Court of Appeals

MERCANTILE BANK V. VOWELL ARK. APP.] Cite as 82 Ark. App. 421 (2003) 421 MERCANTILE BANK of Arkansas v. John G. VOWELL CA 02-839 117 S.W.3d 603 Court of Appeals of Arkansas Divisions II and III Opinion delivered June 11, 2003

1. APPEAL & ERROR — FINDINGS 6F FACT — STANDARD OF REVIEW. — The appellate court reviews findings of fact by deter­mining whether the findings are clearly erroneous, or clearly against the preponderance of evidence; a finding is clearly errone­ous when, although there is evidence to support it, the reviewing court is left with a definite and firm conviction that a mistake has been made.

2. BANKS & BANKING — FAILURE TO EXERCISE ORDINARY CARE — RESULTS IN PRECLUSION FROM ASSERTING ALTERATION OR FOR-GERY AGAINST PERSON WHO PAYS INSTRUMENT. — A person whose failure to exercise ordinary care substantially contributes to

an alteration of an instrument or to the making of a forged signa­ture on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instru­ment or takes it for value or for collection; if the person asserting the preclusion fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss, the loss is allocated between the person precluded and the-person asserting the preclusion according to the extent to which the failure of each to exercise ordinary care contributed to the loss; the burden of

MERCANTILE BANK V. VOWELL 422 Cite as 82 Ark. App. 421 (2003) [82 proving failure to exercise ordinary care is on the person asserting the preclusion, and the burden of proving failure to exercise ordi­nary care is on the person precluded [Arkansas Code Annotated section 4-3-406 (Repl. 2001)].

3. BANKS & BANKING — APPELLEE FOUND TO HAVE EXERCISED ORDINARY CARE TO SAFEGUARD CHECKBOOKS, ATM CARDS, & PIN NUMBER — APPELLANT NOT PRECLUDED FROM ASSERTING

FORGERIES & UNAUTHORIZED TRANSACTIONS AGAINST APPEL-LANT OR ALLOCATION OF LOSS PURSUANT TO ARK. CODE ANN. § 4-3-406 (REPL. 2001). — There was no clear error in the trial court's conclusion that appellee had attempted to take proper pre­cautions to safeguard the checkbooks, ATM cards, and PIN from their daughter, nor did the trial court err in concluding that appel-lee was not precluded from asserting the forgeries and unautho­rized transactions against appellant pursuant to Ark. Code Ann. § 4-3-406 (Repl. 2001) because preclusion applied only if appellee had failed to exercise ordinary care that substantially contributed to the loss; moreover, there could be no allocation of loss under sec­tion 4-3-406 because it required a lack of ordinary care by the cus­tomer and the bank, neither of which occurred here.

4. BANKS & BANKING — ARK. CODE ANN. §§ 4-3-406 & 4-4-406 — APPLICABILITY. — Generally, Ark. Code Ann. § 4-3-406 (Repl. 2001) concerning negligence contributing to a forged signature or alteration of an instrument, applies to a customer's conduct before a forgery and Ark. Code Ann. § 4-4-406 (Repl. 2001), which con­cerns a customer's duty to discover and report an unauthorized sig­nature or alteration, applies to a customer's conduct after a forgery.

5. BANKS & BANKING — ALLOCATION OF LOSS PROVISION — ARKANSAS CODE ANNOTATED SECTION 4-4-406(E). — Accord­ing to Arkansas Code Annotated section 4-4-406(e), if a bank cus­tomer can prove that the bank failed to exercise ordinary care in paying the forged item, even though the customer failed to exercise reasonable promptness in examining the bank statements, the loss is allocated between the bank and the customer according to the extent of the customer's failure to comply with the duties of § 4-4- 406(c) and the bank's failure to exercise ordinary care in paying the item; in order to prove a bank's failure to exercise ordinary care, a customer must prove that the bank's conduct does not fall within the statutory definition of ordinary care.

