Title: Hartford Fire v. Maryland National

State: maryland

Issuer: Maryland Supreme Court

Document:

IN THE COURT OF APPEALS OF MARYLAND
Misc. No. 21
September Term, 1995
_____________________________________
HARTFORD FIRE INSURANCE CO. 
v.
MARYLAND NATIONAL BANK, N.A.
____________________________________
Murphy, C.J.
Eldridge
Rodowsky
Chasanow
Karwacki
Bell
Raker,
JJ.
____________________________________
OPINION BY MURPHY, C.J.
Chasanow, J., concurs in the result
only.
____________________________________
       Filed:  February 7, 1996
     Carbaugh originally opened his accounts with the Bank of
1
Maryland.  MNB acquired the Bank of Maryland in 1985, and MNB has
recently been acquired by NationsBank.  It is not necessary to
treat these banks separately, and for the sake of simplicity, we
will refer to all of them collectively as "the depositary bank" or
"MNB."
In this case, we determine whether a drawer can bring suit
against a depositary bank when (1) it accepts a check with no
indorsement for deposit into an account other than that of the
named payee or (2) when the depositary bank accepts a check in
violation of a restrictive indorsement.
I
From 1969 to 1993, Eugene Carbaugh served as the head of the
accounts payable department of the Prince George's County Board of
Education (the Board).  In 1982, Carbaugh began submitting
fictitious bills to the Board using names such as "PEPCo" and
"Bionomics Product Co."  After checks were issued by the Board to
pay the fictitious bills, Carbaugh deposited the checks into bank
accounts opened in his name at Maryland National Bank (MNB).1
Carbaugh's scheme was not discovered until 1993.  By then, he
had stolen about $1.1 million dollars from the Board.  The Board
recovered most of its losses from the Hartford Fire Insurance Co.
(Hartford), its insurance carrier.  As subrogee and assignee of the
Board's claims, Hartford brought an action in the United States
District Court for the District of Maryland against MNB seeking to
hold MNB liable for the Board's loss.
In July 1995, the district court issued a memorandum of
partial decision in which it concluded that MNB had accepted at
2
least eight and possibly as many as fifty checks containing
restrictive indorsements, in violation of those restrictive
indorsements.  As found by the district court, "MNB violated
restrictive indorsements which required MNB to deposit the checks
into an account of 'BIONOMICS PRODUCTS CO INC' or some variation
thereof.  Instead, MNB wrongly deposited the checks into the
account of 'Eugene N. Carbaugh.'"  In addition, the district court
found that MNB improperly accepted 35 checks from Carbaugh written
to 
"BIONOMICS 
PRODUCTS 
CO 
INC" 
or 
"PEPCo" 
with 
missing
indorsements; it noted by way of example that "some checks are made
out to joint payees but include only one indorsement. . . .  Some
of the checks include as a purported indorsement only the stamped
or typed words 'for deposit only to within payee only' and an
account number. . . ."
In its memorandum, the district court also found that in
accepting checks with missing indorsements and in violation of
restrictive indorsements, MNB failed to follow commercially
reasonable banking practices.  It further concluded that if a
drawer can bring an action directly against a depositary bank under
Maryland law, MNB would be liable to Hartford for improperly
disbursing funds to Carbaugh for those checks with missing or
restrictive indorsements.
The district court, however, found the question of whether the
drawer of a check could sue a depositary bank to be a "significant,
debatable and unresolved question[] of Maryland law."  To resolve
     Section 4-105 defines the roles in which a bank may
2
participate in a commercial paper transaction.  Under § 4-105(a),
"'[d]epositary bank' means the first bank to which an item is
transferred for collection . . . ."  A "collecting bank" is "any
bank handling the item for collection . . . ."  § 4-105(d).  In
this case, MNB is the depositary bank and is also the only
"collecting bank" that is relevant to this action.  Because we need
not distinguish between the liabilities of a "collecting bank" and
those of a "depositary bank" in this case, we will refer
exclusively to MNB as a "depositary bank" for the remainder of this
opinion.
The "drawee bank" is the bank where the drawer of the check
has its checking account.  The drawee bank in this case is not a
party to this action.
3
this issue, the district court certified the following two
questions to this Court pursuant to the Maryland Uniform
Certification of Questions of Law Act, Maryland Code (1995 Repl.
Vol.) §§ 12-601 through 12-609 of the Courts and Judicial
Proceedings Article and Maryland Rule 8-305:
1.
Can the drawer of a check recover from a depositary
bank that accepted the check with a missing
indorsement?
2.
Can the drawer of a check recover from a depositary
bank that violated a restrictive indorsement?
II
A
The rights and duties of drawers and depositary banks are
governed by Maryland Code (1975, 1992 Repl. Vol., 1995 Supp.)
