Tennessee

Warning: The following opinion is provided for purposes of discussion only. We have not Shepardized™ this opinion, and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

K.T. McConnico, Jr. v. Third National Bank in Nashville,
1972.TN.98 (Tenn.App. 04/28/1972)

COURT OF APPEALS OF TENNESSEE, MIDDLE SECTION, AT NASHVILLE

K. T. McCONNICO, JR., TRUSTEE, Complainant-Appellee

v.

THIRD NATIONAL BANK IN NASHVILLE, Defendant-Appellant

Slip Opinion

1972.TN.98

Date Filed: April 28, 1972

Appeal from Part One of the Chancery Court of Davidson County; Honorable Ned Lentz, Chancellor.

APPELLATE judges:

Thos. A. Shriver, Presiding Judge. Puryear, J., concurs. Henry F. Todd, J., concurs in part, Dissents in part.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE SHRIVER

This is a suit by the Trustee in Bankruptcy of W. T. Hardison & Company against the defendant as the depositary bank which cashed or received for deposit ten checks drawn by or payable to W. T. Hardison & Company. It is the insistence of complainant that Tom Hardison, Jr., sometimes referred to as W. T. Hardison or W. T. Hardison, IV, misappropriated the funds of W. T. Hardison & Company by converting the aforementioned checks or their proceeds to his personal use, and that the defendant Bank participated in such conversion by cashing or receiving said checks for deposit to the credit of Tom Hardison, Jr., or by permitting him to withdraw the proceeds of said checks for his own personal use, contrary to accepted banking practices and through negligent failure to investigate the said transactions which were out of the ordinary, or conducted in such manner as to put the Bank on notice of irregularities in connection with same.

The transactions complained of occurred over a period from February 24, 1967 to August 15, 1969.

The cause came on to be heard before Chancellor Ned Lentz on August 8, 1971 on the pleadings, depositions of certain witnesses, oral testimony of other witnesses, stipulations entered into by the parties, documentary evidence and briefs and arguments of counsel, and resulted in a decree sustaining the allegations and prayers of the bill and a judgment against the defendant for $ 116,333.73. From this decree defendant duly perfected an appeal to this Court and assigned errors.

- THE PLEADINGS AND STIPULATIONS -

In view of the stipulations entered into by the parties it will not be necessary to recite the allegations of the bill and the averments of the answer, nor will it be necessary to discuss at any length the testimony of witnesses. This is true because, aside from the stipulations, there are no material determinative facts which are in serious dispute, although there is sharp disagreement as to inferences of fact and Conclusions of law properly to be drawn from the admitted facts and conduct of the parties.

The Chancellor in his Memorandum Opinion recites that the complainant stated the issues in the cause in the following manner:

"This suit has been brought by the Trustee in Bankruptcy of W. T. Hardison & Company against the Third National Bank in Nashville to recover the sum of $ 99,433.60, with interest, upon the theory that the defendant Bank, as the collecting Bank, participated in the conversion of certain checks belonging to the bankrupt, and that in so doing the defendant Bank was so negligent that it did not act in good faith or in accord with reasonable commercial standards applicable to the banking business in this community."

The Chancellor quotes the defendant as stating the issues as follows:

"1. In depositing in his personal checking account checks of W. T. Hardison & Company, signed by him as President, did Tom Hardison, Jr., the sole stockholder of the Company, breach a fiduciary duty?

2. In accepting for deposit to, and permitting withdrawals from, the personal checking account of Tom Hardison, Jr., checks and the proceeds thereof of W. T. Hardison & Company, signed by Tom Hardison, Jr., (its sole stockholder), did the defendant have actual knowledge that Tom Hardison, Jr., by transferring the checks to defendant and making withdrawals from his account was breaching a fiduciary duty, if, in fact, such breach of duty occurred?"

The defendant places the checks involved herein into four categories, as follows:

"(1) Checks of W. T. Hardison & Company payable and negotiated for cash at defendant Bank by a transferee of Tom Hardison, Jr.;

(2) A check of W. T. Hardison & Company, payable to cash and deposited by Tom Hardison, Jr. in his personal checking account at defendant Bank;

(3) Checks issued by W. T. Hardison & Company, payable to the order of Clear Creek Coal Co., signed by W. T. Hardison and endorsed by him in the name of Clear Creek Coal Company, not delivered to Clear Creek Coal Company, but deposited by Tom Hardison, Jr. in his personal checking account in defendant Bank;

(4) A check issued by Merrill Lynch, Pierce, Fenner & Smith to W. T. Hardison & Company, endorsed for the latter Company by W. T. Hardison and deposited in his personal checking account at defendant Bank."

It is stipulated by the parties as follows:

(1) That the complainant is the duly appointed Trustee in Bankruptcy for W. T. Hardison & Company, a Tennessee corporation with principal office in Nashville, which filed its petition in bankruptcy on the 27th day of October, 1969; that creditors' claims totaling $ 1,221,401.25 have been filed against the bankrupt in the bankruptcy proceeding, of which the claim of First American National Bank is in the approximate amount of $ 870,891.87, and assets in the possession of the Trustee total $ 177,619.97. The Trustee has excepted to the claim of First American National Bank.

(2) The status of the Third National Bank in Nashville as a national bank.