6. BANKS & BANKING — ARKANSAS CODE ANNOTATED SECTION 4- 3-103(A)(7) (REPL. 2001) — "ORDINARY CARE" DEFINED. — "Ordinary care" in the case of a person engaged in business means

MERCANTILE BANK V. VOWELL ARK. App.] Cite as 82 Ark. App. 421 (2003) 423 observance of reasonable commercial standards, prevailing in the area in which the person is located, with respect to the business in which the person is engaged; in the case of a bank that takes an instrument for processing for collection or payment by automated means, reason­able commercial standards do not require the bank to examine the instrument if failure to examine does not violate the bank's pre­scribed procedures and the bank's procedures do not vary unreasona­bly from general banking usage not disapproved by this chapter or 4- 4-101 et seq. [Ark. Code Ann. 5 4-3-103(a)(7) (Repl. 2001)].

7. BANKs & BANKING - NO NEGLIGENCE OR FAILURE TO EXERCISE ORDINARY CARE FOUND - TRIAL COURT 'S ALLOCATION OF LOSS REVERSED. - The trial court's findings contained no sugges­tion that appellant was negligent or otherwise failed to exercise ordinary care when it made the payments; the trial court specifi­cally stated that it did not find that appellant had failed to exercise ordinary care or that appellant substantially contributed to the loss; where appellant made its last payment pursuant to the daughter's unauthorized transactions and forgeries eleven days before it received notification from appellee that there was a problem, appel­lant could not have known that the transactions were the result of forgery or other unauthorized conduct; Ark. Code Ann. 5 4-4- 406(e) requires proof that appellant failed to exercise ordinary care, such proof was missing here, and therefore, the trial court's alloca­tion of loss was reversed.

8. BANKS & BANKING - CUSTOMER HAS DUTY TO EXAMINE BANK STATEMENT - PRECLUSION MAY RESULT. - Arkansas Code Annotated subsections 4-4-406(c) and (d) explain a customer's duties with respect to examining his or her bank statements and the consequences of failing to do so; they provide that if a bank sends or makes available a statement of account, the customer must exer­cise reasonable promptness in examining the statement to deter­mine whether any payment was not authorized because a purported signature by or on behalf of the customer was not authorized; if, based on the statement the customer should reasona­bly have discovered unauthorized payment, the customer must promptly notify the bank of the relevant facts; if the bank proves that the customer failed, with respect to an item, to comply with those duties imposed on the customer, the customer is precluded from asserting against the bank- (1) the customer's unauthorized signature or any alteration on the item, if the bank also proves that it suffered a loss by reason of the failure; and (2) the customer's unauthorized signature by the same wrongdoer on any other kern

MERCANTILE BANK V. VOWELL 424 Cite as 82 Ark. App. 421 (2003) [82 paid in good faith by the bank if the payment was made before the bank received notice from the customer of the unauthorized signa­ture and after the customer had been afforded a reasonable period of time, not exceeding thirty days, in which to examine the state­ment of account and notify the bank.

9. BANKS & BANKING — NOTIFICATION MADE OUTSIDE THIRTY-DAY TIME LIMIT IN CUSTOMER-ACCOUNT AGREEMENT — APPEL-LEE PRECLUDED FROM RECOVERING ITEMS CONTAINED IN JUNE & JULY STATEMENTS. — Appellee was precluded from recovering on any of the items contained in the June and July checking-account itatements because of the thirty-day time limit contained in the customer-account agreement, according to which, if the customer failed to examine his or her statement and notify the bank of any unauthorized transactions within thirty days of the date that the statement was deemed to be received, and the bank was not at fault, then the customer was precluded from recovery; the June checking account statement was deemed received on July 11, 1997, and thirty days after that date was August 10, 1997; the July checking account statement was deemed received on August 10, 1997, and thirty days after that date was September 9, 1997; appel-lee did not notify the bank until September 15, 1997, which was outside the agreed-upon time limits.

10. BANKS & BANKING — APPELLEE NOT PRECLUDED FROM RECOV-ERING ITEMS IN THREE REMAINING BANK STATEMENTS — BANK NOTIFIED WITHIN THIRTY-DAY TIME LIMIT. — The terms of the customer-account agreement did not preclude appellee from recovering on items contained in the other three bank statements, i.e., the July savings, the August checking, and the August savings statements, because the bank was notified before thirty days had elapsed following the deemed-receipt dates of those statements.

