Bank of Glen Burnie v. Loyola Federal Savings Bank

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. L 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. ³³⁵ 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 ³³⁶ 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, ¶ 15.02[2][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 ³³⁷ 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(l)(a) and 4-207(l)(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 ³³⁸ 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: ³³⁹ “[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 criminal thus acting.” 30 Md. at 21-22 . Thus, pursuant to the holding in Com. & Farm., a drawee bank has the obligation to ensure that the signature of its account holder is genuine and a forged indorsement on an instrument bearing a forged drawer’s signature is immaterial, since no indorsement could ever pass title to such an instrument. Although Com. & Farm, was decided prior to the enactment of the U.C.C., because the U.C.C. is silent regarding the allocation of liability in double forgery cases and Com. & Farm, is the only time this Court has addressed the issue, the decision provides valuable guidance on Maryland legislative intent regarding loss allocation in double forgery cases.

The Supreme Court, also in a pre-U.C.C. case, held the drawee bank liable for payment on a check bearing both a forged drawer’s signature and a forged indorsement. See United States v. Chase Nat. Bank, 252 U.S. 485 , 40 S.Ct. 361 , 64 L.Ed. 675 (1920). In Chase, the finance clerk to a United States Army lieutenant took an official check form and forged both the drawer’s signature and the indorsement in the name of the lieutenant, and cashed the instrument at the Howard National Bank (Howard).

Howard forwarded the check for collection to Chase National Bank (Chase), who then forwarded it to the drawee, the Treasurer of the United States. Two ³⁴⁰ weeks after the Treasurer paid on the instrument, it discovered the forgery and demanded repayment. 252 U.S. at 493 , 40 S.Ct. at 362 , 64 L.Ed. at 678 . In holding the United States Treasury liable for the loss, the Court stated that the fact that the indorsement was also forged does not prevent application of the Price v. Neal rule which binds a drawee bank to its acceptance once it pays on a forged drawer’s signature. See Chase, 252 U.S. at 495 , 40 S.Ct. at 363 , 64 L.Ed. at 679-80 .

The Court concluded by noting that “[t]he forged indorsement puts [the drawee] in no worse position than he would occupy if [the signature] were genuine. He cannot be called upon to pay again and the collecting bank has not received the proceeds of an instrument to which another held a better title.” Chase, 252 U.S. at 496 , 40 S.Ct. at 363 , 64 L.Ed. at 680 . Following the enactment of the U.C.C., several courts in other jurisdictions have had occasion to decide the liabilities of the respective parties in double forgery cases. These case holdings are consistent with pre-U.C.C. cases holding the drawee bank liable in double forgery cases.

The seminal case addressing the allocation of liability in double forgery cases treats the double forgery as a forged drawer’s signature situation and places liability for the improper payment on the drawee bank. See Perini, supra. Perini Corporation was a large construction company which utilized a facsimile signature machine for writing its large volume of checks. Perini, 553 F.2d at 400.

A number of Perini’s checks were stolen and the thief either gained access to the signature machine or made a perfect copy of the facsimile signature. Perini, 553 F.2d at 401. The facsimile signature on the forged checks was indistinguishable from the signature that was on file at the drawee banks. The stolen checks were subsequently deposited at the Habersham Bank into the account of “Quisenberry Contracting Co.” and a signature card was signed in the forged or fictitious name, “Jesse D. Quisenberry.” Id.

Another account was also opened at Habersham in the name of “Southern Contracting Co.” and the depositor again signed “Jesse D. Quisenberry” on ³⁴¹ the signature card. Perini checks totalling over one million dollars were deposited into the accounts. Habersham stamped each check “P.E.G.” to guarantee the prior indorsement, and forwarded the checks to Fulton National Bank of Atlanta (Fulton) for collection. Id.

Fulton then sent the checks to the drawee banks, Brown Brothers, Harriman & Company (Brown Brothers) and Morgan Guaranty Trust Company of New York (Morgan), both of whom paid the checks. Id. After discovering the forgeries, Perini sued Morgan, Fulton and Habersham to recover the monies paid out to the depositor. Perini, 553 F.2d at 402.

By this time, the depositor had withdrawn almost all of the monies in the account. Perini, 553 F.2d at 401. In assessing liability, the Perini court relied on the U.C.C.’s finality rule of § 3-418 to hold that a double forgery case must be treated as a forged drawer’s signature case and the drawee bank must suffer the loss when it pays on an instrument bearing both a forged indorsement and a forged drawer’s signature. 4 See Perini, 553 F.2d at 417. One author summarized the Perini holding as follows: “The Perini case ... stands for the proposition that double forgeries will be treated as forged drawer’s signature cases, not forged indorsement cases....

