Opinion ID: 344807
Heading Depth: 3
Heading Rank: 1

Heading: Sole Proprietor of Named Payee Businesses

Text: 75 The banks first claim that the indorsements were effective because Jesse Quisenberry was the sole proprietor of the named payees. Under Georgia law, a person operating a business under a trade name may indorse personally checks drawn to him under his trade name. See McCrackin v. Hayes, 118 Ga.App. 267, 163 S.E.2d 246 (1968). 17 76 In the case at bar, however, the argument runs factually aground. As in McCracken, supra, the faces of the checks suggest that the payees are corporations. Little in the record tends to establish the contrary. Quisenberry's was the only signature on the sole proprietorship signature cards used in opening the accounts at Habersham. The cards mean little, however, as the district court recognized that it was doubtful whether anyone at Habersham had actually determined that the businesses were sole proprietorships or corporations. 77 Given this factual uncertainty and the apparent discrepancy between payee and indorser, the district court would have courted severe difficulties had it attempted to rest a grant of summary judgment for defendants on the assumption that the checks were drawn to Quisenberry under trade names. The judge below did not rely on this assumption, and we likewise decline the invitation.2. Bank Stamp Substitute for Indorsement 78 The district court did place importance on the fact that Habersham impressed on the back of ten of the checks the following stamp: 79 CREDIT TO THE ACCOUNT OF THE Within Named Payee in Accordance with Payee's Instructions Absence of Endorsement Guaranteed. 80 The court below determined this stamp sufficient to remove any question of the efficacy of Quisenberry's personal indorsement of these ten checks. We cannot agree. 81 The stamps draw whatever power they have from § 4-205(1): 82 A depositary bank which has taken an item for collection may supply any indorsement of the customer which is necessary to title unless the item contains the words payee's indorsement required or the like. In the absence of such a requirement a statement placed on the item by the depositary bank to the effect that the item was deposited by the customer or credited to his account is effective as the customer's indorsement. 83 This Code section, another lubricating agent in the service of commerce, permits banks to speed the collection process by eliminating any necessity to return to a non-bank depositor any items he may have failed to indorse. § 4-205, Comment 1. The First Circuit has noted that the provision is one of several in Article 4 that recognize the common contemporary practice of accepting unindorsed checks for deposit. See Bowling Green, Inc. v. State Street Bank and Trust Co., 425 F.2d 81 (1st Cir. 1970). 84 A § 4-205 stamp, however, cannot eliminate the depositary and collecting banks' warranty of title or the drawee's duty to accept only properly payable items. Assume a thief of a check convinces a depositary bank that he is the named payee. The bank deposits the check for the thief in an account opened in that name. Whether the thief forged an indorsement or left the reverse side of the check blank, the bank could not give itself good title to the stolen check by application of a § 4-205 stamp. No reported case we have found addressed such a proposition, much less supports it. 85 Rather, § 4-205 allows the bank to forward an indorsed check for collection subject to the same potential warranty liability it faces whenever it transfers a check with a facially regular indorsement. Whether a check bears such an indorsement or a § 4-205 stamp, the collecting banks remain liable for breach of title warranty and the drawee for improper payment if the purported payee proves to have been the thief from, or an unauthorized agent of, the true payee who never received the proceeds of the check. 86 It may be emphasized here, however, that we are not concerned with whether Quisenberry was in fact the authorized agent of the contracting companies. Like the authenticity of Quisenberry's signatures, this question is answered by § 3-405. 18 Given the fact that the drawer intended those companies, fictitious or real, to have no interest in the checks, anyone could have effectively indorsed them in the name of the payee companies regardless of authorization. 