Allied Concord Financial Corp. v. Bank of America Nat. Trust & Sav. Ass'n

• Decision Date: 07 July 1969
• Citation: 80 Cal.Rptr. 622,275 Cal.App.2d 1
• Court: California Court of Appeals Court of Appeals
• Parties: , 6 UCC Rep.Serv. 749 ALLIED CONCORD FINANCIAL CORPORATION, a Delaware corporation, Plaintiff and Appellant, v. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking corporation, and City National Bank, a national banking corporation, Defendants and Respondents. Civ. 33150.

Page 622

80 Cal.Rptr. 622

275 Cal.App.2d 1, 6 UCC Rep.Serv. 749

ALLIED CONCORD FINANCIAL CORPORATION, a Delaware corporation, Plaintiff and Appellant, v. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking corporation, and City National Bank, a national banking corporation, Defendants and Respondents.

Civ. 33150.

Court of Appeal, Second District, Division 2, California.

July 7, 1969.

Rehearing Denied Aug. 6, 1969.

Hearing Denied, Sept. 4, 1969.

Rich & Ezer, Beverly Hills, for appellant.

Robert H. Fabian, Harris B. Taylor, Ullar Vitsut, Los Angeles, and George J. Brusky, Jr., for respondent Bank of America.

Betts & Loomis by Donald E. Ruppe, Los Angeles, for respondent City Nat. Bank.

FLEMING, Associate Justice.

Under the California Commercial Code, are depositary and collecting banks directly liable to the drawer of a check which they have negotiated on a forged endorsement? If they are liable, how long does their liability last? On 20 December 1965, plaintiff Allied Concord Financial Corporation (Allied) issued in New York a check for $18,637.50 drawn on Bankers Trust Co. of New York and payable to the order of Sandor Spector. On 23 December 1965, John Spector, the payee's brother, intercepted the check, forged the endorsement of Sandor Spector, and obained payment for the check from defendant City National Bank (City) in California. City endorsed the check for collection to defendant Bank of America (BankAm), which in turn forwarded it through channels to the drawee, Bankers Trust. The latter paid the check, charged Allied's account, and returned the cancelled check to Allied.

A year elapsed before Allied discovered the forged endorsement. Apparently by that time Allied could no longer require Bankers Trust to reverse its charge against Allied's account. (Comm.Code, § 4406(4); cf. the California statute of limitations, which requires a depositor to bring suit against a bank which has honored a check on a forged endorsement within one year (Code Civ.Proc. § 340(3).) Accordingly, on 15 March 1967 Allied sued the earlier links in the chain of negotiation, the depositary bank, City, and the collecting bank, BankAm. Since the primary bank liability is that of City, we treat the suit as one between Allied and City.

Allied's complaint against City sought recovery on two theories: guarantee of prior endorsements, and conversion. City's demurrer to the complaint was sustained, and Allied then amended its complaint to charge breach of warranty. City's demurrer was again sustained, this time without leave to amend, and thereafter the complaint was dismissed.

It is apparent that Allied sued City on two theories: contract, based on the guarantees and warranties arising from the check's negotiation; and tort, the conversion of Allied's funds. The questions presented are whether Allied has standing to bring suit against City, and if so, whether it is barred by the one-year statute of limitations. The two questions are interrelated.

Direct Suit by a Drawer Against a Depositary or Collecting Bank

Can Allied as the drawer of a check which has been charged to its account under a forged endorsement directly sue depositary and collecting banks which have warranted the validity of the endorsement? Under former California law a drawer had no right of direct action against a collecting bank for losses resulting from a charge made against his account on a forged endorsement. (California Mill Supply Corp. v. Bank of America, 36 Cal.2d 334, 223 P.2d 849; Metropolitan Life Ins. Co. v. San Francisco Bank, 58 Cal.App.2d 528, 136 P.2d 853.) However, the enactment of the Uniform Commercial Code provides an opportunity to consider the matter afresh.

