Watseka First National Bank v. Horney

No. 3--95--0897
_________________________________________________________________

IN THE

APPELLATE COURT OF ILLINOIS

THIRD DISTRICT

A.D., 1997

WATSEKA FIRST NATIONAL BANK, ) Appeal from the Circuit Court
a corporation, ) of the 21st Judicial Circuit,
) Iroquois County, Illinois,
Plaintiff/Counter- )
Defendant-Appellee, )
)
v. ) No. 92--L--4
)
HENRY HORNEY and WILLIAM L. )
WALKER, )
) Honorable
Defendant/Counter- ) Gordon L. Lustfeldt,
Plaintiff-Appellant. ) Judge, Presiding.
________________________________________________________________

JUSTICE SLATER delivered the opinion of the court:
________________________________________________________________

On January 16, 1992, Watseka First National Bank (Bank) was
granted confession judgment on a note in the amount of
$196,842.47 against Henry Horney (Horney) and William Walker
(Walker). Horney and Walker were part owners of EZ Pickins, a
retail grocery store in Watseka which declared bankruptcy in
December 1991. Horney and Walker were co-signers on the
promissory note. The court denied Horney's subsequent motion to
open judgment, but allowed the filing of Horney's counterclaim
and stayed the judgment pending disposition of the counterclaim.
In his verified answer, Horney admitted execution of the note but
claimed a set-off in an amount exceeding the Bank's claims.
Horney claimed he sustained a $1.1 million loss as a result of
the Bank's negligence and failure to use ordinary care. Horney
alleged his right to sue the Bank for EZ Pickins' loss arises
from an oral assignment.
On May 9, 1995, the court heard evidence on Horney's
counterclaim and continued the case for disposition. Written
post-trial arguments were filed by both parties. The Bank also
filed a motion to file a first amended answer and affirmative
defenses. Horney objected and argued that the new affirmative
defenses should not be permitted because of surprise and
prejudice to him, and they did not conform to the proof. In a
written memorandum, the court allowed the Bank's motion to file
its amended answer and new affirmative defenses, finding no
prejudice to Horney. The court further found that the new
filings conformed the pleadings to the evidence presented, and
found the issues in favor of the Bank and against Horney,
specifically ruling that Horney's claim was unavailable as a
set-off against the Bank's judgment or as an independent claim.
Horney filed a motion to vacate judgment and for a new
trial, based on assertions of judicial bias. Horney's motion was
denied.
On appeal, Horney contends that the Bank breached its
contract with EZ Pickins by paying checks to a fictitious payee
in violation of explicit instructions requiring two signatures
and in contradiction of its own policies and procedures.
Specifically, he contends that the Bank's affirmative defenses do
not excuse breach of contract or violation of its own policies
and procedures.
We find that the lower court's ruling against Horney was not
against the manifest weight of the evidence. We find that
Horney's counterclaim was barred because it was not timely made.
We affirm the decision of the trial court.
FACTS
The pertinent facts on appeal are as follows: Horney
developed a banking relationship with the Bank in connection with
his various businesses and maintained several accounts with the
Bank. In 1983, Horney hired a comptroller, Ray Cardinal
(Cardinal), to handle significant financial matters and the
internal audit work pertaining to Horney's various businesses,
including EZ Pickins. Cardinal was entrusted with the duty of
receiving canceled checks and reconciling monthly bank
statements, but he did not have authority to sign checks. Horney
claims he trusted Cardinal absolutely and gave him complete
control of the bank statements. Horney did not examine the bank
statements from 1983 to 1987, which allowed Cardinal free reign
to engage in a scheme of fraud and forgery.
According to Horney, the signature cards on the EZ Pickins
accounts required two signatures. In addition, EZ Pickins'
corporate resolution filed with the Bank required that all checks
or orders for withdrawal of funds should contain two signatures.
Although Horney did not formally rescind these instructions to
the Bank, evidence adduced at trial clearly showed that Horney
and EZ Pickins did not follow their own instructions. The facts
showed that Horney was aware that checks were being honored by
the Bank bearing only one signature because he himself presented
such checks to the Bank. In addition to checks bearing only
