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Bank's liability for cashing an embezzled company check?

Got a case I'm working on where A runs a business and B mana saulgoodmanwannabe04/18/17
§ 3-417. PRESENTMENT WARRANTIES. mnjd04/18/17
Also, check out Article 4. The answer can vary, depending jeffm04/18/17
Checks were never endorsed which leads me to wonder why B's saulgoodmanwannabe04/18/17
I think something is telling you right. When the check is e jeffm04/18/17
You changed your answer from "endorsed" to "not endorsed." jeffm04/18/17
Yeah just got the copies of the cancelled checks today and w saulgoodmanwannabe04/18/17
Common law duty of inquiry perhaps? majorkong04/18/17
jay.law.ou.edu/faculty/McCall/Payme nt%20Systems/Error/Warran sillydood04/18/17
Check out this opinion on a somewhat similar case involving jeffm04/18/17
Although it's talking about fraudulent indorsements, as oppo onehell04/19/17
A never banked with C. B was actually diverting inventory an saulgoodmanwannabe04/19/17
saulgoodmanwannabe (Apr 18, 2017 - 5:02 pm)

Got a case I'm working on where A runs a business and B manages the books for A. B steals checks written to A's company and deposits checks into B's personal account in C bank. Is there a case against C bank for taking these checks that were never even written to B? Did B somehow have the authority to do this and who bears the risk of loss?

I know the answer is somewhere in my State's UCC but wondering where I should start to refine my research.

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mnjd (Apr 18, 2017 - 5:11 pm)

§ 3-417. PRESENTMENT WARRANTIES.

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jeffm (Apr 18, 2017 - 6:02 pm)

Also, check out Article 4.

The answer can vary, depending on whether there is a forgery. You did not indicate whether the checks were indorsed.

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saulgoodmanwannabe (Apr 18, 2017 - 6:09 pm)

Checks were never endorsed which leads me to wonder why B's bank would never question checks written to A's company being deposited.

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jeffm (Apr 18, 2017 - 6:13 pm)

I think something is telling you right. When the check is endorsed, it becomes a bearer instrument. Where it is transferred after that doesn't matter.

I had a similar case many years ago against American Express for taking checks made to fictitious payees, such as "Arctic Express" and "American Rx." My memory of the Art. 3 and 4 rules is very foggy.

Somebody around here probably can point out the exact rule.

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jeffm (Apr 18, 2017 - 6:14 pm)

You changed your answer from "endorsed" to "not endorsed."

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saulgoodmanwannabe (Apr 18, 2017 - 6:22 pm)

Yeah just got the copies of the cancelled checks today and went through them again after replying and there are no endorsements. Before reviewing them we believed there were endorsements as the guy was charged with forgery.

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majorkong (Apr 18, 2017 - 6:42 pm)

Common law duty of inquiry perhaps?

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sillydood (Apr 18, 2017 - 6:58 pm)

jay.law.ou.edu/faculty/McCall/Payment%20Systems/Error/Warranty%20Slides.ppt

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jeffm (Apr 18, 2017 - 6:59 pm)

Check out this opinion on a somewhat similar case involving a missing endorsement. http://caselaw.findlaw.com/us-5th-circuit/1590802.html

"The UCC places the burden on the first bank in the collection chain to ensure an endorsement's authenticity.   Sw. Bank v. Info. Support Concepts, Inc., 85 S.W.3d 462, 465 (Tex.App.—Fort Worth 2002), aff'd, 149 S.W.3d 104 (Tex.2004) (citing Ames v. Great S. Bank, 672 S.W.2d 447, 450 (Tex.1984)).

In Texas, “[a] bank's payment of an instrument on a missing endorsement results in conversion of the instrument.”  Ames, 672 S.W.2d at 450.   This principle was applied in Southwest Bank, 85 S.W.3d 462.   In that case, an employee of Information Support Concepts, Inc. (“ISC”), stole checks made out to ISC, wrote “Deposit Only” on the back of each one, and deposited them into her personal account at Southwest Bank. Id. at 463.   Although none of these checks bore ICS's endorsement, Southwest Bank accepted the deposits and obtained payment on the checks.   When ICS discovered what had happened, it sued Southwest Bank for conversion under Section 3.420.  Id. The trial court found Southwest Bank liable.   The court of appeals affirmed, reasoning:

if a depository bank pays a check to one other than the actual payee or to his order, or is mistaken as to the payee's identity or is paid upon a forged endorsement of the payee, the depository bank is responsible.   Under section 3.420, therefore, a depository bank is liable for conversion if it obtains payment on an instrument that is missing a necessary endorsement."

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onehell (Apr 19, 2017 - 1:28 pm)

Although it's talking about fraudulent indorsements, as opposed to no indorsement at all, UCC 3-405 basically says that companies are liable for the actions of the people they entrust with their deposits UNLESS the bank failed to exercise "ordinary care."

So if there had been a fraudulent indorsement, A would pretty clearly be on the hook. But you'd presumably be arguing that by accepting the check with no indorsement at all, the bank failed to exercise ordinary care. The bank will presumably say that the definition of ordinary care must take into account the realities of modern electronic processing which doesn't check signatures at all, and that company A is the one that failed to exercise ordinary care by entrusting the same person to keep the books and make the deposits, i.e. a failure to implement normal checks and balances.

Does company A also bank with bank C? If so, that might explain both why they trusted B and it also might give C a reason to accommodate A to preserve a good customer relationship. But if bank C digs in its heels, it seems to me that a lawsuit could go either way because there was at least some negligence both on the part of A and C. Regardless, I would indeed give it a try with bank C. But if they refuse, there has to be a business decision about whether suing is worth it given the time and money and uncertain result.

How big was the check? Most business' insurance policies cover crime, so that might be another angle depending on how much of a deductible or retention the crime policy has. A third angle is, of course, pursuit of B himself. He'll also probably get ordered to make restitution as a result of the criminal case. Even before that, he'll have a strong incentive to pay up preemptively because if he makes A whole before he gets convicted, it might help convince the prosecutor to offer a more favorable plea deal or diversion program or something. Might be worth talking to whomever is B's defense attorney in the criminal case, as that lawyer will almost certainly advise his client to pay up any way he can. Even if he's broke, a lot of criminal defendants will turn to family members and such. And white-collar criminals like this book-keeper usually have at least middle class family members to turn to.

Making quick restitution helps people stay out of jail. I bet B had a gambling problem or a drug addiction or something. Granted, he may be guilty of theft as opposed to forgery if there was no indorsement, but they've clearly got him dead to rights on something so he's not going to be defending based on factual innocence. Those sob stories about addiction and whatnot get a lot more persuasive if he makes quick restitution, enrolls in treatment, etc.

(Of course, there are ethics rules proscribing making criminal reports and such to gain leverage in a civil case, but as to B, this is not a civil case. Your client is the victim of a crime and wants restitution directly for that crime).

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saulgoodmanwannabe (Apr 19, 2017 - 5:46 pm)

A never banked with C. B was actually diverting inventory and making fake invoices to get these payments made out to A, but B turned around and placed them in account with C.

Criminal case is done with, B pled no contest to theft and forgery I think, but B is uncollectible and actually violating probation by not making the restitution.

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