(3) That William Thomas Hardison, IV, is sometimes referred to as W. T. Hardison, IV, W. T. Hardison, Jr., Tom Hardison, Jr., and that during the years 1967, 1968 and 1969, he maintained a personal checking account with the defendant in the name of Tom Hardison, Jr., being Account No. 39-07-906.6.

(4) That during the time in question W. T. Hardison & Company did not maintain a bank account with the defendant, but,

(5) That during the time in question the First American National Bank was the depository of funds of W. T. Hardison & Company.

(6) That during the time in question Tom Hardison, Jr. was the sole stockholder of W. T. Hardison & Company, and its chief executive officer.

(7) That the resolution attached as Exhibit 1 was on file with the First American National Bank of Nashville during the years 1967, 1968 and 1969.

(8) That the checks, Exhibit 2 to the stipulation, were drawn on the account of W. T. Hardison & Co. at First American National Bank of Nashville and executed by W. T. Hardison as President of W. T. Hardison & Co., payable to Clear Creek Coal Company of Monterey, Tennessee, and such checks were not delivered to said Coal Company but were endorsed by Tom Hardison, Jr, with the words "Clear Creek Coal Co." and deposited to the account of Tom Hardison, Jr. in the Third National Bank, and

(9) That each of these checks, payable to Clear Creek Coal Company, had written thereon, "For Deposit only 39-07-906-6" or "Deposit to: 39-07-906-6," and were paid by the First American National Bank to the Third National Bank and all proceeds were withdrawn from Third National Bank by Tom Hardison, Jr.

(10) That the check dated May 22, 1968, in the amount of $ 15,000, drawn on the account of W. T. Hardison at the First American National Bank, signed by W. T. Hardison, payable to cash and endorsed, "W. T. Hardison & Co. by W. T. Hardison," was deposited in the account of Tom Hardison, Jr., at the Third National Bank in Nashville from which the proceeds were withdrawn by Tom Hardison, Jr. The said check was charged to W. T. Hardison on the books of W. T. Hardison & Co. Said check is attached as Exhibit 3.

11. That check dated February 24, 1967, payable to cash, in the amount of $ 2,750, drawn on the account of W. T. Hardison & Co. at the First American National Bank by W. T. Hardison, bears the endorsement of W. T. Hardison and B & B Liquor Store, and this check was negotiated for cash by transfer from B & B Liquor Store to Third National Bank which paid cash to B & B Liquor Store in the face amount of the check. The said check was charged to W. T. Hardison on the books of W. T. Hardison & Co. Said check is attached as Exhibit 4.

12. That check dated March 24, 1967, payable to cash in the amount of $ 3,500, drawn on the account of W. T. Hardison & Co. at the First American National Bank by W. T. Hardison, bears no endorsement other than a typewritten endorsement, "B & B Liquor Store," and that said check was negotiated for cash by transfer from B & B Liquor Store to Third National Bank which paid cash to B & B Liquor Store in the face amount of the check. The said check was charged to W. T. Hardison on the books of W. T. Hardison & Co. Said check is attached as Exhibit 5.

13. That the First American National Bank of Nashville was the bank upon which each check payable to Clear Creek Coal Company was drawn and upon which the two checks bearing the endorsement of B & B Liquor Store and the checks referred to in paragraph 10 hereof were drawn, and the defendant, Third National Bank, endorsed each of the aforesaid checks, prior endorsements guaranteed, transmitted them through the clearing house to the drawee bank for payment and received payment there for.

14. On June 4, 1968, W. T. Hardison & Company issued its Check No. 5053 drawn on the First American National Bank, payable to the order of Merrill Lynch, Pierce, Fenner & Smith for $ 10,135.15, which was charged on the books of W. T. Hardison & Company to W. T. Hardison, IV (Tom Hardison, Jr.), personally, and was delivered by Tom Hardison, Jr. to Merrill Lynch, Pierce, Fenner & Smith for Tom Hardison, Jr's. personal debt; this check was deposited by Merrill Lynch, Pierce, Fenner & Smith in its bank account and was paid by the drawee bank. On June 25, 1968, Merrill Lynch, Pierce, Fenner & Smith issued its Check No. 18485 payable to the order of W. T. Hardison & Company in the amount of $ 10,135.15, drawn on Third National Bank in Nashville, payable to W. T. Hardison & Company as a refund of the $ 10,135.15 check it had received from W. T. Hardison & Company on June 4, 1968, and the said Check No. 18485 of Merrill Lynch, Pierce, Fenner & Smith, payable to the order of W. T. Hardison & Company, was endorsed W. T. Hardison & Company by W. T. Hardison, and had written thereon, "For deposit to 39-07-906-6," and was deposited in the Third National Bank in his personal account which was credited with the amount of the check of June 26, 1968. On June 26, 1968, his said personal account in the Third National Bank was charged with a check payable to the order of Merrill Lynch, Pierce, Fenner & Smith in the amount of $ 12,263.30, representing a check he had delivered to Merrill Lynch, Pierce, Fenner & Smith, drawn on his personal account at the Third National Bank for an obligation of Tom Hardison, Jr. Xeroxcopy of Check No. 18485 is attached as Exhibit 6, and xerox-copy of ledger account of W. Thomas Hardison, IV, with Merrill Lynch, Pierce, Fenner & Smith for the period ending June 28, 1968 is attached as Exhibit 7.

15. On August 21, 1969, Tom Hardison, Jr., issued a check on his personal account at Third National Bank, payable to the order of said Bank, for $ 10,000.00, with which he purchased from the Third National Bank's Melrose Office, 531 Franklin Road, Nashville, Tennessee, one hundred (100) American Express Travelers Cheques for $ 100 each.

