Commercial Law - Robert A. Weber Jr.

• Publication year: 2000

Commercial Lawby Robert A. Weber, Jr.^*

This year's survey article attempts a synthesis of case law subdivided according to various aspects of a commercial practice. Topics discussed include banking/lender issues, collections, sales of businesses, pitfalls on the front end of a commercial transaction, and a miscellaneous catchall for cases that stubbornly defy categorization.

I. Bank/Lender Issues

A. Account Management

Several cases addressed account management issues during the survey period. In Emmett v. Regions Bank,¹ the court of appeals confronted a fact scenario that is sadly all too familiar. Husband and wife had a joint savings account and two certificates of deposit ("CDs") titled jointly in their names. In June 1996, wife was admitted to a nursing home. On June 17,1996, husband and his daughter from a previous marriage went to defendant bank and transferred the funds from the savings account and CDs into the joint names of husband and daughter. Four days later, daughter transferred these funds into her name alone, and husband died shortly thereafter on June 24, 1996. Wife died on August 26, 1996, and the executors of the estates of husband and wife sued defendant bank, claiming it had improperly permitted these transactions.²

In particular, plaintiff executors challenged whether the transaction was authorized. In response to plaintiffs' request for production, defendant showed it could not locate or did not have certain requested items, such as the memorandum showing the savings account withdrawal. Defendant did submit, however, affidavits of its vice president concerning the history of both the savings account and CDs; an affidavit by a teller that the CDs were jointly owned by husband and wife; and an affidavit by the teller who conducted the June 17, 1996 transaction.³

Plaintiff asserted the trial court erred in several respects in granting summary judgment to defendant. First, plaintiff argued the affidavits of defendants' employees should have been stricken because the best evidence was the CDs and debit memos showing the withdrawals.⁴ The appellate court found the best evidence rule did not apply as the written documents in question were merely collateral or incidental to the issue of authorization.⁵

Second, plaintiff cited several statutes regarding records retention by financial institutions, apparently suggesting that defendant would be estopped from submitting affidavits because of its inability to produce these records. Plaintiff cited section 7-1-910 of the Official Code of Georgia Annotated ("O.C.G.A."),⁶ which requires banks to retain certain documents.⁷ The court held this code section was not applicable to the transaction at issue as it pertains only to current transactions.⁸ However, O.C.G.A. section 7-l-63(c) specifically permits introduction of legible products of computer operations, which the bank submitted, as a record of a transaction.⁹ The federal statutes cited by plaintiff were also inapplicable. The court found that "12 U.S.C. Sec. 1829b, which provides that where the Secretary of the United States Treasury determines that maintaining records is useful for criminal, tax, or regulatory proceedings, he shall prescribe regulations to carry out those purposes," is silent on financial institution retention of CDs or withdrawal slips.¹⁰ Another federal statute cited by plaintiff, 12 U.S.C. Sec. 1730d,^u had been repealed.¹²

Lastly, plaintiff argued the evidence was insufficient to warrant summary judgment in favor of defendant.¹³ In light of the affidavits from bank personnel, the terms of the bank's customer service agreement, and the provisions of O.C.G.A. section 7-1-816, the court affirmed the grant of summary judgment.¹⁴ The customer service agreement provided that each party listed on a multiparty account can conduct transactions with respect to the account. Even assuming that agreement did not exist, O.C.G.A. section 7-1-816 contains substantially the same authorization.¹⁵

The court of appeals decision in Wachovia Bank of Georgia, NA. v. Reynolds¹⁶ will have a tremendous impact on the procedures financial institutions employ in opening accounts. In Reynolds plaintiff opened a CD for her brother at defendant bank. Plaintiff instructed defendant that the CD was being purchased by her as attorney-in-fact for her brother and that everything pertaining to the CD was to be sent to her address. Although defendant did not obtain a copy of the power of attorney, it issued plaintiff a deposit slip identifying "Bernard S. Bailey, Jr. [brother] by Frances B. Reynolds, P.O.A. [plaintiff]" as the customer. Nevertheless, defendant bank opened the CD in brother's name alone and sent him all correspondence relating to the CD. Brother subsequently withdrew the funds in cash, and the cash was stolen from him. Plaintiff sued bank on the basis it had negligently established, handled, and redeemed the CD.¹⁷ A jury found for plaintiff in the amount of the funds the bank permitted brother to withdraw and also awarded attorney fees to plaintiff on the basis of bad faith under O.C.G.A. section 13-6-11.¹⁸

