Society Natl. Bank v. Security Fed. S.& L. - Ohio Supreme Court Opinion - Ohio Supreme Court Decision

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OPINIONS OF THE SUPREME COURT OF OHIO

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Society National Bank, Appellee, v. Security Federal Savings
and Loan, Appellant.
[Cite as Society Natl. Bank v. Security Fed. S.& L. (1994),
Ohio St.3d .]
Commercial paper -- Bank deposits and collections --
Restrictive indorsements -- Former R.C. 1303.27, applied
-- Depositary bank that has paid a check inconsistently
with a restrictive indorsement made by payee is liable to
payee in conversion, when.
1. Pursuant to former R.C. 1303.27 (former UCC 3-206), a
depositary bank presented with a check bearing an
unmodified blank restrictive "for deposit only"
indorsement made by or on behalf of the payee acts
inconsistently with the indorsement in cashing or
crediting the amount of the check to any account other
than one held in the name of the payee.
2. A depositary bank which has paid a check inconsistently with
a restrictive indorsement made by or on behalf of the
payee is, in the absence of proof of a valid defense,
liable to the payee in conversion.
(No. 93-1878 -- Submitted November 15, 1994 -- Decided
December 23, 1994.)
Appeal from the Court of Appeals for Cuyahoga County, No.
63141.
On March 12, 1990, defendant-appellant, Security Federal
Savings and Loan ("Security Federal"), accepted for deposit a
check dated March 9, 1990 in the amount of $15,600 drawn by
Black River Computer and payable to the order of Microtek
Systems International ("Microtek"). Microtek, an Ohio
corporation, did not have an account at Security Federal. A
second Ohio company, NovelTree Productions ("NovelTree"),
maintained a demand deposit checking account at Security
Federal, and the Microtek check was accepted by Security for
deposit into that NovelTree account under the circumstances
described below.

The president and controlling shareholder of both Microtek
and NovelTree was one John Vedrody, who was authorized to
indorse checks and modify indorsements on behalf of both
companies. Vedrody took the $15,600 check made out to Microtek
and indorsed it by signing the back of it as follows:
"For Deposit Only
John Vedrody"
On March 12, 1990, Vedrody presented the Microtek check to
Security Federal along with a deposit slip which bore the
account number of the Noveltree account and the handwritten
designation "NovelTree Production" on that part of the slip
calling for the name of the depositor. Written on the deposit
slip were directions to apply the proceeds of the check by
crediting $14,000 to NovelTree's checking account, and
tendering $1,000 in cash to Vedrody. Security Federal did not
request or require Vedrody to make any revision or modification
to the indorsement prior to paying the check, nor does the
record indicate that the teller in any way questioned Vedrody
in connection with the deposit of a check made out to one
corporation (Microtek) into the account of another
(NovelTree). Instead, Security Federal's teller accepted the
check and applied its proceeds in accordance with the
instructions on the deposit slip.
Plaintiff-appellee in this action is Society National Bank
(Society"). On March 25, 1988, Microtek had executed a master
promissory note in the amount of $2.5 million in favor of
Society and had also granted Society a first security interest
in the personal property of Microtek, including its accounts
receivable and general intangibles. By March 21, 1990 Microtek
was in default on its obligations to Society, and on that date
Microtek and Society executed a document titled "Surrender of
Collateral and Agreement of Liquidation." Pursuant to the
agreement Microtek surrendered its assets, including all counts
receivable and general intangibles, to Society. On December 7,
1990, Society brought the instant action against Security
Federal claiming that Security Federal had paid the check drawn
to the order of Microtek inconsistently with the restrictive
indorsement made by Vedrody on behalf of Microtek. Society
claimed that Security Federal thereby violated R.C. 1303.27(C)
and 1303.55, and brought suit claiming itself to be the legal
successor to any legal claims Microtek had against Security
Federal. In its complaint against Security Federal, Society
demanded judgment in the $15,600 face amount of the Microtek
check and other relief.
Security Federal answered and Society moved for summary
judgment in its favor, which was denied. Thereafter, and with
the court's approval, the parties waived trial and agreed to
submit the cause for resolution on the basis of an agreed
statement of facts and trial briefs.
The court of common pleas entered final judgment in favor
of the depositary bank, Security Federal. As to the $1,000
cash payment made to Vedrody, the court held that Vedrody had
"modified the restrictive indorsement," by executing a deposit
slip which instructed Security Federal to return $1,000 in cash
to him. The court further held that the check was paid
consistently with the restrictive "for deposit only"
indorsement, in that the deposit slip only served to clarify

