Donald Dunn and Jackey Dunn D/B/A Double D Liquor v. Mengtai Petroleum MacHinery, Co., LTD. ( 2019 )

In the
Court of Appeals
Second Appellate District of Texas
at Fort Worth
___________________________
No. 02-17-00425-CV
___________________________
DONALD DUNN AND JACKEY DUNN D/B/A DOUBLE D LIQUOR,
Appellants
V.
MENGTAI PETROLEUM MACHINERY, CO., LTD., Appellee
On Appeal from the 89th District Court
Wichita County, Texas
Trial Court No. 180,335-C
Before Sudderth, C.J.; Gabriel and Birdwell, JJ.
Memorandum Opinion by Justice Gabriel
MEMORANDUM OPINION
Appellant Donald Dunn and Jackey Dunn d/b/a Double D Liquor is in the
business of selling liquor and cashing checks. W. R. Walls utilized the latter services,
cashing $90,254.58 worth of checks made payable to his employer, appellee Mengtai
Petroleum Machinery, Co., Ltd. Walls indorsed the checks himself, and Double D
Liquor paid him the cash and deposited the checks into its account at First Bank. The
police eventually presented First Bank with forgery affidavits executed by Xiaoing Jin,
a representative of Mengtai, who averred that Walls had not been authorized to cash
the company’s checks and had absconded with the money. In response, First Bank
froze a sufficient amount of funds in Double D Liquor’s account to cover the missing
money and, unable to determine who was entitled to have it, filed an interpleader
action, naming Double D Liquor and Mengtai as defendants. The trial court
conducted a bench trial, found that Walls was not authorized to cash the checks at
issue and that Double D Liquor was therefore liable to Mengtai for conversion of the
checks, and rendered judgment awarding the interpleaded funds to Mengtai.
Its spirits thus shaken, Double D Liquor appealed. We affirm.
I. WALLS’S AUTHORITY TO INDORSE MENGTAI’S CHECKS
As we construe its first of three issues, Double D Liquor argues the evidence is
legally insufficient to support the trial court’s failure to find that Walls was authorized
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to indorse the company checks at issue here.1 As we understand its brief, Double D
Liquor raises two arguments. First, it argues the evidence conclusively establishes that
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Double D Liquor’s brief is no model of clarity. It is somewhat unclear from
Double D Liquor’s brief whether its sufficiency challenge is based on legal
insufficiency, factual insufficiency, or both. While Double D Liquor contends in the
summary-of-argument portion of its brief that the asserted failure to find “was against
the great weight and preponderance of the evidence and is clearly wrong and
manifestly unjust,” which is the standard for a factual-sufficiency challenge, the only
relief it requested in its brief is that we render judgment in its favor, which is the
appropriate relief for legal, not factual insufficiency. See Dow Chemical Co. v. Francis,
46 S.W.3d 237, 241–42 (Tex. 2001) (explaining that if a party challenges the legal
sufficiency of an adverse finding on an issue on which the party had the burden of
proof, the party must demonstrate on appeal the evidence establishes, as a matter of
law, all vital facts in support of the issue, whereas if a party challenges the factual
sufficiency of an adverse finding on such an issue, an appellate court may set aside the
finding “only if the evidence is so weak or if the finding is so against the great weight
and preponderance of the evidence that it is clearly wrong and unjust”). Compare
Wright Way Spraying Serv. v. Butler, 690 S.W.2d 897, 898 (Tex. 1985) (noting that a court
of appeals must reverse the trial court’s judgment and remand for a new trial if it finds
the evidence is factually insufficient and that it has no jurisdiction to render based on
a factual-sufficiency challenge), with Vista Chevrolet, Inc. v. Lewis, 709 S.W.2d 176, 176
(Tex. 1986) (reiterating the well-settled rule that “no evidence” points require
rendition in favor of the appealing party).
