Kenerson v. Morgan Guaranty Trust CV-91-611-SD 10/17/95 UNITED STATES DISTRICT COURT FOR THE

DISTRICT OF NEW HAMPSHIRE

Jean R. Kenerson, Administratrix of the Estate of Vaughan H. Kenerson

v. Civil No. 91-611-SD

Morgan Guaranty Trust Company; Bank of California, N.A.

O R D E R

Presently before the court is plaintiff's motion for partial

summary judgment, which seeks to foreclose defendants (the Banks)

from asserting the negligence defense provided in Uniform

Commercial Code (UCC) § 3-406. Document 66. Defendants have

timely objected thereto, document 69, and plaintiff has filed a

supplemental memorandum in response to said objection, document

11.

Discussion

1. Summary Judgment Standard

Summary judgment shall be ordered when "there is no genuine

issue as to any material fact and . . . the moving party is

entitled to a judgment as a matter of law." Rule 56(c), Fed. R. Civ. P. "In general . . . a party seeking summary judgment [is

reguired to] make a preliminary showing that no genuine issue of

material fact exists. Once the movant has made this showing, the

nonmovant must contradict the showing by pointing to specific

facts demonstrating that there is, indeed, a trialworthy issue."

National Amusements, Inc. v. Town of Dedham,

(1st Cir. 1995) (citing Celotex Corp. v. Catrett,

(1986)), cert, denied, ___ U.S. ___, 115 S. C t . 2247 (1995).

"[T ]rialworthiness[, however,] necessitates 'more than

simply show[ing] that there is some metaphysical doubt as to the

material facts.'"

(guoting Matsushida Elec. Indus. Co. v.

Zenith Radio Corp.,

(1986)) (second alteration

in National Amusements) . Thus, "'[t]he evidence illustrating the

factual controversy cannot be conjectural or problematic; it must

have substance in the sense that it limns differing versions of

the truth which a factfinder must resolve . . . .'"

(guoting

Mack v. Great Atl. & Pac. Tea Co.,

(1st Cir.

1989)) .

The record on summary judgment is reviewed "in the light

most favorable to the nonmoving party, and [the court shall]

indulge all reasonable inferences in that party's favor."

Colonial Courts Apartment Co. v. Proc Assocs., Inc.,

,

2 122 (1st Cir. 1995) (citing Inn Foods, Inc. v. Equitable Coop.

Bank,

(1st Cir. 1995)).

2. Plaintiff's Motion for Partial Summary Judgment

Plaintiff asserts that the UCC § 3-4061 defense does not

here apply for the following reasons:

3. With respect to 24 of the 26 checks, the conversion occurred as the result of the defendants' making payment when a necessary signature was missing, not because there was an unauthorized signature. Section 3-406 therefore does not apply to the conversion of those 24 checks.2 4. With respect to the two checks bearing unauthorized signatures, even if Mrs. Kenerson's conduct was negligent, her conduct did not, as a matter of law, substantially contribute to the making of the unauthorized signatures. 5. No reasonable juror could find that Mrs. Kenerson was negligent in relying on Mr. Fairbanks to administer the estate properly and honestly.

1A11 references to the UCC are intended to refer to such version of the UCC as existed prior to its amendment by the Legislature effective January 1, 1994.

2Plaintiff incorrectly marshals the incomplete check indorsements as part of her negligence argument. That 24 of the 2 6 checks were paid over incomplete indorsements does not resolve the issue of whether plaintiff may be properly charged with some degree of antecedent negligence. Rather, such payments are directly relevant to UCC § 3-406's other consideration--whether the bank followed reasonable commercial standards in honoring the checks. See infra section 2.b.(2) (discussing commercial reasonableness reguirement).

3 Plaintiff's Motion for Partial Summary Judgment as to Negligence

Defense 55 3-5. Defendants counter by merely stating that

whether plaintiff's conduct substantially contributed to the

conversion at issue is a disputed guestion of fact best resolved

at trial by the jury. Defendants' Objection 55 2-3.

a. Parameters of the UCC § 3-406 Defense

"UCC 3-406 . . . reguires that there first exist a signature

endorsing the check and that it be an unauthorized signature

. . . ." Norman Goldstein Assocs., Inc. v. Bank of New York,

(N.Y. A p p . Div. 1994). Upon satisfaction of

these initial conditions, the New Hampshire Legislature has

provided for a negligence defense, applicable only under the

following defined circumstances:

Any person who by his negligence substantially contributes to a material alteration of the instrument or to the making of an unauthorized signature is precluded from asserting the alteration or lack of authority . . . against a drawee or other payee who pays the instrument in good faith and in accordance with the reasonable commercial standards of the drawee's or payor's business. R.S.A. 382-A:3-406.

Kenerson v. EPIC,

(1st Cir. 1995).

Conseguently, in order for the UCC § 3-406 defense to be

4 effective, it must be shown that Mrs. Kenerson was both negligent

and "that such 'negligence substantially contribut[ed] to [the]

material alteration of the instrument or to the making of an

unauthorized signature'--that is, the forgery." American Title

Ins. Co. v. Shawmut Bank,

(D.R.I. 1993)

(alterations in American Title) .

_____ b. Negligence versus Commercial Reasonableness3

(1) Plaintiff's Purported Negligence

Rather than the usual circumstance where a defendant is

seeking to affirmatively apply the section's estoppel mechanism,

the plaintiff herein seeks a ruling that her conduct was not

negligent, and thus, as a matter of law, the UCC § 3-406 defense

is unavailable to the defendant.