Titles 3 and 4 of the Commercial Law Article, which are essentially
the same as Articles 3 and 4 of the Uniform Commercial Code (UCC).2
In addition, where the Commercial Law Article does not expressly
resolve an issue, "the principles of law and equity . . . shall
4
supplement its provisions."  § 1-103.  In a case such as this,
where Titles 3 and 4 do not directly define or limit a drawer's
right of action, we must look to the structure of rights and duties
explicitly imposed by statute and any pre-existing rights and
duties under Maryland's common law.
Under Titles 3 and 4, "[t]o the extent that the forger is
unavailable or insolvent, the burden of loss from a forged
indorsement is generally placed on the person who dealt with and
took the instrument in question from the forger."  George C.
Triantis, Allocation of Losses from Forged Indorsements on Checks
and the Application of § 3-405 of the Uniform Commercial Code, 39
Okl. L. Rev. 669, 669 (1986).  In the typical case, Titles 3 and 4
place ultimate liability for losses resulting from a forged
indorsement upon the depositary bank because the depositary bank
first accepted the check containing the forged indorsement.
Regardless of who is ultimately liable for such losses, the
drawer must initially bear the loss "in the form of the debit to
his account with the drawee bank."  Id. at 671.  The issues in this
case focus on the means by which the drawer can seek to shift this
loss to the depositary bank.  Titles 3 and 4 explicitly provide one
means by which the drawer can recover any losses suffered as a
result of a forged indorsement.  Because a check containing a
forged indorsement is not "properly payable," the drawer can
require the drawee bank to re-credit the drawer's account.  See §
4-401(1) (allowing a bank to charge against a customer's account
     In a few jurisdictions, the drawer has been allowed to bring
3
an action directly against the depositary bank for breach of the
warranty of title under § 4-207.  See Insurance Co. of No. Am. v.
Purdue, Etc., 401 N.E.2d 708 (Ind. App. 1980); Sun 'n Sand, Inc. v.
United California Bank, 21 Cal. 3d 671, 148 Cal. Rptr. 329, 582
P.2d 920 (1978); Insurance Co. of North Am. v. Atlas Supply Co.,
121 Ga. App. 1, 172 S.E.2d 632 (1970).  But see J. White & R.
Summers, Handbook of the Law Under the Uniform Commercial Code 603
n.55 (2d ed. 1980) (citing contrary case law).  Because the
warranty of title has not been raised by either party, we need not
address it here.
5
only those items which are "otherwise properly payable from that
account").  The drawee bank can then proceed against the depositary
bank for a breach of the depositary bank's warranty of title under
§ 4-207(1)(a).3
In addition to this remedy, some jurisdictions have allowed
the drawer to sue a depositary bank for conversion or to bring suit
under other common law causes of action such as money had and
received or negligence.  Kelly v. Central Bank and Trust Co., 794
P.2d 1037 (Colo. App. 1989) (allowing action for conversion to
proceed when depositary bank accepted checks containing missing
indorsement); Underpinning, Inc. v. Chase Manhattan, 46 N.Y.2d 459,
414 N.Y.S.2d 298, 386 N.E.2d 1319, 1319 (1979) (allowing drawer to
bring a conversion action when depositary bank accepted checks
containing forged restrictive indorsements and the checks were
accepted in violation of the restrictive indorsement); Sun 'n Sand
v. United California Bank, 21 Cal. 3d 671, 148 Cal. Rptr. 329, 582
P.2d 920, 937 (1978) (allowing drawer to bring a claim of
negligence against a depositary bank); Commercial Credit Corp. v.
6
Citizens National Bank, 150 W. Va. 196, 144 S.E.2d 784 (1965)
(finding that "the majority of cases hold that the drawer can sue
the collecting or intermediary bank on implied contract for money
had and received and omit suing the drawee bank, thus relieving the
necessity of circuity of actions"); see also G.F.D. Enterprises,
Inc. v. Nye, 37 Ohio St. 3d 205, 525 N.E.2d 10 (1988) (recognizing
that "the negligence cause of action is preserved" under the
U.C.C., but denying recovery to a drawer in cases involving a
forged drawer's signature).
Hartford maintains that "under Maryland law, the drawer of a
check who retains title . . . may bring an action against a
depositary bank that wrongfully pays its proceeds."  Hartford
asserts that this result is mandated by our older case law, and
that it has not been altered by Maryland's passage of the Uniform
Commercial Code.  In contrast, MNB contends that a drawer cannot
sue a depositary bank for conversion because the depositary bank
never handles the drawer's funds.  Instead, MNB asserts, a drawer
must recover its losses from the drawee bank, and the drawee bank
is responsible for bringing a claim against the depositary bank.
