In Severin Mobile Towing, Inc. v. JPMorgan Chase Bank, N.A., the California Court of Appeal reversed a trial court ruling under Article 3 of the Uniform Commercial Code which exonerated a bank from liability for accepting for deposit to an employee’s account a series of checks payable to his employer, that had been indorsed with an illegible scrawl which appeared to be the employee’s initials.
Guillermo Oseguero was employed by Serverin Mobile Towing, Inc., (dba “USA Towing and Recovery,”) as a lot manager who was “100% responsible for running the lot.” Tow trucks bringing cars to the lot would give Oseguero an invoice which Oseguero was supposed to enter into Severin’s computer system. People coming to retrieve their towed vehicles would give Oseguero a check payable to USA Towing, and he would then release the vehicle. At the end of the day, Oseguero would take checks and invoices
to Asad Raffo, one of the owners of Severin. No one at Severin reviewed Oseguera’s files or compared the invoices he delivered at the end of each day to the original invoices in his files.
It was discovered that, on occasion, Oseguero would steal one or two checks and misfile the related invoices. During the period from January, 2014 to September, 2016, Oseguero deposited into his own account, at Chase Bank, 211 checks payable to “USA Towing” totaling $156,805.30. Each check was for an amount less than $1,500 and was deposited at an ATM. Oseguera endorsed the checks with what appeared to be his own name or initials, rather than the name Severin or USA Towing.
When confronted with one of the fraudulent transactions, Oseguera fled the jurisdiction. After discovering the embezzlement, Severin adopted several new procedures including use of invoices in triplicate, with a copy to one of the owners, and division of responsibility for intaking and releasing vehicles.
Severin sued Chase in August, 2017 to recover the misappropriated funds. The complaint stated causes of action for negligence and conversion and a claim based on California’s unfair competition law Business & Professions Code section 17200 (“UCL”). Severin moved for summary adjudication of its conversion claim while Chase moved for summary judgment on all of Severin’s claims. The trial court granted summary judgment to Chase on all claims. It also held that some of the claims, based upon 34 of the 211 checks, were barred by the statute of limitations. The Court of Appeal reversed as to the conversion claim and UCL claim.
The Court of Appeal applied two sections of the Uniform Commercial Code concerning the liability of a depository bank which takes a check for collection based on a fraudulent endorsement. UCC section 3-405 specifically deals with an employer’s responsibility for fraudulent indorsements by an employee. Section 3-405 provides, in part that “if an employer entrusted an employee with responsibility with respect to the instrument and the employee . . . makes a fraudulent indorsement of the instrument, the indorsement is effective as the indorsement of the person to whom the instrument is payable if it is made in the name of that person. If the [depositary bank] fails to exercise ordinary care . . . and that failure contributes to loss resulting from the fraud, 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.”
UCC section 3-406 subdivision (a) states that “[a] person whose failure to exercise ordinary care contributes to . . . the making of a forged signature on an instrument is precluded from asserting the . . . forgery against a person who, in good faith [takes the instrument for collection].” Subdivision (b) states, however, that where “the person asserting the preclusion fails to exercise ordinary care . . . the loss is allocated between the person precluded and the person asserting the preclusion according to the extent to which the failure of each to exercise ordinary care contributed to the loss.”
Severin did not contest the dismissal of its negligence claim, nor did it dispute the summary adjudication ruling based on the statute of limitations as to 34 of the checks. The parties focused on whether Chase had exercised ordinary care within the meaning of UCC sections 3-405 and 3-406.
Chase submitted proof that under its “Deposit Review Operations” procedures, checks under $1,500 deposited at ATM’s were “automatically processed and accepted for deposit without human review.” Accordingly, every check at issue “was processed by automatic means and accepted without review for deposit into Oseguera’s account.” Chase contended that its handling of the checks fell within the safe harbor of UCC section 3-103(7), which provides in part that “Ordinary care” means observance of reasonable commercial standards, and in the case of a depositary bank that takes a deposited check “by automated means, reasonable commercial standards do not require the bank to examine the instrument if the failure to examine does not violate the bank’s prescribed procedures . . . .”
The Court did not reach the issue of whether this showing by Chase was sufficient to satisfy the standard of ordinary care. because both sections 3-405 and 3-406 impose threshold requirements. Section 3-405(a)(2) states that “‘[f]raudulent indorsement’ means . . . in the case of an instrument payable to the employer, a forged indorsement purporting to be that of the employer. [italics added]” The Court appended to its opinion a copy of one of the checks which was indorsed on the back by a squiggle which appeared to be a set of illegible initials. The Court concluded that such indorsements could not be interpreted as having been made “in the name of the employer.” If section 3-405 did not apply at all, then its provision which makes the indorsement effective, and which imposes a comparative negligence standard, would not govern.
As to section 3-406, the threshold requirement was negligence on the part of the victim, i.e., Severin. Section 3-406 provides a defense to liability for accepting a check with a forged signature if the victim failed to exercise ordinary care and the bank accepted the check in good faith. If those conditions are satisfied, then comparative negligence applies if the bank were negligent as well. Severin and Chase submitted conflicting evidence as to whether ordinary care was exercised in supervising Oseguera. The Court concluded that a disputed fact issue existed on that point, stating that “we cannot say as a matter of law that a family-owned business ‘fail[ed] to exercise ordinary care’ in supervising its long-time, trusted employee . . . .”
The Court ordered that “because Severin’s UCL claim is derivative of its conversion claim, and because summary judgment was erroneously granted as to the conversion claim, the UCL claim will be reinstated.”
This case holds that, when a check is indorsed only with an illegible squiggle, and then presented to the depositary bank as if it were validly endorsed, that would not be a case of a “fraudulent endorsement” (within the meaning of section 3-405) or of a “forged signature” (within the meaning of section 3-406).
If an employee has engaged in defalcation by indorsing company checks to themselves, you may be able to recover your loss from the bank. Check with your attorney so he or she can determine whether the bank may be liable for your loss.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