Further, just before the argument portion of its brief concerning its first issue,
Double D Liquor restates that issue as “W.R. Walls did have the authority or apparent
authority to indorse checks made to Mengtai Petroleum,” and in the argument portion
of its brief related to this issue, it merely argues that the evidence established Walls
had the authority to indorse the checks at issue. Those are legal-sufficiency
arguments. See Dow Chemical, 46 S.W.3d at 241. Thus, because Double D Liquor only
raises arguments relating to legal insufficiency in its briefing of its first issue and
requests only that we reverse and render judgment in its favor, we construe its first
issue as raising only a legal-sufficiency challenge. See Maynard v. Booth, 421 S.W.3d 182,
183 (Tex. App.—San Antonio 2013, pet. denied) (addressing only the legal sufficiency
of the evidence where appellant cited both legal- and factual-sufficiency standards of
review but only requested the court reverse the trial court’s judgment and render
judgment in her favor).
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Walls was authorized to make deposits for Mengtai and that it “naturally follows that
[he] had to be able to indorse [Mengtai’s] checks.” Second, Double D Liquor
borrows from section 3.405(a)(3) of the business and commerce code, arguing that
because the evidence establishes Walls had “responsibility” with respect to the checks
within the meaning of that provision, he necessarily had the authority to indorse the
checks. We are not persuaded by either of these arguments.
A. STANDARD OF REVIEW
We may sustain a legal-sufficiency challenge—that is, a no-evidence
challenge—only when (1) the record discloses a complete absence of evidence of a
vital fact, (2) the rules of law or of evidence bar the court from giving weight to the
only evidence offered to prove a vital fact, (3) the evidence offered to prove a vital
fact is no more than a mere scintilla, or (4) the evidence establishes conclusively the
opposite of a vital fact. Ford Motor Co. v. Castillo, 444 S.W.3d 616, 620 (Tex. 2014) (op.
on reh’g); Uniroyal Goodrich Tire Co. v. Martinez, 977 S.W.2d 328, 334 (Tex. 1998) (op.
on reh’g). In determining whether legally sufficient evidence supports the finding
under review, we must consider evidence favorable to the finding if a reasonable
factfinder could and must disregard contrary evidence unless a reasonable factfinder
could not. Cent. Ready Mix Concrete Co. v. Islas, 228 S.W.3d 649, 651 (Tex. 2007); City of
Keller v. Wilson, 168 S.W.3d 802, 807, 827 (Tex. 2005).
If a party is attacking the legal sufficiency of an adverse finding on an issue on
which the party had the burden of proof, and if no evidence supports the finding, we
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review all the evidence to determine whether the contrary proposition is established as
a matter of law. Dow Chem. Co., 46 S.W.3d at 241; Sterner v. Marathon Oil Co.,
767 S.W.2d 686, 690 (Tex. 1989).
B. APPLICABLE LAW
If an instrument is payable to an identified person, negotiation requires transfer
of possession of the instrument and its indorsement by the holder. Tex. Bus. & Com.
Code Ann. § 3.201(b). As relevant here, an indorsement is a signature, other than that
of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is
made on an instrument for the purpose of negotiating the instrument. Id. § 3.204(a).
Generally, an unauthorized signature is ineffective except as the signature of the
unauthorized signer in favor of a person who in good faith pays the instrument or
takes it for value. Id. § 3.403(a). An unauthorized signature is one that was made
without actual, implied, or apparent authority. Id. § 1.201(41).
C. ANALYSIS
We begin with Double D Liquor’s first issue. Mengtai concedes Walls had
responsibility for the checks within the meaning of section 3.405(a)(3), but it denies
this necessarily established he had authority to indorse them. In relevant part, section
3.405(a)(3) provides,
“Responsibility” with respect to instruments means authority (i) to sign
or indorse instruments on behalf of the employer, (ii) to process
instruments received by the employer for bookkeeping purposes, for
deposit to an account, or for other disposition, (iii) to prepare or process
instruments for issue in the name of the employer, (iv) to supply
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information determining the names or addresses of payees of
instruments to be issued in the name of the employer, (v) to control the
disposition of instruments to be issued in the name of the employer, or
(vi) to act otherwise with respect to instruments in a responsible
capacity.
