This appeal is taken from an order of dismissal entered after Security Pacific National Bank's (hereinafter Security) general demurrer to Fireman's Fund Insurance Company's (hereinafter Fireman's) second amended complaint was sustained without leave to amend. Plaintiff-appellant Fireman's instituted these proceedings against defendant-respondent Security, among others, to recover damages in the amount of a $25,000 check deposited by one of the latter's customers, Jason A. Keyes (hereinafter Keyes), into his account having earlier forged one of the drawer's signatures on a check drawn from the account of Daniel Reeves & Company (hereinafter Reeves) at Banco Popular De Puerto Rico (hereinafter Banco).
Fireman's contends that it has pleaded sufficient facts to allege a cause of action for common law negligence, as well as breach of certain warranties found within divisions 3 and 4 of the California Uniform Commercial Code (hereinafter Commercial or Com. Code).
The problem confronting us arose when Keyes absconded with $25,000. The check involved was prepared by Keyes, whose signature was one of two required on checks drawn on the Reeves account at Banco. After signing his own name to the check, Keyes forged the other required signature and the check was made payable to the order of "Security Pacific National Bank A/C No. 260 049 569 GC Associates."
At or about the same time the forgery was committed, Keyes opened an account at Security in the name of G.C. Associates. The account number was No. 260 049 569.
When Security forwarded the check for payment to Banco, Banco paid Security and debited the Reeves account. Although Reeves has demanded that its account be recredited, Banco continues to refuse to do so. In the interim, Fireman's Fund paid Reeves the $25,000 on its Fidelity bond and now seeks reimbursement from Security.
The code provides that as between the drawee bank and the depositor, losses from a forged or unauthorized signature are borne by the bank
We conclude that Fireman's is suing the wrong party.
This summation is insufficient, however, to satisfy Fireman's contentions:
In its second amended complaint, Fireman's sets forth seven separate causes of action. Three of the causes of action were against respondent Security. The others are against other parties not involved in this appeal. In its fifth cause of action, Fireman's alleged that Security was negligent in its handling of the check in that it failed to "adhere to the reasonable commercial standards of the banking business in the community," and also violated its own standards as set forth in its operations manual.
In its sixth cause of action, it alleged that Security, in its capacity as joint payee of the forged check, breached its warranty of good title to Fireman's insured in that it did not have good title to the instrument and was not acting on behalf of a person who did have good title to the instrument.
In its seventh cause of action, Fireman's alleged that Security, in its capacity as collecting bank, breached its warranty of good title to
Fireman's did not discuss its sixth or seventh causes of action in either its opening or reply briefs, except most generally. However, a general demurrer will not be sustained if the pleading, liberally construed, states a cause of action on any theory. (Minsky v. City of Los Angeles (1974) 11 Cal.3d 113, 118 [113 Cal.Rptr. 102, 520 P.2d 726].) Thus, these causes of action are properly before this court.
Does appellant's complaint state a cause of action against Security?
1. Has Fireman's, in its sixth and seventh causes of action, set forth facts sufficient to constitute a cause of action with respect to respondent Security for breach of warranty of good title, or otherwise?
Fireman's sixth cause of action is based upon warranties of presentment and transfer as provided for in section 3417, subdivision (1)(a), of the Commercial Code. That section, which is contained within division 3 of the code governing "Commercial Paper" (Com. Code, § 3101), provides: "(1) Any person[
Fireman's seventh cause of action states that Security is liable for breach of warranty of title under section 4207, subdivision (1)(a), within division 4 of the Commercial Code governing "Bank Deposits and Collections" (Com. Code, § 4101), which provides: "(1) Each customer or collecting bank who obtains payment or acceptance of an item and each
Fireman's has pleaded both of these sections, despite the similarity of their provisions,
This variance in allegations apparently stems from Security's allegedly being named payee on the face of the check in addition to acting as the conduit through which funds were collected on behalf of its customer's (Keyes) account. (See Com. Code, § 4105.)
