Although as a practical matter I may reach the same result as the majority, I cannot agree with the majority’s rationale.
Because the judgment is based on a demurrer sustained without leave to amend, plaintiff’s allegations are deemed to be true: As a duty of her employment with Sun ’n Sand, Eloise Morales prepared checks for signature by a corporate officer. Over a three-year period Morales prepared nine checks payable to United California Bank (UCB), wherein she maintained a personal account. She obtained authorized signatures on these checks from a Sun ’n Sand officer who believed they represented small sums his company owed to UCB. No such debts were in fact owed. Morales then altered the checks, increasing the amount in each case to several thousand dollars, and presented them to UCB for deposit into her personal account. UCB credited Morales’ account, endorsed the checks and presented them to Union Bank, the drawee, who paid them and charged Sun ’n Sand’s account for their face amounts.
Sun ’n Sand filed its original complaint against both Union Bank and UCB on 4 March 1974. The amended complaints alleged six causes of action. UCB demurred on the grounds (1) each of the six counts fails to state facts sufficient to constitute a cause of action, and (2) various statutes of limitation bar some or all of the causes of action alleged. The court sustained the demurrer on the grounds stated, “and in particular and in addition, because United California Bank, as payee, owed no duty to plaintiffs which was breached.”
When a bank named as payee on a check receives and negotiates the check, it holds the funds for the use of the drawer, and if the bank diverts the funds to an unauthorized third party, including the drawer’s employee, it does so at its own risk. (Pacific Finance Corp. v. Bank of Yolo (1932) 215 Cal. 357 [10 P.2d 68] and Pacific Indemnity Co. v. Security First Nat. Bank (1967) 248 Cal.App.2d 75 [56 Cal.Rptr. 142].)
In Bank of Yolo plaintiff finance corporation drew drafts payable to the order of defendant bank for the purchase of automobiles as part of a security transaction to finance an automobile dealer. It was contemplated that the bank would forward the funds to the car seller. Plaintiff on one occasion entrusted the delivery of the drafts to the dealer who endorsed them as if he were the payee and forwarded them to defendant for deposit in his personal account. In allowing the drawer’s recovery from the payee bank, this court relied chiefly on Sims v. United States Trust *705Co. (1886) 103 N.Y. 472 [9 N.E. 605, 606], where the court on similar facts stated: “ ‘The use of 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. . . . The [bank] could have refused to receive the deposit, or act as . . . agent. . . but having accepted the office of so doing, it was bound to keep [the drawer’s] moneys, until it received his directions to pay them out. The language of the check making the funds payable only upon the order of the defendant imposed upon it the duty of seeing that they were not, through its agency, improperly disbursed after it had received them. [The bank] could not safely pay out such funds except under the direction of their lawful owner.’ ” (Pacific Finance Corp. v. Bank of Yolo, supra, 215 Cal. 357, 360-361.)
On facts nearly identical to those at hand, the court in Pacific Indemnity Co. v. Security First Nat. Bank, supra, 248 Cal.App.2d 75, reached the same conclusion. The court noted that in cases involving banks named as payees, the following rules are well established: “ ‘It is generally held that a check or draft drawn to the order of a bank precludes the diversion of the proceeds of it to a use other than that of the drawer, and that such diversion can be justified only by proof of authority from the drawer. It is held to be immaterial that the drawer may have been negligent in signing the check, and inquiry will not protect the bank where it is made only of the person tendering the check. Thus it appears that a drawee bank which is also the payee is liable to the drawer for paying the check to a third person or to the drawer’s agent who has no actual or apparent authority from the drawer to collect its proceeds, or for diverting its proceeds to uses other than those of the drawer, without specific instruction from the drawer to that effect; but that if the drawer has clothed his agent with apparent authority to receive the proceeds of such check, the bank is not negligent in, and is not liable to the drawer for, paying, in reliance upon such apparent authority, the proceeds of such check to such agent, or appropriating them to uses directed by the agent contrary to his actual authority, if the agent should misappropriate such proceeds.’ (10 Am.Jur.2d, Banks, § 560, pp. 529-530.) [H] ‘Where a check is drawn to the order of a bank to which the drawer is not indebted, the bank is authorized to pay the proceeds only to persons specified by the drawer; it takes the risk in treating such a check as payable to bearer and is placed on inquiry as to the authority of the drawer’s agent to receive payment.’ (9 C.J.S., Banks and Banking, § 340, p. 683.)” (Id., at pp. 93-94.)
