(Paralegal) Forged “For Deposit Only” Endorsed Checks: Who Is Responsible?

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Forged “For Deposit Only” Endorsed Checks: Who Is Responsible?

In our case study, we are asked to review Qatar v. First American Bank of Virginia, 1995 and answer the following:

1)      Is a bank liable to a customer who endorses a check “for deposit only into account [number]” if the check is deposited into the wrong account?

2)      Is a bank liable if a customer’s endorsement simply says “for deposit only”?

3)      Would any account qualify to satisfy the endorsement?

4)      Would any bank qualify?

An employee, Bassam Salous, the chief accountant at Qatar’s Ministry of Education’s Office of Cultural Attache (OCA), defrauded his employer by creating false invoices and cashing OCA checks to “pay” the fake invoices. The checks Salous presented at the banks (and for which the banks debited Qatar’s account) took four different forms (and included checks made out to corporations rather than individuals):

  • A forged fake payee’s signature, a check indorsed “in blank” (UCC § 3-204(2) makes this legally payable to the bearer).
  • A forged fake payee’s signature, with “For Deposit Only” stamped on the check
  • A forged fake payee’s signature, with “For Deposit Only” stamped on the check with Salous’ handwritten personal bank account number
  • No signature at all

From 1986 until 1992, when his scheme was uncovered, Salous deposited over a million dollars into his personal accounts at several banks (including First American Bank of Virginia).

Qatar sued the depository banks for conversion, meaning they were alleging that the banks used Qatar’s property improperly; the acceptance of the fraudulent checks (and the subsequent transfer of Qatar’s funds into Salous’ personal accounts) may have been legal, but by refusing to reimburse Qatar’s funds once the fraud was uncovered and once Qatar demanded its funds returned (Qatar argues) is conversion.  (If found liable, the banks could be forced to pay Qatar damages: not only the full amount of the stolen funds but also any interest that Qatar lost once the money was removed from its account.)

The banks, in response, cited a pre-1993 version of UCC § 3-405 — VA Code, Title 8.3, as it existed prior to the January 1, 1993 amendments (District Judge Ellis, 1995) – which would leave Qatar, as Salous’ employer (and thus, ostensibly, in a better position to monitor whether his activities were legitimate and as desired or not), holding the bag for not catching Salous’ fraud sooner.

Predictably, Qatar disagreed. Yes, UCC § 3-405 does hold that even a check with a forged signature can be considered “effective” and negotiable by a bank, but, Qatar argued, the banks did not do due diligence when they failed to respect restrictive endorsements (like “For Deposit Only”) and, Qatar alleges, when the banks failed to act in a “commercially reasonable manner.”

The banks (First American et al) objected, asserting that Qatar, as drawer, should not be able to sue a depository bank for conversion but must file against any drawee banks, and that UCC § 3-405 placed liability for an employee forging employer checks solely on the employer (here, that would mean that Salous’ fraud would be solely Qatar’s problem, not the banks’).

First American et al also cited Western Assurance Co. v. Star Financial Bank of Indianapolis in defense, claiming that they should not be liable because they allegedly obeyed the restrictive endorsement when they deposited the funds into an account, rather than, say, cashing the check, even if the checks were forged and the account was Salous’ account. Western Assurance and Connors Consulting Group (CCG) were collaborating on a contract (Indiana state government hiring both businesses for their expertise in reference to a FICA (Social Security / payroll-related) tax recovery program) and opened separate accounts at Star, but both accounts allowed officers of the other company to endorse checks and perform other transactions. The two companies had a professional disagreement and subsequent falling out. Later Western sued Star for allowing a dishonest employee at CCG to deposit “For Deposit Only” checks payable to Western into some previously fallow/disused/abandoned CCG accounts. The Court did not find Star liable for ignoring the restrictive endorsement because, notably, Western and CCG had previously included each other’s representatives on their account signature cards (Cudahy, 1993).

The Court cited UCC 3-405(1)(c) (i.e., the “fictitious payee” or “padded payroll” rule that holds employers liable for bad employees committing fraud), and noted that § 3-405 does not protect Qatar from a thieving employee cashing unendorsed (unsigned) checks.

The Court said that a forged endorsement does not serve to transfer a check’s title (§§ 3-404, 3-202) and cited Stone & Webster (Wilkins, 1962) and Kraftsman v. United (Drier, 1979). In both cases, company employees forged checks and the banks which cashed the forgeries were said not to have acted in good faith.