While we recognize the permissibility of pleading "inconsistent counts" (3 Witkin, Cal. Procedure (2d ed. 1971) Pleading, §§ 290-292, pp. 1965-1967), it is our conclusion that Security is precluded from being a "payee" in the instant case. (See infra.)
In any event, for our purposes, the warranties of sections 3417, subdivision (1)(a) and 4207, subdivision (1)(a) are identical in that they both present the issue, namely, whether Security breached a warranty of good title under the facts of the case at bar.
Although it had been the general view that section 4207 did not specifically provide for a direct cause of action by a drawer
Fireman's, then, may rely on the warranty of good title provided by sections 3417 and 4207, but do the alleged facts, if assumed to be true, constitute a breach of said warranties?
Fireman's alleges that Keyes was a "co-partner and agent" of G.C. Associates, with authority as signator on account No. 260 049 569. From these allegations we conclude that Keyes did have such authority to indorse the check in question and that such indorsement was valid.
We hold, therefore, that Fireman's has failed to state a cause of action against Security under either section 3417 or section 4207 of the Commercial Code, and that the trial court's dismissal of Fireman's sixth and seventh causes of action was proper.
2. Does a noncustomer drawer whose signature was forged on a check by an employee (with authorization to sign in his own capacity) have a right of action against a bank, functioning in the alternative as either a payee or collecting bank, whose alleged negligent handling of the check aided the forger in collecting the proceeds from the drawer's account at the drawee bank?
Although the legal conclusion that "a duty" exists is neither necessary nor proper in a complaint, facts which cause it to arise (or from which it is "inferred") are essential to the cause of action. (Palmer v. Crafts (1936) 16 Cal.App.2d 370, 374 [60 P.2d 533].) The present California test for negligence liability is much broader and based simply on foreseeability of the risk and proximate cause. (Dillon v. Legg (1968) 68 Cal.2d 728, 740 [69 Cal.Rptr. 72, 441 P.2d 912, 29 A.L.R.3d 1316].) It was the application of this test, "foreseeability of the risk," which led the court, in Sun 'N Sand, supra, 21 Cal.3d 671, at page 695, to find the existence of a duty on the part of a collecting bank with regard to its handling of a noncustomer drawer's check made payable to the bank, but negotiated by a third party for his own benefit.
Furthermore, the Sun 'N Sand court rejected the bank's contention that section 1103 disallowed a cause of action for common law negligence under the facts of that case. (Id., at p. 696.)
Like the case at bar, Sun 'N Sand involved the question of the right of an employer to recover funds embezzled by an employee through the manipulation of company checks. The employee in that case, Eloise Morales, prepared checks for signature by a corporate officer. Her scheme was a simple one: over a three-year period she prepared a series of checks payable to a bank (UCB) at which she deposited the checks into her personal account, after obtaining the necessary authorized signatures. The officer signing the checks, did so under the mistaken belief that they represented sums his company owed to the bank. Such debts, however, did not in fact exist. The checks were originally made out in small amounts. After being signed, however, employee Morales would alter them, increasing the amount of each check to several thousand dollars. (Id., at p. 678.)
The employer based one of his causes of action against the bank on the theory of negligence — on the allegation that "[a]lthough UCB was the named payee, it `caused or permitted' the proceeds of the checks to be deposited in" Morales' personal account which she maintained at UCB. (Id.) As in the case at bar, UCB (the collecting bank) presented the checks to the employer's bank (drawee bank) and the latter paid them after charging Sun 'N Sand's account for their face amounts. Again, as
In reversing the lower court's judgment (order of dismissal), the Supreme Court found that the allegation stated a cause of action for negligence. (Id., at p. 703.) The court, however, was very careful to limit the circumstances upon which such a duty to make inquiry arises. Relying upon the principle of Pacific Finance Corp. v. Bank of Yolo (1932) 215 Cal. 357 [10 P.2d 68], reaffirmed in Pacific Indemnity Co. v. Security First Nat. Bank (1967) 248 Cal.App.2d 75 [56 Cal.Rptr. 142],
The court also rejected UCB's contention that section 1103
The factual pattern in Sun 'N Sand is somewhat similar to that of the instant case; they are, however, critically different in two respects: First,
In order to determine whether Security's duty, if any, can rest upon the "foreseeability of the risk" test, we must first clarify in what capacity Security is to be held.
