Sun ' Sand, Inc. v. United California Bank

Decision Date20 July 1978
Citation582 P.2d 920,148 Cal.Rptr. 329,21 Cal.3d 671
CourtCalifornia Supreme Court
Parties, 582 P.2d 920, 24 UCC Rep.Serv. 667, 21 UCC Rep.Serv.2d 1003 SUN 'N SAND, INC., et al., Plaintiffs and Appellants, v. UNITED CALIFORNIA BANK, Defendant and Respondent. L.A. 30636

George DeRoy and Hochman, Salkin & DeRoy, Beverly Hills, for plaintiffs and appellants.

Gendel, Raskoff, Shapiro & Quittner and Richard S. Berger, Los Angeles, for defendant and respondent.

MOSK, Justice.

We address here a variation on the recurring theme (see, e. g., Cooper v. Union Bank (1973) 9 Cal.3d 371, 107 Cal.Rptr. 1, 507 P.2d 609) of the rights of an employer to recover funds embezzled by a faithless employee through the manipulation of company checks.

The appeal arises from a judgment (order of dismissal) entered after a general demurrer to plaintiffs' second amended complaint was sustained; prior to the ruling plaintiffs conceded they were unable to amend further.

The material facts alleged are as follows: Plaintiffs are sister corporations (hereinafter collectively referred to as Sun 'n Sand) having the same shareholders and doing business from the same premises. 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 she made nine of such checks payable to United California Bank (UCB), each for a different, small amount. 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. Although UCB was the named payee, it "caused or permitted" the proceeds of the checks to be deposited in a personal account maintained by Morales at UCB.

Sun 'n Sand had its company account with Union Bank. UCB presented each of these checks to Union Bank, which paid them and charged Sun 'n Sand's account for their face amounts. Morales concealed her actions by destroying some and manipulating other company records; 1 as a result, Sun 'n Sand did not discover her fraudulent activity until June 23, 1973, some three months after the last altered check transaction. 2

Sun 'n Sand instituted this action by filing its original complaint on March 4, 1974. Although the complaints named UCB and Union Bank as codefendants, the present appeal involves Sun 'n Sand's rights against UCB alone. The amended complaints sought to recover the total amount of the checks in question (fn. 2, Ante ) on six alternative theories: one each based on mistake, fraudulent misrepresentation, negligence, and warranty against material alteration, and two based on title warranties.

UCB demurred on the grounds (1) that each of the six counts fails to state facts sufficient to constitute a cause of action, and (2) that 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." The court ordered the case dismissed as against UCB, and Sun 'n Sand appealed. (Code Civ.Proc., § 581, subd. 3.)


In three of the counts it asserts, Sun 'n Sand relies on certain warranty obligations imposed by sections 3417 and 4207 of the California Uniform Commercial Code. 3 These are parallel provisions, as recognized in the California code comments that explain their effect on California law: "Section 4207 fixes the same warranties for the collection of items through the banking system that Commercial Code § 3417 establishes for the transfer of commercial paper not collected through the banking system." (§ 4207, com. 1; West's Cal.U.Com.Code Ann. (1964 ed.) p. 577.) 4 Sun 'n Sand seeks to utilize both sections because of UCB's dual role in the events alleged herein: the complaint predicates liability under section 3417 on the bank's status as payee on the nine checks and under section 4207 on its activity as a collecting bank in the check collection process. 5

A. Sun 'n Sand's Right to Maintain an Action Based on the Warranties of Sections 3417 and 4207

The first issue we confront is whether Sun 'n Sand, as the drawer of the checks in question, may rely on the warranty provisions it seeks to invoke.

Prior to the development of the UCC, courts split sharply over the right of a drawer to proceed directly against a collecting bank for losses resulting from the bank's negotiation of a check on a forged indorsement. 6 After noting the " 'hopeless conflict' in the authorities" in Cal. Mill Supply Corp. v. Bank of America (1950) 36 Cal.2d 334, 341, 223 P.2d 849, 853, we held that the drawer had "no right of direct action against the collecting bank for its loss on checks bearing forged endorsements." Adoption of this view did not relieve collecting banks of ultimate liability, however; the drawer could proceed against the drawee bank for violation of its contractual obligation to pay monies out of the drawer's account only according to his order, and the drawee bank in turn had a remedy against the collecting bank based on the latter's implied warranty of the validity of the indorsement. Placing the loss on the collecting bank by means of this circuitous route was thought to be necessary because the conceptual basis for that bank's liability was an implied contractual warranty and no contractual relationship existed between it and the drawer. (Id. at pp. 338-339, 223 P.2d 849.)