To hold otherwise, according to MNB, would "eviscerate[] the
careful allocation of rights and liabilities set forth in the
Maryland Commercial Code."
B
Before addressing these contentions, it is necessary to
emphasize the differences between the present case and cases
     Section 3-405(1) forces the drawer to bear any loss resulting
4
from forgeries perpetrated by the drawer's employees on the
rationale that the drawer is in the best position to control the
actions of its employees.  As explained in the commentary to § 3-
405,
[t]he principle followed is that the loss should fall
7
involving only forged indorsements.  At this time, we need not
consider whether a drawer can sue a depositary bank for conversion
when the depositary bank accepts a check containing a non-
restrictive forged indorsement.  That issue is not properly before
us for two reasons.  First, Title 3 explicitly precludes Hartford
from recovering for any checks accepted by MNB that contained only
a forged, non-restrictive indorsement.  In addition, MNB would have
failed to act reasonably and to properly obtain title to the checks
even if all indorsements on those checks had been genuine.
Although a depositary bank generally must bear any loss
resulting from its acceptance of a check containing a forged
indorsement, § 3-405(1) shifts the loss to the drawer in certain
cases of employee embezzlement.  Section 3-405(1) provides that
[a]n indorsement by any person in the name of a named
payee is effective if . . . [a] person signing as or on
behalf of a maker or drawer intends the payee to have no
interest in the instrument; or . . . [a]n agent or
employee of the maker or drawer has supplied him with the
name of the payee intending the latter to have no such
interest.
Because an indorsement signed by its embezzling employee is
"effective" against the drawer, the drawer cannot recover from the
drawee or depositary banks, and the drawer must bear any losses
resulting from the employee's embezzlement.   For this reason, § 3-
4
upon the employer as a risk of his business enterprise
rather than upon the subsequent holder or drawee.  The
reasons are that the employer is normally in a better
position to prevent such forgeries by reasonable care in
the selection or supervision of his employees, or, if he
is not, is at least in a better position to cover the
loss by fidelity insurance; and that the cost of such
insurance is properly an expense of his business rather
than of the business of the holder or drawee.
§ 3-405 cmt. 3.
8
405(1) specifically precludes Hartford from holding MNB liable for
its acceptance of checks containing indorsements forged by Carbaugh
when MNB did not violate any restrictions placed on those
indorsements.
In addition to the fact that § 3-405(1) prevents Hartford from
recovering from MNB solely on the basis of forged indorsements, the
propriety of MNB's conduct in this case does not depend upon the
validity of the indorsements on any of the checks accepted by it.
MNB's acceptance of checks in violation of restrictive indorsements
or despite missing indorsements would have been improper even if
none of the indorsements had been forged.
Even if all of the indorsements on the checks accepted by MNB
had been valid, MNB could not claim the protected status of a
"holder in due course" with respect to any of the checks at issue
here.  Under § 3-206(3), any bank that accepts a check containing
a restrictive indorsement "must pay or apply any value given by him
for . . . the instrument consistently with the indorsement and to
the extent that he does so he becomes a holder for value."  To the
extent that MNB failed to apply the proceeds of the checks accepted
     "Negotiation is the transfer of an instrument in such form
5
that the transferee becomes a holder."  § 3-202(1).  "Negotiation
takes effect only when the indorsement is made and until that time
there is no presumption that the transferee is the owner."  § 3-
201(3).  
9
from Carbaugh consistently with the restrictive indorsements on
those checks, it failed to become a "holder" regardless of
indorsements' validity.
MNB also failed to become a "holder" of those checks written
to joint payees when it accepted them with the indorsement of only
one of the payees.  "Holder" is defined as "a person who is in
possession of . . . an instrument . . . drawn, issued or indorsed
to him or his order or to bearer or in blank."  § 1-201(20).  Under
§ 3-116(b), an instrument payable to the order of two or more
persons "may be negotiated . . . only by all of them."  Without
proper negotiation, MNB could not perfect its title to the checks.5
MNB, therefore, could not become a "holder" without the
indorsements of all of the joint payees.
Finally, MNB could not have become a "holder" of those checks
upon which "for deposit only to within payee only" and an account
number had been stamped or typed.  Although § 4-205(1) allows a
depositary bank to supply a customer's missing indorsement and "a
statement placed on the item by the depositary bank to the effect
that the item was deposited by a customer or credited to his
account is effective as the customer's indorsement," this provision
would only allow MNB to supply Carbaugh's indorsement, since only
     According to the official commentary, 
6
"[a]ll valid claims to it on the part of any person"
includes not only claims of legal title, but all liens,
equities, or other claims of right against the instrument
or its proceeds.  It includes claims to rescind a prior
negotiation and to recover the instrument or its
proceeds.
