                   IN THE COURT OF APPEALS OF TENNESSEE
                              AT KNOXVILLE
                            August 11, 2004 Session

                  CITIZENS FIRST BANK v. ANDREW N. HALL

                  Direct Appeal from the Circuit Court for Morgan County
                   No. 6314C     Hon. Russell Simmons, Jr., Circuit Judge



                No. E2003-02678-COA-R3-CV - FILED JANUARY 24, 2005



The Trial Court entered Judgment for plaintiff on loan to defendant and set off the amounts of certain
forged checks on defendant’s accounts with bank against plaintiff’s recovery. We affirm.


Tenn. R. App. P.3 Appeal as of Right; Judgment of the Circuit Court Affirmed.


HERSCHEL PICKENS FRANKS, P.J., delivered the opinion of the court, in which D. MICHAEL SWINEY ,
J., and SHARON G. LEE, J., joined.

Billy P. Sams, Oak Ridge, Tennessee, for appellant.

James Frank Wilson, Wartburg, Tennessee, for appellee.



                                             OPINION


                 Plaintiff Bank brought action to recover on loan made to defendant. Defendant
counter-claimed, alleging that Bank had honored forged checks on his accounts and that he was
entitled to a set-off against the loan. The Trial Court, after hearing evidence, entered Judgment for
plaintiff on the loan in favor of the Bank, found in favor of defendant as to certain checks on his
counter-claim, but ruled in favor of the Bank on a $4,000.00 forged check drawn on defendant’s trust
account. Defendant has appealed to this Court.

              Defendant has not presented a separate statement of the issues, as required by the
Rules, (Rule 27 Tenn. R. App. P.,) but the first sentence of his argument states:
                Did the trial court err or apply the wrong standard of revue [sic] in determining that
                Andrew N. Hall has not carried his burden of proof that he gave notice before the one
                year?

The issue is inartfully drawn, but we frame the issue for review as to whether defendant’s failure to
review his bank statements, discover any irregularities and notify the Bank, precludes his counter-
claim against the Bank. The Bank has essentially raised this issue in its brief.

               The Bank initially brought this action in Sessions Court on a promissory note
executed by the defendant, and was awarded Judgment on the note, plus attorney’s fees. Defendant
appealed the total Judgment of $12,358.68 to the Circuit Court, where defendant filed a counter-
claim setting out that he had “suffered the loss of $5,313.13 in funds wrongfully paid” to the forger.
In his counter-complaint he set forth the checks at issue, dated March 6, 2002 - $140.00, March 8,
2002 - $200.00, April 4, 2002 - $4,000.00, April 12, 2002 - $57.26, May 6, 2002 - $320.00, May 15,
2002 - $140.00, May 17, 2002 - $455.87. Defendant averred that he learned of the forgeries on or
about May 17, 2002 and immediately informed the Bank.

                At the conclusion of the evidentiary hearing, the Trial Court ruled that plaintiff was
entitled to recover on its note against the defendant, and as to the counter-claim, said that the parties
agreed that the check in the amount of $455.87 could not be verified as having been cashed, and was
taken out of the claim, reducing the claim to $4,857.26.

                The Trial Court continued that the evidence showed that the checks at issue were on
two accounts, one being a trust account and the others on an office account, and the evidence
“showed Andrew Hall first discovered irregularities in the trust account when a check on it was
dishonored. The check was presented on April 18, 2002 and returned on April 19, 2002. The Court
continued that when Andrew Hall was notified by the Bank he called the Bank and discovered that
a $4,000.00 check had been cashed on the account. The Court concluded that Andrew Hall has not
carried his burden of proof that he made claim on that check before the one year statute expired. The
Court further explained, “on discussion of the matter with the employee, Andrew Hall indicated he
fired the employee, but rehired her when she pleaded with him. He also had an agreement that she
would pay back the $4,000.00, which he claimed she never paid back. Andrew Hall did not enter
any testimony that he made a specific request to the Bank, either in writing or verbally to cover this
particular check.” The Court concluded he made no claim to cover this forgery until after he was
sued by the Bank.

                The factual findings of the Trial Court are afforded a presumption of correctness, and
will not be overturned on appeal unless the evidence preponderates against them. See, Tenn. R. App.
P. 13(d); Bogan v. Bogan, 60 S.W.3d 721, 727 (Tenn. 2001). However, with respect to legal issues,
the review is de novo, with no deference to the conclusions of law made by the lower courts.
Southern Constructors, Inc. v. Loudon County Bd. of Educ., 58 S.W.3d 706, 710 (Tenn. 2001).

