The memorandum below is a continuation of
last week’s post. I am reproducing the
facts again to put the discussion below into context.
The Facts
Jerry Zamanski is a salesman at
Stephen’s boats. On December 21, 2005 Stephen’s Boats issued an $850 commission
check to Jerry. Jerry wrote ‘for deposit only’ on the back of the check and
placed it in his desk drawer. Jerry’s identical twin brother Harold stole the
check & raised it from $850 to $8,500. Harold took the altered check to
East Dade Bank, where Jerry had his account.
Harold explained to the teller, that
he had changed his mind on depositing the check and wanted cash for an upcoming
vacation. The teller knew Jerry very well, and had done business with him for
many years and, believing Harold to be Jerry, allowed him to cross out ‘for
deposit only’ followed by his initials. Harold then signed Jerry’s name and was
given $8,500 in cash. Two weeks later, the theft, alteration and forgery were
discovered.
Stephen’s bank, South Dade, has
charged his account $8,500. Jerry has asked Stephen to give him another
commission check. Stephen would like an analysis of this situation.
Particularly, Stephen wants to know whether he is responsible for the charge to
his account, and whether he must reissue the commission check to Jerry.
I would appreciate it very much if
you would review these facts in light of the relevant law contained in the
Uniform Commercial Code.
Overview: Part II
(A) The
Restrictive Indorsement;
(B) Person
Entitled to Enforce the Instrument;
(C) The
Alteration;
(D) When
Payor Bank May Charge Customer’s Account;
A.
The
Restrictive Indorsement
You have
indicated that when Jerry received the check, he wrote the words “for deposit
only” on the back of it. With this language, and accompanying indorsement, this
would have been a restrictive indorsement of the check under Section 3-206(c):
If an instrument bears an indorsement ...
using the words “for deposit” “for collection,” or other words indicating a
purpose of having the instrument collected by a bank for the indorser or for a
particular account. . .[it is a restrictive indorsement].
A Depository Bank has strict duties when it
receives a check which is restrictively indorsed:
A depository 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. Section 3-206(c)(2).
Therefore, any credit given by East Dade for
the check should have been “deposited” to Jerry’s account. Harold clearly had
no authority to alter the restrictive indorsement. Furthermore, his forged signature of Jerry
is ineffective to transfer any rights in the check.[1]
B. Person Entitled to Enforce
the Instrument
The only person who was entitled to enforce
the instrument as it was originally made out was Jerry:
“Person entitled to enforce” an
instrument means:
i. the
holder of the instrument;
ii. a
nonholder in possession of the instrument who is entitled to enforce the
instrument; or
iii. a
person not in possession of the instrument who is entitled to enforce the
instrument pursuant to 3-309 [Lost or Stolen Instruments] or
3-418(d) [Payment by Mistake]. Section 3-301(i)(ii)(iii).
Sections 3-301(ii)(iii) are
outside the general movement of checks and in any event do not apply here.
Under Section 3-301(i), the only person entitled to enforce the
instrument would be the holder, which is defined
as follows:
“Holder” means: the person in possession of a
negotiable instrument that is payable either to bearer or to an
identified person that is in possession. Section 1-201(b)(21)(A).
Harold was not a bearer of the check simply because he had
possession of it:
A promise or order is payable to bearer if it:
(1) states that it is payable to bearer or to the order of bearer or otherwise
indicates that the person in possession of the promise or order is entitled to
payment. Section
3-109(a)(1).
The check was payable to an identified
person—Jerry. While in possession, he would have been the holder, and the only person who could have that
status [unless he indorsed it]. Therefore, Harold was not a holder, and hence
not “entitled to enforce” the instrument.
A.
The
Alteration
When Harold raised the check to $8,500, he
altered the item:
Of course, in raising the check, the
obligation of the drawer was changed from $850 on the check to
$8,500. The unauthorized change in the instrument [the check] purported to
modify the contract of the drawer [Stephen’s Boats]. Additionally, the change
of the restrictive indorsement purported to modify the obligation of East Dade
Bank, and was itself an alteration.
The fact that an alteration occurred in the
instant situation, however, does not insure that the drawer’s account may not
be charged.
A person whose failure to exercise ordinary
care substantially contributes to an alteration
of an instrument or to the making of a forged signature on an instrument is
precluded from asserting the alteration or the forgery against a person who, in
good faith, pays the instrument or takes it for value or
for collection. Section
3-406(a).