§ 3-306 cmt. 2.
10
Carbaugh was its customer.  Because MNB could not supply the
indorsements of the payees to whom the checks had been written, the
checks were never effectively indorsed, and MNB could not become a
"holder" of those checks.
Since MNB could not have become a "holder" of the checks
accepted in violation of restrictive indorsements or accepted with
missing indorsements, MNB could not claim the protection given to
a "holder in due course" under Articles 3 and 4.  See § 3-302.
Under § 3-306, "[u]nless he has the rights of a holder in due
course any person takes the instrument subject to . . . all valid
claims to it on the part of any person . . . ."   Even if all of
6
the indorsements on the checks at issue here had been genuine,
therefore, MNB would still have failed to perfect its title to the
checks, and would be subject to any valid claims against the
proceeds that it collected.
III
A
As to the issue of when a drawer can sue a depositary bank,
"[t]he authorities are hopelessly divided."  Stone & Webster
Engineering Corp. v. First National B. & T. Co., 345 Mass. 1, 184
11
N.E.2d 358, 361 (1962) [hereinafter Stone & Webster].  For our
purposes, three leading decisions will suffice to illustrate and
analyze the various approaches that may be taken in this area.
In Stone & Webster, supra, the Supreme Judicial Court of
Massachusetts held that a drawer can never bring an action against
a depositary bank for conversion of a check containing a forged
indorsement.  In that case, Stone & Webster Engineering Corp.
drafted checks payable to one of its creditors.  Before the checks
were delivered to the creditor, they were stolen by one of Stone &
Webster's employees.  The employee forged the creditor's
indorsement on the back of the check and cashed the checks at the
defendant bank.  Id. at 359.  Although some of the indorsements
were restrictive, the court made no distinction between those
checks that were accepted by the depositary bank in violation of a
restrictive forged indorsement and those accepted with a forged
indorsement in blank.  See id. at 361.
The court noted that the depositary bank was not a "holder" of
the check because the check could not have been negotiated to the
bank when the forged indorsements were "'wholly inoperative' as the
signatures of the payee."  Id.  Accordingly, the court "assume[d]
that the collecting bank may be liable in conversion to a proper
party . . . ."  Because "no explicit provision in the Code
purport[ed] to determine to whom the collecting bank may be
liable," however, the court found that whether the drawer was a
proper party "must be decided on our own law, which, on the issue
12
we are discussing, has been left untouched by the Uniform
Commercial Code."  Id.
The court held that the drawer was not the proper party to sue
because the drawer had no right to the checks themselves or their
proceeds.  Since the drawer would have had no right to present the
checks for payment, the drawer's interest in the checks "was
limited to the physical paper on which they were written, and was
not measured by their payable amounts."  Id. at 362.  The drawer
similarly had no interest in any proceeds that would have been
gained by cashing the checks.  Id. at 360.  Thus, the drawer could
not sue for conversion of the checks themselves.
The drawer's loss did not follow from its loss of the checks,
however, but from the debit of its account by the drawee bank when
the checks were accepted from the depositary bank.  The drawer,
therefore, alleged that the depositary bank wrongfully deprived it
of a credit in its bank account with the drawee bank.  Id. at 360.
The drawer lost this credit when the drawee bank took funds out of
the drawer's account in order to pay the proceeds of the checks to
the depositary bank.  Id.  The court rejected this argument,
finding that any amounts given to a depositary bank by a drawee
bank were in fact the funds of the drawee bank.  Thus, the
depositary bank had no funds that belonged to the drawer.  If the
drawee bank wrongfully debited the account of the drawer, the
drawer would have to recover them from the drawee bank, not the
depositary bank:
13
[w]hen the defendant [depositary bank] 'cashed' checks
with its own funds, no legal harm befell the plaintiff .
. . .  The harm which befell the plaintiff was the
charging of its account by the drawee bank.  As has been
noted above, the drawer has a cause of action, possibly
subject to defenses, against that bank.
Id. at 364; see also id. at 360-61.  If we adopt the reasoning used
in Stone & Webster, therefore, Hartford will be unable to recover
from MNB for any of the checks because any losses suffered by the
Board are attributable to the drawee bank, not MNB.
Other courts have allowed a drawer to bring suit against a
depositary bank in only a few, very specific situations.  In
Underpinning, Inc. v. Chase Manhattan, 46 N.Y.2d 459, 414 N.Y.S.2d
298, 386 N.E.2d 1319, 1319 (1979), the New York Court of Appeals
allowed a drawer to sue a depositary bank for conversion when it
"accepts [a] check and pays out the proceeds in violation of a
forged restrictive indorsement."  In that case, one of the drawer's
employees had created false invoices purportedly from firms with
which the drawer did business.  The employee prepared checks to pay
the invoices and obtained the appropriate signatures from the
drawer's officers.  The employee then forged indorsements on the
checks using stamps similar to those used by the named payees.  The
stamps contained restrictive indorsements such as "for deposit
only."  The checks were then either cashed by the employee or
deposited in savings accounts opened at various depositary banks in
names other than those of the named payee-indorsers.  After
discovering the scheme, the employer brought suit against the
14
depositary banks.  Id. at 1320.