Id. § 3.405(a)(3). This statute enumerates an itemized list of areas of authority with
respect to instruments and provides that if an employee has authority in those areas,
then the employee has “‘Responsibility’ with respect to instruments” within the
meaning of section 3.405. Id. One such area of authority is the authority to sign or
indorse instruments on behalf of the employer. Id. § 3.405(a)(3)(i). And this seems to
be the basis of Double D Liquor’s contention that establishing Walls had
responsibility with respect to the checks at issue here necessarily means he had
authority to indorse those checks.
But this is a misreading of the statute. The statute’s text sets forth the itemized
list of areas of authority using the disjunctive “or,” meaning that if an employee has
authority over any one of the enumerated areas, then the employee has “responsibility
with respect to instruments.” See Webster’s Third Int’l Dictionary 1585 (2002) (stating
that “or” is used as a function word to indicate an alternative between different or
unlike things, states, or actions); see also Antonin Scalia & Bryan A. Garner, Reading
Law: The Interpretation of Legal Texts 116 (2012) (noting that disjunctive use of “or”
creates alternatives and that its use in a list indicates at least one item in the list is
required, but any one or more of the items satisfies the requirement). Thus, it is
possible for an employee to have responsibility with respect to checks under section
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3.405(a)(3) even if he does not have the authority to sign or indorse checks on behalf
of his employer. Accordingly, contrary to Double D Liquor’s argument, showing
Walls had responsibility with respect to Mengtai’s checks does not conclusively
establish that he had authority to indorse them on Mengtai’s behalf.
We turn to Double D Liquor’s other argument, which is that the evidence
conclusively shows that Walls had authority to deposit Mengtai’s checks, so it
“naturally follows” that he had authority to indorse Mengtai’s checks.
Jin testified that Walls was a manager of Mengtai. As Double D Liquor
acknowledges, Jin testified that Walls did not have any authority to indorse checks
that were payable to Mengtai. Jin also testified that Walls did not have authority to
take the proceeds of checks payable to Mengtai. Rather, according to Jin, checks
made payable to Mengtai were supposed to go into Mengtai’s bank account. Viewing
the evidence in the light most favorable to the trial court’s findings, Jin’s testimony
that Walls was not authorized to indorse Mengtai’s checks constitutes more than a
scintilla of evidence supporting the trial court’s finding that Walls lacked authority to
indorse the checks at issue here. Because the evidence is legally sufficient to support
the trial court’s finding that Walls lacked authority to indorse the checks at issue here,
we overrule Double D Liquor’s first issue.
II. ORDINARY CARE
As we understand its second issue, Double D Liquor challenges the trial court’s
implied finding that it failed to exercise ordinary care in receiving from Walls checks
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made payable to Mengtai, arguing that the evidence conclusively established the
contrary.2 The same standard of review we applied to Double D Liquor’s first issue
also applies to its second.
A. APPLICABLE LAW
Under the Texas Uniform Commercial Code (UCC), a person who receives a
check, other than by negotiation, from a person who is not entitled to enforce it is
liable for conversion of the check. Tex. Bus. Com. Code Ann. § 3.420(a). The
measure of liability for such a conversion is presumed to be the amount payable on
the check. See id. § 3.420(b).
The UCC also contains certain comparative negligence provisions that apply to
some, but not all, conversion claims. Sw. Bank v. Info. Support Concepts, Inc., 149 S.W.3d
104, 107 (Tex. 2004). One such defense is the “faithless employee” defense found in
section 3.405. See Tex. Bus. Com. Code Ann. § 3.405; Hanh H. Duong v. Bank One,
N.A., 169 S.W.3d 246, 249 (Tex. App.—Fort Worth 2005, no pet) (referencing
defense afforded by section 3.405 as the “faithless employee” defense). The faithless
employee defense is as follows:
For the purpose of determining the rights and liabilities of a person who,
in good faith, pays an instrument or takes it for value or for collection, if
As with its first issue, and for the same reasons, Double D Liquor’s brief is
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unclear whether its second issue is based on legal insufficiency, factual insufficiency,
or both. For the same reasons we articulated with respect to its first issue, we
construe Double D Liquor’s second issue as presenting only a legal-sufficiency
challenge.