A. Was Security a payee?
Fireman's specifically alleges that the check in question could be construed to be payable to Security itself, and that for the purpose of the demurrer this allegation must be accepted as true.
Fireman's contends that because Security is not specifically designated as agent (Com. Code, § 3117, subd. (a)), or as fiduciary (Com. Code, § 3117, subd. (b)) that it must therefore be an "unconditional payee" under Commercial Code section 3117, subdivision (c).
However, a review of Commercial Code section 3117, Uniform Commercial Code Comment 3, which expands on subdivision (c),
The additional words on the payee line of the forged check — "A/C No. 260 049 569 G.C. Associates" — do not merely "describe" Security.
The purpose of section 3117, subdivision (c), is two-fold: first, that "the person named [as payee] may negotiate ... the instrument if he is otherwise identified, even though he does not meet the description"; and, second, that "[a]ny subsequent party [e.g., indorsers, or depository, collecting or payor banks] dealing with the instrument may disregard the description and treat the paper as payable unconditionally to the individual...." (Com. Code, § 3117, U. Com. Code Com. 3.)
It is clear from this comment that the purpose and intended practical effect of section 3117 is to protect both the payee, in his right to negotiate the instrument, and the subsequent transferor, from being misled. Its purpose is not to protect the drawer of the check.
Few reported cases have involved interpretation of Commercial Code section 3117, subdivision (c), and all are clearly distinguishable from the case at bar.
In Frost National Bank v. Nicholas and Barerra (Tex.Civ.App. 1976) 534 S.W.2d 927, the court found section 3117, subdivision (c), to be applicable where checks had been drawn naming as payee "Depository Account No. 607." Although the court held that the words "No. 607" merely amounted to "words of description," it based its conclusion upon facts which are not present in the case at bar. First, the number "607" was not an account number, and had been placed upon the check by the embezzler "to lend credence to [his] whole scheme." (Id., at p. 933.) Furthermore, there actually did exist an account called "Depository Account," and the deposit was made with preprinted deposit slips coded with the identifying account number and name.
In Swiss Baco Skyline Logging, Inc. v. Haliewicz (1977) 18 Wn.App. 21 [567 P.2d 1141], the court held that the designation "Emil Haliewicz, Swiss Baco Skyline Logging, Inc." on the check in question rendered Haliewicz (former president of Swiss Baco) the unconditional payee. However, in reaching its conclusion the court referred to the presence of the comma, separating the two parties, as introducing a "patent ambiguity" on the face of the instrument; and although the language admittedly was "not typical of instruments payable with words of description ...," based its finding upon evidence that "the parties responsible for this language intended the instrument to be payable to Haliewicz unconditionally." (Italics in original. Id., at p. 1147.)
The Sun 'N Sand court found that it was "UCB's conduct [italics in original] in crediting the embezzler's account with checks drawn payable to UCB that form[ed] the basis for relief [therein]." (21 Cal.3d 671, 693. Italics added.) The court further noted that a duty to make reasonable inquiries arose because the "`defendant's name as payee of the check indicated the drawer's intention to lodge the moneys in its custody and place them under its control, and nothing further than this was inferable from the language of the check.'" (Id., at p. 693, citing Pacific Finance Corp. v. Bank of Yolo (1932) 215 Cal. 357, 360-361 [10 P.2d 68], quoting Sims v. United States Trust Co. (1886) 103 N.Y. 472 [9 N.E. 605]. Italics added.) It is upon these facts that the court concluded that UCB had
Security not being a "payee" of the check in question, the issue then concerns itself with Security's status as a collecting bank and the significance of the check in question bearing a forged drawer's signature.