the identity of the account into which the remaining $14,600 of
the Microtek check was to be deposited.
The court of appeals reversed and held that Security
Federal wrongfully paid the funds to a non-Microtek account
inconsistently with the "for deposit only" restrictive
indorsement. It held that Security Federal thereby violated
former1 R.C. 1303.26 (former UCC 3-205), which defines
restrictive indorsements, and former R.C. 1303.27(C) (former
UCC 3-206), which requires a bank to accept checks consistently
with a restrictive indorsement. The court of appeals entered
final judgment in favor of Society.
The cause is now before this court pursuant to the
allowance of a motion to certify the record.

Howard E. Coburn and Richard G. Zeiger, for appellee.
Dworken & Bernstein Co., L.P.A., Patrick J. Perotti and
David J. Richards, for appellant.

A. William Sweeney, J. We decide this case pursuant to
R.C. Chapters 1303 and 1304 which codify Articles 3 and 4 of
the Uniform Commercial Code ("UCC"), and authorize the payee of
a check to employ indorsements to restrict the way in which a
check drawn to his order will be paid. Specifically, former
R.C. 1303.27 (former UCC 3-206) provided:
"(C) Except for an intermediary bank, any transferee under
an indorsement which *** includes the words *** 'for deposit,'
*** must pay or apply any value given by him for *** the
instrument consistently with the indorsement ***."
We today hold that, pursuant to this statute, a depositary
bank2 (here, Security Federal) presented with a check bearing a
blank restrictive "for deposit only" indorsement made by or on
behalf of the payee acts inconsistently with the indorsement in
cashing or crediting the amount of the check to any account
other than one held in the name of the payee. This holding is
consistent with precedent established by other courts and with
the conclusions expressed in legal treatises. See,
Mid-Atlantic Tennis Courts, Inc. v. Citizens Bank & Trust Co.
of Md. (D.Md. 1987), 658 F.Supp. 140, 143 (citing White &
Summers, Uniform Commercial Code [2d Ed. 1980] 596); AmSouth
Bank, N.A. v. Reliable Janitorial Serv., Inc. (Ala. 1989), 548
So.2d 1365, 1367; Cf. O'Petro Energy Corp. v. Canadian State
Bank (Okla. 1992) 837 P.2d 1391. See, also, Underpinning &
Found. Constructors Inc. v. Chase Manhattan Bank, N.A. (1979),
46 N.Y.2d 459, 414 N.Y.S.2d 298, 386 N.E.2d 1319. Accord 4
Hawkland & Lawrence, UCC Series (1994), Section 3-205:05 (Art.
3) at 366 ("When an instrument is indorsed 'for deposit,' the
holder has signified that the proceeds obtained from payment of
the instrument can only be used to credit a bank account.
Taken literally, this would permit the proceeds to be credited
to any bank account, although the clear purpose of the
indorsement is to limit the application of the proceeds to
deposit in the holder's bank account"); 2 Hart & Willier,
Bender's Uniform Commercial Code Service, Commercial Paper
under the Uniform Commercial Code (1994), Section 3A.02, at
3A-5, ("*** [W]hen an instrument is indorsed 'For Deposit,' the
indorsee, almost always a bank, is obligated to put any money
received for the instrument in the indorser's account."); 1

