The Universal Commercial Code, Banks, And Fraudulent Activity

What happens when a bank accepts a check with a forged endorsement? Who suffers the loss? Who is liable? Where can these answers be found? Check fraud law is governed by Articles 3 and 4 of the Uniform Commercial Code (UCC). The National Conference of Commissioners on Uniform State Laws and the American Law Institute created the Uniform Commercial Code in a joint effort. It took over ten years to originally draft the UCC, and a further fourteen years for the UCC to be implemented across the country. The creation of the UCC began in 1940 in an effort to "attack major commercial problems with comprehensive legal solutions" The UCC allows commercial organizations to do business across jurisdictional boundaries with confidence because these organizations are fairly certain that the same rules apply in each jurisdiction. The UCC has been enacted in every state with the exception of Louisiana.

Recently revisions to the code have resulted in three significant changes to the causes of action available in check fraud litigation. First, a new cause of action for contribution based solely on shared culpability. Second, expansion of conversion as a cause of action in check fraud cases. Third, allowing a drawee bank to recover from upstream banks for encoding errors that may result in shifting liability in some counterfeit check cases.

It is important to know the relationships between parties typically involved in check fraud litigations. A customer is a person with an account at a bank. A drawer or maker is a person writing a check and is typically a customer of the drawee bank. A drawee is a party, typically a bank, required to pay out money when a check or draft is presented. A payee is the party entitled, by the creation of the check by the drawer, to receive funds from the payor bank, usually the drawee. Presentment is the delivery of a check or draft to the drawee or the drawer for payment.

A check written by the drawer moves downstream from the drawer to the payee, and then moves to the drawee bank that pays the amount shown. Several other parties, however, may enter the stream between the payee and the drawee. Typically, the check moves downstream from the payee to the depository bank. Continuing downstream, the check moves from the depository bank to the collecting bank (most often the Federal Reserve Bank for depository institutions), then perhaps to a presenting bank, and finally to the drawee bank.

The essential element of most check fraud claims is an unauthorized or forged signature or endorsement. The offender may enter the stream at any point in the sequence. Since the person committing the fraud often has disappeared with the money or is judgment proof most check fraud litigation involves a claim by an injured party against a drawee bank that paid over a forged signature, or a depository bank that accepted and processed an item bearing a forged endorsement.

Generally, a drawee bank is liable for claims involving the drawer's signature on the face of a check, and a depository bank is liable for claims involving the payee's endorsement on the back of the check. A drawee bank's liability for forged signatures of the drawer arises because the drawee bank maintains the drawer's signature card on file and is held responsible for verifying the signature.

The depository bank's liability for forged endorsement of the payee arises because the depository bank has direct contact with the individual presenting the fraudulent endorsement. Thus, the depository bank is in the best position to verify the endorsement. In double forgery situations, when both the drawer's signature and the endorsement are forged or unauthorized, the case is treated as forged check and the drawee bank is generally liable.

Embedded in the UCC are rules that establish liability for wrongdoing on instruments. One of these is conversion liability. Conversion means that someone has stolen an instrument or a bank has paid a check that ha a forged endorsement. In the case Atlanta Sand & Supply Company v. The Citizens Bank, Atlanta Sand & Supply Company sued The Citizens Bank for conversion, alleging that for a period of six years, Citizens Bank accepted deposits over endorsements forged by Atlanta Sand employee Lisa Leslie and unlawfully provided Leslie with cash back totaling approximately $239,000. It seems that the company does not think it feasible to try to recovery their loses from employee, Lisa Leslie, and therefore goes after the bank for allowing her to steal from them. Is the bank at fault? Does the bank have an obligation to their customers to protect them from fraudulent activity? In short, yes. Customers trust banks to do just that.

In this case, the bank did what it was supposed to do. The court held that a corporate resolution given to the bank and a signature card gave the officer authority to endorse checks for deposit to the account, and to draft checks from the account, so the bank was not liable for conversion. These documents were unambiguous. The resolution and signature card clearly let the officer act for the company regarding the account, including withdrawing money and endorsing checks for deposit. The fact that she was not specifically designated as an officer in the resolution was irrelevant. Her acts did not violate the authority the resolution gave her, and whether she violated company policy related to her abuse of authority, not a lack of authority. The bank was not liable for such abuse. Given her authority, nothing put the bank on notice of her illegal activity, so the bank was protected from liability by O.C.G.A. Ð'§ 7-1-352.

Another case of this nature is The Security State Bank v. Visiting Nurses Association of Telfair County, Inc., in which Wanda Williams, a clerk with the company, was convicted