(Paralegal) Forged checks: Who is liable? (Discussion)

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Case Study:

While Cody was undergoing chemotherapy, he gave his brother Jeff power of attorney to handle his affairs, such as paying bills and other banking responsibilities. During the 15 months that Jeff handled Cody’s affairs, he did not examine Cody’s bank statements carefully as they arrived each month. Cody’s housekeeper, Martha, forged Cody’s name to a check written out to herself for $10,000. The drawee bank paid the check and charged Cody’s account. Jeff did not notify the bank for 13 months after he received the statement and the forged check. Can he compel the bank to reverse the charge? Explain why or why not. Please be sure to include citations to support your response.

Discussion:

The maid, as forger, is liable to Cody first and foremost, but –although it is not stated– she is probably long gone and will be difficult to track down. Jeff and Cody should still file a police report, and if Martha can be found, they should pursue criminal charges.

The bank is liable for a limited time for forged checks if it failed to verify Cody’s signature properly. If Martha managed to forge Cody’s signature well, the bank has more of a leg to stand on, but if the forgery is very poorly done and bears no resemblance whatsoever to Cody’s normal signature, the bank failed to do due diligence. 

“A payor bank that pays a check with a forged payee endorsement has paid a check that is not properly payable and is liable to its customer, the drawer. UCC 4-401(a). This is the same rule as for a check with a forged drawer signature” (Mulford, 2009).

§ 3-118 sets the statute of limitations at six years but it refers to notes (e.g. promissory notes) promising repayment more than checks, as far as I can tell.

§ 4-111 says an “action to enforce an obligation, duty, or right arising under this Article must be commenced within three years after the [cause of action] accrues,” which appears to refer to bank deposits and collections actions.

§ 4-406 says that if the bank sends statements, a customer (and, one assumes, someone with power of attorney acting on the customer’s behalf) “must exercise reasonable promptness in examining the statement” to see if there have been unauthorized transactions made. The customer or his/her representative is required to notify the bank promptly of any irregularities. Cody’s bank could easily assert that Cody and his POA designee Jeff both failed to notify the bank promptly and thus can not “assert against the bank” for the forged check.

The bank can say that Cody and Jeff, as POA, had had more than enough time to examine the statements provided by the bank: “the customer had been afforded a reasonable period of time, not exceeding 30 days, in which to examine the item or statement of account and notify the bank.”

The bank will no doubt cite § 4-406(f). Regardless of who is more at fault, “a customer who does not within one year after the statement or items are made available to the customer (subsection (a)) discover and report the customer’s unauthorized signature on or any alteration on the item is precluded from asserting against the bank the unauthorized signature or alteration”.

Jeff was also negligent in that he failed to monitor Cody’s bank statements properly while he had power of attorney. It took Jeff more than a year to notice the forgery. Most banks limit recovery for forgeries to forgeries challenged within 30 days. The bank is probably off the hook for the money since the forgery was not reported within a year.

I was distracted by the power of attorney detail; some websites I examined asserted that POA is limited to a year and must be renewed at that time or it no longer applies. Other websites clarified that there are different types of power of attorney, and some are restricted to dealing with medical decisions and some are restricted to making financial decisions. We aren’t told what type of POA Jeff was granted. Has he been granted POA over Cody’s finances, his medical decisions, or both?

These websites also failed to cite any caselaw or regulations, but I am wondering if Jeff still legally had POA after a year, and if that would change the circumstances. Would Cody, if he had regained his health, be able to challenge the forgery himself, claiming Jeff’s failure to act diligently on his behalf? The forgery has still occurred more than a year ago, but Cody arguably has only become aware of it.

I suspect this is a red herring and that Cody would be out of luck trying to get the bank to refund his stolen money. He might have more success trying to locate Martha (though the likelihood that even if she could be tracked down and charged criminally for her theft that she would still have funds on hand to cover the cost of her theft is slim, and you can’t get money from someone who has no money), and, in the meantime, to get his brother to compensate him for the loss that occurred under his watch.

As unpleasant as it may be, Cody will probably have to hold his brother responsible and seek remedy from him (one hopes this could be done without going to court), and if Martha can be tracked down and held liable, then Jeff could recover the money from her (which, as noted, is unlikely to happen on several fronts).

A hard lesson for Cody: choose the person you give Power of Attorney to very carefully.

References:
Twomey textbook and SUO Week 3 online lecture

Robinson, D. O. (Rob). (2003, July 22). Our Readers Speak: Taking Losses on Forgeries.  Retrieved fromhttp://www.bankersonline.com/articles/bhv13n05/bhv13n05a3.html

Burnett, J. (2008, November 3). Reg CC- Three Years to Return a Forged Item? Retrieved fromhttp://www.bankersonline.com/operations/guru2008/gurus_op110308a.html

Burnett, J. (2009, April 20). Forged Endorsement – Course of Action? Retrieved fromhttp://www.bankersonline.com/security/guru2009/gurus_sec042009c.html

Burnett, J. (2010, September 6). Statute of Limitation for Submitting Forgery Claim. Retrieved fromhttp://www.bankersonline.com/compliance/guru2010/gurus_comp090610d.html