                The well-settled rule in forgery cases as between the customer and the bank, is the


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bank must bear the loss where money has been paid as a result of a third party forging the drawer’s
signature on a check. Kaley et al v. Union Planters Nat’l Bank of Memphis, 775 S.W.2d 607, 609
(Tenn. Ct. App. 1988).

               If the Bank can show that the depositor failed to exercise ordinary care with respect
to duties imposed in Tenn. Code Ann. 47-4-406(c), then it will not be liable on the forgeries. Tenn.
Code Ann. 47-4-406(d).

                Inquiries as to the application of the Statute, T.C.A. § 47-3-406 are highly factual.
See, Bank/First Citizens Bank v. Citizen’s & Assoc., 825 S.W.3d 259 (Tenn. 2002). The evidence
does not preponderate against the Trial Court’s finding on the $4,000.00 check honored by the Bank.
The evidence establishes that it was the Bank’s procedure when notified of a forgery to have the
depositor make an Affidavit of Forgery. No such Affidavit was completed as to this check. While
defendant testified that he told a Bank employee over the phone that the $4,000.00 check was a
forgery, his actions support the Trial Judge’s conclusion that he did not make a claim against the
Bank for this forgery until this suit was filed. Hall testified that he became aware of the $4,000.00
check drawn on his trust account on Saturday, after April 4. He testified that he checked his mail
and that he had a statement from the Bank that a check he had written to the Juvenile Court Clerk
“had bounced”, which was in the amount of a little over $2,500.00. He then called the Bank to
enquire about why the check bounced, and the bank employee went over his account and advised that
Angela Davis had cashed the $4,000.00 check at a drive-in window for a loan. He testified that he
told the Bank employee that she had forged the check, but he then deposited money in the bank so
that the Clerk’s check would clear, and he fired his employee, Angela Davis, but then changed his
mind and “gave her another chance”. She agreed to repay him the $4,000.00.

                 The Bank insists that Hall’s negligence precludes any recovery, in that he hired a
known thief as an employee, didn’t take proper precautions, and then rehired her on the same date
he fired her for stealing from him. Also, he left his check books where dishonest employees could
easily access them. He failed to check and reconcile his bank statements in a timely manner, and in
his letter of June 5 to the Bank requesting copies of the checks, he did not explain why he needed
the checks. The Trial Court’s remarks did not address the issue of negligence and proximate cause
directly, rather, the Trial Court focused on defendant’s conduct in terms of whether timely notice was
given. Since the Court awarded a set-off for the office account checks, it is implicit in his ruling that
the plaintiff did not establish defendant’s conduct was negligent and the proximate cause of these
losses.

               The Bank insists that Hall never made a claim for the $4,000.00 forgery until a year
had elapsed, and if a claim had been made, the Bank would have taken an Affidavit of Forgery and
credited Hall’s account. As stated earlier, the evidence does not preponderate against the Trial
Court’s finding on this issue. In sum, Hall, when learning of the forgery, did not make a claim
against the Bank but deposited monies to cover the overdraft and sought to recover from the forger.
He did not formally make a claim until the counter-claim was filed in this action.



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                On the Bank’s issue of whether Hall was entitled to credit for the remaining forged
checks, the evidence does not preponderate against the Trial Court’s findings. Tenn. R. App. P.
13(d). Hall testified that when he fired and rehired his employee, he did not know that she had
access to his account on which these checks were forged. Hall testified when he learned of these
forgeries, he closed the office account and opened another account with the Bank in late May, and
told the Bank employee about the forgeries in his office account. Hall testified that when he went
to the Bank in September of 2002 to renew his note, the President of the Bank asked him what was
going on, and that he told the President that he couldn’t pay off the note because checks forged on
his account had put him in the hole. While the Bank’s President disputes this testimony, the Court
obviously credited Hall’s recounting of this conversation because it commented that “a delay of three
months was not unreasonable” in giving notice to the Bank, which apparently referred to the
September 2002 meeting between the Bank’s President and Hall, and the Court additionally found
“that the reasons for the transaction were discussed, the notice was given to the Bank . . . the Bank
was notified as to the office account.” The evidence does not preponderate against the Trial Court’s
finding that the defendant was entitled to the set-off for those checks. Tenn. R. App. P. 13(d).

                For the foregoing reasons, we affirm the Judgment of the Trial Court and remand,
with the cost of the appeal assessed one-half to Citizens First Bank and one-half to Andrew N. Hall.




                                                      ______________________________
                                                      HERSCHEL PICKENS FRANKS, P.J.




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