At the outset of its discussion, the court enunciated the same
view of a drawer's interest in the money debited from its account
that was applied in Stone & Webster:
Simply stated, the reason why a drawer is normally held
to have no cause of action against a depositary bank
which wrongfully paid over a forged indorsement, is that
the depositary bank is not deemed to have dealt with any
valuable property of the drawer. . . .  In the typical
forged indorsement case, the indorsement will be
ineffective, and thus the check will not authorize the
drawee bank to pay it from the drawer's account.  Absent
such authority, the drawee may not charge the drawer's
account--and any payment made on the check is deemed to
have been made solely from the property of the drawee,
not the drawer. . . .  Since the money received by the
depositary bank from the drawee is the property not of
the drawer, but rather of the drawee alone, nothing the
depositary bank does with those funds can be considered
a conversion of the drawer's property.
Id. at 1321.  The court also applied the rationale used in Stone &
Webster to explain why the drawer had no interest in the checks
themselves:
[S]ince the drawer is not a holder, and could not present
the check for payment, the drawer is normally considered
as having no interest in the check.  Moreover, since the
check cannot be paid over a forged indorsement, the
drawer is viewed as having no valuable interest in
whatever right the check might otherwise be seen as
transferring to the payee and to subsequent holders, for
the simple reason that there exists no such right.
Id.  In New York, therefore, a drawer could not sue a depositary
bank for payment of a check containing a forged indorsement when
that indorsement was ineffective to transfer title to the check and
the proceeds could not have been properly debited from the drawer's
account by the drawee bank.
15
In Underpinning, 
however, 
the 
forged 
indorsement was
considered to be "effective" under § 3-405(1)(c) of New York's
Commercial Code, which provided that "[a]n indorsement by any
person in the name of a named payee is effective if . . . an agent
or employee of the maker or drawer has supplied him with the name
of the payee intending the latter to have no such interest."  Id.
at 1322 (quotation omitted).  Because the indorsement was
"effective," the check was negotiable and the drawee bank acted
properly in disbursing the funds to the depositary bank and
debiting the drawer's account.  Therefore, "the drawee is in fact
paying out funds in which the drawer does have an interest and
which may serve as the basis for an action against a depositary
bank which has wrongfully obtained that money."  Id.   Noting that
the UCC "places liability solely upon the bank which first takes
the check with the restrictive indorsement," the court found that
"[t]he depositary bank . . . was responsible for checking all
restrictive indorsements, and is liable for payment made in
violation thereof."  Id. at 1322.
Under the reasoning in Underpinning, MNB could be held liable
for all of the checks accepted from Carbaugh in violation of a
restrictive indorsement.  As we discussed above, § 3-405(1) of our
Commercial Law Article makes Carbaugh's signature effective as an
indorsement in this case.  Therefore, the drawee bank properly
charged the drawer's account, and the drawer may sue the depositary
bank for its wrongful acceptance of the check in violation of a
16
restrictive indorsement.  Were we to adopt Underpinning, however,
MNB could not be held liable for the acceptance of the checks with
missing indorsements.  Because the stamp placed on the reverse of
the checks by MNB was not effective as an indorsement, the checks
were not "properly payable" and the drawee bank would have been
considered to have paid its own money to the depositary bank.
In Sun 'n Sand, Inc. v. United California Bank, 21 Cal. 3d
671, 148 Cal. Rptr. 329, 582 P.2d 920 (1978), the California
Supreme Court defined a drawer's right to sue a depositary bank
more broadly than Massachusetts or New York.  Sun 'n Sand involved
embezzlement by an employee of Sun 'n Sand who was responsible for
preparing checks for signature by a corporate officer.  Over three
years, the employee made nine checks payable to the United
California Bank (UCB), and obtained authorized signatures from the
appropriate corporate officers under the belief that the checks
represented small sums owed by the company to UCB.  The employee
then altered the checks by increasing the amount of each check, and
presented the check to UCB for payment.  Although UCB was the named
payee, it permitted the employee to deposit the proceeds of the
checks into her own personal account while UCB presented the checks
to the drawee bank for payment.
