Question

ax purchased a motorcycle from Wanda for $10,000. When the motorcycle was delivered, Max paid for it by giving Wanda a $10,000 check drawn on his personal account at City Bank. At the time Max gave Wanda the check, Max knew he had only $7,000 in his account, but he hoped to be paid on an outstanding insurance claim in time to cover the check.

Wanda immediately deposited the check in her account at National Bank, and several days later, she was advised by National that the check was being dishonored and returned for insufficient funds. Wanda complained to Max, and Max explained that some funds he had expected had not arrived, but that he could make the check good in two weeks. Wanda agreed to wait for two weeks before redepositing the check.

Max was employed as an accounts payable clerk in the treasury department at ABC Incorporated. Within a week after Max assured Wanda that he would make the check good, Max prepared an ABC Incorporated check drawn on its account at City Bank payable to Max Corp., a non-existent entity, in the amount of $3,000. Because Max did not have check signing authority, he obtained by deception the signature of Acme's treasurer on the check. Max took the check, endorsed it payable to the order of Max, signed the endorsement, "Max Corp., by Max, President," and deposited the check in his personal account at City Bank.

Max then realized that other checks he had written might clear before the check he had given to Wanda, making the $3,000 deposit insufficient. Max prepared another ABC Incorporated check drawn on its account at City Bank payable to Max in the amount of $2,000. This time Max signed the name of ABC’s treasurer to the check. Max endorsed the check and deposited it in his personal account at City Bank.

After waiting the agreed two weeks, Wanda redeposited Max's check and it cleared. Criminally, Max is guilty of issuing a bad check to Wanda, forgery, and theft. Civilly, is City Bank liable to ABC Incorporated for paying either check?

Answer 1

Under the Uniform Commercial Code, a payer bank is legally correct in honoring checks that are “properly payable”--- ie. Bearing the authorised signature , submitted to the bank for its records.

In the first instance, Max has endorsed the check , in his favor , after getting it payable to the non-existent Max Corp. by the original authorised signatory (the treasurer of ABC inc.)--by signing as its President.

Normally the payee bank (here the City Bank) will be held responsible for verifying the signature of the drawer . In this case, that part is clear , as the check is signed by the authorised signatory of ABC Inc. only.

Satisfying the above,it is to be agreed that City Bank has no grounds to suspect that the carrier of the check , is by name Max & the endorsement ,on the back of ABC's check has also been signed by one Max.

But while crediting Max's personal account , this doubt should have caught the attention of the checking clerk--that the endorsee & the payee bear the same name & should have stalled the clearing & depositing of money, into the Max personal a/c.

So, in this case, City bank is liable to make good the loss to ABC Inc.on account of its negligence and lack of proper care and diligence , while crediting accounts , with a check which bore invalid endorsement.

In the second instance, Max signed the name of ABC’s treasurer to the check & hence forged the latter's signature.

Under the Uniform Commercial Code,a payee bank (here the City Bank) will be held responsible for verifying the signature of the drawer, with the latter’s signature card on the bank's file before honoring the same.Though this is becoming increasingly impracticable due to the advent of facsimile signatures being used , still the bank is legally liable and cannot plead for any favor.

So, in this case also , City bank is liable to make good the loss to ABC Inc.on account of its negligence and lack of adequate care and diligence , for honoring a forged check.