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an employer entrusted an employee with responsibility with respect to
the instrument and the employee or a person acting in concert with the
employee makes a fraudulent indorsement of the instrument, the
indorsement is effective as the indorsement of the person to whom the
instrument is payable if it is made in the name of that person. If the
person paying the instrument or taking it for value or for collection fails
to exercise ordinary care in paying or taking the instrument and that
failure contributes to loss resulting from the fraud, the person bearing
the loss may recover from the person failing to exercise ordinary care to
the extent the failure to exercise ordinary care contributed to the loss.
Tex. Bus. Com. Code Ann. § 3.405(b). In other words, as the Fifth Circuit has aptly
summarized, under section 3.405, a person who converts a check nevertheless escapes
liability for the conversion if (1) the person, in good faith, took the check for value,
(2) the embezzler was an employee whose employer entrusted him with responsibility
for the check, and (3) the employee fraudulently indorsed the check, but (4) with the
proviso that the person remains liable for any loss to the extent that the person failed
to exercise ordinary care. See Coastal Agric. Supply, Inc. v. JP Morgan Chase Bank, N.A.,
759 F.3d 498, 506 (5th Cir. 2014).
B. ANALYSIS
It is undisputed that the checks Double D Liquor received from Walls that are
at issue here were payable to Mengtai. Additionally, the trial court found that Walls
was not authorized to indorse those checks, and we have concluded that finding is
supported by legally sufficient evidence. Thus, Double D Liquor received the checks
from a person who was not entitled to enforce them. Consequently, Double D
Liquor converted those checks and is presumptively liable for the full amount that is
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payable on them, see Tex. Bus. Com. Code Ann. § 3.420(a)–(b), unless it established a
defense, and that is where section 3.405 comes in.
During trial, the parties did not dispute that Double D Liquor had taken the
checks in good faith and for value. Nor did they dispute that Walls was an employee
of Mengtai who was entrusted with responsibility for the checks. It also was
undisputed that Walls had indorsed the checks “Mengtai Petroleum Machinery / W.R.
Walls.” The extent of Double D Liquor’s liability, then, turns on whether it exercised
ordinary care in taking the checks. See id. § 3.405. The trial court impliedly found it
did not, and Double D Liquor challenges this finding.
However, before making that challenge, Double D Liquor seems to advance a
self-defeating argument on appeal: it contends section 3.405—the faithless employee
defense—is inapplicable to this case because the checks in question were not
fraudulently indorsed. Because Double D Liquor is the party that converted those
checks, it is the party who stands to benefit from the faithless employee defense, and
one requirement for that defense to apply is that the checks were fraudulently
indorsed. See id. Thus, to accept Double D Liquor’s contention that the checks were
not fraudulently indorsed would mean that the faithless employee defense is
unavailable to it, rendering its argument that it exercised ordinary in receiving the
checks from Walls moot.
But Double D Liquor also argues that if section 3.405 is applicable, the
evidence conclusively shows it exercised ordinary care in receiving the checks from
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Walls. In trying to reconcile Double D Liquor’s alternative arguments, we bear in
mind that we are to “construe appellate briefs reasonably, yet liberally, so that the
right to appellate review is not lost by waiver.” See Ho v. Saigon Nat’l Bank, 438 S.W.3d
871, 873 (Tex. App.—Houston [14th Dist.] 2014, no pet.). Looking to Double D
Liquor’s brief, we note that in both the issues-presented and summary-of-argument
portions of its brief, Double D Liquor framed its second issue as whether it had used
“due diligence” in receiving the checks from Walls. We also note that in its first issue,
Double D Liquor maintained that Walls was not an imposter or fictitious payee under
section 3.404 but rather was an employee with responsibility under section 3.405. We
note again that neither party disputed at trial that Walls had indorsed the checks at
issue here “Mengtai Petroleum Machinery / W.R. Walls.” And we note that Mengtai
does not argue that section 3.405 is inapplicable and that it insists the checks were
fraudulently indorsed. Given these facts, we do not construe Double D Liquor’s
second issue as challenging the applicability of section 3.405’s faithless employee
defense to this case. Accordingly, we will proceed to consider Double D Liquor’s
argument that the evidence conclusively establishes it exercised ordinary care in
receiving the checks from Walls.