Horney's signature, many other checks were honored bearing only
one of the authorized signatures on file with the Bank or a
facsimile of Horney's signature.
Horney discovered Cardinal's forgery scheme on Friday before
the Labor Day weekend in 1987. The Bank called to notify him of
an overdraft in the amount of approximately $39,000 made out to
Charles Fuller. Neither Horney nor Walker recognized the name,
but a subsequent search of Cardinal's desk and bank statements
revealed many more checks made payable to the fictitious payee
totalling approximately $1.1 million. Horney told Walker to
advise the Bank of the forgeries, but the Bank has no record of
the handwritten note purportedly written by Walker. Other than
Walker's purported note to the Bank, Horney does not recall
speaking to anyone at the Bank nor writing to them about the
forgeries after that weekend. The evidence showed that the Bank
was not asked to take any action to return the forged checks
through normal banking channels.
After discovering the forgeries, Horney continued to do
business with the Bank without protest or complaint as to the
manner in which checks were handled. Horney renewed the note to
the Bank six times and continued to do business as usual with the
Bank for another four years. It was not until January 1992,
after EZ Pickins filed for bankruptcy relief and the Bank
obtained confession judgment on its note, that Horney presented
his $1.1 million claim.
ANALYSIS
Horney contends that the Bank breached its contract with EZ
Pickins when it honored checks made payable to a fictitious payee
in violation of explicit instructions requiring two signatures on
checks and in contradiction of its own policies and procedures.
Specifically, Horney contends that the Bank's affirmative
defenses do not excuse breach of contract or violation of its own
policies and procedures. We do not reach Horney's contentions on
their merits, however, because our determination that his claim
is barred by the applicable statute of limitations is
dispositive.
The Illinois Uniform Commercial Code, as it existed during
the years involved in this case, provided in pertinent part:
"Customer's Duty to Discover and
Report Unauthorized Signature or
Alteration.
(1) When a bank sends to its
customer a statement of account
accompanied by items paid in good faith
in support of the debit entries ***, the
customer must exercise reasonable care
and promptness to examine the statement
and items to discover his unauthorized
signature or any alteration on an item
and must notify the bank promptly after
discovery thereof.
(2) If the bank establishes that
the customer failed with respect to an
item to comply with the duties imposed
on the customer by subsection (1) the
customer is precluded from asserting
against the bank *** his unauthorized
signature or any alteration on the item
if the bank also establishes that it
suffered a loss by reason of such
failure ***.
***
(3) The preclusion under subsection
(2) does not apply if the customer
establishes lack of ordinary care on the
part of the bank in paying the item(s).
(4) Without regard to care or lack
of care of either the customer or the
bank a customer who does not within one
year from the time the statement and
items are made available to the customer
(subsection (1)) discover and report his
unauthorized signature or any alteration
on the face or back of the item *** is
precluded from asserting against the
bank such unauthorized signature or
indorsement or such alteration." Ill.
Rev. Stat. 1987, Ch. 26, par. 4--406.
The Committee Comments to the Uniform Commercial Code
emphasized the onus placed on the customer to discover
unauthorized signatures and alterations when it stated that "one
of the best ways to keep down losses is for the customer to
promptly examine his statement and notify the bank of an
unauthorized signature or alteration so that the bank will be
alerted to stop paying further items." (Ill. Ann. Stat., ch. 26,
par. 4--406, Uniform Commercial Code Comments--1963, Comment 3,
at 548 (Smith-Hurd 1988)). Further, the Committee noted that
subsection (4) placed "an absolute time limit on the right of a
customer to make claim for payment of altered or forged paper
without regard to care or lack of care of either the customer or
the bank." (Ill. Ann. Stat., ch. 26, par. 4--406, Uniform
Commercial Code Comments--1963, Comment 5, at 548-9 (Smith-Hurd
1988)).
Horney contends that section 4--406 does not apply because
Horney's claims are based upon breach of contract--specifically,
