Civil Liability for Check Forgeries in Colorado
| Publication year | 1987 |
| Pages | 959 |
1987, June, Pg. 959. Civil Liability for Check Forgeries in Colorado
The scenario is altogether too familiar for many small business owners. An employer is shocked to discover that a trusted bookkeeper has forged the employer's name on various company checks. The employer feels betrayed, confronts the dishonest employee with the forgeries, and demands to be repaid. The remorseful employee agrees to pay back the amounts fraudulently obtained and perhaps even pays a portion of the total sum owed before becoming unable or unwilling to make any further payment. Seeking another source of recovery, the employer turns to the bank which honored the forged checks.
However, the employer may be surprised to find that because of the partial restitution received from the former employee, the employer may be barred, under the election of remedies rationale, from pursuing recovery from the bank. The employer also may find that certain notification/limitation periods have expired or that the employer's own negligence may supersede that of the bank. Either of these will preclude the employer from asserting the forgeries against the bank.
This article focuses on the respective rights and liabilities of a bank and its customers concerning the forgery of checks. It also explores the remedies and defenses available to both such parties in the event the forgeries are asserted against the bank or the forger.(fn1) The article is directed not only to the practitioner who specializes in the law of commercial paper, but also to those who handle the general affairs of small businesses.
Articles 3 and 4 of the Uniform Commercial Code ("Code")(fn2) govern commercial paper, bank deposits and collections and thus provide the framework for this analysis. The Code sets forth a parallel series of obligations of banks and their customers to prevent the forgery of checks. Failure by either party to satisfy its respective obligations with regard to a forged check may result in that party being held liable for any subsequent loss. In so providing, the Code has adopted a theory that where one of two innocent persons must suffer by reason of the misconduct of a third, the person whose act, omission or negligence facilitates such misconduct should bear the resulting loss.(fn3)
CRS § 4-3-401(1) provides that "[n]o person(fn4) is liable on an instrument unless his(fn5) signature properly appears thereon."(fn6) Thus, an "unauthorized signature"(fn7) is wholly inoperative as the signature of the person whose name is signed.(fn8) Moreover, the Code provides that a bank may charge against its customer's account only "properly payable" items.(fn9) The Code does not state specifically a customer's remedy in the event a bank improperly debits the customer's account pursuant to a forged check. However, the negative implication of CRS § 4-4-401(1) appears to give the customer a right that the bank recredit the account in such an instance. Consequently, when a bank debits a customer's account pursuant to a forged check, it breaches its agreement with the customer and will normally be liable to its customer for the amount debited.(fn10)
However, the Code also provides that a person may (1) ratify the unauthorized signature or (2) be precluded from denying it.(fn11) Moreover, it has been held in Colorado that a customer has no absolute right to the recrediting of the account and that a bank may assert defenses to a recrediting claim.(fn12) Consequently, the issues that must be addressed in connection with the potential liability of a bank with respect to a forged check are (1) whether the customer subsequently ratified the forged signature either expressly or by operation of law under the election of remedies doctrine, and (2) whether the customer otherwise is precluded from denying such signature.
An unauthorized signature may be ratified by the named party.(fn13) The meaning of ratification for purposes of the Code is similar to its general meaning in the law of agency.(fn14) Ratification is defined as "the affirmance by a person of a prior act which did not bind him but which was done, or professedly done on his account, whereby
It has been held when a bank customer elects as a course of action to pursue recovery from the forger, the customer may impliedly ratify the bank's payment to the forger under the election of remedies doctrine.(fn18)
For example, in United States Fidelity & Guaranty Co. v. Fidelity National Bank & Trust Co.,(fn19) a construction company discovered that its payroll clerk was embezzling the funds represented by the paychecks of former employees. In this forged endorsement case, the court held that upon discovery of the embezzlement, the company had two available remedies, either (1) demand that the bank credit its account with the funds wrongfully debited therefrom on the theory that the bank paid out its money and not that of the construction company, or (2) affirm the act of the bank in paying out the money on the forged endorsements and, upon the theory that the payroll clerk had the company's money, pursue the payroll clerk to obtain the return of the embezzled funds. The court held further that these two remedies were inconsistent with each other and the choice of one would preclude subsequent resort to the other under the election of remedies doctrine.(fn20)
Similarly, in V.H. Juerling & Sons, Inc. v. First National Bank,(fn21) a bank customer brought suit against its bank for the recovery of money paid by the bank pursuant to various checks forged by a dishonest bookkeeper. Prior to the institution of its action against the bank, the customer had confronted the bookkeeper who admitted the forgeries and agreed to pay back the sums fraudulently obtained. As an initial partial payment of this sum, the bookkeeper deeded to the company her residence and turned over certain personal property she had purchased with the funds derived from the forged checks. No further payments were made by the bookkeeper, causing the customer to turn to the bank fo the amounts debited to its account pursuant to the forged checks.
In rejecting the customer's complaint against the bank, the court held that because the customer did not properly examine its cancelled checks as they were returned by the bank, the customer was guilty, as a matter of law, of such negligence as to constitute a ratification of the bank's actions in paying the forged items.
In discussing the election of remedies issue, the court found that the general rule was that an election of remedies is not binding on a party unless the remedy chosen has been prosecuted to a conclusion and judgment obtained. Consequently, the court first noted that the general rule sustained the customer's position that it was not estopped from suing the bank, despite its previous election to pursue the bookkeeper. However, the general rule did not contemplate a situation like the one at hand where the customer had received a benefit as the direct result of a choice of one remedy.
The court noted that the customer first turned to the bookkeeper and received partial payment of the sums fraudulently obtained by the bookkeeper. Because the bookkeeper did this voluntarily, the customer was not required to prosecute to judgment a civil action against her for recovery of these sums. Therefore, the court held that the fact that the customer derived a "substantial benefit" from its election to recover from the bookkeeper before it pursued another remedyagainst the bank distinguished this case sufficienttly from those from those giving rise to the general rule.
The court concluded that the customer's receipt of partial payment from the bookkeeper constituted a ratification of the bank's action in paying the sums to her. The court further held that the customer, having chosen to proceed against the bookkeeper and having received partial restitution from her, made its election of remedies, and, having benefitted from its election, was estopped from pursuing another remedy against the bank.(fn22)
This analysis was expressly rejected in Hennesy Equipment Sales Co. v. Valley National Bank,(fn23) which involved a bookkeeper who forged checks drawn on her employer's account. The customer discovered these forgeries, terminated her employment, brought suit, and obtained a partial satisfaction of the resulting judgment. The customer subsequently filed suit against the bank seeking to recover the balance of its losses, alleging that there were unauthorized deductions from its account.
In upholding the customer's action against the bank, the appellate court stated that the majority rule seems to provide that a suit to judgment against a forger precludes a subsequent action against the bank. The theory is that a course of action against the bank is based on an assumption that the bank paid out the customer's money, while a suit against the forger is based on the inconsistent assumption that the forger has obtained the victim's money. Consequently, the majority view holds that a suit against a forger on such an assumption constitutes an implicit ratification of the wrongful payment by the bank.(fn24)
However...
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