The modern trend of procedure looks on circuity of action with disfavor. Privity of contract is no longer a bar to suit. (Peterson v. Lamb Rubber Co., 54 Cal.2d 339, 341--348, 5 Cal.Rptr. 863, 353 P.2d 575; Stewart v. Cox, 55 Cal.2d 857, 13 Cal.Rptr. 521, 362 P.2d 345; cf. Heyer v. Flaig, 70 A.C. 232, 236--237, 74 Cal.Rptr. 225, 449 P.2d 161.) Likewise the right of third-party beneficiaries to directly enforce promises made and obligations assumed for their benefit has been extensively recognized, both substantively and procedurally. (Connor v. Great Western Sav. & Loan Assn., 69 Cal.2d 850, 73 Cal.Rptr. 369, 447 P.2d 609; Lucas v. Hamm, 56 Cal.2d 583, 589--591, 15 Cal.Rptr. 821, 364 P.2d 685; Johnson v. Holmes Tuttle Lincoln-Merc., 160 Cal.App.2d 290, 325 P.2d 193; Watson v. Aced, 156 Cal.App.2d 87, 319 P.2d 83.)

On third-party beneficiary principles we think the benefit of warranties given by a bank which negotiates a check on a forged endorsement extends by implication to the drawer of the check. (Comm.Code, §§ 4207, 3603(2).) By allowing direct suit we reduce circuity of action and make litigation easier between parties located in different jurisdictions. In this case the drawer of the check and the drawee bank are located in New York, and the depositary and collecting banks are located in California. Obvious procedural difficulties are avoided by permitting direct suit by the drawer, the party which suffered the loss, against the depositary bank, the party which first honored the forged endorsement. Settlement in one lawsuit of all aspects of a controversy involving commercial paper is clearly one of the prime objectives of the Commercial Code. (See Comm.Code, §§ 4406, 3803, anno. comment #8, § 3417: 'Where there is an indorsement the warranty runs with the instrument and the remote holder may sue the indorser-warrantor directly and thus avoid a multiplicity of suits which might be interrupted by the insolvency of an intermediate transferor.') We conclude that direct suit by the drawer against a depositary bank is authorized under the Commercial Code. The West Virginia Supreme Court of Appeals has reached a similar conclusion. (Commercial Credit Corp. v. Citizens Nat. Bank (1965), 150 W.Va. 196, 144 S.E.2d 784; see also cases collected in 99 A.L.R.2d 638, ff.) Our conclusion is fortified by section 3419(3) of the Commercial Code which by implication permits direct suit by the true owner of a forged check against a representative, including a depositary or collecting bank, to the extent of any proceeds remaining in the hands of the

representative.

Time Limitations Governing Suits by the Drawer Against a Depositary Bank on a Forged Instrument

To apply the proper statute of limitations we must analyze the nature of the cause of action. In the first part of this opinion we concluded that the drawer could bring direct suit against the depositary and collecting banks on an implied contract theory under which it became a third-party beneficiary of the warranties and guarantees given by these banks to subsequent persons in the chain of negotiation back to the drawee bank.

Nevertheless, the rights of the drawer against these banks are secondary to its primary claim against its own bank, the drawee, for having disregarded its specific instruction to pay money to Sandor Spector and not to someone else and for having charged its account without authority. Whether City paid money to an imposter or whether BankAm and Bankers Trust later reimbursed City for such a payment is no direct concern of the drawer and caused no direct injury to it. Injury to the drawer only occurred when Bankers Trust improperly charged its account. The drawer's primary claim, therefore, is based on its own rights against its own bank. By contrast, its secondary claim essentially derives from the rights of its bank, for its bank is liable to it for an improper charge against its account on a check paid on a forged endorsement, in turn the bank is entitled to recoup from those who earlier in the chain of negotiation warranted the genuineness of the endorsement. Thus, the drawer's rights against prior endorsers derive from those of its bank, and in turn the bank's rights are based on its liability to the drawer. It follows that if the drawee bank has no existing liability to the drawer, then the drawee bank has no claim against the banks which improperly negotiated the instrument because the drawee bank suffered no loss.

Under the California Commercial Code a depositor has one year to report an unauthorized endorsement, and if he does not do so within that period he is barred from later asserting his claim. (Comm.Code, § 4406(4).) This was also the law in California for many years prior to the adoption of the Commercial Code. (Code Civ.Proc. § 340(3).) We find it significant that the Uniform Commercial Code is originally drafted provided a three-year period for the discovery of a forged endorsement, but, that the California Commercial Code, when adopted, changed this period to one year. (See, California Code Comment to section 4406.) Under the Commercial Code, defenses available to a drawee bank against claims of its depositor, by clear implication are also available to a collecting or depositary bank. Commercial Code, section 4406(4) and (5) reads:

'(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...