the Bank's breach of its written promise to exercise due care
contained in the "Depositor's Contract" located on the back of
the Bank's signature cards. The proper statute of limitations,
Horney argues, provides that actions on written contracts shall
be commenced within ten years after the cause of action accrued.
735 ILCS 5/13--206 (West 1996). We disagree.
Where two statutes of limitations arguably apply to the same
cause of action, the one which more specifically relates to the
action must be applied. Haddad's of Illinois, Inc. v. Credit
Union 1 Credit Union, 286 Ill. App. 3d. 1069, 678 N.E.2d 322
(1997). In holding that the more specific statute of limitations
applied, the Haddad's court noted the need for finality and
certainty in commercial transactions and the fact that the
customer is in the best position to detect unauthorized use of
its bank account. Despite Horney's attempt to find shelter in
the ten-year limitations statute by claiming breach of contract,
section 4--406, because of its specificity, takes precedence over
the general limitations statute. See Calumet Country Club v.
Roberts Environmental Control Corp., 136 Ill. App. 3d 610, 483 N.E.2d 613 (1985). We find that section 4--406 deals
specifically with Horney's duty to discover and report
unauthorized use of EZ Pickins' accounts and apply it to the case
at hand.
Horney also contends that the Bank cannot use section 4--406
as a defense because: (1) the Bank did not exercise reasonable
care when it honored checks bearing only one signature and made
payable to a fictitious payee, and (2) the Bank did not supply EZ
Pickins with a statement of account sufficient to put it on
notice that unauthorized checks may have been paid. We disagree
with both of these contentions.
First, the plain language of the statute states that the one
year statute of limitations applies without regard to care or
lack of care of either the bank or the customer. Ill. Rev. Stat.
1987, ch. 26, par. 4--406(4). Accepted principles of statutory
construction dictate that where the language is clear and
unambiguous, the plain meaning of the statute shall be applied.
Advincula v. United Blood Services, 176 Ill. 2d 1, 678 N.E.2d 1009 (1996). The statute should be evaluated as a whole, with
each provision construed in connection with every other section.
Barnett v. Zion Park District, 171 Ill. 2d 378, 665 N.E.2d 808
(1996).
The language of section 4--406 of the Uniform Commercial
Code is clear, unambiguous and logically structured. Subsection
(1) outlines the duties of the parties. The bank's duty is to
provide or make available to the customer statements of account
and the accompanying items. Once the bank has satisfied this
duty, it becomes incumbent on the customer to examine such
statements to discover unauthorized use and promptly notify the
bank. Subsections (2) and (3) address considerations of good
faith and ordinary care to assist in the allocation of loss or to
determine the preclusion of claims. Subsection (4) makes a clear
and unambiguous shift away from considerations of care or lack of
care and states that "without regard to care or lack of care of
either the customer or the bank," claims against the bank are
precluded if the customer failed to discover and report
unauthorized items within one year after the customer received
the bank statements and accompanying items. Ill. Rev. Stat.
1987, ch. 26, par. 4--406(4).
Evaluating section 4--406 as a whole and applying the plain
meaning of subsection (4), we find that more than one year had
elapsed from the time that the unauthorized items were made
available to Horney. Ill. Rev. Stat. 1987, ch. 26, par. 4--406.
The time limitation in subsection (4) is absolute and any
discussion of care or lack of care is superfluous.
Horney's second contention that he did not have sufficient
notice to discover the unauthorized checks is without merit.
Horney never examined the bank statements during 1983 and 1987.
The statements sent every month to Cardinal contained cancelled
checks. If Horney had examined the cancelled checks, the
forgeries would have been readily discoverable. While Horney
complains of the fact that check numbers were not included on the
bank statements sent each month to Cardinal, there was no
requirement during 1983 and 1987 that bank statements include
check numbers. It was not until the 1992 amendments to the
Uniform Commercial Code that check numbers were required to be
supplied to the customer on the bank statements. 810 ILCS 5/4--
406(a) (West 1992). When Horney finally did examine the