Lawrence, Commercial Paper and Payment Systems (1990), Section
3.6[3] at 3-37 ("A payee who indorses a check 'for deposit
only' provides notice to the depository [sic] bank that the
check is to be credited to the payee's account. *** [T]he
bank cannot credit the check to any account other than the
payee's or apply the check to an outstanding indebtedness.")
Pursuant to Am.Sub.S.B. No. 147, former R.C. 1303.27 was
replaced by a revised version of R.C. 1303.26. Our holding
today is consistent with the express terms of newly enacted
R.C. 1303.26 (1990 UCC 3-206[c]), which provides:
"(C) If an instrument bears an indorsement *** using the
words *** 'for deposit,' *** or other words indicating a
purpose of having the instrument collected by a bank for the
indorser or for a particular account, the following rules apply:
"***
"(2) A depositary bank that purchases the instrument or
takes it for collection when so indorsed converts the
instrument unless the amount paid by the bank with respect to
the instrument is received by the indorser or applied
consistently with the indorsement." (Emphasis added.)
This revision does not change prior law, but merely
constitutes an attempt to clarify and continue the existing UCC
law of restrictive indorsements. See Official Comments 1 and 3
to the 1990 draft proposals.3
In addition to former R.C. 1303.27, former R.C. 1303.55
(former UCC 3-419) provided, in part:
"(C) Subject to the provisions of sections 1303.26,
1303.55, 1303.69, and 1304.11 of the Revised Code, concerning
restrictive indorsements, a representative, including a
depositary or collecting bank, who has in good faith and in
accordance with the reasonable commercial standards applicable
to the business of such representative dealt with an instrument
or its proceeds on behalf of one who was not the true owner is
not liable in conversion or otherwise to the true owner beyond
the amount of any proceeds remaining in his hands."
"(D) An intermediary bank or payor bank which is not a
depositary bank is not liable in conversion solely by reason of
the fact that proceeds of an item indorsed restrictively,
pursuant to section 1303.26 and 1303.27 of the Revised Code,
are not paid or applied consistently with the restrictive
indorsement of an indorser other than its immediate transferor."
This statute constitutes additional authority for holding
that, in the absence of a valid defense, a depositary bank
which has paid a check inconsistently with a restrictive
endorsement is liable to the payee in conversion. See AmSouth
Bank, N.A. v. Reliable Janitorial Serv., Inc., supra, 548 So.2d
at 1367 ("The inference from [Alabama's version of UCC-3-419]
is that banks that are depositary banks may be liable in
conversion 'solely by reason of the fact that proceeds of an
item indorsed restrictively *** are not paid or applied
consistently with the restrictive indorsement.'" (Emphasis
sic.)
In the case at bar, the parties agree that when John
Vedrody indorsed the check by affixing his signature under the
words "for deposit only," he restrictively indorsed the check
on behalf of Microtek, the named payee. Thereafter the check
could only, consistent with the restrictive indorsement, be

deposited into an account held by Microtek, the named payee.
When Security Federal credited an account of a separate legal
entity, NovelTree, it thereby converted the check by acting in
express contravention of the restrictive indorsement.
Security Federal argues that it acted lawfully in
accepting the check into the account of a separate legal
incorporated entity (NovelTree) because the check was presented
by Vedrody with a written deposit slip signed by Vedrody (an
authorized agent of both the payee Microtek and NovelTree),
directing deposit of the net proceeds of the check into that
separate NovelTree account. Security's argument lacks merit.
The issue is not whether Vedrody had legal authority to modify
the indorsement he previously had made on behalf of Microtek.
The issue is whether his act of preparing a deposit slip on
behalf of NovelTree instructing payment of the check in a
manner contrary to the indorsement he had previously made on
behalf of Microtek was an act sufficient to accomplish a
modification of that indorsement. We find no statutory
authority for the proposition that a depositary bank may
disregard a restrictive indorsement based on the content of a
deposit slip which is facially inconsistent with that
restrictive endorsement. On the contrary, the law compels the
opposite conclusion. A deposit slip, which is neither attached
to nor incorporated into the check itself, does not constitute
an allonge, nor can a writing contained on a deposit slip serve
as a restrictive indorsement, or a modification of a
restrictive indorsement. See former R.C. 1303.23(B) ("An
indorsement must be written by or on behalf of the holder and
on the instrument or on a paper so firmly affixed thereto as to
become a part thereof." [Emphasis added.]) See, also, All
American Finance Co. v. Pugh Shows, Inc. (1987), 30 Ohio St.3d
130, 132, 30 OBR 443, 445, 507 N.E.2d 1134, 1136, at fn. 3.
Security Federal further contends that Society, as
Microtek's successor-in-interest, can assert no greater rights
than could Microtek itself, and that Microtek would be estopped
to assert payment of the check inconsistent with the
restrictive indorsement. Security Federal argues that Society,
as successor-in-interest to Microtek, is estopped from
asserting Microtek's conversion claim because Vedrody achieved
the very result he intended when Security Federal deposited the
check's net proceeds into the NovelTree account and remitted
$1,000 in cash to him. We reject this argument as we disagree
with its underlying premise that Microtek itself would be
estopped from asserting its claim in conversion. Cf. Cairo
Cooperative Exchange v. First National Bank of Cunningham
(1980), 228 Kan. 613, 620 P.2d 805, 808, modified and rehearing
denied (1981), 229 Kan. 184, 624 P.2d 420. ("[D]efendant [a
depositary bank] cannot assert the defense of estoppel where it
failed to act with ordinary care.") In addition, Security
Federal misconstrues the identity of the owner of the check in
this case. The parties have stipulated that John Vedrody
indorsed the Microtek check with his signature under the words
"For Deposit Only" as president of Microtek. His action in
presenting the check to Security Federal with a deposit slip
directing a deposit into NovelTree's account was made on behalf
of NovelTree, as is evident from the deposit slip itself, which
specifies the depositor by name as NovelTree and includes the

