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

Heading: The Code Framework

Text: 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