Sun 'n Sand brought suit against UCB under various theories of
liability, one of which was negligence.  It asserted that "UCB
breached its duty of care in permitting checks on which the bank
was named as payee to be deposited in the personal account of Sun
17
'n Sand's employee."  Id. at 935.  The California Supreme Court
held that the drawer could bring a negligence action against the
depositary bank because "the asserted wrong . . . is not that UCB
failed to intervene beneficially (nonfeasance) but rather that it
affirmatively engaged in risk-creating conduct (misfeasance)."  Id.
Under these circumstances, UCB should have been alerted to the
possible fraud: 
We agree that an attempt by a third party to divert the
proceeds of a check drawn payable to the order of a bank
to the benefit of one other than the drawer or drawee
suggests a possible misappropriation.  Accordingly, we
conclude 
that 
Sun 
'n 
Sand's 
allegations 
define
circumstances sufficiently suspicious that UCB should
have been alerted to the risk that Sun 'n Sand's employee
was perpetrating a fraud.  By making reasonable
inquiries, UCB could have discovered the fraudulent
scheme and prevented its success.
Id. at 936.  Finding that "the chief element in determining whether
defendant owes a duty or an obligation to plaintiff is the
foreseeability of the risk," the court found that 
[o]ur conclusion that UCB should have appreciated the
indicia of misappropriation is, of course, nothing other
than a determination that Sun 'n Sand's loss was
reasonably foreseeable.  We are not persuaded that
commerce will be so impeded by a duty of inquiry in this
context that we should depart from the fundamental
principle 
that 
actors 
are 
liable 
for 
reasonably
foreseeable losses occasioned by their conduct.
Id. at 937.  The court found that UCB had breached this duty when
it accepted checks from the employee for deposit into the
employee's personal account, even though UCB was the named payee.
Were we to adopt the California Supreme Court's approach, MNB could
be liable for accepting checks with missing indorsements or in
18
violation of restrictive indorsements using similar reasoning.
B
In Maryland, we have not addressed whether a drawer can sue a
depositary bank after the passage of Maryland's version of the UCC.
As we recently noted, however, where the Commercial Law Article
does not "expressly provide for the allocation of loss," we "look
to our prior cases and to the legislative intent behind the U.C.C.
in determining where to allocate liability . . . ."  Bank of Glen
Burnie v. Loyola, 336 Md. 331, 337-38, 648 A.2d 453 (1994).
Although not entirely clear of ambiguity, our prior cases appear to
allow a drawer to sue a depositary bank in conversion when the bank
accepts a check containing a forged indorsement and no existing
payee has a superior claim to the check or its proceeds.
In Nat. Union Bank v. Rubber Co., 148 Md. 449, 129 A. 688
(1925), this Court recognized that a payee could recover from a
depositary bank when the depositary bank cashes a check on a forged
indorsement:
There the collecting bank on the forged endorsement
acquires no title whatever to the paper because the
endorsement, its only source of title, is a nullity.  It
therefore is wrongfully in possession of the check and in
equity and good conscience holds it for the payee.  If,
while in possession of it, it by means of the forged
endorsement collects it, then it holds the proceeds of
the collection in the same way for the payee, and that
relationship creates a privity between it and the payee.
And if the payee elects to ratify the collection of the
check by the collecting bank he may recover from it the
amount collected.
Id. at 455-56.  While Nat. Union Bank provided a definitive
19
statement of a payee's rights, however, it did not discuss the
rights given to a drawer.
The right to sue a depositary bank in conversion was extended
to drawers in certain circumstances by John Hancock v. Fid.-Balto.
Bank, 212 Md. 506, 129 A.2d 815 (1956), and Fid.-Balto. Bank v.
John Hancock, 217 Md. 367, 142 A.2d 796 (1958).  In John Hancock,
supra, 212 Md. at 508-09, an insurance company's employee filed
claims on behalf of fictitious persons, collected checks payable to
those fictitious persons from the insurance company, indorsed the
checks by forging the names of the fictitious payees, and deposited
the checks in various accounts at depository banks.  The insurance
company, the drawer of the checks, sued the depositary banks for
conversion.  Id.  The trial court sustained the defendant banks'
demurrers on the grounds that Massachusetts law applied.  Id. at
510.  Under Massachusetts law, checks made to fictitious payees
were rendered payable to bearer, and the banks would have no
liability.  Id. at 514.
On appeal to this Court, the only issue was whether Maryland
or Massachusetts law applied.  The Court assumed that "if the
Maryland law be applicable and the checks were not payable to
bearer, the indorsements would be forgeries for which the said
banks would be responsible."  Citing Nat. Union Bank, supra, 148
Md. at 455-56, for the proposition that the depositary banks would
be liable under Maryland law, the Court made no distinction between
the rights of payees and those of drawers.  See John Hancock,
20
supra, 212 Md. at 514-15.  The Court held that the defendant banks'
liability was governed by Maryland law.