11. BANKS & BANKING — PRECLUSION PROVISION OF ARK. CODE ANN. § 4-4-406(d)(2) — PROVISION AFFECTED JULY SAVINGS, AUGUST CHECKING, AND AUGUST SAVINGS STATEMENTS. — The preclusion provision of Arkansas Code Annotated section 4-4-

406(d)(2) did affect the July savings, the August checking, and the August savings statements because "the same wrongdoer," appel-lee's daughter, was involved in all of the unauthorized transactions contained in those statements; this section precluded appellee from recovering on any unauthorized transactions that occurred after August 10, 1997, which was thirty days from the deemed receipt-date of the first statement, i.e., the June checking account state-ment; this totally precluded appellee's recovery under the August

MERCANTILE BANK V. VOWELL ARK. APP.] Cite as 82 Ark. App. 421 (2003) 425 checking and the August savings statements; the July savings account statement contained seventeen items, some of which were precluded and some of which were not; the last ten items had transaction dates after August 10, 1997, and were therefore pre-cluded; however, the first seven items, preceded the August 10 date and so were not precluded.

12. BANKS & BANKING — ARK. CODE ANN. § 4-4-406 — PURPOSE. — The rule of Ark. Code Ann. § 4-4-406(d)(2) follows pre-Code case law that payment of additional items bearing an unauthorized signa­ture or alteration by the same wrongdoer is a loss suffered by the bank traceable to the customer's failure to exercise reasonable care in examining the statement and notifying the bank of objections to it; one of the most serious consequences of failure of the customer to comply with the requirements of subsection (c) is the opportunity presented to the wrongdoer to repeat misdeeds; conversely, one of the best ways to keep down losses in this type of situation is for the customer to promptly examine the statement and notify the bank of an unauthorized signature or alteration so that the bank will be alerted to stop paying further items; hence, the rule of subsection (d)(2) is prescribed, and to avoid dispute a specific time limit, thirty days, is designated for cases to which the subsection applies; these considerations are not present if there are no losses resulting from the payment of additional items; in these circumstances, a reasonable period for the customer to comply with its duties under subsection (c) would depend on the circumstances and the subsection (d)(2) time limit should not be imported by analogy into subsection (c) [Code Commentaries at 298-99 (Repl. 1995)].

13. BANKS & BANKING — LANGUAGE CONTAINED IN CUSTOMER-- ACCOUNT AGREEMENTS TRACKED REQUIREMENTS UNDER ARKAN-SAS CODE ANNOTATED SECTION 4-4-406 — NO ERROR OR BASIS FOR ALLOCATION UNDER SECTION 4-3-406, SECTION 4-4-406, oR CUSTOMER-ACCOUNT AGREEMENTS EXISTED. — The language contained in the customer-account agreements virtually tracked the language of Arkansas Code Annotated section 4-4-406, and the trial court, when addressing appellant's contractual argument, expressly referred to its finding concerning allocation of loss under Arkansas Code Annotated section 4-4-406(e); therefore, the appellate court did not need to address appellant's argument that the trial court erred in apportioning loss between appellee and appellant pursuant to the customer-account agreements because there was no error in the trial court's findings of fact that appellee did not substantially contribute to the forgery, that appellant did not fail to use ordinary care in pay-

MERCANTILE BANK I/. VOWELL 426 Cite as 82 Ark. App. 421 (2003) [82 ing the forged items, and that appellee did fail to timely examine and report the forgeries reflected in the bank statements; there was no basis for allocation under section 4-3-406, section 4-4-406, or the customer-account agreements.

Appeal from Pulaski Circuit Court; Willard Proctor, Jr., Judge; affirmed in part; reversed and remanded in part.

