Gina Chin & Associates, Inc. v. First Union Bank

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

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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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