The above paragraphs constitute the complete stipulation entered into and filed in the cause.

Referring now to the pleadings and the contentions of the parties, it is to be noted that there is no claim of fraud or dishonesty on the part of the defendant Bank in the transactions involved here. And it is understood and admitted that the Trustee stands in the shoes of the corporation, to-wit, the stockholders and creditors.

There is no contention that it is illegal for a stockholder or officer of a corporation to borrow from or lend to that corporation.

Significantly, the Bill of Complaint makes no allegation of insolvency of the corporation during the period in which the questioned transactions occurred, February 24, 1967 to August 15, 1969, and there is no allegation that the transactions involved here produced a state of insolvency or contributed to such condition.

It is to be noted that the bill herein was filed February 9, 1970 and W. T. Hardison was adjudicated a bankrupt as of October 27, 1969, whereas, the last transaction in the series questioned by this litigation occurred on August 15, 1969, and no evidence is offered that W. T. Hardison & Company was insolvent prior to bankruptcy.

Considering the checks involved, it is to be noted that nine of the ten checks upon which the Trustee's claim is predicated were issued by W. T. Hardison & Company, drawn on its account at the First American National Bank, and signed by W. T. Hardison as President of the Company. The other, or tenth check involved, was issued by Merrill Lynch, Pierce, Fenner & Smith, payable to the order of W. T. Hardison & Company, as set forth in Item 8 of the stipulation hereinabove.

The defendant denies liability and, among others, presents the following defenses:

(1) At the time of each transaction the defendant had no knowledge of any fraud, misappropriation of funds or other wrongdoing by Hardison;

(2) Those checks which defendant cashed or accepted as deposits were received in good faith, in reliance on the validity of the maker's signature and the legal effectiveness of the endorsements, and insists that it was the holder in due course in good faith and for value;

(3) That as to the defendant, the endorsements by Hardison of the payee's name on the checks payable to Clear Creek Coal Company were effective endorsements, since those checks were signed by Hardison on behalf of W. T. Hardison & Company, intending that the payee have no interest in such checks;

(4) That the defendant received the check of Merrill Lynch, Pierce, Fenner & Smith, which was payable to the order of W. T. Hardison & Company and endorsed by Tom Hardison for his Company (with authority to do so) and for deposit to his persona account with defendant as a holder in due course, without any knowledge of fraud, misappropriation or bad faith;

(5) That the acts of Tom Hardison, Jr. in connection with said checks, were the acts of W. T. Hardison & Company since he acted within the scope of his authority in signing, endorsing and transferring said checks;

(6) That all of the said checks drawn on the W. T. Hardison & Company account at First American National Bank were paid by the drawee bank to which defendant guaranteed prior endorsements and such payment is final in favor of defendant as a holder in due course;

(7) That Tom Hardison, Jr., the sole stockholder of W. T. Hardison & Company, its President, chief executive and financial officer, so controlled and dominated the corporation that it merged into his individuality and became a mere instrument of his will so that his acts were the acts of the corporation and were authorized by the said corporation with the consent of its shareholders.

- ASSIGNMENTS OF ERROR AND OUR HOLDINGS -

We will discuss the assignments of error in the order in which they appear in the Assignments and Brief of the appellant.

Assignment No. 1 asserts that the Chancellor erred in finding that the defendant in cashing checks for the B & B Liquor Store drawn on the account of W. T. Hardison & Company at First American National Bank on February 24, 1967 and March 24, 1967 for $ 2,750.00 and $ 3,500.00, respectively, had knowledge of a diversion of corporate funds for non-corporate purposes for the benefit of Tom Hardison, Jr., thereby making the defendant liable to complainant for the amount of said checks.

It is insisted by the defendant-appellant that as to the checks cashed for the B & B Liquor Store, defendant was the holder in due course without actual knowledge of any defense to or irregularity in the checks cashed, and, under the Uniform Commercial Code of Tennessee, is not liable to complainant.

As to the check of February 24, 1967, the record shows that Hardison, as President of W. T. Hardison & Company, signed the check drawn on that Company's account at the First American National Bank, payable to the order of cash for $ 2,750.00, which he endorsed and which bears the endorsement of B & B Liquor Store. This check was negotiated at defendant's East Nashville Branch by B & B Liquor Store for the face amount of the check.

On March 24, 1967, a check of W. T. Hardison & Company for $ 3,500.00, payable to cash, was drawn on the account of W. T. Hardison & Company at First American National Bank and signed by Hardison as President of the Company. This check bears no endorsement other than that of B & B Liquor Store and was cashed at defendant's East Nashville Branch by the B & B Liquor Store for the face amount of the check.

The record shows that the B & B Liquor Store was a regular customer of the defendant's East Nashville Branch and its owner was well known to the defendant's employees at the Bank. He frequently cashed checks for customers of the store which, in turn, were often carried by him to the bank and cashed or deposited.

The two checks in question were received by the Bank from B & B Liquor Store in the usual course of business. Both checks were charged to W. T. Hardison, Jr. on the books of W. T. Hardison & Company.

We fail to find in this record anything which was unusual or out of the ordinary so as to put the Bank on notice that funds were being improperly or unlawfully diverted from their proper use by Tom Hardison, Jr. We wonder what explanation the Teller at the Bank would have offered to the Bank's customer, B & B Liquor Store Manager, if it had refused to cash either of these checks when presented for payment.