Hilburn, Calhoon, Harper, Pruniski & Calhoon, Ltd., by: Randy L. Grice and Traci LaCerra, for appellant. No response. OHN F. STROUD, JR., Chief Judge. This appeal arose from J a civil judgment of $6,014.38 in the circuit court of Pulaski County in favor of appellee and against appellant, Mercantile Bank of Arkansas and its successor entity, Firstar Bank. Appellant argues (1) that the trial court erred in finding that the conduct of appellee, Dr. John G. Vowell, did not substantially contribute to forgeries and unauthorized transactions by his daughter, Suzan Vowell, and that, as a result, appellee was not precluded from asserting the forgeries and unauthorized transactions against appellant pursuant to Ark. Code Ann. § 4-3-406; (2) that the trial court further erred in apply­ing the allocation and preclusion provisions of Ark. Code Ann. § 4- 4-406(e); and, finally, (3) that the trial court erred in apportioning the loss between appellee and appellant pursuant to the customer-account agreements. Appellee chose not to file a brief in response. We hold that there is no clear error in the trial court's finding that Dr. Vowell's conduct did not substantially contribute to the forger­ies and unauthorized transactions. Neither do we find clear error in the trial court's finding that the appellant bank did not fail to exer­cise ordinary care. Where we do find error, however, is in the trial court's determination of which items appellee is precluded from recovering from appellant and the trial court's allocation of the loss between appellant and appellee. We therefore affirm in part and reverse and remand in part so that the trial court can enter a new judgment in accordance with this opinion.

Appellee and his wife, now deceased, had an interest-bearing checking account and a savings/money-market account with appellant. Both appellee and his wife signed the customer-

MERCANTILE BANK V. VOWELL ARK. APP.] Cite as 82 Ark. App. 421 (2003) 427 account agreements with respect to each account. Each agree­ment contained a provision immediately above the signature line, which provided:

SIGNATURE(S) — THE UNDERSIGNED AGREE(S) TO . THE TERMS STATED ON THE .FRONT AND BACK OF THIS FORM, AND ACKNOWLEDGE(S) RECEIPT OF A COMPLETED COPY ON TODAY'S DATE. THE UNDER-SIGNED ALSO ACKNOWLEDGE(S) RECEIPT OF A COPY OF OUR ACCOUNT INFORMATION BROCHUREH

The agreements also contained the following provision: STATEMENTS — You must examine your statement of account with "reasonable promptness." If you discover (or rea­sonably should have discovered) any unauthorized payments or alterations, you must promptly notify us of the relevant facts. If you fail to do either of these duties, you will have to either share the loss with us, or bear the loss entirely yourself (depending on whether we exercised ordinary care and, if not, whether we sub­stantially contributed to the loss). The loss could be not only with respect to items on the statement but other items forged or altered by the same wrongdoer. You agree that the time you have to examine your statement and report to us will depend on the circumstances, but that such time will not, in any circumstance, exceed a total of 30 days from when the statement is first made available to you.

You further agree that if you fail to report any unauthorized signatures, alterations, forgeries or any other errors in your account within 60 days of when we make the statement available, you cannot assert a claim against us on any items in that state-ment, and the loss will be entirely yours. This 60 day limitation is without regard to whether we exercised ordinary care. The limitation in this paragraph is in addition to that contained in the first paragraph of this section.

Appellant's policy regarding bank statements is to mail monthly bank statements on any account that has deposit or with­drawal activity. The bank statement covers the previous month's activity for the time frame that appears on the statement. The state­ments were usually sent to the account holder two days after the cutoff day listed on the statement and were generally considered as

MERCANTILE BANK V. VOWELL 428 Cite as 82 Ark. App. 421 (2003) [82 received two days thereafter. Appellee received bank statements at the Little Rock, Arkansas, address provided in the customer-account agreements. Appellee testified at trial that his wife had been respon­sible for reviewing the . bank statements and balancing the check-books. Appellee did not . personally review the accounts. In June of 1997, appellee and his wife allowed their daughter, Suzan Vowell, now also deceased, and her boyfriend to move in with them at their home. At that time, they knew that Suzan and her boyfriend had been involved with drugs, alcohol, writing bad checks, and stealing. They also knew that Suzan had stolen checks from them in the past and forged either appellee's or his wife's sig-natures. The trial court found that appellee and his wife took pre­cautions against future theft and forgeries by Suzan by hiding Mrs. Vowell's purse, which contained their checkbook, under the kitchen sink. Furthermore, appellee's wife suffered from diabetes mellitus and alcoholism, conditions that forced her to stay in bed either all or most of the time. Appellee, however, continued to rely on his wife to review the bank statements and to balance the checkbooks.

