotiable instrument having a forged indorsement come to the hands of a bank and is collected by it, the proceeds are held for the rightful owners of the paper, and may be recovered from them, although the bank gave value for the paper, or has paid over the proceeds to the party depositing the instrument for collection.” 5 Currently, conversion is defined at CL § 3—419(l)(e), (3) as follows: (1) An instrument is converted when ijs # if: :}! sjt (c) It is paid on a forged indorsement „ ⁶⁷⁷ (3) Subject to the provisions of Titles 1 through 10 of this article concerning restrictive indorsements 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. But see C.S. Bowen Co. v. Maryland Nat’l Bank, 36 Md.App. 26, 37-38 , 373 A.2d 30 (1977) (listing several defenses available in a conversion action). MIFCO asserts that the evidence presented during the trial established that Mrs. Pagani endorsed “checks made payable to MIFCO with a rubber stamp provided to her and then put her own account number on the check and deposited the checks in her own account at Citizens.” MIFCO explains that Mrs. Pagani’s duties included making bank deposits into MIF-CO accounts by endorsing the checks with the MIFCO stamp, that contained MIFCO’s address and phone number, and a “for deposit only” stamp.

Mrs. Alexander specifically testified that Mrs. Pagani was instructed to use both the stamps and then make the deposits into MIFCO accounts. The trial court specifically found that Mrs. Pagani’s actions were not a forgery because she was authorized to endorse the checks with the MIFCO stamp. In so concluding, the court summarized its understanding of the case as follows: [T]he number of the account was only put on the deposit slip. If the procedure used was to put the number of the account on the check as part of the signature, and that number somehow was modified, or altered, or changed or something, you might have an argument.

But that was never on the check. All that ever showed on the check was, one, the name of the company, which was used as the endorsement, and two, for deposit only. (Emphasis added). We conclude that the trial court erred in its analysis and explain. ⁶⁷⁸ b.

Other jurisdictions In Matco Tools Corp. v. Pontiac State Bank, 614 F.Supp. 1059 (E.D.Mich.1985) the court addressed whether a payee of a negotiable instrument could bring an action against the depository bank for accepting the instrument over an unauthorized endorsement. On the issue of the endorsement, the Court noted that [t]he parties seriously dispute whether any endorsement on the check can be considered “forged.” Matco clearly gave Cox authority to endorse checks from customers. Travelers, however, was not a customer of Cox. [U.C.C.] Section 3-401(2) provides: A signature is made by use of any name, including any trade name or assumed name, upon an instrument, or by any word or mark used in lieu of a written signature. Here, the check bore an endorsement stamp bearing the words “Matco Tools.” This suffices as Matco’s signature under section 3^401(2).

Section 1-201(43) defines an unauthorized signature to mean “one made without actual, implied or apparent authority and includes a forgery.” Conversely, a signature which is authorized is not a forgery. It is clear that Cox had no express authority to endorse the check on behalf of Matco because Travelers, the drawer of the check, was not a customer of Cox. Id. at 1062 (citations omitted). The Court then effectively concluded that the bank had converted the instrument because it “deposited the check in the account of DMC Enterprises over the unauthorized endorsement of Matco.” Id.

The Court further opined that the bank’s assertion that “nothing on the face of the check put it on notice that Cox was acting beyond the scope of his authority” was relevant to the issue of whether it had acted in a commercially reasonable manner. Id. ⁶⁷⁹ Numerous other jurisdictions have held that the term “forgery,” 6 in their respective equivalent of CL § 3-419, is applicable to unauthorized endorsements. 7 See generally, Equitable Life Assur. Soc. of U.S. v. Okey, 812 F.2d 906 , 908 (4th Cir.1987) (“an action for conversion lies when an instrument is paid on a forged indorsement. An unauthorized indorsement receives the same treatment as a forgery.”); D & G Equip ⁶⁸⁰ ment v. First Nat'l Bank of Greencastle, PA., 764 F.2d 950, 955 (3d Cir.1985) (interpreting the Pennsylvania equivalent of CL § 3-419(l)(e) as follows “[although by its terms this section would seem to require an actual forgery as a precondition to liability, section 3-419 has been generally interpreted to impose liability when an instrument is paid upon an unauthorized indorsement as well.”); Oswald Machine & Equip., Inc. v. Yip, 10 Cal.App. 4th 1238, 1243-44 , 13 Cal.Rptr.2d 193 (1992) (holding that the conversion provisions relating to forged endorsements are also applicable to unauthorized endorsements); Fort Dodge Creamery Co. v. Commercial State Bank, 417 N.W.2d 245, 246 (Iowa App.1987) (concluding that for purposes of a conversion action, forged endorsement and an unauthorized endorsement are synonymous); Levy v. First Pennsylvania Bank N.A., 338 Pa.Super. 73 , 487 A.2d 857, 860-61 (1985) (noting that an unauthorized signature is the same as a “forgery” for purposes of an action for conversion under the U.C.C.); Confederate Welding v. Bank of the Mid-South 458 So.2d 1370, 1373-74 (La.App.1984) (explaining that an unauthorized endorsement is a “forged endorsement”); Aetna Cas. & Sur.

Co. v. Hepler State Bank, 6 Kan.App.2d 543 , 630 P.2d 721, 723, 725-26 (1981) (“There is no substantial difference between an unauthorized indorsement and a forged indorsement, the result being the same insofar as concerns the passing of title.”); Equipment Distrib. v. Charter Oak Bank, etc., 34 Conn.Supp. 606 , 379 A.2d 682, 684 (Conn.Super.Ct.1977) (holding that “collection of the proceeds of [a] check based on an unauthorized endorsement constituted a conversion”); Hartford Accident and Indemnity Co. v. South Windsor Bank and Trust Co., 171 Conn. 63 , 368 A.2d 76, 79-80 (1976) (“An unauthorized signature, one made without actual, implied or apparent authority and including a forgery, is inoperative as that of the person whose name is signed. The unauthorized signature in this case may not constitute a forgery in the strict sense, but the use of the term ‘forged endorsement’ ... does not preclude the finding of a conversion.”); Salsman v. National Community Bank of Ruther ⁶⁸¹ ford, 102 N.J.Super. 482 , 246 A.2d 162, 167-68 (Law Div.1968), (“There is no substantial difference between an unauthorized endorsement and a forged endorsement, the result being the same in so far as concerns the passing of title.”), affirmed 105 N.J.Super. 164 , 251 A.2d 460 (1969). See also 6A Anderson, Uniform Commercial Code, § 3-419:71, p 126-27 (3d ed. 1993) (“Payment on an unauthorized indorsement is a conversion as there is no distinction between a forged indorsement and one made without authorization”). Accord Payee’s Right Of Recovery, In Conversion Under UCC § 3-I19(l)(c), For Money Paid On Unauthorized Indorsement, 23 A.L.R.4th 855 (1983 & Supp.1993); 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 (1965 & Supp. 1993, 1994).

Contra, Jones v. Van Norman, 513 Pa. 572 , 522 A.2d 503, 507 (1987). Thus, as in the case of a forgery, when a bank accepts an instrument with an unauthorized endorsement, it has exercised “dominion and control over the instrument inconsistent with the rights of the owner, and results in liability for conversion.” 2A West’s Unif. Laws Ann., Unif. Comm.Code, Off. com. 3 to § 3—119, p. 341 (1991).

We find the reasoning of these cases and other authorities to be persuasive on this point and conclude that CL § 3-419(l)(c) is applicable in instances of unauthorized endorsement. CL § 3-202(1) explains that an