So far as the record here is concerned, the Bank had every right to rely upon the endorsement of B & B Liquor Store as its security for the payment of the checks, which checks, indeed, were paid in due course when presented to First American National Bank where W. T. Hardison & Company maintained its checking account.

The first assignment is sustained and the claim of complainant arising from the cashing of the two checks for B & B Liquor Store is reversed.

Assignment No. 2 charges error in holding that defendant was so negligent in the handling of the two checks presented by B & B Liquor Store that it was rendered liable to complainant. This assignment is disposed of in our consideration of Assignment No. 1.

Assignment No. 3 charges error in finding that the Bank was liable in a transaction wherein a check for $ 15,000.00, dated May 22, 1968, drawn on the account of W. T. Hardison & Company at First American National Bank and payable to cash, was deposited by Tom Hardison, Jr. in his personal account with defendant, and wherein he, subsequently, withdrew $ 10,500.00 from his account by personal checks payable to the defendant in satisfaction of an indebtedness owing by him to defendant.

It is insisted by complainant that the effect of this transaction was the payment of Tom Hardison, Jr's. debt to the Bank with a check of W. T. Hardison & Company and that the defendant was charged with knowledge of this fact at the time of the deposit and the subsequent payment to the defendant.

In this connection it is to be observed that a Resolution of the Board of Directors of W. T. Hardison & Company, attached to the stipulation hereinabove set forth, designates the First American National Bank as depository of the corporation and specifically authorizes W. T. Hardison, IV, as President, to withdraw funds from any account of the corporation by checks, drafts, or orders payable to any individual, firm or corporation, including one or more of the parties signing or countersigning such checks, drafts or orders, with authority to cash or receive for deposit such instrument, payable to one or more of the signers, and providing that said Bank shall be fully protected in paying such, including overdrafts, against any such accounts.

Upon receipt of the $ 15,000.00 check hereinabove referred to for deposit to the account of Tom Hardison, Jr., it is insisted by the defendant-appellant that the Bank became a holder in due course of the check, free from any claim of the complain -ant, citing T.C.A. 47-3-305, which sets forth the rights of a holder in due course.

It has long been the law in Tennessee, which has not been changed by the adoption of the Uniform Commercial Code, that the holder of a negotiable note in due course without notice may enforce payment of the full amount thereof, with interest, although the note may be without consideration and invalid as between the maker and the payee; and a corporation's negotiable note for an ultra vires purpose, although not collectible by the payee thereof, is not void in the hands of an innocent purchaser for value before its maturity. See Jefferson Bank v. Chapman, 122 Tenn. 415, 123 S.W. 641, and numerous cases.

We find nothing in the record which we consider sufficient to have put the Bank on notice that there was any defect in the check or lack of authority on the part of Tom Hardison, Jr. to obtain and deposit to his account the check in question.

It results that Assignment No. 3 is sustained and the judgment rendered against the defendant for the amount of the check in question is reversed.

Assignment No. 4 charges that the Chancellor erred in finding that the endorsements of six checks aggregating $ 68,048.45, drawn on the account of W. T. Hardison & Company, signed by W. T. Hardison, Jr., payable to Clear Creek Coal Company and endorsed by W. T. Hardison, Jr. and deposited to his account with the defendant, are forgeries or unauthorized endorsements and, in either event, not sufficient to pass title to such checks to the defendant.

The defendant insists that the endorsement of a check in the name of a named payee by the signer of the check is an effective endorsement when a person signing on behalf of a maker or drawer makes the check payable to an existing person whom he knows, intending to receive it himself, and intending that the payee shall have no interest in the check. Counsel cites as authority T.C.A. 47-3-405(b) which, for reasons hereinafter stated, we think is not controlling in the instant case.

We think the clear preponderance of the evidence sustains the finding of the Chancellor that the name of Clear Creek Coal Company affixed as an endorsement on said checks by W. T. Hardison, Jr. was an outright forgery.

Section 39-1701, T.C.A., is as follows:

"'Forgery' defined. -- Forgery is the fraudulent making or alteration of any writing to the prejudice of another's rights."

In Garner v. State, 73 Tenn. 213, it was held that any alteration of a written instrument whereby its legal effect is varied will constitute the offense of forgery.

In Ratliff v. State, 73 Tenn. 213, it was said that the offense of forgery is complete by the mere forgery, with fraudulent intent, whether any third person be actually injured thereby or not, since it is sufficient that the instrument forged, with fraudulent intent, might have been prejudicial to the rights of another.

It is argued that W. T. Hardison, Jr. had no intention of conveying any right to Clear Creek Coal Company by the issuance of said checks, but intended to use said checks for his own benefit. We cannot follow this course of reasoning since there is nothing in this record to show that when the bookkeeper of W. T. Hardison & Company prepared these checks and made them payable to Clear Creek Coal Company, there was any intention that the said Coal Company should not have an interest in them. The intention on the part of the agents of the Company who prepared the checks to participate in the commission of a felony by the forgery of the Coal Company's name on said checks and the diversion of the proceeds to the private use of Tom Hardison, Jr. cannot be presumed.

