Opinion ID: 344807
Heading Depth: 1
Heading Rank: 2

Heading: The Uniform Commercial Code and Forgery Losses

Text: 27 This case illustrates the unwisdom of the belief that codification provides the yellow brick road to juridical certainty. Unimaginable circumstantial concatenations and scientific innovation very often outrun the fixity of a codified consensus. Such is emphatically the situation this court faces today. 28 The case at bar presents an unusual, fortuitous combination of circumstances: checks bearing undisputedly forged drawer's signatures accompanied by indorsements that may be legally defective because made in a personal capacity without indication of authority to indorse for the named payee businesses, indorsements that may or may not also have been forged, i. e., falsely written. This unique juxtaposition of factors creates numerous and vexing questions relating to the Uniform Commercial Code allocation of forgery losses among the various parties to checks and the check collection process. 3 29 One answer is clear, however. Perini has no recourse on the unauthorized signature of R. A. Munroe against Morgan or Brown Brothers. Perini's resolution authorizing the drawees' payment of checks bearing signatures resembling the machine-embossed facsimile signature precludes that course of action. 30 Perini makes no contrary contention. Rather, it offers claims on this appeal that rest in one way or another on asserted defects in the indorsements signed by Quisenberry. 4 The checks were made payable to Quisenberry Contracting Co. or Southern Contracting Co.; each was indorsed simply Jesse D. Quisenberry. As will be seen, if liability may be rested on these indorsements, none of the appellee banks were entitled to summary judgment. If not, the trial court's action was proper. Further explanation of the controversies created by this indorsement however, must be preceded by a sketch of the general UCC scheme dealing with forged and unauthorized signatures on checks and of the policies said to underlie that scheme. 5
31 Perpetuating a distinction introduced into the legal annals by Lord Mansfield in the eighteenth century, the Code accords separate treatment to forged drawer signatures (hereinafter forged checks) and forged indorsements. In general, the drawee bank is strictly liable to its customer drawer for payment of either a forged check or a check containing a forged indorsement. In the case of a forged indorsement, the drawee generally may pass liability back through the collection chain to the party who took from the forger and, of course, to the forger himself if available. In the case of a forged check, however, liability generally rests with the drawee. The patchwork of provisions from which this general allocation of liability emerges merits more detailed description.
32 A check bearing a forged indorsement, included in the § 1-201(43) definition of unauthorized signatures, 6 is not properly payable. J. White and R. Summers, Uniform Commercial Code 559 (1972). 7 Regardless of the care exercised, a drawee bank is with few exceptions liable to its drawer customer for payment of such a check. See § 4-401. 33 Upon recrediting the drawer's account after payment over a forged indorsement, the drawee will seek redress against prior parties in the collection chain through an action for breach of the statutory warranty of good title. Each person who obtains payment of a check from the drawee and each prior transferor warrants to the party who in good faith pays the check that he has good title to the instrument. §§ 3-417(1)(a), 4-207(1)(a). 8 A forged indorsement is ineffective to pass title; see § 3-417, Comment 3. The drawee may therefore bring a breach of warranty action against a person who presented a check bearing a forged indorsement. These warranty actions will continue up the collection chain to the party who took from the forger or to the forger himself. 34 Additionally, payment of a check bearing a forged indorsement constitutes conversion under § 3-419(1)(c). This conversion action at least provides the check's true owner, the payee or indorsee from whom it was stolen and whose name was falsely indorsed, direct relief from the drawee. See White and Summers, supra, 500. Without the conversion action the true owner would have to seek payment from the drawer, who might be overcautious and unaware of his right to force the drawee to recredit his account for any payment over a forged indorsement. 35 The danger created by forged indorsements is that the party designated by the instrument as entitled to its proceeds will appear with a claim to those proceeds after payment has been made to the malefactor. The statutory actions for improper payment, conversion, and breach of warranty of good title combine, however inartfully, to safeguard the drawer against double liability and to assure the payee of payment. The loss falls on the party who took the check from the forger, or on the forger himself.
