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03/29/89 Spec-Cast, Inc., v. First National Bank &

March 29, 1989





538 N.E.2d 543, 128 Ill. 2d 167, 131 Ill. Dec. 168 1989.IL.408

Appeal from the Appellate Court for the Second District; heard in that court on appeal from the Circuit Court of Winnebago County, the Hon. Daniel D. Doyle, Judge, presiding.


JUSTICE RYAN delivered the opinion of the court. JUSTICE WARD took no part in the consideration or decision of this case.


Defendant, First National Bank & Trust Company of Rockford, cashed a check drawn on the account of the plaintiff, Spec-Cast, Inc.; however, this check was missing the drawer's signature. Plaintiff filed suit in the circuit court of Winnebago County alleging that a bank cannot, in violation of Uniform Commercial Code section 3-401(1) (Ill. Rev. Stat. 1985, ch. 26, par. 3-401(1)), debit a depositor's account when it makes payment on an unsigned check. The trial court ruled that pursuant to section 1-103 of the Uniform Commercial Code (Ill. Rev. Stat. 1985, ch. 26, par. 1-103), the bank could raise common law defenses, and it then found that the plaintiff received the benefit of its bargain and ratified the bank's action. The appellate court agreed (168 Ill. App. 3d 615), and the plaintiff filed a petition for leave to appeal before this court. We hold that common law defenses are available to a bank which pays an unsigned check and that the trial court's findings are not against the manifest weight of the evidence.

William E. Jackson, president of Spec-Cast, Inc., agreed to make a loan to Richard A. Lundquist, owner of Richard's Auto Sales, a used-car dealership. Lundquist was experiencing financial difficulties and the loan was intended to allow him to purchase inventory for his business. On February 9, 1983, Jackson met with Lundquist at his office and gave Lundquist an unsigned $20,000 check made payable to Richard's Auto Sales. Jackson claims he purposely did not sign the check, but the trial court concluded that it was left unsigned accidentally. Lundquist was unable to give security for the loan contemporaneously with the delivery of the check because all of his business assets were subject to a lien in favor of a bank. There was conflicting testimony as to whether or not he was supposed to provide Jackson with a security interest in the items he purchased with the loan. However, the following day, Lundquist delivered a $20,000 unsecured note in favor of Jackson and Spec-Cast. The note recites that it was "for value received" and required Lundquist to pay Jackson $20,000, with interest, on demand. That same day, a $20,000 deposit was made in Spec-Cast's checking account.

On February 11, 1983, defendant First National Bank & Trust Company of Rockford paid the unsigned check. During the second week of March 1983, Jackson received his checking account statement and cancelled checks, and learned that the bank had paid the unsigned check. He requested his secretary to look into the matter. She called the bank and was advised that the check had been paid and that there was nothing the bank could do to get the money back. On March 15, 1983, Jackson met with Richard S. Peterson, a senior vice-president of First National Bank & Trust Company of Rockford. Peterson concurred that there was no action that the bank, at that time, could take concerning the check because it had already been paid. He suggested that the matter be taken up with Lundquist. At trial, Peterson testified it was banking procedure that if a check came through unsigned, it was necessary to obtain authorization for the payment of the check, and that no authorization was received from Jackson to pay the check.

Jackson received an interest payment on the promissory note in the amount of $589 in May 1983. That was the only payment received on the note, and no security was ever provided for the loan. The following year, March 28, 1984, Jackson made a formal, written demand on Lundquist for payment of the promissory note. However, Lundquist was unable to pay the note. Sometime in May 1984, Jackson spoke with a former bank executive, who informed him that the bank could be held responsible for its improper payment of the check. Later that month, Jackson's attorney contacted the defendant bank and notified it that Jackson held the bank responsible for the $20,000. On June 1, 1984, Lundquist filed for bankruptcy and listed the $20,000 as a debt. When Richard's Auto Sales, Inc., the entity to which the loan was made, went out of business, its assets were used to satisfy business creditors other than Jackson. Plaintiff subsequently filed this action against the bank in October 1984.

Section 3-401(1) of the Uniform Commercial Code provides that "[n]o person is liable on an instrument unless his signature appears thereon." (Ill. Rev. Stat. 1985, ch. 26, par. 3-401(1).) Plaintiff contends that section 3-401(1) establishes a virtual per se rule that if the bank pays a check missing the maker's signature, it is liable for the unauthorized payment. Defendant argues that section 3-401 establishes a general rule, but does not preclude it from raising common law defenses.

The check in question was drawn on the account of the plaintiff, Spec-Cast, Inc., and the defendant bank was instructed to only cash Spec-Cast's checks if they were signed by the plaintiff or his wife. The defendant, as the drawee bank, stands in a debtor-creditor relationship to its customer, Spec-Cast. (National Bank v. Quinn (1988), 126 Ill. 2d 129, 134.) There is a high standard of contractual responsibility placed upon depository banks to pay checks in strict accordance with the direction of their depositors. (United States Cold Storage Co. v. Central Manufacturing District Bank (1931), 343 Ill. 503, 513; Malley v. East Side Bank (7th Cir. 1966), 361 F.2d 393, 402.) The bank is bound by the deposit agreement and may not legally pay out funds except upon the approval and signature it has been instructed are necessary. (Miller v. First Granite City National Bank (1953), 349 Ill. App. 347, 351; Malley v. East Side Bank (7th Cir. 1966), 361 F.2d 393, 402; 5A Michie, Banks and Banking § 170, at 530 (1983).) Defendant failed to exercise reasonable care when it paid the check which was missing the plaintiff's signature. However, contrary to the plaintiff's argument, we do not believe that defendant is precluded from raising a defense when it pays a check missing the signature.

The general rule, pursuant to section 3 -- 401, is that unless a person signs a negotiable instrument, he is not liable on the instrument. (Miller v. First Granite City National Bank (1953), 349 Ill. App. 347, 351; Wolfe v. University National Bank (1973), 270 Md. 70, 74, 310 A.2d 558, 560; T. Quinn, Uniform Commercial Code Commentary and Law Digest 3 -- 401(1) (1978).) However, the Uniform Commercial Code contemplates that it shall be supplemented by common law principles, including common law defenses. Section 1 -- 103 states:

"Unless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause ...

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