Bank of Glen Burnie v. Loyola Federal Sav. Bank

• Decision Date: 01 September 1993
• Docket Number: No. 145,145
• Citation: 648 A.2d 453,336 Md. 331
• Parties: , 25 UCC Rep.Serv.2d 1 The BANK OF GLEN BURNIE v. LOYOLA FEDERAL SAVINGS BANK. ,
• Court: Maryland Court of Appeals

Page 331

336 Md. 331

648 A.2d 453, 25 UCC Rep.Serv.2d 1

The BANK OF GLEN BURNIE v. LOYOLA FEDERAL SAVINGS BANK.

No. 145, Sept. Term, 1993.

Court of Appeals of Maryland.

Oct. 7, 1994.

Charles W. Ayres, Jr. (John Michael Lis, both on brief), Glen Burnie, for petitioner.

Barkley Clark (C. Lamar Garren, Bruce T. Carton, Piper & Marbury, all on brief), Baltimore, for respondent.

Argued before MURPHY, C.J., RODOWSKY, CHASANOW, KARWACKI, BELL and RAKER, JJ., and ALAN M. WILNER, Chief Judge of the Court of Special Appeals, Specially Assigned.

CHASANOW, Judge.

We are called upon in this case to decide the issue of who bears the loss, as between the collecting bank and the drawee bank, for an improperly paid check bearing both a forged drawer's signature and a forged indorsement (i.e., a "double forgery"). For the reasons set forth below, we hold that where a drawee bank pays on an instrument bearing both a forged drawer's signature and a forged indorsement, the drawee bank is liable for the loss.

I.

This case arises out of an action filed in August, 1992, by Richard and Nancy Tinkler in the District Court of Maryland sitting in Anne Arundel County against Loyola Federal Savings Bank (Loyola) and the Bank of Glen Burnie (Glen Burnie) to recover funds that were debited from their account in payment of several checks that turned out to contain forgeries. In 1991, the Tinklers' daughter, Nina Tinkler (Nina), stole a number of blank checks from her parents' home that were drawn on a home equity checking account the Tinklers maintained at Loyola. Between May 13 and May 28, 1991, Nina presented ten of these checks at three different Glen Burnie branches to seven different tellers. Nina signed the checks "Nancy Tinkler" as the drawer, indorsed each check as "Nancy Tinkler," and made the checks payable to "Cash." Glen Burnie cashed the ten checks totalling $5,725.00 and disbursed the cash to Nina.

Glen Burnie's check cashing policy required its tellers to verify a customer's identification by examining the customer's driver's license. Notwithstanding this requirement, there was no indication on the checks that the tellers checked a driver's license to verify the identity of "Nancy Tinkler." When Glen Burnie presented the ten checks to Loyola for payment, Loyola debited the Tinklers' account and reimbursed Glen Burnie for the money paid to Nina. When the Tinklers discovered that the checks had been stolen and forged, they notified Loyola and demanded that the funds be credited to their account.

Glen Burnie and Loyola each denied liability for failing to detect the forgeries, and Loyola refused to credit the Tinklers' bank account. Consequently, the Tinklers filed suit against Loyola and Glen Burnie in the District Court sitting in Anne Arundel County seeking reimbursement from Loyola and Glen Burnie for the banks' improper payments on the forged checks. Loyola and Glen Burnie then filed cross-claims against each other, each alleging that the other was ultimately liable.

The district court held that the Tinklers were not negligent because they "took all reasonable steps that the [c]ourt would expect the parties [to take] ..., to prevent any loss." The court then found Glen Burnie liable for the losses on the checks it cashed, holding that Glen Burnie was in the "best position" to avoid such losses. Pursuant to a Motion to Revise Judgment, the district court entered judgment in favor of the Tinklers against Loyola in the amount of $7,781.00 (which included the $5,725.00 Loyola debited from the Tinklers' account to pay the forged checks and $1,206.00 in interest that had accrued on the Tinklers' home equity loan account because of the payment on the forged checks), with costs plus post-judgment interest, and judgment on Loyola's cross-claim against Glen Burnie in the amount of $5,725.00, with costs plus post-judgment interest.

Glen Burnie appealed to the Circuit Court for Anne Arundel County. The circuit court affirmed the district court, holding Glen Burnie liable because it was "in the superior position to detect the impropriety." We granted certiorari to address the issue of who bears the loss, as between the collecting bank and the drawee bank, for an improperly paid check bearing both a forged drawer's signature and a forged indorsement, 333 Md. 429, 635 A.2d 976.

II.