The trial court made several findings relevant to Double D Liquor’s challenge
to the trial court’s implied finding that Double D Liquor did not exercise ordinary
care in receiving the checks from Walls:
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3. Donald Dunn and wife Jackey Dunn d/b/a/ Double D Liquor
cashed checks which were payable to Mengtai, but which were endorsed
by W.R. Walls. The cash proceeds for each check were then delivered
by Donald Dunn and wife Jackey Dunn d/b/a/ Double D Liquor to
W.R. Walls. (However, on at least one instance when Donald Dunn and
wife Jackey Dunn d/b/a/ Double D Liquor cashed a check payable to
Mengtai and endorsed by W.R. Walls, W.R. Walls was not even present.
W.R. Walls’s spouse delivered the check to Donald Dunn and wife
Jackey Dunn d/b/a/ Double D Liquor and was paid the proceeds
thereof).
4. W.R. Walls provided no proof to Donald Dunn and wife Jackey Dunn
d/b/a/ Double D Liquor that W.R. Walls ha[d] the authority to endorse
check(s) payable to Mengtai.
5. Donald Dunn and wife Jackey Dunn d/b/a/ Double D Liquor took
no action to determine if W.R. Walls had the authority to endorse checks
which were payable only to Mengtai as the Payee.
Double D Liquor does not challenge these findings, and thus they are binding on us.
See Inimitable Grp., L.P. v. Westwood Grp. Dev. II, Ltd., 264 S.W.3d 892, 902 & n.4 (Tex.
App.—Fort Worth 2008, no pet.).
Under the UCC, in the case of a person engaged in business, “ordinary care”
means “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.” Tex. Bus. Com. Code Ann. § 3.103(a)(9). Here, the trial court found that
Walls never gave any proof to Double D Liquor verifying he was authorized to cash
checks made payable to Mengtai and that Double D Liquor took no action to
determine whether he was so authorized. From these facts, the trial court could
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reasonably have concluded that Double D Liquor failed to exercise ordinary care in
cashing the checks. Accordingly, we overrule Double D Liquor’s second issue.
III. CONTRIBUTORY NEGLIGENCE
In its third issue, Double D Liquor argues that the evidence shows that
Mengtai’s own negligence caused its losses and that consequently, it is precluded from
recovery. Specifically, Double D Liquor argues that Mengtai failed to adequately
examine its records, causing it not to discover that Walls was cashing its checks over a
period of several months. Double D Liquor attempts to rely upon business and
commerce code section 4.406(d)(2) to argue that Mengtai’s alleged failure to
adequately examine its records was negligence that precludes it from recovery.
Section 4.406(d)(2) generally provides that a customer of a bank who fails to
exercise reasonable promptness in examining his bank statements for unauthorized
payments from his account is precluded from asserting against the bank
the customer’s unauthorized signature or alteration by the same
wrongdoer on any other item paid in good faith by the bank if the
payment was made before the bank received notice from the customer
of the unauthorized signature or alteration and after the customer had
been afforded a reasonable period of time, not exceeding 30 days, in
which to examine the item or statement of account and notify the bank.
Tex. Bus. & Com. Code Ann. § 4.406(d)(2). As Double D Liquor admits, by its
express terms, this statute does not apply to this case because it is not a bank. See id.
§ 4.105(1). Nevertheless, on the simple, conclusory statement that this statute “can be
used as a guiding principle for Mengtai’s negligence,” Double D Liquor invites us to
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apply its requirements to Mengtai’s alleged failures anyway. But Double D Liquor
points us to nothing that would authorize us to do so, nor has it offered any cogent
reason why a statute whose express terms it admits do not apply to Mengtai’s conduct
should nevertheless be applied to Mengtai’s conduct. We decline Double D Liquor’s
bare invitation to reverse the trial court’s judgment by applying the requirements of a
statute to a situation outside of the statute’s scope. We overrule Double D Liquor’s
third issue.
IV. CONCLUSION
Having overruled all of Double D Liquor’s issues, we affirm the trial court’s
judgment. See Tex. R. App. P. 43.2(a).
/s/ Lee Gabriel
Lee Gabriel
Justice
Delivered: July 11, 2019
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