36 As opposed to diverting an intended payment to someone other than the intended recipient, forged checks present the problem of depleting the ostensible drawer's funds when he had intended no payment. The Code's treatment of forged checks, however, begins in the same place as its treatment of forged indorsements. The forgery does not operate as the ostensible drawer's signature. See § 3-404(1). Payment consequently is not to the ostensible drawer's order and violates the drawee bank's strict duty to charge its customer's account only for properly payable items. See § 4-401(1). 37 The Code's analysis of forged check liability not only begins with the drawee, however; it also generally ends there. The drawee's payment of a forged check is final in favor of a holder in due course or one who has relied on the payment in good faith. § 3-418. This final payment rule codifies and attempts to clarify the rule of Price v. Neal, 3 Burr. 1354 (K.B.1762), under which a drawee who accepts or pays an instrument on which the signature of the drawer is forged is bound on his acceptance and cannot recover back his payment. § 3-418, Comment 1. Prior parties in the collection chain who meet the prerequisites set out in § 3-418 will be immunized by its final payment rule from any liability for negligence in dealing with the forged check. 38 The above scheme allocating forgery losses among the various parties to the check collection process operates without regard to fault. The drawee's duty to charge its customer's account only for properly payable items and the warranty of title given by prior parties in the chain of transfer impose standards of strict liability. 39 Fault does occupy a secondary role in the UCC treatment of forgery losses. One whose negligence substantially contributes to the making of an unauthorized signature cannot assert the invalidity of that signature against a holder in due course or a drawee who without negligence pays the check. § 3-406. Thus the drawee can pass the loss back to a drawer or forward to a prior party in the collection chain whose negligence substantially contributed to a forgery. The complaining party's negligence will not, however, bar otherwise available recovery against a party, including a drawee, who is also negligent. Id. Additionally, while nothing in the Code precludes a bank and its customer from modifying the forgery loss rules by contract, the bank cannot enforce an agreement permitting it to act in violation of reasonable commercial standards. § 4-103(1). 40
41 In sum, the Code, while allowing for some modification on the basis of fault or agreement, sets up a system of strict liability rules allocating loss according to the type of forgery. The system uneasily rests on two policy bases. First, it incorporates an at least partially outmoded notion of the relative positions of drawee banks and prior parties in the collection chain with respect to detecting different types of forgeries. Second, it incompletely serves the notion that commerce will be facilitated by bringing to the swiftest practicable conclusion the processing of a check transaction. 42 As mentioned, the separate treatment given forged checks and forged indorsements harkens back to the eighteenth century decision of the King's Bench in Price v. Neal. That decision left forged check liability on the drawee on the view that, as against other parties in the line of transfer, the drawee stood in the best position to recognize the signature of the drawer, its customer. The corollary principle for forged indorsements is that the person who takes the check from the forger frequently, as here, the depositary bank is in the best position to detect the bogus indorsement. 43 Reaffirming Price v. Neal in the final payment rule of § 3-418, the Code drafters recognized that the case's appraisal of relative opportunity to scrutinize drawer signatures was somewhat unrealistic in a nation where banks may handle some 60 million checks daily. 9 The contemporary pace of commerce has eroded the five senses used by bankers in the face-to-face era of Price versus Neal; little remains save the sensory activity of punching keys. While the drafters thus concluded that Price v. Neal had been drained of all its personality, they nevertheless insisted that its conclusion survives. The drafters noted that modern groundwork for the final payment rule could be found in the 44 less fictional rationalization . . . that it is highly desirable to end the transaction on an instrument when it is paid rather than reopen and upset a series of commercial transactions at a later date when the forgery is discovered. 45 § 3-418, Comment 1. In recognition of the frenetic commerce of our time, the thrust of the UCC here and elsewhere is for speed and facility at some expense to exact checks and balances. 46 Leaving forged check liability on the drawee may serve well this finality policy. That policy, however, does not itself justify separate treatment for forged checks and indorsements. The concern that commercial transactions be swiftly brought to rest applies with equal force to both varieties of wrongdoing. See White and Summers, supra, at 522-23; Comment, Allocation of Losses From Check Forgeries Under the Law of Negotiable Instruments and the Uniform Commercial Code, 62 Yale L.J. 417, 459-60 (1953). 47 While finality viewed alone calls for equal treatment of forged checks and forged indorsements, one might still maintain that forged indorsements merit separate rules. The modern demands of commerce have as the drafters recognized, deprived drawees of any superior opportunity to detect forged drawer's signatures. Only a concern for finality therefore justifies placing forged check losses on drawee banks. 