87 We are concerned rather with the fact that the indorser here omitted the names of the payee companies he appeared to represent. It might be argued that, with questions of authenticity and authorization removed, the stamp could suffice to remedy such an omission. Courts that have dealt with these and analogous omissions, however, have rested their determinations on an assessment of the relationship between the defect in the indorsement and the loss complained of. A § 4-205 stamp, designed to facilitate check collections but not to abrogate the warranty and proper payment obligations imposed by the Code, cannot immunize the appellee banks from scrutiny of the consequences of Quisenberry's defective indorsement.3. Scope of Liability for Accepting Incomplete Indorsements 88 Numerous cases under the Code and earlier law recognize that a party who transfers or pays a check bearing an incomplete indorsement incurs no liability if the proceeds of the check reach the intended payee. See First National Bank of Gwinnett v. Barrett, 141 Ga.App. 161, 233 S.E.2d 24 (1977); Blackmon v. Hale, 1 Cal.3d 548, 83 Cal.Rptr. 194, 463 P.2d 418 (1970); Gotham-Vladimir Advertising, Inc. v. First National City Bank, 27 A.D.2d 190, 277 N.Y.S.2d 719 (1967); Commercial Credit Corp. v. Empire Trust Co., 260 F.2d 132 (8th Cir. 1958); Gilbert v. Chase National Bank, 108 F.Supp. 229 (S.D.N.Y.1962); Florida National Bank at St. Petersburg v. Geer, 96 So.2d 409 (Fla.1957). Emerging from these cases is the notion that in accepting for deposit or in paying a check with an incomplete indorsement, a bank does not become accountable for every loss that would not have occurred had the bank returned the check for a proper indorsement. Rather, the bank becomes accountable for any manifestation of the danger evidenced by an incomplete indorsement; i. e., that some person with a superior claim to the rights created by the instrument will surface and demand payment. 89 That danger has not manifested itself in the case at bar. There is not the slightest hint in the record that entities named Southern Contracting Co. and Quisenberry Contracting Co. or their transferees are loitering in the lobbies with a claim to these checks. As far as this litigation is concerned, the proceeds of the checks went to the payees designated on the face of the instruments. 90 We need not, however, accept fully the proposition that one dealing with an incomplete indorsement risks only the possibility that he is dealing with someone other than the check's true owner. Rather we may limit our holding to the unusual instances in which a defective indorsement accompanies a forged drawer's signature. We do so with reference to the body of double forgery cases, in which the majority of courts have long assessed liability as if the drawer's signature alone were forged. In line with those cases, we conclude that as a matter of law Perini's loss is a forged check loss, not an indorsement loss. Accordingly, no liability can be assessed against the appellee banks on the basis of Quisenberry's indorsements. 91
92 As the court below recognized, handling a check bearing an incomplete indorsement creates no liability so long as the proceeds reach the payee designated by the instrument. In Gotham-Vladimir Advertising, Inc. v. First National City Bank, 27 A.D.2d 190, 277 N.Y.S.2d 719 (1967), a participant in a joint venture had drawn checks to the new entity, Clark-Gotham. The checks were indorsed Clark Associates, the old name of the other participant, and deposited in an account bearing that name. When debts and unauthorized withdrawals depleted the funds of the joint operation, the drawer brought suit against the drawee, alleging payment over an improper indorsement. The court rejected the claim, finding that the check proceeds had gone to the intended recipients and that the drawer's loss could not be related to any improprieties in the indorsements. 93 The Court of Appeals of Georgia has recently addressed a similar problem and reached the same conclusion. In First National Bank of Gwinnett v. Barrett, 141 Ga.App. 161, 233 S.E.2d 24 (1977), the payee had failed to indorse a check. The depositary bank had failed to supply the missing indorsement by a § 4-205 stamp. The drawers sued the drawee for improper payment. The court reversed a summary judgment for plaintiffs, noting that the depositary bank had paid the check to the named payee. Though the court did not expressly order judgment for the drawee, the conclusion that payment in the circumstances was proper leaves no room for liability for failing to return the check. 94 Other cases follow this approach. 