Question

THEFT OF ORDER PAPER WITH FORGED ENDORSEMENT (EXAMPLE 3)

The Case of the Stolen Check
Identify the legal issues presented by the following series of events and explain how those issues

would be resolved under Article 3 of the UCC.

X draws a check payable to the order of A in the amount of $1,000 for services rendered and then places it in the mail. B steals the check out of A’s mailbox, forges A’s signature, and transfers it to C for the face amount. C, who has no idea that the check has been stolen, then purports to “negotiate” it to his bank after endorsing it. C’s bank then passes it along to X’s bank through the bank collection process after endorsing it “for collection,” and it is eventually charged against X’s account. A, who never received the check, calls X to ask when he is going to send it, to which X replies that he already did, and that the check, in fact, had cleared his bank. Surprised at this news, A tells X that he never received the check, suspecting that a thief must have inter- jected himself in the process.

Answer 1

1. When a negotiable instrument has been lost or has been obtained from any maker, acceptor or holder thereof by means of an offence or fraud, or for an unlawful consideration, no possessor or indorsee who claims through the person who found or so obtained the instrument is entitled to receive the amount due thereon from such maker, acceptor or holder, or from any party prior to such holder, unless such possessor or indorsee is, or some person through whom he claims was, a holder thereof in due course.

2. It is well established that if a party primarily liable on a negotiable instrument pays the amount thereof to a wrong person, who holds it under a forged indorsement, he remains liable to the true owner. The only exception to this is where the payee's indorsement on a cheque payable to order is forged.

Therefore X will be liable to pay.