Plaintiff Kraftsman Container Corporation (customer) brought this breach of contract action against United Counties Trust Company (bank), alleging that the bank was negligent in cashing checks drawn on the customer's checking account at the bank. Defendant bank has moved for summary judgment based upon provisions of the Uniform Commercial Code (U.C.C.). The pivotal issue is one of first impression in New Jersey.
The facts are uncontroverted. Plaintiff maintained a checking account with defendant bank. The customer's treasurer, who also acted as bookkeeper, was authorized to draw and sign checks on behalf of the customer. Over a four-year period ending in December, 1975, the treasurer drew and signed over 100 checks payable both to fictitious parties and to actual creditors of the customer. He retained the checks and then cashed them at the bank, converting the funds to his own use. The checks ranged in amounts from $200 to $3,000, with the sum of the embezzled funds totaling $46,714.28. In most instances the treasurer indorsed the checks, usually illegibly, although the bank's tellers cashed some of the checks without any indorsement. It was the normal procedure of the bank to require that any party cashing a check indorse it, but the tellers did not obtain the treasurer's personal indorsement, nor did they make any inquiry regarding any of the illegible or missing payee indorsements. The customer had employed accountants throughout the four-year period to review its cancelled checks and the customer's monthly bank statements, but the scheme remained undetected for four years.
The bank claims by way of the present motion that it is shielded from liability by the terms of the U.C.C., specifically N.J.S.A. 12A:3-405(1)(b). Plaintiff responds that the bank's failure to exercise reasonable care in guarding against improper payment of the checks renders the bank liable for the amount embezzled. The application of a "reasonable care" negligence standard to a bank in a
fictitious-payee indorsement case is the novel proposition urged upon this court.
Articles 3 and 4 of the U.C.C., N.J.S.A. 12A:3-101 et seq. and 4-101 et seq. set forth the duties, rights and liabilities of banks and their customers concerning commercial paper. Under § 4-401(1)*fn1 a bank may charge a customer's account only for checks which were properly payable by the bank. Wrongful payment by the bank renders it liable to the customer, who must be reimbursed. This broadly defined duty of the bank is modified by other provisions which define the obligations of the customer. Section 3-406 precludes a customer from claiming wrongful payment when its own negligence has substantially contributed to the making of a material alteration or an unauthorized signature. The customer is required by § 4-406 (1) to (3) to be reasonably careful and prompt in examining the periodic bank statements and cancelled checks to discover and report alterations or the unauthorized use of its signature. Failure of the customer to discharge these duties may relieve the bank from liability under § 4-406(2) and (3).
The customer acknowledges that its treasurer was authorized to draw and sign its checks. Therefore none of the drawer's signatures were unauthorized, and plaintiff cannot have been negligent in failing to discover an unauthorized signature. Section 3-406 is thus inapplicable, as are the provisions of § 4-406(1) to (3) which impose upon the customer the duty of discovering its own unauthorized signatures or alterations. The dispute here is over the relative duties of the parties regarding indorsements. The only reference to indorsements in § 4-406 is found in subsection (4), where the time limitation for "asserting against the bank such unauthorized signature or indorsement" is set at three years from the availability to the customer of
the relevant bank statement and checks, "Without regard to care or lack of care of either the customer or the bank."*fn2
Liability for payment on a forged indorsement is treated by the U.C.C. as a separate concept. The basic rule is that a bank which pays a check on a forged indorsement is liable, since a forged indorsement is wholly inoperative as the signature of the actual payee (§ 3-404), and is thus not properly payable under § 4-401. A check validly issued but wrongfully paid by the bank on a forged indorsement entitles the customer to a credit. The commitment of the U.C.C. to finality, Perini Corp. v. First Nat'l Bank of Habersham Cty., Ga. , 553 F.2d 398, 21 U.P.P. Rep. 929 (5 Cir. 1977), reh. den. 557 F.2d 823 (5 Cir. 1977), is manifested by allocating the forgery loss to the bank.
The risk of loss may shift. Section 3-405 deems effective an indorsement by anyone in the name of a fictitious payee.*fn3 The treasurer in the instant case, drawing and signing checks ...