Present: All the Justices
GINA CHIN & ASSOCIATES, INC.
v. Record No. 971463 OPINION BY JUSTICE ELIZABETH B. LACY
June 5, 1998
FIRST UNION BANK
FROM THE CIRCUIT COURT OF ARLINGTON COUNTY
Benjamin N.A. Kendrick, Judge
Gina Chin & Associates, Inc. (Chin) filed a motion for
judgment against First Union Bank alleging that First Union
was negligent when it accepted checks drawn on Chin's accounts
bearing both forged signatures of the drawer and forged
indorsements of the payees. The trial court sustained First
Union's demurrer and entered summary judgment. We awarded
Chin an appeal, and we will reverse the judgment of the trial
court because we conclude that Chin's motion for judgment pled
a cause of action pursuant to §§ 8.3A-404 and –405 of the
Uniform Commercial Code, Code §§ 8.1-101 through 8.11-108 (the
UCC).
In reviewing a case decided on a demurrer, we accept as
true the facts alleged in the motion for judgment and all
reasonable inferences to be drawn therefrom. Adkins v. Dixon,
253 Va. 275, 277, 482 S.E.2d 797, 799 (1997). Chin, a food
wholesaler, maintained checking accounts at Signet Bank and
Citizens Bank of Washington, D.C. (the drawee banks). During
1994 and 1995, an employee of Chin, Amie Cheryl Lehman, forged
the signature of one of Chin's officers on a number of checks
that were payable to Chin's suppliers. Lehman then forged the
payees' indorsements and, with the assistance of a First Union
teller, deposited the checks in an account which she held at
First Union. The drawee banks then paid the checks and
debited a total amount of $270,488.72 from Chin's accounts.
First Union asserts that, under the UCC, it is amenable
to suit only by the drawee banks based on a breach of warranty
of title theory. § 8.4-207.1. 1 Chin's sole cause of action,
according to First Union, is against the drawee banks for
improperly charging Chin's accounts for the amount of the
forged checks. See §§ 8.4-401, -406. Under First Union's
interpretation of §§ 8.3A-404 and –405, Chin does not have a
cause of action against it pursuant to those sections because
they only apply to instances involving a forged indorsement of
the payee and not to the circumstances where both the payee's
indorsement and the signature of the drawer were forged.
While First Union correctly states that the UCC provides
a drawer with a cause of action against a drawee bank that
charges a drawer's account based on checks containing a forged
signature of the drawer, its conclusion that §§ 8.3A-404 and –
1
First Union also argued on brief and in oral argument
that Chin cannot maintain a cause of action against it for
conversion. First Union is correct, see § 8.3A-420; however,
2
405 cannot be utilized by a drawer against the depositary bank
in a double forgery situation is erroneous.
Sections 8.3A-404 and -405 were part of the 1992
revisions to the UCC. Revised § 8.3A-404(b) provides that
where the payee on a check is fictitious or not the person
intended to have an interest in the check by the person
determining to whom the check is payable, a forged payee's
indorsement on the check is nevertheless effective for one who
takes the check in good faith. 2 Similarly, where an employee
vested with the responsibility for processing, signing, or
indorsing the employer's check makes a fraudulent indorsement
of such check, revised § 8.3A-405 continues the prior
provision's rule that the indorsement is effective if taken or
paid in good faith. However, both revised sections provide
that if the person taking the check fails to exercise ordinary
care, "the person bearing the loss may recover from the person
failing to exercise ordinary care to the extent the failure to
exercise ordinary care contributed to the loss." §§ 8.3A-
404(d), -405(b).
The revisions to §§ 8.3A-404 and –405 changed the
previous law by allowing "the person bearing the loss" to seek
Chin is not asserting a cause of action for conversion in this
appeal.
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recovery for a loss caused by the negligence of any person
paying the instrument or taking it for value based on
comparative negligence principles. The concept of comparative
negligence introduced in the revised sections reflects a
determination that all participants in the process have a duty
to exercise ordinary care in the drawing and handling of
instruments and that the failure to exercise that duty will
result in liability to the person sustaining the loss.
Nothing in the statutory language indicates that, where the
signature of the drawer is forged, the drawer cannot qualify
as a "person bearing the loss" or that the drawer is otherwise
precluded from seeking recovery from a depositary bank under
these sections. In the absence of any specific exclusion, we
conclude that the sections are applicable in double forgery
situations.
This conclusion is consistent with Comment 2 of the
Official Comments to § 8.3A-404, which states that subsection
(b) "also applies to forged check cases." Another commentary
also concludes that § 8.3A-404 applies to double forgery
situations. Remarking that under the previous law, double
forgery cases were treated solely as forged drawer's signature
cases, allowing the depositary bank to avoid liability, the
2
The person whose intent determines to whom an instrument
is payable includes a person who forges the drawer's
4
commentary concludes that the result under the revised section
"differs sharply."
In fictitious payee double forgeries under the
Revision, some of the ultimate loss will end up on
the shoulders of the company that hired the
dishonest bookkeeper and failed to supervise the
miscreant. The rest will be shouldered by the
depositary bank for [its] negligence . . . .
Barkley Clark & Barbara Clark, The Law of Bank Deposits,
Collections and Credit Cards ¶ 12.07[3][b] (rev. ed. 1995).
Accordingly, we hold that Chin was not precluded from
asserting a cause of action against First Union pursuant to
§§ 8.3A-404 or -405. In light of this conclusion, we next
examine Chin's motion for judgment to determine whether it is
sufficient to state a cause of action under these sections.
Chin seeks recovery for a loss sustained as a result of
the negligent actions of First Union. Chin alleged that its
employee, Lehman, forged both its signature and the
indorsement of the payees on a number of checks and, with the
cooperation of an employee of First Union, deposited the
checks into Lehman's account at First Union. The motion for
judgment specifically alleged that the acceptance of the
forged checks by First Union for payment "was negligent and
was in contravention of established banking customs and
standards" and "was due to the negligent failure of First
signature. See § 8.3A-110(a).
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Union Bank to supervise its employee." The pleading further
asserts that this negligence caused Chin to suffer a loss of
over $270,000.
These allegations are sufficient to state a cause of
action against First Union pursuant to §§ 8.3A-404 and –405.
Accordingly, the trial court erred in sustaining First Union's
demurrer. The judgment of the trial court is reversed and the
case is remanded for further proceedings.
Reversed and remanded.
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