Beginning in June 1997 and continuing into September 1997, Suzan forged appellee's wife's signature on forty-two checks, drawn on both accounts, and committed nine unautho­rized ATM withdrawals in the aggregate amount of $12,028.75.1 Suzan found her mother's purse hidden under the kitchen sink and stole the checkbooks and ATM card from the purse. She apparently had access to, or figured out, appellee's PIN (personal identification number) because the number was identical with appellee's home security-system code. Suzan also stole certain credit cards, which she used to conduct various unauthorized transactions, but they did not involve appellant.

The first unauthorized banking transaction appeared on the June 1997 bank statement for the checking account, covering trans-

1 Judge Roars dissenting opinion mentions a federal statute that pertains to electronic-fund transfers, including ATM transactions, 15 U.S.C. § 1693 et seq. The applicability of this statute and the manner in which it affects this case were not raised before the trial court by either party below nor were they raised to this court on appeal. With no Arkansas appellate cases construing this statute and without the benefit of argument from counsel for the parties involved in this case, we decline to address the issue.

MERCANTILE BANK V. VOWELL ARK. APP.] Cite as 82 Ark. App. 421 (2003) 429 actions occurring June 6 through July 7, 1997. This statement was sent to appellee on July 9, 1997. The trial court found that the statement was therefore deemed received as of July 11, 1997. This statement contained unauthorized payments totaling $230.00.

The second set of unauthorized transactions appeared on the July 1997 bank statement for the checking account, covering transactions occurring July 8 through August 6, 1997. That state­ment was mailed on August 8, 1997, and was thus deemed received as of August 10, 1997. This statement contained unau­thorized payments totaling $1,235.25.

The third set of unauthorized transactions also appeared on the July 1997 bank statement for the savings account, covering transactions occurring July 23 through August 21, 1997, which was sent on August 23, 1997, and was deemed received as of August 25, 1997. 2 This statement contained unauthorized pay­ments totaling $5,140.00.

The fourth set of unauthorized transactions appeared on the August 1997 bank statement for the checking account, covering transactions occurring August 7 through September 7, 1997. That statement was mailed to appellee on September 9, 1997, and was deemed received as of September 11, 1997. This statement contained unauthorized payments totaling $1,423.50.

Finally, the fifth set of unauthorized transactions appeared on the August 1997 bank statement for the savings account, covering transactions occurring August 22 through September 22, 1997. This statement was sent on September 24, 1997, and was deemed received as of September 26, 1997. It contained unauthorized pay­ments totaling $4,000.00. The trial court specifically found that appellee did not notify appellant of the unauthorized transactions appearing on the June and July checking-account statements within thirty days from the date each was either sent or deemed received. Finally, on September 15, 1997, appellee discovered a receipt for an

2 The trial court notes in its findings of fact that the July 1997 bank statement for the savings account was sent out on August 23, 1997, and "deemed received as of September 11, 1997." This must be a clerical error, inadvertently also picked up by appellant in its brief. Pursuant to the stated policy, the trial court deemed statements as received two days after they were sent to the customer, which would have been August 25, 1997.

MERCANTILE BANK V. VOWELL 430 Cite as 82 Ark. App. 421 (2003) [82 unauthorized credit-card transaction and notified appellant about his discovery at a meeting with Bill Eldridge, branch manager of appel-lant's Geyer Springs branch. Immediately, appellant froze appellee's and his wife's accounts, alerted its tellers and computer system, and began investigating the alleged forgeries and other unauthorized transactions pursuant to its policy.

As a result of the alert on appellee's account, Suzan was arrested on September 16, 1997, after she attempted to obtain an unauthorized cash advance at appellant's Riverfront branch. No more unauthorized transactions occurred after the alert was issued. Appellant prepared eight separate "Forged or Altered Check Affi­davits of Loss," setting forth the forty-two forged checks and nine unauthorized ATM withdrawals. Appellee's wife signed the affi­davits and Bill Eldridge notarized her signature on each affidavit.