The general rule regarding a bank's duty to its customer in the context of establishing a CD account, quoted by the court, is set forth in Tucker Federal Savings & Loan Ass'n v. Rawlins¹⁹ as follows:

[A]ny financial institution which receives money from its customer in exchange for certificate(s) of deposit has a duty to issue and/or change the certificate in a manner that complies with the wishes of the customer, so long as the wishes of the customer are not contrary to any applicable law, and that the financial institution may be liable to the

customer or a third-party beneficiary for mishandling the transaction, including improperly advising the customer how the certificate should be established or changed to comply with the wishes of the custom-

Defendant's primary argument on appeal was that "its duty of care extended to [brother] alone as its sole depositor-customer and the principal for whom [plaintiff] acted as agent in establishing his CD account."²¹ Defendant supported this argument through reference to the law of agency, which provides that a "'principal may follow his money.'"²² Nevertheless, the court concluded plaintiff was in fact a customer because her name as power of attorney was listed on the "customer line" on the initial deposit slip.²³ At this point, the court expanded its definition of "customer," stating that even if the bank's arguments on agency were accepted, "where one acts for another by power of attorney suggesting possible incapacity or other special circumstances, as here, a bank's customer must be deemed inclusive of the depositor and the attorney-in-fact who acts as the depositor/principal's agent."²⁴ Upon deciding plaintiff was in fact a customer, the court concluded there was sufficient evidence, including testimony by a bank employee that defendant bank failed to follow its own procedures in setting up the CD and by a banking expert that defendant violated reasonable banking practices, to support the jury's verdict.²⁵

In the absence of clarification from the supreme court on this holding, the account opening process just became a little more involved. Aside from having to inquire carefully whether an account is being opened for the benefit of an incompetent, banks will need to ensure no other "special circumstances" exist that might establish a legal obligation on their part to some other individual. One cannot possibly begin to imagine the numerous "special circumstances" that, upon being suggested to a bank official opening an account for a power of attorney, might impose additional legal obligations upon the bank.

The court also affirmed the award of attorney fees under O.C.G.A. section 13-6-11.²⁶ In particular, the court found the bank had demonstrated bad faith by failing to adhere to reasonable banking practices, failing to maintain a signature card, and not sending correspondence regarding the CD to plaintiff as specifically requested.²⁷

The holding in Family Partners Worldwide, Inc. v. SunTrust Bank, Atlanta,²⁸ in contrast to Reynolds, imposes a less stringent standard upon banks in opening accounts in the corporate depositor context. In Family Partners Worldwide, the chief executive officer ("CEO") of a corporation, unbeknownst to its directors, set up a separate corporate account for purposes of embezzling funds. Upon learning of the embezzlement, the corporation sued the bank on the basis of conversion. The corporation relied on the fact that the bank neither sought nor obtained a corporate resolution or certificate of authority from the CEO upon setting up the embezzlement account.²⁹

The court began its analysis by citing O.C.G.A. section 7-l-325(a), which provides that "whenever an agent deposits money in a bank to the credit of his principal, the bank 'shall be authorized to pay the amount of such deposit, or any part thereof, upon the order of such agent [properly signed] without being accountable in any way to the principal.'"³⁰ Ignoring questions of actual or apparent agency, the court proceeded to determine whether the CEO had inherent agency power, which exists when '"the power of an agent ... is derived not from authority, apparent authority or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent.'"³¹ Based on the following factors, the court concluded the CEO had inherent authority to open the account and conduct transactions: (1) the CEO exercised undisputed, complete executive power to run the daily affairs of the corporation; (2) he had implied authority to execute contracts on behalf of the corporation with access to the corporate seal; (3) he possessed complete authority to "oversee and supervise the financial end" of the corporation; (4) he had authority to conduct transactions in other accounts at other banks; and (5) he had implied...