Fid.-Balto. Bank v. John Hancock, supra, involved a second
appeal in the same case.  After losing at trial, the depositary
banks appealed, directly raising the issue of whether the
depositary bank was liable to the drawer of a check issued to a
fictitious payee.  The Court found that this issue had been raised
and specifically decided in the earlier appeal:
There we quoted from Nat. Union Bank v. Miller Rubber
Co., 148 Md. 449, to show that a payee of a check under
similar circumstances as those presented here could bring
suit and recover from a collecting bank.  We were and are
unable to discover any difference in principle between a
payee and a drawer of a check under such circumstances.
Fid.-Balto. Bank, supra, 217 Md. at 371.  At least in the
circumstances presented in Fid.-Balto Bank, therefore, our
predecessors have made no distinction between the rights of a
drawer and payee to sue in conversion.
In Levin v. Union National Bank, 224 Md. 603, 168 A.2d 889
(1961), we gave a qualified endorsement of Fid.-Balto. Bank's
holding:
It was said in Fidelity-Balto. Nat. Bank v. John Hancock
Ins. Co., 217 Md. 367, 371, that a drawer likewise has an
action [in conversion] against a collecting bank,
although there is authority to the contrary. . . .
Doubtless the question would depend upon whether the
title to the check, or the proceeds, remained in the
drawer, as it did in the Fid.-Balto. Bank case, supra, or
passed to the true payee.
Id. at 608.  Although we have recognized that other jurisdictions
disagree, Maryland common law appears to allow a drawer to bring
21
suit against a depositary bank for conversion in cases where the
named payee has no interest in the check.
C
We conclude that under Maryland common law, Hartford can bring
an action to recover the Board's losses from MNB for those checks
accepted with missing indorsements or in violation of restrictive
indorsements.  In reaching this conclusion, we reject the legal
fictions employed in Stone & Webster, supra, and Underpinning,
supra.  At the same time, however, we need not determine whether a
drawer has a general cause of action for negligence against a
depositary bank, as was found in Sun 'n Sand, supra.  Instead, we
hold that under the facts of this case, MNB may be held liable in
conversion to Hartford for those checks still in issue.
As we noted above, we need not address whether drawers in
general may bring conversion actions against depositary banks that
accept a check with a forged indorsement.  Section 3-405(1)
explicitly saves MNB from liability to Hartford simply for
accepting checks from Carbaugh that contained only a forged
indorsement.  The checks at issue here were accepted despite
obvious irregularities on the face and back of the checks
themselves that prevented MNB from obtaining good title to the
checks regardless of whether any indorsements were forged.
While we are unwilling to pronounce upon the rights of drawers
in general, our prior decisions make it clear that the legal
fiction underlying Stone & Webster, supra, and Underpinning, supra,
22
has not been adopted in Maryland.  Had our predecessors assumed
that the drawee bank paid out its own funds to the depositary bank
in Fid.-Balto. Bank v. John Hancock, supra, the result in that case
would have been different.  In that instance, we would have
required the drawer to proceed against the drawee bank instead of
the depositary bank.
It would be particularly inappropriate to adopt such a legal
fiction in this case.  As noted in Underpinning, supra, 386 N.E.2d
at 1321-22, the forged restrictive indorsements were "effective"
and those checks were properly paid by the drawee bank.  In that
instance, MNB received the Board's funds even if one were to assume
that a drawee bank pays out its own funds in other cases where the
forged indorsement was ineffective.  Thus, MNB could be liable in
conversion even if Stone & Webster's reasoning properly applies to
other situations.
It would be similarly inappropriate to assume that the drawee
bank paid out its own funds when it paid MNB the proceeds of the
checks containing missing indorsements.  MNB can properly accept a
check from a customer that lacks the customer's indorsement and can
properly supply the customer's indorsement.  § 4-205(1).  As found
by the district court, some of the checks contained the statement
"for deposit only to within payee only" as a purported indorsement.
With respect to these checks especially, the drawee bank would have
been unable to determine whether MNB properly accepted the check
and supplied only its customer's indorsement.  The drawee bank's
23
actions in debiting the Board's account, therefore, even though
improper, 
were 
taken 
at 
the 
request 
of 
and 
based 
upon
representations made by MNB.  It seems fair to conclude that the
proceeds transferred from the Board's account to MNB were actually
the Board's money.
We conclude, therefore, that upon presenting the checks for
payment, MNB received money taken from the Board's account.  When
receipt of such money is inconsistent with the Board's rights to
it, MNB may be liable in conversion.  See Interstate Insurance Co.
v. Logan, 205 Md. 583, 588-89, 109 A.2d 904 (1954) ("A 'conversion'
is any distinct act of ownership or dominion exerted by one person
over the personal property of another in denial of his right or
inconsistent with it.").  Under our common law, therefore, the
drawer may bring an action against MNB for conversion under these
facts.