19 We shall draw on only one for some explication of the undergirding rationale. Decided under the Negotiable Instruments Law, Gilbert v. Chase National Bank, 108 F.Supp. 229 (S.D.N.Y.1962), involved an indorsement very similar to those at issue here. A check drawn to Snowden Oil & Gas Co., Ltd. was indorsed only in the names of Clark and Hemby, a limited partner and another party with an interest in the payee. The depositary bank had credited the proceeds to the Snowden account. Then-District Judge Kaufman refused to allow the drawer's claim of improper payment against the drawee. 95 The court stated baldly that there is no sacred relationship between an indorsement and the legal payment of a check. More specific meaning may be gleaned from the court's quotation from Osborn v. Gheen, 16 D.C. 189, 194 (Sup.Ct.D.C. 1886), aff'd, 136 U.S. 646, 10 S.Ct. 1072, 34 L.Ed. 552 (1889): 96 But (an indorsement) is not necessary . . . to give validity to a payment. The bank makes the payment, of course, at its peril, if the payee shall afterwards challenge the payment and say that the money was not paid to him, but to somebody else. 97 Gilbert, supra, 108 F.Supp. at 231. The drawee bank in Gilbert had complied with the drawer's order. Although the bank might have returned the check for a proper indorsement, its failure to do so did not render it liable for the drawer's loss on the transaction underlying the check. 98 The Code definition of negotiation and the warranties it imposes may imply a more strict relationship between indorsement and title than that recognized in Gilbert. Interpretation of the Code, however, need not be wholly formalistic. Where missing or formally incomplete indorsements are concerned, it is consistent both with the drafters' emphasis on speeding the collection process and with ample customer protection to limit the liability of paying and collecting parties to the situation in which the intended payee did not receive the proceeds of the check. 20 99 Cases decided under the Code, such as Gotham-Vladimir and Barrett, suggest that such a delimitation of liability is appropriate. It is true, as Perini points out, that in all the cases discussed the drawer did intend to make some payment to the party who eventually received payment. Forcing a bank to reimburse the drawer because of the incomplete indorsement would have resulted in a windfall to the drawer. As the court below noted, however, the cases rest equally on the observation that the losses claimed by the drawers were not related to the improper indorsements. Implicit in that observation is a limitation of liability to claims raised in the name of the true payee. 21 100 That limitation bars Perini's indorsement claims. Upon this record, there is no possibility that a true payee will demand payment and subject the appellant company to dual liability. 22 Perini argues that if someone in the collection process had returned the check for proper indorsement, something might have happened in the interim to prevent the loss it did suffer. The argument is of no avail. It could have applied to drawers in all the missing or incomplete indorsement cases discussed above. 101 Perini has not encountered the peril created by missing or incomplete indorsements. The Code does not compel, and its policies do not counsel, that this court shift the loss Perini did incur to the appellee banks on the basis of Quisenberry's failure to add to his indorsement words of agency. 102
103 Nevertheless, we need not announce that, as a matter of law, liability for handling missing or incomplete indorsements shall extend no further than necessary to provide for claims of the true payee. Rather, we hold only that such a limitation of liability is appropriate when the missing or incomplete indorsement is on a forged check. The ostensible drawer's loss in such a situation can generally, as here, be related to the defective indorsement in only the most speculative fashion. No sound basis exists for extending liability for handling the indorsement beyond the unlikely event of a claim of superior right to payment under the instrument. 23 104 Our holding receives support from the double forgery cases in which courts have grappled with claims that forged checks also bear forged or improper indorsements on which liability might be predicated. Prior to the Code, the majority of jurisdictions treated double forgery cases as if they involved forged drawer's signatures alone. See Comment, supra, 62 Yale L.J. at 455. Thus the loss rested with the drawee, who had to recredit the account of the ostensible drawer but could not recover from prior collecting banks under the rule of Price v. Neal. 24 105 Discussing the application of Price v. Neal in the double forgery context, the Supreme Court in United States v. Chase National Bank, 252 U.S. 485, 496, 40 S.Ct. 361, 363, 64 L.Ed. 675 (1920), suggested the theory limiting indorsement liability that we recognize today: 106 The forged indorsement puts (the drawee) in no worse position than he would occupy if that were genuine. He cannot be called upon to pay again and the collecting bank has not received the proceeds of an instrument to which another held a better title. 