account numbers of an account held by that legal entity. To
accept Security Federal's suggestion that Vedrody's act in
preparing the NovelTree deposit slip was simultaneously an act
made on behalf of Microtek would require us to merge the legal
identity of two separate incorporated entities with the
individual who serves as president, controlling shareholder,
and authorized signator of both. Ohio law does not permit such
a merger. The doctrine that a corporate legal entity is
distinct from his individual shareholders should be disregarded
only when justice cannot be served in any other way. E.S.
Preston Assoc., Inc. v. Preston (1986), 24 Ohio St.3d 7, 11, 24
OBR 5, 9, 492 N.E.2d 441, 446. We conclude in this case that
equitable estoppel principles do not preclude Society from
asserting Microtek's conversion claim.4
We are aware that Vedrody had the legal authority to
convert the Microtek check into bearer paper by simply
indorsing the check with his signature. Had Vedrody done so he
might have simply cashed the check, thereby perhaps keeping its
proceeds from the reach of Microtek's secured creditor,
Society. We find this to be largely irrelevant, however, as is
the fact that Vedrody might have deposited the $15,600 check
into a Microtek account and promptly thereafter withdrawn all
the funds in the account, leaving Society with no claim against
the depositary bank. The question before us is not what
Vedrody, as an authorized agent of both Microtek and NovelTree,
might have done, the task before us is to determine the legal
effect of what both Vedrody and Security Federal actually did.
Vedrody restrictively indorsed the check on behalf of Microtek,
and then presented it to Security Federal with a separate
request made on behalf of Noveltree that the bank pay the check
inconsistently with the Microtek indorsement. At the moment
that Security Federal honored that latter request, it incurred
liability in conversion to Microtek. We affirm the judgment of
the court of appeals and find that Society, as successor to
Microtek's general intangibles (including choses in action), is
entitled to judgment on its claim.
Judgment affirmed.
Moyer, C.J., Douglas, Jones and F.E. Sweeney, JJ., concur.
Wright and Pfeifer, JJ., dissent.
Fred E. Jones, J., of the Twelfth Appellate District,
sitting for Resnick, J.

FOOTNOTES:
1 The enactment of Am.Sub.S.B. No. 147 effective August
19, 1994 has modified both the content and codification of the
Uniform Commercial Code into R.C. Chapters 1303 and 1304.
Am.Sub.S.B. No. 147 adopted many proposals to revise Articles 3
and 4 of the UCC made by the National Conference of
Commissioners on Uniform State Laws and the American Law
Institute in 1990. ("1990 UCC draft.") See LSC Analysis of
Am.Sub. S.B. 147, 1 Baldwin's Ohio Legislative Service, 1994
Session Laws--Full Text at 5-657. See also, Uniform Commercial
Code, Articles 3 and 4, Proposed Final Draft (1990), American
Law Institute.
2 A "depositary bank" is the first bank to which a check
is transferred for collection. Former R.C. 1304.01 (UCC 4-105).
3 Official Comment 3 provides the following example:

