Payroll Check Cashing v. New Palestine Bank

• Decision Date: 25 March 1980
• Docket Number: No. 1-1079A280,1-1079A280
• Citation: 401 N.E.2d 752
• Parties: 28 UCC Rep.Serv. 1421 PAYROLL CHECK CASHING, Appellant (Defendant Below), v. NEW PALESTINE BANK, Appellee (Plaintiff Below). LOU'S LIQUORS, Appellant (Defendant Below), v. NEW PALESTINE BANK, Appellee (Plaintiff Below).
• Court: Indiana Appellate Court

Page 752

401 N.E.2d 752

28 UCC Rep.Serv. 1421

PAYROLL CHECK CASHING, Appellant (Defendant Below), v. NEW PALESTINE BANK, Appellee (Plaintiff Below).

LOU'S LIQUORS, Appellant (Defendant Below), v. NEW PALESTINE BANK, Appellee (Plaintiff Below).

No. 1-1079A280.

Court of Appeals of Indiana, First District.

March 25, 1980.

W. Brent Threlkeld, Martz & Threlkeld, Indianapolis, for appellants.

John S. Merlau, New Palestine, for appellee.

NEAL, Judge.

STATEMENT OF THE CASE

Defendant Payroll Check Cashing, Division of Lou's Liquors (PCC) appeals an adverse judgment in an action brought by New Palestine Bank (NPB) to recover $896.52, the aggregate amount of three forged checks.

FACTS

The undisputed facts relevant to our review are as follows: A man purporting to be R. E. Merriman tendered three checks at PCC's place of business. Each check was drawn on the account of Allied Construction Company (Allied) in the amount of $298.84, was payable to the order of R. E. Merriman, and bore the signature of Steve Snider. PCC had previously cashed checks drawn on Allied's account and was in possession of a credit rating from NPB which reflected Allied's average monthly balance and the length of time the account had been maintained. PCC cashed the checks, then indorsed and deposited them in a People's Bank and Trust Company (People's). Thence, the checks went through the banking cycle and were presented to NPB for payment. At NPB, the checks were inspected and paid. The cancelled checks were sent to Allied in its monthly statement. Allied notified NPB that the three checks bore forged signatures and forwarded affidavits of forgery. NPB returned the checks to People's, but they were refused due to untimely notice. NPB commenced the present action against PCC, and received a judgment for the amount claimed. PCC appeals.

ISSUES

Appellant PCC presents three allegations of error for our review. These include: (1) the trial court erred in refusing to grant PCC's motion to transfer to preferred venue; (2) the judgment was contrary to the evidence; and (3) the judgment was contrary to law. Inasmuch as we feel that the court committed reversible error in awarding judgment in favor of NPB, we will not consider the venue issue.

Essentially, the issue is this: As between NPB, the drawee-payor bank which made payment on checks bearing forged drawer's signatures, and PCC, which cashed the checks, who should bear the loss?

DISCUSSION AND DECISION

Initially in our analysis we must determine whether to treat this as a forged drawer's signature (forged check) case or a forged indorsement case. This distinction is of great importance in assessing the liabilities between the innocent parties in a check passing scheme. The gist of the distinction is this: generally, the drawee bank is strictly liable to the customer drawer for payment of a forged check or a check bearing a forged indorsement. In the case of a forged indorsement, the drawee may sue back up the collection stream and recover against the party who took the check from the forger. In the case of a forged check, however, liability generally rests with the drawee bank, unless certain warranties are broken.

We consider this to be a forged check case. Arguably, the checks bear a forged indorsement as well as a forged drawer's signature. There was no evidence, however, that the signature of R. E. Merriman, the named payee, was forged, despite NPB's groundless assertion in its brief that a forged indorsement and an imposter are involved in this case. In Perini Corporation v. First National Bank of Habersham County, (5th Cir. 1977) 553 F.2d 398, the machine-embossed facsimile signature of the drawer was forged. The sole proprietorship named as payee and the name of the person indorsing the checks were probably fictitious, although this was not established. The court there elected to treat the case as a forged check case, recognizing "the UCC's concern for finality and the probability that depositary banks, whatever their position in the usual forged indorsement case, have no unique opportunity to detect improper indorsements on checks that are themselves forged." 553 F.2d at 406. We agree with the analysis of the Perini court and shall consider this to be a forged check case.