B. What, if any, is the liability of Security acting as a collecting bank, to a noncustomer drawer whose signature was forged on a check handled for deposit and presentment by Security in an allegedly negligent manner.
Fireman's contends that:
(1) Section 4202 of the California Commercial Code imposes a duty of due care on collecting banks in accepting checks for deposit and presentment, and that this duty runs to a noncustomer drawer.
(2) Neither existing case law nor the final payment rule as embodied in California Uniform Commercial Code section 3418 bars a drawer's direct cause of action for common law negligence against a collecting bank for its handling of a check bearing a forged maker's signature.
(3) To allow such a cause of action, if found not to be expressly barred, would not vitiate the policy of the final payment rule.
(4) The requirements of good faith and reasonable commercial standards imposed upon collecting banks by the code are breached by mere negligent acts; and
(5) Its second amended complaint alleges a negligent breach by Security of the above mentioned standards, and also a breach of its common law duty, sufficient to withstand a general demurrer.
In drafting the Uniform Commercial Code, its authors first delineated central "underlying purposes and policies," as a guide to aid in its interpretation. Section 1102, subdivision (2), states that:
"(2) [The] [u]nderlying purposes and policies of this code are
"(a) To simplify, clarify and modernize the law governing commercial transactions;
"(b) To permit the continued expansion of commercial practices through custom, usage and agreement of the parties;
"(c) To make uniform the law among the various jurisdictions."
They also directed that "[t]his code shall be liberally construed and applied to promote its underlying purposes and policies." (Com. Code, § 1102, subd. (1).)
In light of the above stated underlying purposes of the various sections of the code that are in contention:
1. Has Security breached a duty of care imposed upon it, as a collecting bank, pursuant to Commercial Code section 4202.
The responsibility of a collecting bank is set forth in Commercial Code section 4202, subdivision (1), which provides as follows:
"A collecting bank must use ordinary care in
"(a) Presenting an item or sending it for presentment; and
"(b) Sending notice of dishonor or nonpayment or returning an item other than a documentary draft to the bank's transferor after learning that the item has not been paid or accepted, as the case may be; and
"(c) Settling for an item when the Bank receives final settlement; and
"(d) Making or providing for any necessary protest; and
"(e) Notifying its transferor of any loss or delay in transit within a reasonable time after discovery thereof."
Fireman's contends that a duty of care is imposed on collecting banks pursuant to Commercial Code section 4202. In its general statement, Fireman's is correct; however, the presentment of the subject item is not in question in the case at bar. Presentment is made by a presenting bank at a place where the payor bank (Banco) has requested that presentment be made. (U. Com. Code, § 4204, subd. (3); Com. Code, § 4204, subd. (2).)
Fireman's cites in support of its contention Frontier Refining Co. v. Home Bank (1969) 272 Cal.App.2d 630 [77 Cal.Rptr. 641]. There the plaintiff-drawer brought an action against the defendant-payee bank for payment made by said bank on a check which was issued as a result of a mistake by the drawer. Although the court held that the collecting bank status did not apply, in that the check was made payable to the bank, it specifically noted that even as a collecting bank the defendant would not have been liable, since the duty of ordinary care imposed under section 4202 of the Commercial Code, subdivision (1)(a), does not create a duty of ascertaining whether or not a check was issued by mistake. (Id., at P. 636.)
Even viewing the receiving and initial processing of a check as part of the process of "presentment," such duties as imposed on a collecting bank by section 4202 of the code, when properly applied, should be imposed only by the owner of the instrument who initiates collection or by a prior collecting bank.
2. May Security avail itself of California Commercial Code section 3418, and if so, does this section prevent a drawer from bringing a direct suit against a collecting bank for negligence — expressly or impliedly?