D
Maryland's common law, however, is not our sole consideration.
We must also consider whether Maryland's adoption of the UCC
mandates a change in that common law.  Obviously, the Commercial
Law Article controls when that statute explicitly contradicts pre-
existing common law.  In addition, even where there is no
explicitly applicable statute in the Commercial Law Article, we
hesitate to adopt or perpetuate a common law rule that would be
plainly inconsistent with the legislature's intent in passing
Titles 3 and 4 of that Article.  We therefore must determine
24
whether allowing Hartford to recover from MNB would be inconsistent
with the explicit loss-allocation scheme provided in Titles 3 and
4.
Contrary to MNB's contentions, we find that allowing a drawer
to sue a depositary bank to recover losses suffered when the
depositary bank accepts checks with missing indorsements or in
violation of restrictive indorsements is consistent with the UCC's
loss-allocation scheme.  The UCC's loss-allocation rules generally
seek to place liability upon the party best situated to prevent the
loss.  See Underpinning, supra, 386 N.E.2d at 1323.  Since the
party who takes from the forger is generally in the best position
to prevent a forged indorsement, the depositary bank is ultimately
liable in most cases.  The burden of loss, however, can be placed
upon another interested party when a forgery results from that
party's negligence.  See § 4-406.  Similarly, when the drawer could
have most readily prevented the forgery from occurring, as when the
forger is the drawer's employee, the drawer must bear the burden of
the loss.  § 4-405.
In the present case, MNB accepted checks that were clearly
irregular on their face.  Our holding in this case does not depend
upon whether MNB was in the best position to detect or prevent a
forged signature or whether the Board was in the best position to
control its employees.  For the checks at issue here, the forgery
would have been prevented if MNB had simply determined that the
check contained the necessary signatures, whether valid or not, and
     MNB contends that our holding today "gives the wrongdoer the
7
control to provide or deprive the drawer with a remedy against the
depositary bank," a result which MNB "respectfully suggests would
be bizarre and inequitable."  (emphasis in original).  MNB points
to our conclusion in Citizens v. Maryland Indus., 338 Md. 448, 463-
64, 659 A.2d 313 (1995), where we found it "unjustifiable" to place
a payee's "ability to recover entirely in the hands of the
[embezzling] agent."  We agree that a principal's ability to
recover its losses generally should not depend upon the fortuity of
the means by which an agent chooses to embezzle.  This case,
however, demonstrates that there are limits to this reasoning. 
When a check manifesting clear indications of irregularity or
potential fraud is presented for deposit, the depositary bank
cannot ignore obvious warning signals on the grounds that those
signals are within the embezzling employee's control.  It was
surely within Carbaugh's "control" to announce "I am depositing
checks containing forged indorsements yet again" on each of his
visits to MNB.  Yet, there can be little doubt that MNB could not
properly accept such checks for collection, knowing them to contain
forgeries.  Here, MNB accepted checks which were not properly
25
complied with any restrictive indorsements written on the check
itself.  As stated by the New York Court of Appeals, "[a]
restrictive indorsement . . . imposes a new and separate duty upon
a transferee to pay the check only in accord with the restriction.
. . .  [T]he failure to do so serves as a basis for liability
independent of any liability which might be created by payment over
a forged indorsement alone."  Underpinning, supra, 386 N.E.2d at
1323.  We apply the same reasoning to MNB's failure to ensure that
all necessary signatures were present on the check.  "Based on such
a failure to follow the mandates of due care and commercially
reasonable behavior, it is appropriate to shift ultimate liability
from the drawer to the depositary bank."  Id. at 1324.  MNB could
most readily have prevented the fraud in this case simply by
ensuring that the check was regular on its face and back.7
negotiable, even though the checks' irregularities were apparent on
their face and back because they were missing signatures or had
explicit, restrictive indorsements.  The fact that Carbaugh might
have been more devious cannot shield MNB from liability resulting
from its own wrongful acceptance of such checks.
26
In this case, where the assignment of ultimate liability
depends upon the propriety of actions taken by the depositary bank,
it makes no sense to require the drawer to sue the drawee bank.  To
allow Hartford to bring an action against MNB for conversion in
this case does not conflict with the loss-allocation scheme
provided in Titles 3 and 4 of the Commercial Law Article.  We thus
answer both certified questions in the affirmative, concluding that
the drawer, in the circumstances of this case, may bring an action
directly against the depositary bank to recover its losses.
CERTIFIED 
QUESTIONS 
ANSWERED AS
HEREIN SET FORTH; COSTS TO BE
DIVIDED EQUALLY BETWEEN THE PARTIES.
Judge Chasanow concurs in the result only.