If there is no ‘intended payee,’ the case should not be cast as a forged indorsement case.” Barkley Clark, The Law of Bank Deposits, Collections and Credit Cards, ¶ 805[1], at 8-207 (3d ed. 1990). Subsequent judicial decisions also treat double forgeries as forged drawer’s signature cases and impose liability solely on the drawee bank. See Cumis Insurance Society, Inc. v. Girard Bank, 522 F.Supp. 414, 419 (E.D.Pa.1981); Winkie v. Heritage Bank of ³⁴² Whitefish Bay, 299 N.W.2d 829, 836-37 (Wis.1981); Brighton, Inc. v. Colonial First Nat’l Bank, 176 N.J.Super. 101 , 422 A.2d 433, 440 (Ct.App.Div.1980), aff'd, 86 N.J. 259 , 430 A.2d 902 (N.J.1981). Section 3-418, relied on by the Perini court, provides that “except for liability for breach of warranty on presentment under [§ 3^417], 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.” 5 Section 3-418’s finality rule is the codification of the common law rule established by the King’s Bench of England in Price v. Neal, 3 Burr. 1354 (K.B. 1762), which provided that once a drawee bank improperly pays a check bearing a forged drawer’s signature, the drawee bank is bound by its acceptance and cannot recover back its payment. 3 Burr, at 1357.

The finality rule also corresponds with the policy of encouraging finality in commercial transactions involving checks. See § 3-418 cmt. 1 (stating 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”); Com. & Farm., 30 Md. at 22 (stating that the “safest rule for the commercial public, as well as that most consistent with justice, is to allow the loss to remain where by the course of business it has been placed [on the drawee bank]”). In the instant case, Loyola initially asserts that Glen Burnie is not protected by the finality rule because the rule is expressly subordinate to a claim for a breach of the presentment warranty of good title under § 3-417. Section 3- ³⁴³ 417(l)(a) provides that “any prior transferor warrants to a person who in good faith pays or accepts that ... [h]e has good title to the instrument or is authorized to obtain payment or acceptance on behalf of one who has a good title.” Loyola argues that Glen Burnie breached this presentment warranty because forged indorsements cannot convey good title.

Thus, Loyola asserts that it may recover the monies it paid on the forged checks from Glen Burnie based on a claim for breach of the presentment warranty of good title and Glen Burnie is precluded from invoking § 3-418 as a defense to Loyola’s breach of presentment warranty claim. We disagree. Courts have stated that § 3-417’s warranty of title “is nothing more than an assurance that no one has better title to the check than the warrantor, and therefore, that no one is in a position to claim title as against the warrantee, as the payee or other owner of a genuine check could do if his endorsement were forged.” Perini 553 F.2d at 415 (quoting Aetna Life and Casualty Co. v. Hampton State Bank, 497 S.W.2d 80, 84 (Tex.Civ.App.1973)). Unlike instruments containing only a forged indorsement in which a named payee will come forward with a valid claim of superior title to the instrument, when an instrument contains a double forgery, because both the drawer’s signature and the indorsement are forged, no valid payee or drawer can come forward with a superior claim of title.

Thus, in double forgery cases, because no party has better title to the instrument, no breach of presentment warranty exists. See, e.g., Brighton, Inc. v. Colonial First Nat’l Bank, 176 N.J.Super. 101 , 422 A.2d 433, 441 (Ct.App.Div.1980), aff'd, 86 N.J. 259 , 430 A.2d 902 (N.J.1981) (noting that “[t]he normal hazard encountered in honoring a check bearing the forged indorsement of the payee[,] ... that the forger will be paid, and when the true payee comes forth, his debt will have to be paid” does not exist in double forgery cases). Applying the above analysis to the instant case, Glen Burnie did not breach the warranty of good title because no party exists who can ³⁴⁴ assert better title to the instrument due to the forged drawer’s signature. 6 In addition, the warranty of title merely guarantees that the instrument contains all “necessary” indorsements and that those indorsements are deemed effective. See Fireman’s Fund Ins. v. Sec. Pac.

Nat. Bank, 85 Cal.App.3d 797, 809-10 , 149 Cal.Rptr. 883, 892 (1978), and Longview Bank & Trust v. First Nat. Bank, 750 S.W.2d 297, 298 (Tex.Ct.App.1988) (both noting that- the warranty of good title guarantees that all necessary indorsements are deemed effective). Given that the instruments in the instant case were all bearer paper requiring no indorsements to transfer good title, see §§ 3-111 and 3-202, the forged indorsement