*706The rights and liabilities of the payee of a check and those of the drawer of a check are ordinarily determined by reference to the contract or obligation, express or implied, which gave rise to the issuance of the check. When a person pays another to whom no debt is owed, the latter may not retain the proceeds for his use but must return them to the paying party. (E.g., 1 Witkin, Summary of Cal. Law (8th ed. 1973) p. 50.) The fact that the paying party uses a check will not preclude recovery of the payment any more than cash payment will preclude recovery. Additionally, Bank of Yolo and Pacific Indemnity Co. make clear that a payee bank absent authorization to pay may not properly assert as a defense that it paid to the drawer’s employee who delivered the check.
Although those two cases did not involve altered checks, the fact that the checks were raised furnishes no basis for refusing to follow the cases. The payee bank upon negotiating the checks obtained the raised amounts, and the drawer was charged in those amounts. Had UCB properly held the funds for the direction of the drawer-plaintiff, the latter would have suffered the loss of neither the original amounts nor the raised amounts. All of the drawer’s loss flowed directly from UCB’s failure to hold the funds for the direction of the drawer. It is thus immaterial that the checks were raised prior to presentation to the bank.
UCB contends the one-year notice requirement of California Uniform Commercial Code section 4406, subdivision (4), and the one-year statute of limitation of Code of Civil Procedure section 340, subdivision 3, apply to this action. Although I am of the view that these sections are inapplicable to the instant case, I reach this result on a different theory from the majority.
California Uniform Commercial Code section 4406 contemplates a system of duties between a depositor and his bank. Subdivision (1) provides that when a bank makes available to its customer statements of account and paid items, the customer has a duty to reasonably examine the statements and items and promptly notify the bank of any forgery or alteration. Under subdivision (2), if the customer fails to comply with the above duty, he is precluded from asserting against the bank a claim for payment of the forged or altered check. However, subdivision (3) provides the customer is not so precluded if he can establish the bank’s lack of ordinary care in paying the item. Subdivision (4) provides a customer is precluded in any event if he does not discover and report any *707forgery or alteration within one year from the time the statement and items were made available to him.1
Code of Civil Procedure section 340, subdivision 3, provides a plaintiff must file within one year “An action ... by a depositor against a bank for the payment of a forged or raised check, or a check that bears a forged or unauthorized endorsement... .”2
The foregoing statutes have no application where the payee’s liability arises from breach of its obligation not to divert the drawer’s funds to some third person. In such case, the action is based on the wrongful *708diversion—not on forgery or alteration. As discussed above, the alteration of the checks does not affect UCB’s liability as payee of the checks, and the fact that the drawer could recover not only for the wrongful diversion of its funds but also part of the funds for the alterations should not limit its right to recover for the diversion.3
I agree with the majority opinion insofar as it concludes that action on the first three checks may be barred if plaintiff fails to excuse his failure to discover the fraud within three years after it took place. (Ante, pp. 701-702.)