Mr. Harry Talkington, President of Clear Creek Coal Company, was called to testify on behalf of the complainant. He was President during the time that the checks in question, payable to Clear Creek Coal Company, were issued and negotiated. He testified that W. T. Hardison & Company had been a customer of Clear Creek Coal Company for four and one-half or five years prior to the time the Hardison Company went into bankruptcy; that the bankrupt Company was in debt to Clear Creek Coal Company in a large amount at the time the checks were drawn and at the time the petition in bankruptcy was filed, and that the balance due the Company at the time of the trial and subsequent to the bankruptcy was "in round figures about $ 33,000.00 or $ 34,000.00."

Mr. Talkington examined each of the checks involved, to-wit: a check for $ 12,263.30 dated June 27, 1968; a check for $ 12,750.00 dated October 29, 1968; a check for $ 7,500.00 dated December 5, 1968; a check for $ 12,750.00 dated December 13, 1968; a check for $ 10,000.00 dated May 19, 1969; and a check for $ 12,785.15 dated August 15, 1969, and stated his Company's endorsements were not to be found on any one of said checks and that the endorsements on them were not authorized by his Company and the Coal Company did not receive the proceeds of these checks.

By stipulation it is shown that each of said checks were drawn on the First American National Bank of Nashville, payable to Clear Creek Coal Company, and the name "Clear Creek Coal Company" was endorsed on the back of said checks by W. T. Hardison, Jr., and each check bore the endorsement of the Third National Bank "with prior endorsements guaranteed", and were then transmitted through the Clearing House to the drawee bank for payment and were paid by said drawee bank.

Since it is shown that the W. T. Hardison Company, as a corporation, owed substantial sums of money to the Clear Creek Coal Company for coal bought and delivered by said Coal Company for the account of W. T. Hardison & Company, it necessarily follows that, in law and equity, the checks in question should have been used as credits on the indebtedness of the corporation to the Clear Creek Coal Company, which indebtedness continued until the bankruptcy petition was filed although some payments were made on the account from time to time.

Beyond any question, the Clear Creek Coal Company was damaged and sustained a loss by the unauthorized cashing of these checks and the diversion of the funds from it to the personal account of W. T. Hardison, Jr., and it seems equally clear that the assets of the corporation (W. T. Hardison & Company) available for the payment of debts were diminished by reason of having its checks diverted from the payment of a just account then owing, to the personal use of W. T. Hardison, Jr.

It is to be noted that the last of the above mentioned checks payable to Clear Creek Coal Company was dated August 15, 1969, just a little more than two months before W. T. Hardison & Company was adjudicated a bankrupt with creditors' claims totaling $ 1,221,401.25 and with assets totaling $ 177,619.97.

As is stated by counsel for the complainant in his well-reasoned Brief and Argument, it is settled law in Tennessee that a Bank receiving and collecting a check upon a forged or unauthorized endorsement of the payee's name is liable to the payee for its proceeds, although the Bank has fully paid over and accounted for the same to the forger without knowledge or suspicion of the forger. Water Co. v. Bank, 123 Tenn. 364, 373, and Farmer v. Bank, 100 Tenn. 187.

And, where the payees of checks were bona fide creditors of the drawer, the Bank is not relieved of liability to the drawer because of U.C.C. 3-405 (1) (b), upon the theory that it was not intended for the payee to have an interest in the instrument. Snug Harbor Realty Co. v. First Natl. Bank of Toms River, N.J., 105 N.J., 572, 253 A. 2d 581. Affirmed 54 N.J. 95, 253 A. 2d 545.

Applying these authorities to the facts shown here, the Trustee in Bankruptcy, standing in the shoes of the bankrupt corporation, has a right to recover on behalf of the corporation and its creditors.

In Pickle v. People's Natl. Bank, 88 Tenn. 380, 7 L.R.A., 93, 17 Am. St. Rep. 900, it was held that, after acceptance by a bank of a check drawn upon it in favor of a particular payee or order, the bank must at its peril see that the check is paid to the payee therein named or upon his genuine endorsement. If the bank mistakes the identity of the payee or pays to another upon a forged endorsement, it will remain responsible.

In Chism v. First Natl. Bank, 96 Tenn. 641, 32 L.R.A. 778, it was held that where a bank draft is endorsed by the payee to a fictitious person in good faith, the endorsement of the name of the fictitious endorsee by a third person without authority is a forgery and does not protect the bank in paying the draft.

In Gardner v. American Woodmen, 11 Tenn. App. 52, the Court held that where a party deposited money in the bank to the credit of complainant with the knowledge of the bank and later checked the money out on forged checks, the bank was guilty of converting the funds of complainant.

It is significant that Mr. Warren Gray, one of the executive officers of the defendant bank, in his deposition, says that the transactions were unusual and, if known, should have caused further inquiry to be made by the Bank.

It also appears from the record that the Bank made no inquiry, did not ask for or receive a corporate resolution authorizing these transactions involving checks payable to the Clear Creek Coal Company, and did not at any time communicate with the Coal Company with respect to these checks.

It also appears in the record that printed instructions to the Tellers of the defendant Bank provide: "Checks payable to corporations cannot be cashed. These must be deposited." We construe this to mean that such checks must be deposited to the account of the payee.

It is again to be observed that officers and directors of a corporation are fiduciaries, as that term is defined in the Uniform Fiduciaries Act (T.C.A., 35-202 (1) (b) ), and it has been consistently held by the Courts of this State that officers of a corporation owe a fiduciary duty to the creditors as well as the shareholders.

