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#91725 - 06/26/03 05:46 PM Forged Endorsement Checks
Hello Offline
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Hello
Joined: Jun 2003
Posts: 26
I sent a claim to Bank “A” for reimbursement on forged endorsement checks against a corporate account. The claim submitted to bank “A” involved numerous checks. All checks were made payable to different employees within the corporation and the person who signed the check was an authorized signer for the company. The maker signed the checks presuming they were for the benefit of the employees, but the corporate accountant never gave those checks to the employees, but instead endorsed and cashed the checks through his or her own personal account.

Bank “A” returned the claim to us “Unpaid” due to section 3-405 (Employers Responsibility for Fraudulent Endorsement by Employee). I disagree with this decision, because the authorized checks were for the benefit of the employees. Additionally, at the time of deposit, bank “A” guaranteed endorsements of all items presented to their bank.

Is my belief incorrect and/or do I have another course of action in trying to recover funds for this claim?

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#91726 - 06/26/03 05:54 PM Re: Forged Endorsement Checks
111 Offline
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111
Joined: Jun 2003
Posts: 484
Bank A appears to be correct:
"Revised Article 3 also makes an employer liable for the fraudulent endorsement by a "responsible" employee, that is, an employee entrusted with responsibility with respect to the instrument. [15] Thus, if an employee responsible for processing incoming checks forges the employer's name on a check made payable to the employer and absconds with the proceeds, the resulting loss will fall upon the employer not the bank. [16] As explained in the official comments to this UCC provision, "the employer is in a far better position to avoid the loss by care in choosing employees, in supervising them, and in adopting other measures to prevent forged endorsement on instruments payable to the employer or fraud in the issuance of instruments in the name of the employer." [17] Again, however, if the bank fails to exercise ordinary care in paying the check, the loss will shift back to the bank to the extent that this failure contributed to the loss."

You should not take a loss - the corporation needs to step up to the plate on this.

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#91727 - 06/26/03 09:30 PM Re: Forged Endorsement Checks
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 47,517
Bloomington, IN
I'm not an expert in UCC and my statments are without research, but I'm not sure if your cite is correct Tenacious.

Your cite references incoming checks payable to the employer. Hello's post references that this person "forged" employee names (on checks payable to the employee by the employer) not the employer's name.

I think this may warrant more research.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#91728 - 06/26/03 09:53 PM Re: Forged Endorsement Checks
111 Offline
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111
Joined: Jun 2003
Posts: 484
That's probably true, but further research may result in the same thing - that the corporation that employees the accountant has the liability. Looks like the attorney's will be involved, so double the out-of-pocket loss potential.

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#91729 - 06/26/03 10:12 PM Re: Forged Endorsement Checks
Hello Offline
Junior Member
Hello
Joined: Jun 2003
Posts: 26
We are not in a loss position for the fraudulent checks, our client is. We are trying to collect funds on behalf of our client. Our liability falls on the maker’s signature, which was valid. Bank “A” responsibility is the endorsement on the back of the check. The checks were not payable to Bank “A” customer. By Bank “A” accepting third-party checks from their customer, Bank “A” increased their liability by guaranteeing the endorsement at the time of accepting the deposit.
Shouldn’t they take some type of responsibility for this too? Or am I still wrong and our client is just at a loss?

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#91730 - 06/27/03 01:37 PM Re: Forged Endorsement Checks
John Burnett Offline
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Cape Cod
I'm in the TENACIOUS camp on this one. §3-405 deals both with forged employer endorsement on incoming instruments and a forged endorsement "purporting to be that of the person identified as payee" on instruments issued by the employer. Paragraph (a)(3) of 3-405 is pretty all-inclusive when describing the types of persons whose actions are presumed to be the responsibility of the employer, and I think the accountant in this case falls squarely into that list.

The bank that accepted these checks for deposit after the endorsements had been forged would be responsible for the endorsements, but for the provisions of 3-405. But that bank rightly refuses to pay your bank since it believes you have no standing to collect from them.

It's the employer's responsibility under 3-405 to try to collect from any person who failed to exercise ordinary care in paying or taking the instrument for value. The employer could try to use that provision of 3-405(b) against either your bank or the bank that took the checks for deposit, but I would not bet on the employer's chances for success in that suit.

The employer's obvious target is the dishonest accountant, and that's where the suit ought to be directed. Of course, odds are the accountant will have squandered the funds and will be judgment-proof.
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John S. Burnett
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#91731 - 06/27/03 03:58 PM Re: Forged Endorsement Checks
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 47,517
Bloomington, IN
John, good explanation.

Tenacious, I wasn't saying you were wrong I was just trying to point out that as I read your post, it seemed to apply to instruments forged by an employee payable to the employer and I felt further research may be in order. I don't deal with UCC unless I just have to, and then it usually has to do with Loans/liens not checks/deposits.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#91732 - 07/09/03 12:17 AM Re: Forged Endorsement Checks
Anonymous
Unregistered

I have decided to resubmit the claim to bank “A” and refer them back to section 3-405 (b). In reviewing this section of the UCC the depository does have some responsibility pertaining to this fraud. If bank “A” exercised ordinary care, then fraud could have been prevented or reduced at least to a bare minimum. Bank “A” accepted 25-30 items, totaling a little over $100K, in which none of the items were in the name of their customer. During verbal conversation they asked me to resubmit the claim in writing, detailing my arguments, and an amount that I see as fair for settlement.

My argument:
1. The items were third party checks and at the time of acceptance, the depository bank guaranteed the endorsement.
2. Under UCC 3-405 (b) the depository bank did not exercise ordinary care, which aided in the result of fraud.
3. They are responsible up to three years for forged endorsements

Do I have any other arguments?


Settlement:

I do agree that the employer is responsible for not auditing their internal controls to control internal fraud. I also agree that the depository bank should take responsibility, per my arguments above. The checks were issued between 10/01 thru 9/02. Should I ask for settlement in full or should I request for half.

Personally- I am very determined individual and never ask for less . I think I have a good case. What do you suggest?


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#91733 - 07/09/03 03:29 PM Re: Forged Endorsement Checks
John Burnett Offline
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John Burnett
Joined: Oct 2000
Posts: 40,086
Cape Cod
I'll remind anyone reading this that I'm not an attorney, but I've been accused of thinking like one.

I see that Bank A has suggested they might offer a settlement, depending on Anon's arguments. That, at least, is a positive outlook. While I agree that Bank A might be liable to the employer/drawer of these checks under their obligation to exercise ordinary care, I wonder if Anon's bank is creating a swamp for themselves here.

Assuming that Bank A is willing to accept some of the liability for these forged endorsements, Bank A will want some form of indemnity to protect itself against future claims on the items. Anon's bank is not in a position to offer that indemnity, IMO, since the right to these future claims isn't theirs; it belongs to the employer/drawer. So if Anon's bank issues an indemnity, it might be back in the swamp if employer/drawer decides to sue Bank A.

Anon's bank could also be back in the fens if it convinces its customer to sign an indemnity agreement in favor of Bank A. Tenacious counsel (not in all caps, so not a reference to TENACIOUS) for depositor/maker might argue that Anon's bank offered legal advice to depositor's detriment.

My advice is to consult with counsel before pursuing Bank A on this. I applaud Anon's determination to assist a customer, but wonder if it might come back to bite Anon's bank in the assets.
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John S. Burnett
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Fighting for Compliance since 1976
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