48 Such simple expedients as requiring identification, however, may still permit transferees of checks to provide a significant protection against forged indorsements that drawees cannot. To insure such protective measures are taken, it may be sensible to override the finality policy and to place forged indorsement losses on the depositary bank or other party who takes from the forger. It should be immediately noted, however, that whatever force this approach has in the usual forged indorsement case is diminished where, as here, the suspect indorsement appears on a check that is itself forged. Someone forging a check will likely draw the check to a payee whose identity he can readily assume, such as himself or a fictitious person. In such circumstances the party who first takes the check may well have no particular opportunity to detect any impropriety in the indorsement. 49 In any case, we need not resolve whether the Code's rule of strict liability for those who take a forged indorsement check from the forger may be fully justified by the opportunity such parties have to thwart the criminal enterprise. It suffices to note that the Code bases its separate treatment of forged checks and forged indorsements on a finality policy that itself calls for no such distinction. Of course we have no mandate to ignore the codified distinction. The significance for this court today of the clash between the drafters' rule and the drafters' policy lies elsewhere. 50 Put simply, when we consider the arguments that these forged checks also contain unauthorized indorsements, we must keep in mind the Code's commitment to finality. We cannot call forged indorsements by any other name in order to serve our own interpretations of the balance between the UCC finality policy and relative opportunity to flush out forged indorsements. On the other hand, as we assess whether the highly unusual circumstances before us call for the label of forged check or forged indorsement, or how to operate if we are in the ill-defined and rarely encountered region in which both labels are applicable, we need not prostrate ourselves blindly before the formalisms of title on an assumption that depositary banks should be held accountable in every instance of improper indorsement. Without a uniform commercial blueprint for every possible fraud and forgery, our calling is to interstitial interpretation. In its pursuit we must recognize two considerations the UCC's concern for finality and the probability that depositary banks, whatever their position in the usual forged indorsement case, have no unique opportunity to detect improper indorsements on checks that are themselves forged.
51 We may now see how Perini's allegations and claims of error fit into the UCC scheme. Assume Quisenberry had included in his indorsements that he was signing for Quisenberry Contracting Co. or Southern Contracting Co. The case would become one involving only forged checks. 10 Accordingly, the drawee banks would be liable to the ostensible drawer, Perini, for improper payment. Perini would be precluded from asserting that liability, however, by its resolution authorizing payment of checks bearing the facsimile signature embossed by the machine or sufficiently similar signatures. Blocked from recourse against the drawees, Perini could reach back up the collection chain only against parties who had taken the checks in bad faith and therefore could not claim the protection of the § 3-418 codification of the Price v. Neal rule. 11 52 The court below, after concluding in effect that the indorsements were valid, reached just this result. Under the orders on appeal, Perini is essentially left with a trial on the issue of Habersham's bad faith in handling Perini's checks. Habersham will be able to assert Perini's alleged negligence as a defense, and Perini may press allegations of Habersham's negligence in response. 53 Perini claims, however, that Quisenberry's failure to indorse in a representative capacity makes the case one of unauthorized indorsements and should entitle the company to recover from any of the three defendant banks on a strict liability basis. In other words, given the happenstance that Quisenberry failed to add to his indorsement for Quisenberry Contracting Co., Perini would impose strict liability for improper payment, breach of title warranty, and conversion in what would otherwise be a relatively straightforward forged check case. 54 Perini vociferously urges that a parade of horribles will follow if this court affirms the trial court's disposition of the dispute over the handling of these checks. It must be recognized and emphasized, however, that any such dire predictions relate necessarily to the highly questionable manner in which Quisenberry was able to obtain and deposit these checks. The alleged inadequacy of the indorsement bears no relation to those suspicious circumstances. Had the indorsements been letter perfect, Perini would have been limited in equally suspicious circumstances to asserting Habersham's bad faith. 55 The Code does generally provide an ostensible drawer greater protection in such circumstances. For its own commercial reasons, however, Perini chose to employ a facsimile signature machine and agreed to forfeit its otherwise absolute right to have its drawees recredit its accounts for any payments of forged checks. Perini's inability to recover from the drawees on the basis of the forged drawer's signature cannot fuel in the slightest its arguments regarding the indorsements. Those arguments must stand or fall on their own. 56 In short, this case does not present the possibility of lowering one whit the UCC protection offered bank customers against losses from forged checks; it presents only the effect on a forged check case of a malefactor's failure to make an indorsement proper in form. 57 We must now consider that effect, which arises in two possible ways. First is the claim that there exists liability on the basis of the indorsements themselves. This surfaces in the statutory claims for improper payment, breach of warranty, and conversion considered next in Part III. Second, Perini claims that the indorsements' adequacy affects the common law liability of Habersham and Fulton on the forged drawer signatures. Those defendants avoid such liability, which would attach regardless of due care or good faith, only by virtue of the final payment rule. We consider in Part IV the claims that an improper chain of indorsement renders unavailable the protection of that rule.