statements in 1987 after discovering Cardinal's fraudulent
scheme, he was able to easily identify the forgeries simply by
looking at the statements and the cancelled checks. We find that
the Bank provided Horney with sufficient notice to discover the
forgeries. Despite this notice, Horney failed to examine the
bank statements and discover unauthorized use of the EZ Pickins
account.
The last question we address is whether Horney reported the
forgeries practiced on the EZ Pickins account. Section 4--406
requires that upon discovery of unauthorized use of an account,
the customer must notify the bank promptly. Ill. Rev. Stat.
1987, ch. 26, par. 4--406(1). Horney contends that the Bank did
receive notice of the forged checks. Given our holding above,
that claims against the Bank are precluded unless they are made
within one year after receipt of the bank statements and the
cancelled checks, we are obliged to distinguish between claims on
checks forged from 1983 to August 1986 and checks forged from
August 1986 to Labor Day weekend 1987. There is clearly no
evidence of record that Horney reported any checks allegedly
forged during the years 1983 through August 1986. In fact,
Horney admitted to having first discovered the forgeries on
Friday before the Labor Day weekend in 1987. Therefore, any
claims against the Bank regarding checks allegedly forged prior
to August 1986, are clearly time barred.
With respect to checks forged from August 1986, through
Labor Day weekend in 1987, there is a question whether Horney's
communications with the Bank constituted sufficient notice of the
forgeries. Horney asserts that the handwritten note by Walker
referring to a conversation with Luke Montgomery, then vice
president of the Bank, constitutes a report to the Bank. Horney
also asserts that the conversation he had with the Bank employee
who notified him that the account was overdrawn also constitutes
notice to the Bank. Other than these two incidences, however,
Horney presented no other evidence showing that he fulfilled his
duty to report unauthorized use of the EZ Pickins account to the
Bank.
In Knight Communications, Inc. v. Boatmen's National Bank of
St. Louis, 805 S.W.2d 199 (1991), which involved the customer's
failure to report unauthorized signatures, the court held that
even if a corporate director had called to inform the bank of
wrongly honored checks, it was questionable whether such
conversations were deemed to be sufficient notice to the bank.
The court noted that the Uniform Commercial Code does not define
the word "report" and does not prescribe what would constitute
sufficient report to the bank. Knight, 805 S.W.2d 199. Although
the Knight court declined to decide the degree of specificity
required (Knight, 805 S.W.2d 199), common sense indicates that
the report should be sufficient to at least identify the quantity
of checks involved, their amounts, the dates and check numbers,
the names of the payees, or any other specific information upon
which the bank could have acted.
In the instant case, no evidence was presented showing that
the Bank received specific information regarding the forged
checks. The conversations of Walker and Horney with Bank
employees were devoid of any specific information. Walker's
handwritten note simply asks the Bank for copies of checks and
bank statements from 1983 to 1987 because they suspected forgery.
Other than these general references to a possible forgery, Horney
did nothing further. He did not give the Bank a list of the
forged checks and did not ask the Bank to restore the funds or
pursue repayment of the forged checks through normal banking
channels.
Even after discovery of the forged checks, Horney never
instructed the Bank to change the way it handled his accounts.
In fact, Horney continued to conduct substantial business with
the Bank until December 1991, when EZ Pickins filed for
bankruptcy and the Bank obtained confession judgment on its note
against Horney and Walker.
We find that the evidence clearly established that the Bank
received insufficient notice from Horney regarding the alleged
forgeries. Horney's claims against the Bank, asserted more than
four years after discovery of the forgeries, are time barred by
application of section 4--406.
We conclude that the trial court's ruling was not against
the manifest weight of the evidence. Because we find that
section 4--406 serves to completely bar Horney's claims, we
decline to address the other issues raised.
The judgment of the circuit court of Iroquois County is
affirmed.
Affirmed.
HOLDRIDGE and HOMER, J.J., concur.