I would reverse the trial court’s judgment for the reason Sun ’n Sand has stated facts sufficient to constitute a cause of action against UCB.4
Section 4406 provides; “(1) When a bank sends to its customer a statement of account accompanied by items paid in good faith in support of the debit entries or holds the statement and items pursuant to a request or instructions of its customer or otherwise in a reasonable manner makes the statement and items available to the customer, the customer must exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and must notify the bank promptly after the discovery thereof. [U] (2) If the bank establishes that the customer failed with respect to an item to comply with the duties imposed on the customer by subdivision (1) the customer is precluded from asserting against the bank [H] (a) His unauthorized signature or any alteration on the item if the bank also establishes that it suffered a loss by reason of such failure; and [If] (b) An unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank after the first item and statement was available to the customer for a reasonable period not exceeding 14 calendar days and before the bank receives notification from the customer of any such unauthorized signature or alteration. [H] (3) The preclusion under subdivision (2) does not apply if the customer establishes lack of ordinary care on the part of the bank in paying the item(s). [H] (4) Without regard to care or lack of care of either the customer or the bank a customer who does not within one year from the time the statement and items are made available to the customer (subdivision (1)) discover and report his unauthorized signature or any alteration on the face or back of the item or any unauthorized indorsement, and if the bank so requests exhibit the item to the bank for inspection, is precluded from asserting against the bank such unauthorized signature or indorsement or such alteration. The burden of establishing the fact of such unauthorized signature or indorsement or such alteration is on the customer. [U] (5) If under this section a payor bank has a valid defense against a claim of a customer upon or resulting from payment of an item and waives or fails upon request to assert the defense the bank may not assert against any collecting bank or other prior party presenting or transferring the item a claim based upon the unauthorized signature or alteration giving rise to the customer’s claim.”
Section 340 provides in pertinent parts: “Within one year: ... [1] 3. An action for libel, slander, assault, battery, false imprisonment, seduction of a person below the age of legal consent, or for injury to or for the death of one caused by the wrongful act or neglect of another, or by a depositor against a bank for the payment of a forged or raised check, or a check that bears a forged or unauthorized endorsement, or against any person who boards or feeds an animal or fowl or who engages in the practice of veterinary medicine as defined in Business and Professions Code Section 4826, for such person’s neglect resulting in injury or death to an animal or fowl in the course of boarding or feeding such animal or fowl or in the course of the practice of veterinary medicine on such animal or fowl;...” (Italics added.)
I cannot agree with the majority’s conclusion that California Uniform Commercial Code section 4406, subdivision (4) and the one-year limitation on depositor actions of Code of Civil Procedure section 340, subdivision 3, are applicable only to warranty actions and are not applicable to mistake and negligence actions. As pointed out above, section 4406, subdivision (1), imposes a duty upon the bank’s customer to promptly notify the bank of forgeries and alterations after the statement and items are received. Subdivision (2) precludes customers’ claims when such duty is breached. Subdivision (3) provides the customer is not so precluded if the bank failed to exercise ordinary care. Subdivision (4) provides: “[without regard to care or lack of care of either the customer or the bank,” a customer action will be barred unless notice of forgery or alteration is given within one year. It is apparent that the main, if not the sole, application of subdivision (4) is to cases where the bank has been negligent. Where the bank is not negligent, subdivision (2) ordinarily will be controlling. To conclude, as the majority does, that subdivision (4) does not apply to negligence actions is to ignore the surrounding provisions and the placement of the subdivision as well as the plain import of the words quoted above, showing that the one-year limitation is to apply whether or not there is negligence.
Similarly, the one-year limitation on depositor actions of Code of Civil Procedure section 340, subdivision 3, shows in context that it is applicable to negligence actions. Both the preceding and subsequent provisions in the subdivision deal with actions based on “neglect.” (See fn. 2.)
I am satisfied that both subdivisions are applicable to actions against drawee banks for paying forged or altered checks whether the action sounds in negligence, mistake, or breach of warranty. They are not applicable here because the action is against the payee.
Because I adopt a different approach from the majority, I do not reach many of the issues addressed by their opinion. However, I am compelled to comment on the opinion’s cursory referral to the application of the comparative fault doctrine enunciated in Li v. Yellow Cab Co. (1975) 13 Cal.3d 804 [119 Cal.Rptr. 858, 532 P.2d 1226, 78 A.L.R.3d 393]. While the opinion states Li would apply to the negligence cause of action, it proceeds to hold the customer’s lack of care would not be a defense to warranty or mistake causes of action. This conclusion relying upon the form of the action seems contrary to Daly v. General Motors (1978) 20 Cal.3d 725 [144 Cal.Rptr. 380, 575 P.2d 1162], where we held comparative fault is not limited to negligence actions but applies to strict liability actions.
I would reserve for future determination whether comparative fault is limited to personal injury and property damage cases or applies to commercial transactions as well, and, if so, whether the form of the action should govern Li’s applicability.