It is worth repeating that, unlike Sun 'N Sand, supra, 21 Cal.3d 671, our case deals essentially with payment over a forged drawer's signature, and a collecting bank's liability to the noncustomer
This rule, first enunciated in Price v. Neal (1762) 3 Burr. 1354, is embodied in Commercial Code section 3418 (restating the rule of former Civ. Code, § 3143), which provides as follows: "Except for recovery of bank payments as provided in the division on bank deposits and collections (Division 4) and except for liability for breach of warranty on presentment under the preceding section, payment or acceptance of any instrument is final in favor of a holder in due course, or a person who has in good faith changed his position in reliance on the payment."
Before reviewing the meaning of this section and its applicability to the case at bar, it is essential to determine whether or not Security qualifies for its protection.
Under section 3418 payment or acceptance of an instrument is final in favor of a holder in due course, or in favor of "a person who has in good faith changed his position in reliance on the payment."
(12) Did Security in good faith change its position in reliance on the payment made by Banco?
Fireman's alleges that Security allowed Keyes to withdraw the $25,000 after it had received final payment. This satisfies the "reliance" requirement of section 3418. The determinative fact regarding the issue of
Was Security's reliance in good faith? California Uniform Commercial Code Comment 2 to section 3302 (delineating the meaning of "good faith" with regard to holder in due course status) refers to the term "good faith" as "honesty in fact in the conduct or transaction concerned." (Com. Code, § 1201, subd. (19).) It is of note that this comment continues as follows: "The presence of suspicious circumstances sufficient to put a reasonably prudent person on inquiry does not negative existence of good faith." (Italics added.)
Fireman's maintains, however, that even conceding the fact that Security has met the requirement of "honesty in fact," the qualification for protection under section 3418 regarding good faith requires a consideration of "negligence and all the circumstances surrounding the transaction" in question.
Admittedly, the code is in need of clarification as to its varying standards of negligence, but with regard to section 3418, Uniform Commercial Code Comment 4 (adopted from the official text) makes the criteria quite clear: "[This] section rejects decisions under the original Act permitting recovery on the basis of mere negligence of the holder in taking the instrument." This comment continues by concluding that the holder's negligence does not affect the finality of payment or acceptance unless "such negligence amounts to a lack of good faith ... or to notice under the rules (Section 3-304) relating to notice to a purchaser of an
Appellant cites section 3304 of the Commercial Code as providing that the purchaser of commercial paper has notice of a claim or defense if (subd. (1)(a)): "The instrument is so incomplete, bears such visible evidence of forgery or alteration, or is otherwise so irregular as to call into question its validity, terms or ownership or to create an ambiguity as to the party to pay; ..." (Subd. (4)(e)): "[A]ny person negotiating the instrument is or was a fiduciary."
Fireman's apparently is contending (1) that Security was put on notice of inquiry because of the purported "ambiguity" as to the party to be paid, and (2) that Security had a duty of inquiry because it purportedly had notice that the person negotiating the instrument was a fiduciary. Both contentions are without merit.
In the first instance, we have already concluded that the payee line was not "so irregular" as to call into question the validity of the instrument; and, secondly, Fireman's has misstated Commercial Code section 3304 with regard to its claim that a collecting bank has notice of a claim or defense when it has knowledge that the person negotiating an item is or was a fiduciary.
"(4) Knowledge of the following facts does not of itself give the purchaser notice of a defense or claim ... (e) That any person negotiating the instrument is or was a fiduciary." (Italics added.)
Even accepting the restrictive view of notice, as approved by Sun 'N Sand, we find that the alleged facts herein do not constitute such notice. Even if Security was aware that the item was being negotiated by a fiduciary, unless it took the item with knowledge of a breach of trust (there being no such allegation in the case at bar), or, at a minimum, without "objective indicia from which [it] could reasonably conclude that the party presenting the check [was] authorized to transact in the manner proposed," it was free to assume that the fiduciary was acting properly.