107 The Court treated the dispute as a forged check case, and, applying Price v. Neal, left the loss on the drawee. 108 Commentators have suggested with remorse that the Code warranties of title overturned this analysis and required treating double forgery cases under the rules of forged indorsement liability. See Comment, supra, 62 Yale L.J. at 455. 25 At least one recent case, however, suggests that the title warranty does not mandate shifting the loss to collecting banks in a double forgery case. 109 In Aetna Life and Casualty Co. v. Hampton State Bank, 497 S.W.2d 80 (Tex.Civ.App.1973, writ ref'd n. r. e.), the court had to determine whether a forged indorsement rendered a depositary bank liable in circumstances similar to the case at bar. Someone had stolen company checks and forged the drawer's signature. He made the checks payable to a fictitious Pizza Inn # 32 and indorsed them in that manner. The depositary bank credited an account he had opened in the name of Pizza Inn # 32. 110 The court rejected the argument that the forged indorsement deprived the depositary bank of title and gave rise to warranty liability: 111 A warranty of title is nothing more than an assurance that no one has better title to the check than the warrantor, and therefore, that no one is in a position to claim title as against the warrantee, as the payee or other owner of a genuine check could do if his endorsement were forged. 112 On payment of the check to Hampton, Northwest's loss could not be said to have resulted from any breach of Hampton's warranty of title because no person whose name appeared to be endorsed on the check has asserted any claim of title based on lack of a genuine endorsement. Northwest's loss was rather the result of paying out its money on a check to which its own depositor's name was forged. 113 497 S.W.2d at 84 (citations omitted). The loss in the instant case is equally the result of the drawees' paying checks to which Perini's name was forged, rather than any claim of title raised by Southern Contracting Co. or Quisenberry Contracting Co. That Perini's facsimile signature resolution precludes it from placing the forged check loss on the drawees does not make it any the less a forged check loss. 114 It is true that the indorsements in Aetna were in the name of the named payee. The case thus fell squarely under § 3-405(1)(b), the fictitious payee provision we earlier encountered. 26 Quisenberry's failure to indorse in the name of the contracting companies does remove the case from the coverage of that provision. 115 Nonetheless we find that the Aetna court's definition of title warranty and characterization of a double forgery loss extends persuasively to the case at bar. Others have explained why no warranty liability should arise even in the true double forgery situation not covered by § 3-405(1)(b): 116 Since the drawer whose signature is forged is not meeting an obligation to the payee and the payee is not entitled to payment in the first place, the drawee bank could not be compelled to pay again. Thus, the drawee bank's loss (here Perini's loss as the estopped drawer) results not from making payment to the wrong person because of a forged indorsement, but from making any payment at all on the basis of a forged drawer's signature. 117 O'Malley, The Code and Double Forgeries, 19 Syracuse L.Rev. 36, 43-44 (1967). 27 The appellee banks did pass along and pay checks with a discrepancy between payee and indorsement. They credited the proceeds, however, to accounts in the names of the designated payees. In such a situation courts dealing with valid checks generally limit indorsement-related liability to the claims of the true payee. We find such a limitation particularly appropriate where the defective indorsement occurs on a forged check, in which case no true payee can demand payment. Accordingly, we hold that the indorser's failure to sign a forged check in a representative capacity provides no basis for imposition of improper payment, warranty, or conversion liability. 28 On this basis we affirm the judgment in favor of appellees on these claims, as well as the claims of common law conversion and breach of an implied deposit contract. 29