In Central Bus Lines v. Hamilton Natl. Bank, 34 Tenn. App. 480, 239 S.W.2d 583, it was said:

"Corporate officers stand in a fiduciary relation to the corporation and while occupying such position must act in utmost good faith and cannot deal with corporate assets for themselves and for the corporation at one and the same time even though they own or control a great majority of the stock."

We call attention to Section 11-107 of Chapter 7 of the Bankruptcy Act which provides that every transfer made and every obligation incurred by a debtor within one year prior to the filing of a petition in bankruptcy is fraudulent as to creditors existing at the time of such transfer, if made or incurred without fair consideration by a debtor who is or will be thereby rendered insolvent, without regard to his actual intent, and is fraudulent if made or incurred without fair consideration by a debtor who is engaged or is about to engage in such business or transaction, for which the property remaining in his hands is an unreasonably small capital, or by a debtor who intends to incur or believes that he will incur debts beyond his ability to pay as they mature.

And, under subsection (6) it is provided that a transfer made or an obligation incurred by a debtor adJudged a bankrupt under this title, which is fraudulent against creditors of such debtor having claims provable under this title, shall be null and void against the Trustee, except as to bona fide purchasers and lienors for fair value.

In Evans v. Wood, 41 Idaho 679, 241 P. 609, it was held that, under this section a conveyance made with intent to hinder, delay or defraud creditors is void, although the debtor may have other property sufficient to satisfy their claims.

And, in Marlow v. Gillen, 5 N.E. 2d 327 (Ohio), it was held that the intent to hinder, delay, or defraud creditors need not be shared by transferee to make the transfer of the bankrupt within four months of bankruptcy void.

In Maley, Trustee in Bankruptcy, v. East Side Bank of Chicago, 234 F. Supp. 395, affirmed in opinion rendered by U.S. Court of Appeals, 7th Circuit, 361 F. 2d 393, the Court, in dealing with a fraudulent transfer within one year of bankruptcy and in holding the defendant bank liable on the ground that it had been guilty of gross negligence in the handling of the assets, cashing of checks, etc., of the sole stockholder of the bankrupt corporation, discussed at length the sole stockholder's legal right to corporate assets and the proposition of liability of the bank because of gross negligence.

Among other things, the Court said that there was a fraudulent transfer where, within one year of bankruptcy, while the corporation's capital was unreasonably small and it was incurring debts beyond its ability to pay as they matured, the sole stockholder, with intent to defraud the corporation's creditors, cashed checks payable to the corporation and received the proceeds personally, stating that the sole stockholder's legal right to the corporate assets is subservient to the right of the corporation's creditors and the bank cannot legally pay out corporate funds except upon approval and signature it has been instructed as being necessary.

Among other things, the Court said:

"The corporate shell is there for a very real reason - to protect both the stockholders and the creditors, and the bank could not so lightly assume that the sole stockholder had the absolute right to corporate proceeds. And especially should this be so where the circumstances surrounding the transactions were so fraught with suspicion."

The Court concluded as follows:

"The Court is of the opinion that in the factual setting of this case that Schulman's being the sole stockholder - if he were - should not affect the Conclusion as to the rights of the creditors of the corporation against the bank. It made the severe losses possible through its gross negligence and violation of the resolution on file.

The Court of Appeals in its opinion, among other things, stated that it could not say that evidence of gross negligence does not have a proper place in a lawsuit such as the one under consideration and that the evidence of the circumstances in that case, as set forth in the opinion, had satisfied the Court that the decision of the Trial Judge should be approved as being based upon the obvious fact that the defendant bank had committed a serious breach of duty which resulted in detriment to the corporation's innocent creditors. The Court also observed that the Bank knew or should have known that the sole stockholder of the bankrupt corporation was in the position of a fiduciary and that his action in diverting funds to his own personal account was in breach of that duty which was known or should have been known to the defendant bank.

It results that Assignment No. 4 is overruled and the judgment of the Chancellor for recovery by the Trustee of the aggregate amount of the checks of W. T. Hardison & Company to Clear Creek Coal Company, with interest, is affirmed.

Assignment No. 5 dealing with the same subject matter as that in Assignment No. 4 is likewise overruled and the judgment of the Chancellor affirmed.

Assignment No. 6 deals with the same subject matter as that covered in Assignments Nos. 4 and 5, but it is not necessary for us to pass on the sufficiency of said assignment.

Assignment No. 7 charges error on the part of the Chancellor in finding that when the check of Merrill Lynch, Pierce, Fenner & Smith, payable to W. T. Hardison, Jr., was deposited by him in his personal account at the defendant Bank, the defendant had knowledge that a fiduciary (Tom Hardison, Jr.), had negotiated the instrument for his own benefit and in breach of his duty to W. T. Hardison & Company.

In reviewing the questions posed by the transaction in which the check of Merrill Lynch, Pierce, Fenner & Smith was handled, we cannot agree with the Chancellor that the Bank violated any duty or was grossly negligent in the handling of same so as to render it liable to the Trustee in Bankruptcy.

It is to be remembered that Tom Hardison, Jr., sole stockholder, President and dominant influence in the affairs of W. T. Hardison & Company, had authority to endorse corporate checks and the defendant is not shown to have had any knowledge of any defense to such check when it accepted it for deposit.