Unlike Sun 'N Sand, in which the defendant bank's "negligence derives from its failure to respond reasonably to the `notice' conveyed by ... suspicious circumstances," we find in the case at bar that there was no "notice" as defined in Commercial Code section 3304. (Id., at p. 697.)
Therefore, we conclude that Security, as both a holder in due course
Before turning to the consequences of such protection, we address ourselves to one final argument Fireman's makes in an attempt to preclude such coverage. Fireman's argues that even if more than "mere negligence" is required to deprive one of the availability of the section 3418 shield, the violation by Security of its own regulations may amount to "gross negligence." However, we note that a holder's good faith has been upheld despite violation of the holder's own managerial rules
The facts here are similar to those presented in Aetna Life & Casualty Co. v. Hampton State Bank (Tex.Civ.App. 1973) 497 S.W.2d 80, in which a drawee bank tried to recover on a forged check after payment to the collecting bank. The drawee bank argued that the collecting bank was liable to the drawee based on common law negligence. In rejecting this argument, and specifically referring to Uniform Commercial Code section 3418, the court made the following observations: "The code sweeps away all exceptions to the Price v. Neal rule and substitutes the more definite standard of good faith for the standard of ordinary care, which produced confusion and uncertainty. J. Brady, Bank Checks 469 (4th ed. H. Bailey 1969). Consequently, we find no merit in Hampton's argument, based on pre-code cases [dealing with negligence], that Hampton [the collecting bank] had a common-law liability to Northwest [the drawee bank] for negligence in failing to observe the prevailing banking practice of requiring a corporate resolution before permitting withdrawal from an account opened in a corporate name. Under § 3-418, common-law liability is excluded and the controlling question is whether payment of the check by Northwest to Hampton was `final'." (Id., at pp. 85-86.)
Likewise, Fireman's reliance on precode cases dealing with common law negligence is misplaced.
Moreover, even if notice of the reason-to-know type depends upon some grade of negligence or what is "commercially reasonable" (see, e.g., Von Gohren v. Pacific National Bank of Washington (1973) 8 Wn.App. 245 [505 P.2d 467]; Kaw Valley State Bank and Trust Company v. Riddle (1976) 219 Kan. 550 [549 P.2d 927]), the alleged facts of the instant case were not sufficiently suspicious that a duty to make reasonable inquiry arose. As Sun 'N Sand states "`the chief element in determining whether defendant owes a duty or an obligation to plaintiff is the foreseeability of the risk....'" (Sun 'N Sand, Inc. v. United California Bank, supra, 21 Cal.3d 671,
The key fact here is that there were two signatures on the check in question, only one of which was that of the fiduciary (Keyes). Even if Security had noticed, as alleged, that Keyes was a fiduciary and the named payee on the check (signator of the account to which the payee line was made out), Security could have relied upon the second signature as an assurance that no misappropriation or fraud was being conducted which would lead to a foreseeable risk to Fireman's. Security awaited final payment from Banco (whose duty it was to verify the signatures) before it released the $25,000 which the check represented. We find that the presence of the second signature, coupled with the fact that a specific name and account number was designated as payee of the check, satisfied the requirement stated in Sun 'N Sand that "[t]here must be objective indicia from which the bank could reasonably conclude that the party presenting the check is authorized to transact in the manner proposed." (Id., at pp. 695-696 of 21 Cal.3d.) It is only in the absence of such indicia that the bank "pays at its peril." (Id., at p. 696 of 21 Cal.3d.)
Noting that section 3418 articulates a loss distributive scheme that is applicable to the fact pattern as alleged herein (forged drawer's signature), we further find that this section displaces an action for common law negligence.
Only by the use of a negative inference can the language of section 3418 be said not to preclude an action by a drawer. However, "`[w]here a section is silent on a particular point, negative inference may be justified when the reason of the situation requires or justifies such an inference.'"