The rule of California Mill Supply, of course, sharply conflicts with the objective of avoiding multiple suits; we therefore reexamine that rule in light of section 4207, which shifts the basis for imposing liability on the collecting bank from an implied contractual warranty to an explicit statutory warranty. In determining whether the drawer of a check is among those to whom the statutory warranties of section 4207 were intended to be extended, we are guided by our observation in Cooper v. Union Bank (1973) supra, 9 Cal.3d 371, 381-382, 107 Cal.Rptr. 1, 9, 507 P.2d 609, 617: "Requiring cumbersome and uneconomical circuity of action to achieve an identical result would obviously run contra the code's explicit underlying purposes 'to simplify, clarify and modernize the law governing commercial transactions.' (§ 1102, subd. (2) (a).)."

In Allied Concord etc., Corp. v. Bank of America (1969) 275 Cal.App.2d 1, 3-4, 80

Cal.Rptr. 622, the court determined that with the enactment of the California Uniform Commercial Code California Mill Supply was effectively overruled, as the Code authorizes direct suit by a drawer against both depositary and collecting banks. The court found support for its holding in principles of contract law relating to third party beneficiaries. While we agree that direct suit is authorized by the California Uniform Commercial Code, we find it unnecessary to rely on third party beneficiary principles in reaching this conclusion.

Section 4207, subdivision (1), provides that its warranties extend to "the payor bank or other payor who in good faith pays or accepts the item." To receive the benefit of these warranties, then, the drawer of a check must qualify as an "other payor who . . . pays." At least one court has held, although without offering any explanatory rationale, that a drawer whose account was debited by his bank is a payor entitled to claim the benefit of these warranties. (Insurance Company of No. Amer. v. Atlas Supply Co. (1970) 121 Ga.App. 1, 172 S.E.2d 632, 636.) We find this broad construction of the payor concept justified by inferences that can be drawn from the structure of section 4207 and language in the official comments to the UCC. 7

The warranties provided for in subdivisions (1)(b) and (1)(c) of section 4207 are expressly made subject to certain exceptions which operate in favor of a holder in due course who acts in good faith. These warranties are not extended to a number of parties, including a drawer "whether or not the drawer is also the drawee." (§ 4207, subds. (1)(b)(ii) & (1)(c)(ii).) By negative implication, the warranties are given by a collecting bank to a drawer who is not also the drawee (payor) bank at least when the collecting bank is not a holder in due course or does not act in good faith. Section 4207 is quite clear in excepting drawers under subdivisions (1)(b)(ii) and (1)(c)(ii); accordingly, we may infer that drawers are among those to whom the warranty of section 4207, subdivision (1)(a), extends, as no comparable exceptions are there made.

The inferences thus compelled by the structure of section 4207 indicate the Code contemplates that the drawer of a check is an "other payor" for purposes of that section who may, unless specifically excepted, claim the benefits of the warranties therein created. Although the term "payor" is more commonly used in reference to the drawee than the drawer, it is not defined anywhere in the Code and hence should not be regarded as a term of art used in a narrow, technical sense; when a check is negotiated, it is the drawer who ultimately "pays" when his account is charged in the amount of the check. This is implicitly recognized in the official comments to the UCC: "Similarly, under subparagraph (ii) a drawer of a draft is presumed to know his own signature and if he fails to detect a forgery of his signature and Pays a draft he may not recover that payment from a holder in due course acting in good faith." (Italics added.) (UCC, § 3417, com. 4.) 8

We therefore hold that the drawer of a check whose account is charged is a payor within the meaning of section 4207 and may maintain an action against a collecting bank based on that section's warranties. For the foregoing reasons, we further hold that the drawer of a check is "a person who in good faith pays" within the meaning of section 3417 and may maintain...

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