Citing § 8.4-401, and Prudential-Bache v. Citibank (Kaye, 1989), the Court said that the drawee bank (First American, with whom Qatar, as drawer in this situation, had an account) is not entitled to deduct funds from the drawer’s account to satisfy a fraudulent check (Ellis, 1995). In Prudential-Bache v. Citibank, dishonest Citibank employees colluded with a thieving Prudential-Bache employee and his accomplice (who opened the Citibank accounts), did not file required federal legal documents for transactions over $10,000.00, and, notably, other bank employees uninvolved in the scam had also ignored the high percentage of “niners” (checks made out for $9,999.99 specifically to circumvent the federal reporting guidelines) that the thieves deposited (and then withdrew once these stolen Prudential-Bache funds were transferred to their Citibank accounts). The Court noted that Prudential-Bache v. Citibank set a precedent whereby Qatar could possibly defeat First American’s defense (that an employee forging checks was solely Qatar’s problem) if Qatar could demonstrate that First American failed to follow established standards or failed to behave with reasonable responsibility (UCC §§ 3-406, 4-406).

The Court stated that the forged signature did not prevent the bank cashing the check per UCC § 3-405, but the accompanying “For Deposit Only” restriction should have forced the bank to “deposit the funds only into the account of the last endorser” (e.g., the payee’s account) as required by UCC § 3-205(c): “First American’s argument to the contrary is a little like saying that a store sign reading “shirts and shoes required” does not restrict a trouserless man from entering the store” (Ellis, 1995). Thus, Qatar could insist that not just “any account” should qualify when a (forged) check is restricted by “For Deposit Only.”

The Court held that First American et al failed to obey the restrictive endorsements on the “For Deposit Only” checks that they deposited into Salous’ personal accounts. Whereas Qatar is stuck taking the loss for checks Salous forged without the restrictive endorsements because a bank can’t be charged with conversion for processing unendorsed checks, even if they are forged (per § 3-405), First American et al were liable for conversion, as Qatar asserted, for the total face value of the “For Deposit Only” checks that were deposited into Salous’ accounts rather than Qatar’s (because depositary banks must comply with restrictive endorsements (UCC § 3-206).

The Court also said that if the depository bank asked Salous to write an account number on the forged checks, then the “for deposit only” endorsement would be violated, because the original assumption would have any deposit go into the payee’s account. If Salous took it upon himself to put his own account number on the check prior to handing it over to a bank representative, then the depositary bank would not be liable for conversion as Qatar asserts, because they can argue that they acted with reasonable care and complied with the restrictive endorsement as written on the check when it was presented (Ellis, 1995).

So we have our answers:

1)      Is a bank liable to a customer who endorses a check “for deposit only into account [number]” if the check is deposited into the wrong account? According to Qatar v. First American Bank of Virginia, 1995 (affirmed by an appellate court’s decision), yes, because “for deposit only” is a restrictive endorsement that requires the bank to perform a specific action.

2)       Is a bank liable if a customer’s endorsement simply says “for deposit only”? Since “for deposit only” implies that the check is to be deposited into the payee’s account per UCC § 3-206(3), then it does matter if the bank instead deposits the funds into a third party’s account. In this case, a fictional payee (or a real client to whom no payment was owed) named on the “pay to” line plus a forged payee signature do not override the basic assumption of a restrictive endorsement like “for deposit only.” As the court pointed out, it is unreasonable to assume that an account holder would want a “for deposit only” check deposited anywhere but in its own account.

3)      Would any account qualify to satisfy the endorsement? As noted above, no. The bank would not be liable if the funds went to the account holder rather than being stolen (by an employee with forged checks) from the account holder.Otherwise, they might be, if the account holder can convince a court that the bank did not follow best practices and guidelines when examining checks. The court did note that it matters when and at whose behest an account number is added to a “for deposit only” endorsement. First American will be liable only if Salous added his account number after being directed to do so by a bank representative. (If he wrote his account number down on his own without being asked to do so by a bank employee, then they are not liable.)

4)      Would any bank qualify? If a drawee bank fails to observe reasonable standards of care and due diligence, it can be liable; generally it is the depositary bank which actually accepts a forged check, but it is the drawee bank which releases the drawer’s (account holder’s) funds. This doesn’t seem fair, as part of the UCC holds employers responsible for employee theft via check forgery or fraud because the employer is supposedly in a better position to examine and curb (if necessary) the employee’s behavior directly but the depositary bank–which actually handles and allegedly examines checks–is not held to a similar standard, even though it would arguably have a better chance to examine a check for forgery or irregularities. This is an odd guideline, since the drawee bank is the one releasing funds and therefore on the hook, but such are the rules.