In Perini Corp. v. First Nat. Bank of Habersham County (5th Cir.1977) 553 F.2d 398, a federal court of appeals rejected plaintiff's claim that the final payment rule protects holders in due course only against subsequent claims of a drawee, and not those of a drawer. The plaintiff in Perini was a drawer who tried to bring a direct action for negligence against a collecting bank. The court noted that "[n]othing in the Code provide[d] [plaintiff with] an action against the collecting banks on the basis of [a] forged drawer's signature." (Id., at p. 416.) It further noted that the code, however, displaces common law causes of action only to the extent they are inconsistent with the provisions of the code,
This interpretation of the code is consistent with its underlying purpose to "simplify, clarify and modernize the law governing commercial transactions." (Com. Code, § 1102, subd. (2)(a).)
This interpretation is also in harmony with the finality policy which the drafter's recognize as the only valid modern basis for the rule of Price v.
Admitting these allegations as true for the purpose of ruling on the demurrer, we find that Fireman's has still failed in its attempt to state a cause of action for negligence.
While in some situations violation of a company rule may be used as evidence of breach of duty, it cannot be used to establish the existence of such a duty when contrary to both statutory and common law.
For the violation of a statute to create actionable negligence, the plaintiff must have suffered the type of harm sought to be prevented by the rule, and also be a member of the class of people for whose protection the rule was enacted. (Routh v. Quinn (1942) 20 Cal.2d 488, 491-492 [127 P.2d 1, 149 A.L.R. 215].) A self-imposed rule from a bank's internal operations manual would have even less effect than a statute.
Fireman's reliance on Commercial Standard Ins. Co. v. Bank of America (1976) 57 Cal.App.3d 241 [129 Cal.Rptr. 91], is of no avail. In that case the duty imposed upon the bank was based upon a contractual obligation.
We hold, therefore, that under the facts of this case a noncustomer drawer whose signature was forged on a check drawn upon his account is precluded, by divisions 3 and 4 of the California Uniform Commercial Code, from bringing a direct cause of action based upon statutory or
Our holding, however, does not go so far as to preclude a drawer's direct cause of action for common law negligence against a collecting bank for the negligent handling of a check bearing a forged indorsement in all cases. We note that such a cause of action is nowhere specifically prohibited by the language of the code.
While the underlying policy of section 3418 makes it clear that to allow a cause of action for negligence by the drawer against the collecting bank based on the latter's failure to ascertain whether the drawer's signature is forged would vitiate the final payment policy (Perini Corp. v. First Nat. Bank, supra, 553 F.2d 398), allowing a cause of action against a collecting bank for unreasonable conduct outside of the collection process, or for failure to detect a forged instrument, would not so impede the processing of check transactions as to vitiate the final payment policy of section 3418. In our view such a cause of action would comport with the modern objectives of the Uniform Commercial Code and the directives for its application as set forth in section 1102.
The final obstacle to such a plaintiff stating a cause of action for common law negligence might be the assertion of a failure to exercise a
In imposing liability for negligence upon UCB, the Sun 'N Sand court noted that "[t]he most important of these [policy considerations] were set forth in Rowland v. Christian (1968) 69 Cal.2d 108, 113 [70 Cal.Rptr. 97, 443 P.2d 561, 32 A.L.R.3d 496], and include[d] `... the foreseeability of harm to the plaintiff, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury suffered, the moral blame attached to the defendant's conduct, the policy of preventing future harm, the extent of the burden to the defendant and consequences to the community of imposing a duty to exercise care with resulting liability for breach, and the availability, cost, and prevalence of insurance for the risk involved.'" (Sun 'N Sand, Inc. v. United California Bank, supra, 21 Cal.3d 671, 695. See also Biakanja v. Irving (1958) 49 Cal.2d 647, 650 [320 P.2d 16, 65 A.L.R.2d 1358]; Commercial Standard Ins. Co. v. Bank of America (1976) 57 Cal.App.3d 241, 248 [129 Cal.Rptr. 91].)
