Case Title: Gina Chin & Assoc. v. First Union Bank

Citation: 

Docket Number: 971463

State: virginia

Court: Virginia Supreme Court

Date: 1998-06-05T00:00:00Z

Document:
Present:  All the Justices 
 
GINA CHIN & ASSOCIATES, INC. 
 
v.  Record No. 971463     OPINION BY JUSTICE ELIZABETH B. LACY 
 
 
 
June 5, 1998 
FIRST UNION BANK 
 
FROM THE CIRCUIT COURT OF ARLINGTON COUNTY 
Benjamin N.A. Kendrick, Judge 
 
 
Gina Chin & Associates, Inc. (Chin) filed a motion for 
judgment against First Union Bank alleging that First Union 
was negligent when it accepted checks drawn on Chin's accounts 
bearing both forged signatures of the drawer and forged 
indorsements of the payees.  The trial court sustained First 
Union's demurrer and entered summary judgment.  We awarded 
Chin an appeal, and we will reverse the judgment of the trial 
court because we conclude that Chin's motion for judgment pled 
a cause of action pursuant to §§ 8.3A-404 and –405 of the 
Uniform Commercial Code, Code §§ 8.1-101 through 8.11-108 (the 
UCC). 
 
In reviewing a case decided on a demurrer, we accept as 
true the facts alleged in the motion for judgment and all 
reasonable inferences to be drawn therefrom.  Adkins v. Dixon, 
253 Va. 275, 277, 482 S.E.2d 797, 799 (1997).  Chin, a food 
wholesaler, maintained checking accounts at Signet Bank and 
Citizens Bank of Washington, D.C. (the drawee banks).  During 
1994 and 1995, an employee of Chin, Amie Cheryl Lehman, forged 
the signature of one of Chin's officers on a number of checks 
that were payable to Chin's suppliers.  Lehman then forged the 
payees' indorsements and, with the assistance of a First Union 
teller, deposited the checks in an account which she held at 
First Union.  The drawee banks then paid the checks and 
debited a total amount of $270,488.72 from Chin's accounts. 
First Union asserts that, under the UCC, it is amenable 
to suit only by the drawee banks based on a breach of warranty 
of title theory.  § 8.4-207.1.1  Chin's sole cause of action, 
according to First Union, is against the drawee banks for 
improperly charging Chin's accounts for the amount of the 
forged checks.  See §§ 8.4-401, -406.  Under First Union's 
interpretation of §§ 8.3A-404 and –405, Chin does not have a 
cause of action against it pursuant to those sections because 
they only apply to instances involving a forged indorsement of 
the payee and not to the circumstances where both the payee's 
indorsement and the signature of the drawer were forged. 
While First Union correctly states that the UCC provides 
a drawer with a cause of action against a drawee bank that 
charges a drawer's account based on checks containing a forged 
signature of the drawer, its conclusion that §§ 8.3A-404 and –
                     
1 First Union also argued on brief and in oral argument 
that Chin cannot maintain a cause of action against it for 
conversion.  First Union is correct, see § 8.3A-420; however, 
 
2
405 cannot be utilized by a drawer against the depositary bank 
in a double forgery situation is erroneous. 
Sections 8.3A-404 and -405 were part of the 1992 
revisions to the UCC.  Revised § 8.3A-404(b) provides that 
where the payee on a check is fictitious or not the person 
intended to have an interest in the check by the person 
determining to whom the check is payable, a forged payee's 
indorsement on the check is nevertheless effective for one who 
takes the check in good faith.2  Similarly, where an employee 
vested with the responsibility for processing, signing, or 
indorsing the employer's check makes a fraudulent indorsement 
of such check, revised § 8.3A-405 continues the prior 
provision's rule that the indorsement is effective if taken or 
paid in good faith.  However, both revised sections provide 
that if the person taking the check fails to exercise ordinary 
care, "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."  §§ 8.3A-
404(d), -405(b). 
The revisions to §§ 8.3A-404 and –405 changed the 
previous law by allowing "the person bearing the loss" to seek 
                                                                
Chin is not asserting a cause of action for conversion in this 
appeal. 
 
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recovery for a loss caused by the negligence of any person 
paying the instrument or taking it for value based on 
comparative negligence principles.  The concept of comparative 
negligence introduced in the revised sections reflects a 
determination that all participants in the process have a duty 
to exercise ordinary care in the drawing and handling of 
instruments and that the failure to exercise that duty will 
result in liability to the person sustaining the loss.  
Nothing in the statutory language indicates that, where the 
signature of the drawer is forged, the drawer cannot qualify 
as a "person bearing the loss" or that the drawer is otherwise 
precluded from seeking recovery from a depositary bank under 
these sections.  In the absence of any specific exclusion, we 
conclude that the sections are applicable in double forgery 
situations.  
This conclusion is consistent with Comment 2 of the 
Official Comments to § 8.3A-404, which states that subsection 
(b) "also applies to forged check cases."  Another commentary 
also concludes that § 8.3A-404 applies to double forgery 
situations.  Remarking that under the previous law, double 
forgery cases were treated solely as forged drawer's signature 
cases, allowing the depositary bank to avoid liability, the 
                                                                
2 The person whose intent determines to whom an instrument 
is payable includes a person who forges the drawer's 
 
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commentary concludes that the result under the revised section 
"differs sharply."  
In fictitious payee double forgeries under the 
Revision, some of the ultimate loss will end up on 
the shoulders of the company that hired the 
dishonest bookkeeper and failed to supervise the 
miscreant.  The rest will be shouldered by the 
depositary bank for [its] negligence . . . . 
 
Barkley Clark & Barbara Clark, The Law of Bank Deposits, 
Collections and Credit Cards ¶ 12.07[3][b] (rev. ed. 1995). 
Accordingly, we hold that Chin was not precluded from 
asserting a cause of action against First Union pursuant to 
§§ 8.3A-404 or -405.  In light of this conclusion, we next 
examine Chin's motion for judgment to determine whether it is 
sufficient to state a cause of action under these sections. 
Chin seeks recovery for a loss sustained as a result of 
the negligent actions of First Union.  Chin alleged that its 
employee, Lehman, forged both its signature and the 
indorsement of the payees on a number of checks and, with the 
cooperation of an employee of First Union, deposited the 
checks into Lehman's account at First Union.  The motion for 
judgment specifically alleged that the acceptance of the 
forged checks by First Union for payment "was negligent and 
was in contravention of established banking customs and 
standards" and "was due to the negligent failure of First 
                                                                
signature.  See § 8.3A-110(a). 
 
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Union Bank to supervise its employee."  The pleading further 
asserts that this negligence caused Chin to suffer a loss of 
over $270,000.  
These allegations are sufficient to state a cause of 
action against First Union pursuant to §§ 8.3A-404 and –405.  
Accordingly, the trial court erred in sustaining First Union's 
demurrer.  The judgment of the trial court is reversed and the 
case is remanded for further proceedings. 
Reversed and remanded.
 
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