Based on the facts before it, the trial court concluded that appellee and his wife "attempted to take proper precautions to safe­guard their checkbooks, ATM cards and PIN" and that Dr. Vowell's conduct did not "substantially contribute to the forgeries and unau­thorized transactions by Suzan Vowell which were paid in good faith by Firstar." Thus, the trial court determined that appellee was not precluded from asserting any of the forgeries and unauthorized transactions against appellant under Ark. Code Ann. § 4-3-406.

The trial court concluded, however, that appellee failed to exercise reasonable promptness in the examination and reporting of the forged checks and other unauthorized transactions on the June checking-account statement and the July checking-account statement. Therefore, the court found that appellee was precluded from asserting against appellant the forgeries contained on both of those checking-account statements. The trial court also found that appellee was entitled to an allocation of loss as between him and appellant. The trial court ordered appellant to pay $6,014.38, without going into any detailed explanation of how this allocation was calculated.3 The trial court further found that appellant had not failed to exercise ordinary care and that it did not substantially contribute

3 We note that the trial court's order to appellant to pay $6,014.38 constitutes exactly one-half of the entire sum of Suzan Vowell's unauthorized bank transactions and forgeries.

MERCANTILE BANK V. VOWELL ARK. APP.] Cite as 82 Ark. App. 421 (2003) 431 to the losses. Specifically, the court found that appellee was pre­cluded from asserting against appellant the unauthorized payments in the June 1997 checking statement totaling $230.00, as well as the payments contained in the July 1997 checking statement total­ing $1,235.25. The court then held:

As previously noted, the Court finds that the additional amount should be apportioned. Specifically, the Court finds that Dr. Vowell should be responsible for an additional $4,552.12 of the loss. Therefore, Dr. Vowell is entitled to recover from the defen­dant the total sum of $6,014.38.

From that order arises this appeal.

Arkansas Code Annotated section 4-3-406 Appellant first argues that the trial court (1) erred in finding that appellee's conduct did not substantially contribute to the for­geries and unauthorized transactions, and (2) therefore erred in con­cluding that appellee was not precluded from asserting the forgeries and unauthorized transactions against appellant pursuant to Arkansas Code Annotated section 4-3-406. We find no error and affirm.

[1] We review findings of fact by determining whether the findings are clearly erroneous, or clearly against the preponderance of the evidence. Knight v. Day, 343 Ark. 402, 36 S.W.3d 300 (2001). A finding is clearly erroneous when, although there is evi­dence to support it, the reviewing court is left with a definite and firm conviction that a mistake has been made. City of Van Buren v. Smith, 345 Ark. 313, 46 S.W.3d 527 (2001).

[2] Our state uses a version of the applicable Uniform Commercial Code section 3-406, as provided in Arkansas Code Annotated section 4-3-406 (Repl. 2001). It states:

(a) A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the altera­tion or the forgery against a person who, in good faith, pays the instru­tnent or takes it for value or for collection.

(b)Under subsection (a), if the person asserting the preclu­sion fails to exercise ordinary care in paying or taking the instru-

MERCANTILE BANK V. VOWELL 432 Cite as 82 Ark. App. 421 (2003) [82 ment and that failure substantially contributes to loss, the loss is allocated between the person precluded and the person asserting the preclusion according to the extent to which the failure of each to exercise ordinary care contributed to the loss.

(c) Under subsection (a), the burden of proving failure to exercise ordinary care is on the person asserting the preclusion. Under subsection (b), the burden of proving failure to exercise ordinary care is on the person precluded.

(Emphasis added.) [3] Here, the trial court concluded that appellee attempted to take proper precautions to safeguard the checkbooks, ATM cards, and PIN from their daughter, Suzan Vowell. We find no clear error in that factual determination. Consequently, we also find that the trial court did not err in concluding that appellee was not precluded from asserting the forgeries and unauthorized trans­actions against appellant pursuant to section 4-3-406 because the preclusion would only apply if appellee failed to exercise ordinary care that substantially contributed to the loss. Moreover, there could be no allocation of loss in this case under section 4-3-406 because it requires a lack of ordinary care by the customer and the bank, neither of which occurred here.