In regard to the Merrill Lynch check for $ 10,135.15, it appears that on June 4, 1968, W.T. Hardison & Company issued its check on the First American National Bank, signed by W.T. Hardison, Jr, payable to the order of Merrill Lynch, Pierce, Fenner & Smith, which was charged on the books of W. T. Hardison & Company to Tom Hardison, Jr., personally, and was delivered by him to Merrill Lynch, Pierce, Fenner & Smith for his personal debt.

The check was deposited to the account of the payee and was paid by the First American National Bank. On June 25, 1968 the payee issued its check payable to the order of W. T. Hardison & Company in the amount of $ 10,135.15, drawn on the Third National Bank in Nashville, as a refund of the check which it had received on June 4th from the corporation. This check was endorsed in the name of the corporation and written underneath the endorsement was the following: "For deposit to 39-07-906-6," the personal account of Tom Hardison, Jr. So endorsed, it was accepted for deposit by defendant Bank in the personal account of Tom Hardison, Jr., and on the same day, to-wit, June 25, 1968, Tom Hardison, Jr. issued his personal check drawn on the above numbered account, payable to Merrill Lynch, Pierce, Fenner & Smith in the amount of $ 12,263.30. This check was in payment of the $ 10,135.15 personal obligation of Tom Hardison, Jr., and an additional obligation of slightly in excess of $ 2,000.00. Complainant seeks to recover the sum of $ 10,135.15.

In this transaction we are unable to conclude from the stipulation and the evidence that the Bank violated its duty to the parties involved or was, as the Chancellor held, so grossly negligent as to become liable. On the other hand, it appears that the Bank received the deposits made by Tom Hardison, Jr. in the regular course of business without any actual knowledge of any misappropriation of funds on his part, if, indeed, there was a misappropriation in this particular transaction, and without such negligence in the handling of these accounts as would render the Bank liable.

Assignment No. 7 is sustained and the judgment of the Chancellor for the $ 10,135.15 is reversed.

The foregoing disposes off the matters involved here and it is, therefore, unnecessary to discuss the remaining assignments which deal with these same checks and deposits.

It results that the judgment of the Chancellor is reversed except as to the checks involving the Clear Creek Coal Company payments, the judgment as to which, as hereinabove stated, is affirmed. The cause is remanded for such other and further orders and decrees as may be necessary or proper in conformity with this Opinion. The costs will be equally divided between complainant and defendant.

AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.

CASE RESOLUTION

AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.

MINORITY OPINION

It is necessary to express respectful disagreement with that portion of the majority opinion which allows a recovery of $ 68,048.45 based upon the five checks issued by W. T. Hardison & Company to Clear Creek Coal Company and diverted by W. T. Hardison, IV, by improper endorsement to his own use through the cooperation of the defendant, Third National Bank in Nashville.

If the checks payable to Clear Creek Coal Company were the property of Clear Creek and were feloniously diverted and cashed with forged endorsements, then the right of action for such diversion, forgery and cashing would belong to Clear Creek, not the trustee in bankruptcy. However, the checks did not belong to Clear Creek, hence Clear Creek has no right of action.

It was stipulated that none of said checks were delivered to Clear Creek Coal Company. It is assumed that they were issued with an intent that they be delivered to and cashed by the payee. However, so long as such checks remained in the possession and/or control of W. T. Hardison & Company, its agents or servants, it was within the power and authority of W. T. Hardison & Company, its agents or servants, to change the original intent of preparation of the checks (i.e., delivery to Clear Creek) and to destroy or otherwise divert the checks and/or their proceeds to other destinations. This, indeed, is what occurred. Regardless of the original intent of issuance, before the checks were delivered, the sole owner, director and president of W. T. Hardison & Company determined not to deliver the checks to Clear Creek Coal Company, but to divert the checks and funds they represented to another destination.

Until the checks were delivered to the payee, the payee acquired no title to the checks or the funds represented by them. Until the payee received delivery of the checks, it had no "rights" therein to be prejudiced. Therefore, the irregular, unauthorized endorsement of the checks by W. T. Hardison, IV, did not prejudice the rights of Clear Creek Coal Company.

"Forgery is the fraudulent making or altering of any writing to the prejudice of another's rights." T.C.A. 39-1701 (Emphasis Supplied)

The diversion of the checks by W. T. Hardison, IV, was equivalent to his obtaining cash from his corporation for the proposed purpose of transmission to Clear Creek Coal Company and thereafter converting such cash to his own use.

Thus the handling of the checks payable to Clear Creek Coal Company was no more and no less than the other bizarre transactions of W. T. Hardison, IV, which produced this lawsuit; namely, the diversion of corporate funds to the personal use of the sole stockholder of the corporation.

Accordingly, the right to recover for such diversion or withdrawal of assets by the sole stockholder is governed by the same rule which prevents the recovery for other diversions or withdrawals involved in this suit; namely, the creditors, ergo the trustee, can recover only for those withdrawals by a sole stockholder which occurred while the corporation was insolvent or which rendered the corporation insolvent. There is no evidence that any of the checks payable to Clear Creek Coal Company ware diverted under these conditions.

The last of the Clear Creek Coal Company checks was dated August 15, 1969, seventy-three days before the filing of petition in bankruptcy on October 24, 1969. It is conceivable, but hardly subject to inference or presumption, that the corporation was, or became insolvent within a 73 day period before bankruptcy. The next earlier check was dated May 19, 1969, more than five months prior to bankruptcy and the others were dated 11 months and 12 months prior to bankruptcy.