The Uniform Commercial Code (U.C.C.), codified at Maryland Code (1975, 1992 Repl.Vol.), Commercial Law Article, §§ 3-101, et seq., ¹ provides for loss allocation in cases of either forged indorsements or forged drawer's signatures. The U.C.C. does not, however, specifically allocate liability in cases where an instrument contains both a forged drawer's signature and a forged indorsement and is paid by both the collecting and drawee banks. ² See Perini Corp. v. First Nat. Bank of Habersham County, 553 F.2d 398, 402 (5th Cir.1977) (noting that the U.C.C. does not provide "the yellow brick road to juridical certainty" in double forgery cases); Barkley Clark, The Law of Bank Deposits, Collections and Credit Cards, p 15.02[c], at S15-9 (3d ed. 1990 & Supp. I 1994) (noting that "[w]here both the drawer's signature and the indorsement are forged, the courts are in a dilemma under the current version of the UCC"); Payroll Check Cashing v. New Palestine Bank, 401 N.E.2d 752, 754 (Ind.Ct.App.1980) (noting that the allocation of loss in a double forgery case depends upon whether the instrument is treated as a forged drawer's signature or a forged indorsement because the U.C.C. does not provide for allocation of loss when a double forgery is involved).

When a drawee bank makes payment on an instrument bearing a forged drawer's signature and a genuine indorsement, the drawee bank is "bound on [its] acceptance and cannot recover back [its] payment." See § 3-418 cmt. 1. The traditional justification behind the "finality" rule is that the drawee is expected to know the drawer's signature and has the superior ability to detect a forgery. See § 3-418 cmt. 1. The modern justification for the rule is that it is "highly desirable to end the transaction on an instrument when it is paid rather than reopen and upset a series of commercial transactions at a later date when the forgery is discovered." See id.

In contrast, when a drawee bank makes payment on an instrument bearing a genuine drawer's signature and a forged indorsement, the drawee bank can generally pass liability back to the collecting bank in an action for a breach of the presentment warranty of good title. See §§ 3-417(1)(a) and 4-207(1)(a) (prior transferors warrant that they have "good title to the instrument"). ³ Because a forged indorsement generally does not confer good title, the drawee bank can recover upstream under a breach of warranty claim "against a[ny] person who presented a check bearing a forged indorsement." See Perini, 553 F.2d at 404.

Because the U.C.C. does not expressly provide for the allocation of loss when the collecting bank and the drawee bank pay on an instrument containing both a forged drawer's signature and a forged indorsement, we must look to our prior cases and to the legislative intent behind the U.C.C. in determining where to allocate liability in a double forgery case.

This Court has had only one occasion to address the issue of where to allocate the loss in a double forgery case. Prior to the adoption of the U.C.C., this Court held in Com. & Farm. Nat. Bk. v. First Nat. Bk., 30 Md. 11 (1869), that the loss in a double forgery case should fall on the drawee bank. In so holding, this Court relied on the principle articulated in Price v. Neal, 3 Burr. 1354, 1357 (K.B. 1762), which provided that it is "incumbent upon the [drawee] to be satisfied 'that the bill drawn upon him was the drawer's hand,' before he accepted or paid it ...[,]" to support its conclusion that the drawee bank was liable.

In Com. & Farm., an individual using the probably fictitious name, John S. Hillan, opened an account at Commercial and Farmers National Bank (Commercial) and deposited a check for $4,600.15 purporting to be drawn by Horace Abbott. The presenter signed the signature book "John S. Hillan, No. 504 West Fayette [S]treet," and indorsed the check in the same name. 30 Md. at 16. The following day, the check was sent to the clearing house and subsequently reached the drawee bank, First National Bank (First National), which debited Horace Abbott's account. The person using the name Hillan returned to Commercial on another occasion and withdrew $4,500.00 from his account. 30 Md. at 16-17. Horace Abbott later discovered that the check payable to John S. Hillan was a forgery and notified First National. First National then credited Abbott's account and sued Commercial to recover the money Commercial paid on the forged check. 30 Md. at 17-18.

In holding First National liable on the forged check, this Court first observed that "the drawee is bound to know the handwriting of his correspondent ... and if it pays in mistake a forged check there is no reason why the loss should be shifted to another innocent party...." 30 Md. at 19. This Court summarized its holding by noting that "[T]he rule of commercial law, that no title can be acquired through a forged endorsement, ... is no doubt clearly settled, but its very statement shows it can have no bearing on such a case as the present. It pre-supposes a genuine negotiable instrument, the title to which can be transferred by a valid endorsement; but it is a solecism to say, any title can be acquired to that which has in fact no existence ... and it matters not in such case what may be the form of the forged instrument, whether payable to order or bearer. It is therefore perfectly immaterial to the rights of the parties to this suit whether the name of John S. Hillan, the payee in the check, was a fictitious name inserted by the forger and endorsed thereon by the person who deposited the check with the defendant, or was the genuine name of the...