This approach would also be consonant with California's "strong policy favor[ing] fault-based liability; negligent tortfeasors must compensate persons injured by their failure to exercise ordinary care. (Civ. Code, § 1714....)" (Sun 'N Sand, supra, at p. 698 of 21 Cal.3d.) In that both statutory and case law clearly place the burden of loss from a forged indorsement on the party who deals with the forger, the foreseeability of the risk to the drawer, if such checks are handled in a negligent manner, is therefore direct and immediate. The drawee bank, having no means by which to ascertain the validity of such indorsement, cannot prevent the ensuing loss if the indorsement happens to be forged. Therefore, "the chief element in determining whether defendant owes a duty or an obligation to plaintiff ... the foreseeability of the risk"
With regard to the instant case, however, we reiterate our holding that under these facts a noncustomer drawer whose signature was forged on a check drawn from his account is precluded by the California Commercial Code from bringing a direct cause of action against a collecting bank after final payment has been made.
The order of dismissal is affirmed.
Ashby, J., and Hastings, J., concurred.
A petition for a rehearing was denied November 8, 1978, and appellant's petition for a hearing by the Supreme Court was denied December 13, 1978.
"(1) Any unauthorized signature is wholly inoperative as that of the person whose name is signed unless he ratifies it or is precluded from denying it; but it operates as the signature of the unauthorized signer in favor of any person who in good faith pays the instrument or takes it for value." (Com. Code, § 3404, subd. (1).) Payment, therefore, was not in accordance with the drawer's instructions, since none were given. The payment violated the drawee bank's duty to charge its customer's account only for properly payable items.
The Supreme Court noted that the rule of California Mill Supply Corp., supra, (requiring the drawer to proceed against the drawee bank) was thought to be necessary because the "conceptual basis for [the collecting bank's liability] was an implied contractual warranty...." (Id., at p. 681.) Since this rule conflicted with the objective of avoiding multiple suits, the court reexamined it "in light of section 4207, which shifts the basis for imposing liability on the collecting bank from an implied contractual warranty to an explicit statutory warranty." (Id., at p. 681.) The court further noted that requiring the drawer to proceed against the drawee bank, and then the latter to proceed against the collecting bank, ran "`contra to the code's explicit underlying purposes "to simplify, clarify and modernize the law governing commercial transactions." (§ 1102, subd. (2)(a).)'" (Id., at p. 681, quoting from Cooper v. Union Bank (1973) 9 Cal.3d 371, 381-382 [107 Cal.Rptr. 1, 507 P.2d 609].)
"29.... [Security] owed a duty to plaintiff to use reasonable care in dealing with said check and proceeds thereof, and to adhere to the reasonable commercial standards of the banking business in the community.
"30. [Security], through the following acts or omissions, has breached its duty of care to plaintiff's insured [and has] violated the standards set forth in its operation manual with respect to handling items of the nature set forth in the within complaint:
"32. As a proximate and direct result of the acts of defendant [Security] ... plaintiff's insured [Reeves] suffered the loss of $25,000."
"An instrument made payable to a named person with the addition of words describing him
"(a) As agent or officer of a specified person is payable to his principal but the agent or officer may act as if he were the holder;
"(b) As any other fiduciary for a specified person or purpose is payable to the payee and may be negotiated, discharged or enforced by him.
"(c) In any other manner is payable to the payee unconditionally and the additional words are without effect on subsequent parties."
Not only did the evidence reveal that the bank subsequently acted in a manner consistent with the agreement, but in addition "appellant's own three expert witnesses testified that in their opinions [the bank] was the payee of the checks." (Id.)
When the bank receives a final settlement for an item it has forwarded for collection, the agency status, in the absence of mutual agreement to the contrary, typically ends and the bank becomes a debtor of its customer. (Cooper v. Union Bank (1973) 9 Cal.3d 371, 378 [107 Cal.Rptr. 1, 507 P.2d 609].)
"A holder in due course is a holder who takes the instrument: (a) For value; and (b) In good faith: and (c) Without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person."