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September 9, 1994


Appeal from Blount Circuit Court. (CV-92-074). William E. Hereford, Trial Judge.

Released for Publication December 7, 1994.

Almon, Shores, Houston, Kennedy, and Cook, JJ., concur. Steagall, J., concurs in the result.

The opinion of the court was delivered by: Almon


The plaintiffs, C & N Contractors, Inc., and Alabama Siding Construction Company, appeal from a summary judgment in favor of the defendant Community Bancshares, Inc., d/b/a Community Bank ("Community Bancshares"). C & N and Alabama Siding (sometimes herein "the plaintiffs") brought this action for damages against Community Bancshares, Mary Bivens, and sundry fictitiously named defendants, alleging conversion, negligence, and wantonness, all in connection with the action of Community Bancshares in cashing, or accepting for deposit, payroll checks on which Bivens forged the indorsements of the payees. The issues are (1) Whether in an action by two drawers, C & N and Alabama Siding, against a depositary bank, Community Bancshares, a genuine issue of fact exists as to whether the bank converted numerous payroll checks that it cashed or accepted for deposit, after an employee of C & N and Alabama Siding forged the indorsements of the payees, and (2) Whether § 7-3-405(1)(c), Ala. Code 1975, displaced the common law claims of negligence and wantonness by C & N and Alabama Siding against Community Bancshares.

C & N and Alabama Siding are construction and general contracting companies. They share the same office in Gardendale, Alabama. In 1988, Bivens was an employee of both corporations and performed various administrative duties for them.

C & N and Alabama Siding perform construction work at job sites throughout the southeastern United States. On Wednesday morning of each week, the foreman at each job site telephoned Bivens and gave her the names of the employees working on the job site and the number of hours they had worked. Bivens then conveyed this information to Automatic Data Processing ("ADP"), whose offices were in Atlanta, Georgia. Under a contract with C & N and Alabama Siding, ADP prepared payroll checks for the two companies. After preparing the payroll checks, based on the information given to it by Bivens, ADP sent the checks to the offices of C & N and Alabama Siding in Gardendale for authorized signatures. Bivens was not an authorized signatory. After the checks were signed, Bivens sent the checks to the job site foreman for delivery to the employees.

In 1991, Bivens began conveying false information to ADP about employees and hours worked. On the basis of this false information, ADP prepared payroll checks payable to persons who were actual employees but had not worked the hours Bivens had indicated. After obtaining authorized signatures from officers of C & N and Alabama Siding, Bivens intercepted the checks, forged the indorsement of the payees, and either cashed the checks at Community Bancshares or deposited them into her checking account at Community Bancshares, often presenting numerous checks at one time. Bivens continued this practice for almost a year, forging over 100 indorsements, until Jimmy Nation, vice president of C & N, discovered the embezzlement after noticing payroll checks payable to employees who had not recently performed services for the corporations. Bivens later admitted to forging the indorsements.

With regard to the claim of conversion, the circuit court, in its summary judgment, held that under the "padded payroll" rule of § 7-3-405(1)(c), Ala. Code 1975, *fn1 the forged indorsement of Bivens was effective and that, therefore, the loss caused by the forged indorsements fell on C & N and Alabama Siding. Relying on Continental Bank v. Wa-Ho Truck Brokerage, 122 Ariz. 414, 595 P.2d 206 (Ariz. Ct. App. 1979), the circuit court also held that § 7-3-405(1)(c) displaced any common-law claim of negligence that the plaintiffs might otherwise have against Community Bancshares. Although it did not so state in its summary judgment, the circuit court presumably reached the same Conclusion with regard to the claim of wantonness.

Assuming, without deciding, that either a statutory or a common law cause of action for conversion exists in the circumstances of this case, *fn2 we conclude that § 7-3-405(1) is dispositive of the conversion claim. Section 7-3-405(1)(c) provides in pertinent part:

"(1) An indorsement by any person in the name of a named payee is effective if:


"(c) An agent or employee of the maker or drawer has supplied him with the name of the payee intending the latter to have no [interest in the instrument]."

A forged indorsement is ordinarily ineffective to pass title to an instrument to a collecting bank, *fn3 § 7-3-404(1), Ala. Code 1975 ("Any unauthorized signature is wholly inoperative as that of the person whose name is signed unless he ratifies it or is precluded from denying it"); § 7-1-201(43), Ala. Code 1975 ("unauthorized signature" includes a forgery); Peerless Ins. Co. v. Texas Commerce Bank-New Braunfels, N.A., 791 F.2d 1177 (5th Cir. 1986); Western Casualty & Sur. Co. v. Citizens Bank, 676 F.2d 1344, 1345 (10th Cir. 1982); see Brighton, Inc. v. Colonial First Nat'l Bank, 176 N.J. Super. 101, 422 A.2d 433 (N.J. Super. 1980), affm'd 86 N.J. 259, 430 A.2d 902 (N.J. 1981); Fidelity & Cas. Co. v. First City Bank of Dallas, 675 S.W.2d 316, 317 (Tex. App. 1984), or, generally, to authorize a drawee bank to pay the instrument, § 7-4-401(1), Ala. Code 1975; Western Cas. & Sur. Co., 676 F.2d at 1345; Shearson Lehman Bros, Inc. v. Wasatch Bank, ...

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