1973, October, Pg. 17. The Forgotten Commandment: Know Thy Indorser.

• Author: by Norman R. Helwig

2 Colo.Law. 1

The Colorado Lawyer

1973.

1973, October, Pg. 17.

The Forgotten Commandment: Know Thy Indorser

17Vol. 2, No. 12, Pg. iThe Forgotten Commandment: Know Thy Indorserby Norman R. HelwigSooner or later most practicing attorneys are confronted with the problems arising from forged or unauthorized indorsements on checks. Although supposedly we are moving toward a checkless society,(fn1) the volume of checks in use continues to increase each year. Consequently, the indorsement dilemma may be with us for some time.

Bankers are shocked at the law's sometimes callous disregard for the realities of modern-day banking procedures, and bank attorneys fidget as they advise their clients that the law requires them to do something they cannot possibly do. The banks involved in the check collection process play a continual game of trying to shift the loss to one another, and the customer is left with a bewildering assortment of remedies and potential defendants.

The ProblemThere are two ways in which the problem can arise. In each situation, the indorsement of at least one of the payees has been forged or is unauthorized.(fn2) In the first instance, the drawer is usually required to deliver another check to the intended payee, and the drawer then wants to know whom he can sue. The second situation arises where the payee has been unable to recover against the drawer and is, therefore, cast in the role of a plaintiff against one or another of the banks in the collection process.

In each situation suit may be brought against the payor bank, the collecting bank or both. The payor bank is usually the drawee bank and is defined in Article 4 of the Uniform Commercial Code (the Code) as the bank where "an item is payable as drawn or accepted."(fn3) The collecting bank is usually the bank where the check was initially deposited, although the definition in the Code is somewhat more broad.(fn4)

Depending on whether you represent the drawer or the payee and depending on which bank is sued and when, a variety of results may be obtained. This article delineates the various possibilities.

Suit by the DrawerAgainst the payor bank. Assuming that the drawer has complied with his duty to inspect and promptly report any unauthorized signature to his bank,(fn5) he can bring an action to compel his bank (payor bank) to credit his account with the amount of the unauthorized payment. This is based on the Code rule that a bank may charge its customer's account only for those items which are "properly payable."(fn6) The payor bank, of course, has

18recourse against all prior banks in the chain of collection based upon their warranties of title and genuineness of indorsements.(fn7)

An exception exists in the situation where the drawer gives the check to a person whom he thinks is the intended payee, even though he has been deceived.(fn8) Absent this, however, the drawer can recover from the payor bank,(fn9) since a bank paying a check with a forged indorsement in effect in paying an unindorsed check.(fn10)

Against the depositary (collecting) bank. Since the depositary and collecting banks give warranties to each successor bank in the check collection process, it seems more convenient and less circuitous to simply sue the depositary (collecting) bank directly. However, this is easier said than done.

One of the first post-Code cases to arise on this subject was Stone & Webster Engineering Corp. v. First National...