The total of the Clear Creek Coal Company checks was $ 68,048.45, yet the debt of the corporation to Clear Creek at bankruptcy was "in round figures, about $ 33,000.00 or $ 34,000.00." If the $ 68,048.45 in checks was issued for an actual debt to Clear Creek Coal Company, then obviously, between the diversion of the subject checks and the bankruptcy, Clear Creek Coal Company received other checks representing other funds of the corporation to the amount of at least $ 34,048.45 to reduce the debt from $ 68,048.45 to the estimated $ 34,000.00 balance at bankruptcy. There is no evidence that the corporation was insolvent at the time of or rendered insolvent by the (supposed) payment of this amount to partially replace the previously diverted funds.

The foregoing reasoning assumes that there was no continuation of shipments of coal, charges and payment therefor between the time of the diversion of checks and the petition in bankruptcy.

The "$ 33,000.00 or $ 34,000.00" due Clear Creek Coal Company at bankruptcy may well be the result of the diversion of the $ 68,048.45 in checks payable to Clear Creek. This does not necessarily establish that this $ 33,000.00 or $ 34,000.00 indebtedness, when left unpaid by diverted checks, rendered the corporation at that time insolvent. The mere existence of a delinquent, past due, unpaid debt does not render a corporation insolvent, and the continuation of such a debt to bankruptcy does not establish that the corporation was insolvent at all times that the debt was in existence.

The running account between Clear Creek Coal Company and the corporation was no different from the running checking account between First American Bank and the corporation. Each was a series of charges and credits. The coal company generally carried a "debit" balance due to the coal company; and the bank generally carried a "credit" balance due the corporation; but the results of transactions were the same: if the corporation transmitted funds to either the bank or coal company, it was "credited," and if it received funds or property from either the bank or coal company, it was "charged."

Therefore, the rights of the trustee in bankruptcy in respect to the dealings of W. T. Hardison & Company and its sole stockholder with Clear Creek Coal Company should be subject to the same rules as their dealings with banks and others. The degree of irregularity of the conduct of W. T. Hardison, IV, or the degree of negligence of the defendant bank in honoring improper endorsements cannot obviate the necessity of a showing of insolvency at the time of the acts complained of because the only rights of the trustee in bankruptcy in this case are the rights of creditors.

The Federal Bankruptcy Act, § 67(d), 11 U.S.C.A. § 107(d) provides in part:

"(2) Every transfer made and every obligation incurred by a debtor within one year prior to the filing of a petition initiating a proceeding under this title by or against him is fraudulent (a) as to creditors existing at the time of such transfer or obligation, if made or incurred without fair consideration by a debtor who is or will be thereby rendered insolvent, without regard to his actual intent; or (b) as to then existing creditors and as to other persons who become creditors during the continuance of a business or transaction, if made or incurred without fair consideration by a debtor who is engaged or is about to engage in such business or transaction, for which the property remaining in his hands is an unreasonably small capital, without regard to his actual intent; or (c) as to then existing and future creditors, if made or incurred without fair consideration by a debtor who intends to incur or believes that he will incur debts beyond his ability to pay as they mature; or (d) as to then existing and future creditors, if made or incurred with actual intent as distinguished from intent presumed in law, to hinder, delay, or defraud either existing or future creditors.

"(6) A transfer made or an obligation incurred by a debtor adJudged a bankrupt under this title, which is fraudulent under this subdivision against creditors of such debtor having claims provable under this title, shall be null and void against the trustee, except as to a bona fide purchaser, lienor, or obligee for a present fair equivalent value: - - -"

(Emphasis Supplied)

The emphasized portions of the preceding statute are the necessary requisites for a recovery by the trustee of funds transferred by the debtor, W. T. Hardison & Company, to its sole stockholder, W. T. Hardison, IV, by whatever devious or apparently fraudulent means accomplished.

There is no evidence in this record that the actions of the bankrupt corporation and/or its sole stockholder, and/or the defendant bank in respect to checks payable to Clear Creek Coal Company occurred:

(a) while or whereby W. T. Hardison & Company was or became insolvent; or

(b) while W. T. Hardison & Company was engaged or about to engage in a business or transaction for which it possessed an unreasonably small capital; or

(c) while W T. Hardison & Company intended to incur debts beyond its ability to pay at maturity; or

(d) with intent to hinder, delay, or defraud creditors.

It is indeed regrettable that the records of the bankrupt corporation for the period in question were not made a part of this record so that this Court might readily determine the condition of solvency or insolvency at the time each transaction occurred. Absent such records, or any other evidence on the subject, no inferences or presumptions should be indulged in regard to the condition of the bankrupt corporation at any time prior to its bankruptcy.

This is especially true because of the unusual character, personality and conduct of the sole owner of the corporation. His outlandish and irrational handling of the affairs of the corporation creates a considerable probability that he was thoroughly capable of suddenly precipitating the insolvency of his corporation in a period of a few minutes, hours or days. Under these peculiar circumstances, there is no justification for presuming that the corporation gradually and slowly, over a long period, declined from a condition of solvency to its ultimate, insolvent, condition when bankruptcy occurred. Accordingly, there is no basis for any inference or presumption that insolvency occurred at any particular time or existed for any particular period prior to bankruptcy.

Under the evidence in this record, no recovery should be allowed as to the Clear Creek checks, and the complainant's suit should be dismissed in its entirety.

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