"*** [A] check is payable to X, who indorses in blank but
writes above the signature the words 'For deposit only.' The
check is stolen and is cashed at a grocery store by the thief.
The grocery store indorses the check and deposits it in
Depositary Bank. The account of the grocery store is credited
and the check is forwarded to Payor Bank which pays the check.
Under subsection (c), the grocery store and Depositary Bank are
converters of the check because X did not receive the proceeds
of the check." (Emphasis added.) The case at bar is analogous
to this example.
4 We do not speculate as to whether this conclusion would
obtain were successful prosecution of Microtek's claim likely
to accrue to Vedrody's individual benefit. In such a case, a
piercing of Microtek's corporate veil so as to preclude
assertion of the conversion claim by Vedrody might well be
justified.
Wright, J., dissenting. I agree wholeheartedly with
both paragraphs of the syllabus and the majority's
determination that Security Federal applied the funds
inconsistently with the restrictive indorsement in this case.
However, unlike the majority, I would not hold Security Federal
liable to Society in conversion, because the unique
circumstances of this case provide Security Federal with a
valid defense.
The majority correctly points out that John Vedrody had
the authority to indorse checks and modify indorsements on
behalf of Microtek. However, the majority fails to note the
critical fact that the parties stipulate that Microtek had
given Vedrody the unlimited authority to direct the application
of its check proceeds. The majority does concede that Vedrody
had the authority to cash the Microtek check or withdraw all
the funds from the Microtek account after depositing the check
proceeds into Microtek's account.
By stating that Vedrody was acting only on behalf of
NovelTree when he directed Security Federal to return cash and
to deposit the remaining check proceeds into the NovelTree
account, the majority is, in essence, saying that Vedrody was
some thief who was stealing the proceeds from Microtek.
Obviously, this cannot be so, because Microtek had given
Vedrody the authority to deposit the funds into the NovelTree
account. It is clear that the teller at Security Federal
followed Vedrody's instructions regarding the application of
the Microtek check not because Vedrody was an authorized agent
of NovelTree, but because he was an authorized agent of
Microtek. In point of fact, the parties stipulate that the
Security Federal teller personally knew Vedrody and knew that
Microtek had given Vedrody the unlimited authority to direct
the application of the proceeds of the Microtek check.
As is evident from the second paragraph of the syllabus, a
depositary bank is not automatically liable in conversion for
applying funds inconsistently with a restrictive indorsement.
A depositary bank is liable only if it has no valid defense.
R.C. 1301.03 provides: "Unless displaced by the particular
provisions of Chapters 1301, 1302, 1303, 1304, 1305, 1306,
1307, 1308, 1309, and 1310 of the Revised Code, the principles
of law and equity, including *** the law relative to ***
principal and agent, estoppel, *** or other validating or

invalidating cause shall supplement their provisions." Thus,
the common-law principles relating to estoppel, waiver, and
agency supplement the statutory provisions concerning
restrictive indorsements. If the defenses of waiver and
estoppel were not available, I could place a "for deposit only"
restrictive indorsement upon a check payable to me, take the
check to my bank, instruct the teller that I have changed my
mind and want cash, and then sue the bank in conversion if it
gives me the cash instead of depositing the check proceeds into
one of my accounts.
Microtek, through the words and actions of its general
agent who was authorized to direct the application of check
proceeds, waived the right to have the check proceeds deposited
into one of its own accounts. A waiver is generally defined as
a "voluntary relinquishment of a known right." State ex rel.
Hess v. Akron (1937), 132 Ohio St. 305, 307, 8 O.O. 76, 77, 7
N.E.2d 411, 413. See, also, Michigan Auto. Ins. Co. v. Van
Buskirk (1927), 115 Ohio St. 598, 155 N.E. 186, paragraph one
of the syllabus. A person may waive rights and privileges
secured by contract, conferred by statute, or guaranteed by the
Constitution, provided the waiver does not violate public
policy. See Hess, supra, at 307, 8 O.O. at 77, 7 N.E.2d at
413. Furthermore, a duly authorized agent may waive the rights
of his principal, with respect to matters within the scope of
the agent's authority. See 28 American Jurisprudence 2d (1966)
837, Estoppel and Waiver, Section 155. The only means by which
a corporation like Microtek can waive its contractual or
statutory rights is through the actions of an authorized agent
like Vedrody.
In this case, Vedrody exercised his express authority to
direct the application of the check proceeds when he instructed
Security Federal to return cash and to deposit the remaining
proceeds from the Microtek check into the NovelTree account.
By doing so, Vedrody voluntarily relinquished Microtek's right
to have the check proceeds deposited into one of its own
accounts in accordance with the restrictive indorsement.
Because Microtek, through its authorized agent, waived the
right to have the check proceeds deposited into one of its
accounts, it is precluded from asserting any claims against
Security Federal based upon the latter's failure to apply the
check proceeds consistently with the restrictive indorsement.
Society, as Microtek's successor-in-interest, can assert no
greater rights than Microtek. Therefore, Society cannot assert
any claims against Security Federal for violating the
restrictive indorsement on Microtek's check.
For the foregoing reasons, I respectfully dissent.
Pfeifer, J., concurs in the foregoing dissenting opinion.