"It should be observed at the outset that U.C.C. § 3-406

addresses negligence that is antecedent to the making of the

unauthorized signature." Zambia Na t '1 Commercial Bank Ltd. v.

Fidelity Int'l Bank,

(S.D.N.Y. 1994).

3The court notes that plaintiff, to her ultimate detriment, has, for the purposes of the instant motion, "assume[d] that the defendants paid the checks in accordance with the 'reasonable commercial standards' of their business." Plaintiff's Memorandum of Law at 1. Said issue therefore is not properly before the court and will be addressed only insofar as is necessary to resolve the motion sub judice.

5 Additionally, under § 3-406 the bank must establish not merely that the customer was careless, but that the customer's negligence set the stage for, or in some way provided the wrongdoer with the opportunity to make[,] the unauthorized signature. In this respect, the U.C.C. departs from the common law notion of proximate cause in favor of a more expansive standard, whereby the customer is estopped from asserting the forgery if his negligence bears a causal relationship to the forgery.

Id. (citation omitted).

Although the comments to UCC § 3-406 provide a nonexclusive

list "of acts or omissions which according to the draftsmen

constitute negligence," J a m e s J. W h i t e & R obert S. S u m m e r s , U n i f o r m

Commercial Co d e , § 16-6, at 537 (1972), "no attempt is made to

specify what is negligence . . .," New Hampshire Revised Statutes

Annotated (RSA) 382-A:3-406 cmt. 7 (1961). Indeed, none of the

situations depicted therein are even remotely analogous to the

instant facts.

However, insofar as UCC § 3-406 states that "[a]ny person

who by his negligence substantially contributes . . . to the

making of an unauthorized signature" will be precluded from

recovering the proceeds of any check found to be wrongfully

honored due to such negligence, RSA 382-A:3-406, the court

herewith finds and rules that conduct which creates, fosters, or

perpetrates a forgery scheme is the type of negligent conduct

6 that forms the very basis of UCC § 3-406's estoppel mechanism.

Whether the plaintiff herein is chargeable with such antecedent

negligence "and whether such negligence substantially contributed

to the making of a forgery are guestions of facts to be

determined by the jury." 6 R o n a l d A. A nd er son, Uniform Commercial Co d e ,

§ 3-406:30, at 433-34 (3d ed. 1993); accord Zambia Na t '1 Bank,

supra,

("the guestion of whether the drawer

failed to exercise ordinary care and thereby substantially

contributed to the forgery is a guestion for the finder of fact,

to be decided on a case-by-case basis").

(2) The Banks' Commercial Reasonableness

Plaintiff's own negligence notwithstanding, summary judgment

on the UCC § 3-406 defense may still issue in her favor should

the Banks herein be contributorily negligent.

Proof of the plaintiff customer's negligence is not sufficient to establish a successful estoppel under U.C.C. § 3-406. The defendant bank seeking refuge in § 3-406 must also establish that it was not contributorily negligent, i.e., that it exercised "reasonable commercial standards" in verifying signatures on the checks presented to it for payment.

Zambia N a t '1 Bank, supra,

-8 8; see also New

Jersey Steel Corp. v. Warburton,

(N.J. 1995)

7 ("the slightest contributory negligence on the part of the bank

makes the defense of the customer's negligence unavailable")

(applying New Jersey law).

Of the 26 checks at issue herein, 24 lacked Mrs. Kenerson's

signature--!orged or otherwise. The remaining two checks were

indorsed by Attorney Fairbanks "by writing first his own name

(without any description of his role) , followed by the name of

Mrs. Kenerson."

. No evidence has

been proffered to show "that Mrs. Kenerson had ever affirmatively

authorized Fairbanks to endorse any checks in her name."

Plaintiff, having assumed commercial reasonableness herein,

supra note 3, simply presents no evidence on said issue. Despite

this evidentiary shortfall, the court notes that "the guestion of

whether a bank acted with commercial reasonableness is ordinarily

a guestion of fact." American Title, supra,

;

accord A n d e r s o n , supra, § 3-406:30, at 434 (bank's exercise of

ordinary care should be determined as a guestion of fact) .

On the basis of the evidence before it, the court finds and

rules that genuine issues of material fact remain surrounding

whether Mrs. Kenerson's conduct as co-administrator of her

husband's estate amounted to negligence or whether any such

negligence "substantially contributed" to Attorney Fairbanks' misdeeds. Furthermore, in light of plaintiff's limited

concession regarding the Banks' commercial reasonableness, and

acknowledging that such issue is best reserved for determination

by a jury, the court further finds and rules that plaintiff has

failed to demonstrate the absence of any genuine issue of facts

material to her alternate means of obtaining the reguested

relief. Accordingly, plaintiff's motion for partial summary

judgment on the issue of negligence must be and herewith is

denied.

Conclusion

For the reasons set forth herein, plaintiff's motion for

partial summary judgment (document 66) is denied. The issues of

plaintiff's negligence and the Banks' commercial reasonableness

will be resolved at trial by jury, calendared to commence

February 20, 1996.

SO ORDERED.

Shane Devine, Senior Judge United States District Court

October 17, 1995

cc: Bradford W. Kuster, Esg. John T. Broderick, Jr., Esg.