In the present case, Stephen probably issued
the check via customary business practices, and would not be within 3-406(a). If however, he would have written the
check in pencil, and such conduct, were deemed ‘a failure to exercise ordinary care [which] substantially contribute[d]
to the alteration’ Stephen would be precluded from asserting
the alteration against the bank, provided, that the bank paid in accordance
with the standard set forth in Section 3-406(a).
Similarly, if Jerry were found somehow to be
negligent within Section 3-406, he would be similarly precluded from asserting
the alteration against his bank. [For example, would it matter if Harold had a
history of theft, forgery, or was known to be in desperate need of money? These are the types of questions that are
activated once you get into the facts of a particular case. Does Harold, being
an identical twin, figure into this at all?]
D. When a Payor Bank May
Charge
Customer’s Account
Part 4 of Article 4 deals with the
relationship between the payor bank and its customer, here, South Dade and
Stephen. Section 4-401 states when a bank may charge its customer’s
account and reads in relevant part as follows:
A bank may charge against the account of a
customer an item that is properly payable from the account even though the charge
creates an overdraft. An item is properly payable if it is authorized by the
customer and is in accordance with any agreement between the customer and the
bank. Section
4-401(a).
payable’ and Stephen should have his account
recredited [unless he fell within Section 3-406].
If on the other hand, Jerry had altered the item and taken it for collection, the
indorsement would have been effective, and Stephen’s account could have been
charged, although not $8,500:
(d) A bank that in good faith makes payment to a holder may
charge the indicated account of its customer according to:
(1) The original terms of the altered item;
(2) The terms of the completed item, even though
the bank knows the item has been completed unless the bank has notice that the
completion was improper.
Section 4-401(d)(1)(2).
If in fact Jerry had altered the item,
Section 4-401(d)(1) would
control. East Dade would have been a ‘holder’ within 1-201(b)(21)(A) since
Jerry would have endorsed the check to its order. South Dade would have made a
good faith payment to East Dade, and therefore would
be entitled to enforce the instrument according to its original terms.
Among the ‘original terms’ of the altered
item was the amount to be paid. That amount was $850 and thus, South Dade would
be entitled to charge Stephen’s account at least that amount.[3]
[1]
Subsection (a) to Section 3-403 states in pertinent part:
…[A]n 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….
Therefore, Harold’s signature was not ‘effective’ as
Jerry’s, but in fact operated as Harold’s.
Furthermore, Jerry would not be liable on the instrument
since neither he, nor his authorized representative signed it:
A person is not liable on an instrument
unless (i) the person signed the instrument, or (ii) the person is represented
by an agent or representative who signed the instrument and the signature is
binding on the represented person under Section 3-402. Section 3-401(a).
[2]
The obligations of the drawer and endorser are set forth in Sections 3-414 and 3-415 respectively. These sections are discussed in
detail later in the book but are reproduced here in case the reader wants to
examine the respective obligations of drawer or indorser (in connection with
the statement which was the basis for this footnote).
[3]
Before leaving this case, a few other points should be briefly noted. First,
South Dade Bank would have a cause of action against East Dade Bank for
breaching warranties under Section 4-207(a)(1)(2)(3):
(a) A customer
or collecting bank that transfers an item and receives a settlement or other
consideration warrants to the transferee and to any subsequent collecting bank
that:
(1)
the warrantor is a person entitled to enforce the instrument;
(2)
all signatures on the instrument are genuine and authorized;
(3)
the item has not been altered.
It should also be noted that East Dade would have a cause of
action against Harold for similar warranties under Section 3-417(a)(1)(2)(3). [See Statutory Supplement
for text of these sections.] Finally, a
customer of a bank, such as Stephen, is under a duty to promptly examine his
bank statement to discover forgeries or alterations which must be promptly
reported to the bank:
If
a bank sends or makes available a statement of account or items pursuant to
subsection (a), the customer must exercise reasonable promptness in examining
the statement or the items to determine whether any payment was not authorized
because of an alteration or an item or because a purported signature by or on
behalf of the customer was not authorized. If, based on the statement of the
items provided, the customer should reasonably have discovered the unauthorized
payment, the customer must promptly notify the bank of the relevant facts. Section 4-406(c).
If the bank proves that the customer failed with respect to
an item, to comply with the duties imposed on the customer by subsection (c),
the customer is precluded from asserting against the bank:
(1) the customer’s unauthorized signature or any alteration on the
item, if the bank also proves that it suffered a loss by reason of the failure….
Section 4-406(d)(1).
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