The obstacle NPB must clear if it is to succeed in recovering against PCC is the final payment rule which has its roots in the 18th century case of Price v. Neal, (1762) 3 Burr. 1354, 97 Eng.Rep. 871. That case held that a drawee who pays an instrument bearing a forged drawer's signature is bound on his acceptance and cannot recover back his payment. Indiana has long followed this rule. In the pre-Uniform Commercial Code case of Commercial and Savings Bank Company v. Citizens National Bank, (1918) 68 Ind.App. 417, 424, 120 N.E. 670, 672, it was held that "(w)here a check purporting to have been drawn by one of . . . (the drawee bank's) depositors is presented to the bank by a bona fide holder thereof for value, and is paid by the bank, the latter cannot compel such holder to whom payment has been so made to repay the amount to it, if it subsequently discovers the check to have been forged." An exception was recognized where the party accepting payment was negligent in failing to ascertain the identity of the person from whom it took the instrument.

The rule of Price v. Neal, supra, is maintained in the Code at Ind. Code 26-1-3-418. That section states:

"Except for recovery of bank payments as provided in the Article on Bank Deposits and Collections (Article 4) and except for liability for breach of warranty on presentment under the preceding section, payment or acceptance of any instrument is final in favor of a holder in due course, or a person who has in good faith changed his position in reliance on the payment."

Ind. Code 26-1-4-213 defines the points at which final payment by a payor bank is effected as follows, in relevant part:

"(1) An item is finally paid by a payor bank when the bank has done any of the following, whichever happens first:

(c) completed the process of posting the item to the indicated account of the drawer, maker or other person to be charged therewith . . .

Upon a final payment under subparagraphs (b), (c) or (d) the payor bank shall be accountable for the amount of the item."

Unless the drawee can recover upon a warranty as prescribed by Ind. Code 26-1-4-207 or Ind. Code 26-1-3-417, its payment is final in favor of a holder in due course or a person who has in good faith changed his position in reliance on the payment.

The warranties made by a customer who obtains payment of an item are found at Ind. Code 26-1-4-207. PCC is a "customer" within the meaning of the Code. "Customer" is defined as "any person having an account with a bank or for whom a bank has agreed to collect items and includes a bank carrying an account with another bank." Ind. Code 26-1-4-104(1)(e). See J. White and R. Summers, Uniform Commercial Code 510 (1972).

The warranties extended by the parties in the bank collection process with which we are here concerned are found at Ind. Code 26-1-4-207(1) and (2), which read in pertinent part as follows:

"(1) Each customer or collecting bank who obtains payment or acceptance of an item and each prior customer and collecting bank warrants to the payor bank or other payor who in good faith pays or accepts the item that

(a) he has a good title to the item or is authorized to obtain payment or acceptance on behalf of one who has a good title; and

(b) he has no knowledge that the signature of the maker or drawer is unauthorized, except that this warranty is not given by any customer or collecting bank that is a holder in due course and acts in good faith

(iii) to an acceptor of an item if the holder in due course took the item after the acceptance or obtained the acceptance without knowledge that the drawer's signature was unauthorized; and

(c) the item has not been materially altered, except that this warranty is not given by any customer or collecting bank that is a holder in due course and acts in good faith

(2) Each customer and collecting bank who transfers an item and receives a settlement or other consideration for it warrants to his transferee and to any subsequent collecting bank who takes the item in good faith that

(a) he has a good title to the item or is authorized to obtain payment or acceptance on behalf of one who has a good title and the transfer is otherwise rightful; and

(b) all signatures are genuine or authorized; and

(c) the item has not been materially altered; and

(d) no defense of any party is good against him; and

(e) he has no knowledge of any insolvency proceeding instituted with respect to the maker or acceptor or the drawer of an unaccepted item. In addition each customer and collecting bank so transferring an item and receiving a settlement or other consideration engages that upon dishonor and any necessary notice of dishonor and protest he will take up the item."

The warranties of Ind. Code 26-1-4-207(2) do not run to payor banks. White and Summers, supra, 511. If the warranty of Ind. Code 26-1-4-207(2)(b), i.e., that all signatures are "genuine or authorized," were to run to payors, the doctrine of Price v. Neal, alive in the Code, would be obliterated. Further, the language "to his transferee and any subsequent collecting bank" would not include a payor, as a "collecting bank" does not include a payor bank. Ind. Code 26-1-4-105(d). See also, UCC § 4-207, Official Comment (4). Thus, the drawee bank making payment receives only the warranties of Ind. Code 26-1-4-207(1). The warranty against material alterations, Ind. Code 26-1-4-207(1)(c), is not applicable in the instant case.

Ind. Code 26-1-4-207(1)(a) provides the warranty of good title to an item, and this warranty is not broken upon the transfer of a check bearing a forged drawer's signature. "A warranty of title is nothing more than an assurance that no one has...