Burnett, J. (2003, September 22). Claiming Forgery on Old Checks. Retrieved fromhttp://www.bankersonline.com/operations/gurus_op092203c.html

Mulford, R. (2009, July 22). Forged and Missing Endorsement and Altered Checks. Retrieved from http://www.financialfraudlaw.com/content/forged-and-missing-endorsement-and-altered-checks

Addenda:
Examined GINA CHIN ASSOCIATES INC v. FIRST UNION BANK; in this case, a bank employee colluded with a Chin employee to honor double-forged checks. Not applicable to our case study on several grounds, given that Cody’s bank did not have an employee colluding and since only Cody’s signature was forged. Though they occurred over a two-year period, and a Chin representative was trusted to monitor statements, that employee was dishonest and Chin also discovered the forgeries more promptly than did Jeff.
See: http://caselaw.findlaw.com/va-supreme-court/1118433.html

Examined NAPLETON v. GREAT LAKES BANK; in this case plaintiff Napleton sought reimbursement for a cashed forged check from the defendant bank. Check was stolen, forged and cashed on October 31st, 2007 and plaintiff discovered the loss in March, 2008, and reported it to his bank. Bank responded in May, 2008 that it would not credit his account because he failed to report the forgery in a timely manner. Bank statements included wording urging customers to report discrepancies within 30 days or the bank would consider all information on the statement correct. Bank contended that notification after December 1st, 2007 meant that Napleton had failed to notify them promptly enough. The court sided with the bank. Napleton had not exercised due diligence when he failed to examine his statements promptly and report the discrepancy within 30 days.
See: http://caselaw.findlaw.com/il-court-of-appeals/1559446.html

Examined MONREAL v. FLEET BANK; Dr. Monreal employed a bookkeeper who embezzled from him from 1988 through May 10, 1995. Monreal reported embezzlement on May 18th, the day after he discovered it. He sued the bank, alleging that it was negligent in paying the forged checks. Bank asserted that “UCC 4-406(4)’s one-year period had expired in 1989” and this barred all Monreal’s claims. (New York) Supreme Court disagreed, saying each statement of account carried its own year-long deadline for action. Appellate disagreed, sided with bank. Monreal appealed, and Supreme Court order was reinstated. Plaintiff can recover funds dating back to May 18, 1994 to May 17, 1995 if he can prove bank failed to exercise due diligence and ordinary care in honoring those fraudulent checks. Again, the bank is only held liable for transactions that fell within a one-year period, and could possibly not be held liable for even that if a court determined that the bank exercised “ordinary care” / due diligence.
See: http://caselaw.findlaw.com/ny-court-of-appeals/1362788.html

Examined LEVY v. FIDELITY; a Levy employee fraudulently endorsed company checks with his own personal account number; only once did a bank employee challenge why a corporate check was being deposited into a personal account but the forger simply went to a different branch, where the check was accepted and cashed. Fidelity argued that Levy failed to discover fraud in a timely manner. § 3-406 allows a bank to “assert a claimant’s negligence as a defense only if the bank can demonstrate that its conduct met reasonable commercial standards”. Courthad to determine how to allocate loss, which generally falls on party best capable of avoiding the loss. Levy argued that the bank was best capable of determining the fraud, as forger was depositing company funds into a personal account. Bank asserts that Levy did not cotton on to the fraud quickly enough. Fidelity was held responsible, and after appeal, the court upheld that judgment.
See: http://openjurist.org/988/f2d/311/lou-levy-sons-fashions-inc-lou-levy-sons-fashions-inc-v-j-romano-na

Mulford offered an example: “Bucci v. Wachovia Bank. N.A. Bucci’s secretary/bookkeeper was charged with preparing checks payable to creditors. After 13 faithful years, she started altering checks and depositing them into her own account at Wachovia. Before she was caught she did this with hundreds of checks totaling $925,000. Bucci sued Wachovia on a variety of theories, including common law negligence, conversion, breach of contract, and breach of the covenant of good faith and fair dealing. Wachovia moved to dismiss, arguing UCC preemption. The court agreed that Bucci’s common law conversion claim was preempted, but was not so sure as to the other claims. It was not clear whether the totality of Bucci’s allegations would be fully addressable by UCC 4-406 or by any other UCC provision. So, the court denied Wachovia’s motion to dismiss those claims, even while noting that Wachovia might ultimately prevail on this issue later in the litigation.” Secretary/bookeeper was Elizabeth Greenawalt, and as of 2008 was facing criminal prosecution in Delaware. Wachovia was considered fraudulently or negligently complicit by the court.
See: http://www.leagle.com/xmlResult.aspx?xmldoc=20081364591bgfsupp2d773_11306.xml&docbase=CSLWAR3-2007-CURR

 

Note: 

I noticed that this case study was very similar to one given by the textbook, with two factors changed to make the scenario more complex: in the original, the sick man had his wife handling his affairs. There was no complication like power of attorney thrown in, because, I assume, a wife doesn’t need one to handle a husband’s medical or financial affairs if necessary. Also, in the original, the forger was an acquaintance, not an employee. There could be an argument that an employee was acting on behalf of an employer. When the forger is just an acquaintance, the situation changes.

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