In short, the only checks that First American will have to refund to Qatar are those with “For Deposit Only” endorsements which First American deposited into any account other than Qatar’s, including any “For Deposit Only” checks that a bank representative may have asked Salous to endorse with an account number (even if he wrote his own account number). If Salous placed his own account number on those checks in advance, then the banks are off the hook for any of Qatar’s embezzled funds represented by those particular checks.

 

References

Twomey, D. P., and Jennings, M. M. (2011) Anderson’s Business Law and the Legal Environment. Retrieved from http://digitalbookshelf.southuniversity.edu

USLegal. (2012). Fraudulent Conversion Law & Legal Definition. Retrieved from http://definitions.uslegal.com/f/fraudulent-conversion/

USLegal. (2012). Civil Causes of Action – Conversion Law & Legal Definition. Retrieved from http://definitions.uslegal.com/c/civil-causes-of-action-conversion/

Cudahy, Circuit Judge (United States Court of Appeals, Seventh Circuit). (1993). Western Assurance Co. v. Star Financial Bank of Indianapolis, 3 F.3d 1129 (7th Cir.1993). Retrieved from http://openjurist.org/3/f3d/1129/western-assurance-co-inc-v-star-financial-bank-of-indianapolis

Wilkins, Circuit Judge (Supreme Judicial Court of Massachusetts, Suffolk). (1962). Stone & Webster Eng’g Corp. v. First Natl. Bank & Trust, 184 NE 2d 358. Retrieved from http://scholar.google.com/scholar_case?case=7544253803203684392&q=Stone+%26+Webster+Eng%27g+Corp.+v.+First+Nat%27l+Bank+%26+Trust+Co&hl=en&as_sdt=2,11&as_vis=1

Drier, Supreme Court Justice (Superior Court of New Jersey, Law Division). (1979). Kraftsman Container Corp. v. United Counties Trust Co., 169 N.J.Super. 488, 404 A.2d 1288, 1291 (Law Div. 1979). Retrieved from http://www.leagle.com/xmlResult.aspx?xmldoc=1979657169NJSuper488_1600.xml&docbase=CSLWAR1-1950-1985

Kaye, Judge (Court of Appeals of the State of New York). (1989). Prudential-Bache v. Citibank, 73 NY 2d 263 – NY: Court of Appeals 1989. Retrieved from http://scholar.google.com/scholar_case?case=4563867008960507921&q=Prudential-Bache+Sec.,+Inc.+v.+Citibank&hl=en&as_sdt=2,11&as_vis=1

Mann, R. A. & Roberts, B. S. (2010). Essentials of Business Law and the Legal Environment. Retrieved from http://books.google.com/books?id=sFFR3y510R0C&pg=PA437&lpg=PA437&dq=Qatar+v.+First+American+Bank+of+Virginia,+1995&source=bl&ots=If8PqNYmnx&sig=s7363hHs53IjES6TR5PC-aBDWqA&hl=en&sa=X&ei=Y6CAUL6uF4zXsgadyoHYAg&ved=0CEkQ6AEwBA#v=onepage&q=Qatar%20v.%20First%20American%20Bank%20of%20Virginia%2C%201995&f=false

Ellis, District Judge (United States District Court, E.D. Virginia, Alexandria Division). (1995, April 4). State of Qatar v. First American Bank of Virginia, 880 F. Supp. 463 – Dist. Court, ED Virginia 1995(MEMO) [a.k.a. “Qatar I”]. Retrieved from http://scholar.google.com/scholar_case?case=2348881501872498088&q=Qatar+v.+First+American+Bank+of+Virginia,+1995&hl=en&as_sdt=2,11&as_vis=1#[8]

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA, ALEXANDRIA DIVISION. (1995, May 3). STATE OF QATAR v. FIRST AMERICAN BANK OF VIRGINIA. Retrieved from http://va.findacase.com/research/wfrmDocViewer.aspx/xq/fac.19950503_0000056.EVA.htm/qx

Ellis, District Judge (United States District Court, E.D. Virginia, Alexandria Division). (1995, May 3). The STATE OF QATAR, et al., Plaintiffs, v. FIRST AMERICAN BANK OF VIRGINIA, d/b/a First Union National Bank of Virginia, et al., Defendants. (MEMO). Retrieved from http://scholar.google.com/scholar_case?case=1102569369018879687&q=Qatar+v.+First+American+Bank+of+Virginia,+1995&hl=en&as_sdt=2,11&as_vis=1

 

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