FORGERIES AND DOUBLE FORGERIES
UNDER ARTICLES 3 AND 4 OF THE DCC
ANTHONY N. PALIZZI*
Remedies available to a person or bank which has taken on a forged
instrument, as well as to a drawee bank which has paid that instrument, are dependent to a large extent upon the status of the party receiving the instrument in the first instance. The technical classifications
of those in possession of commercial paper, and particularly the definition of a "holder in due course," must be derived from various Sections of
the Uniform Commercial Code, l the interdependence of which may not
be readily apparent. This article will attempt to reconcile these apparently inconsistent Sections of the Code, as they relate to double forgeries,
in terms of the broad policy considerations underlying the negotiability
of instruments and the allocation of loss among parties to an action involving such instruments.
Although Articles 3 and 4 of the Uniform Commercial Code, dealing
with Commercial Paper and Bank Deposits and Collections, contain 116
Sections of somewhat technical "black letter law" plus Comments, the
paucity of litigation thus far under those Articles suggests that few
problems are being encountered. At least three alternative conclusions
can be postulated: (1) the statute was so well drafted that the "machine" is running smoothly;2 (2) the amounts in controversy are not
sufficiently significant to warrant appeal; or (3) counsel have not yet
uncovered the difficulties which may exist in Articles 3 and 4. Whatever the precise explanation for the lack of litigation, Articles 3 and 4
contain unresolved linguistic and structural problems which admit of
no easy solution. Consider, for example, the following hypothetical. s
* Assistant Professor of Law, Texas Technological College. Ph.B. 1964, J.D. 1966,
Wayne State University; LL.M. 1967, Yale University. The author wishes to e>..-press
his sincere appreciation to Raymond G. McGuire, Assistant Professor of Law at
Florida State University, for his help in the preparation of this article.
1 Hereinafter referred to as the Code.
All citations, except where expressly
noted, are to the 1962 official text.
2 See Penney, Bank Statements, Cancelled Checks, and Article Four in the Electronic Age, 65 MICH. L. REv. 1341 (1967).
S A brief explanation of the format used is perhaps in order. A hypothetical
problem serves as the primary vehicle of analysis, more out of necessity than preference.
659
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The Acme Corporation utilizes two different types of instruments to
pay its obligations. On the face of one type appears the following:
an identifying number in the upper right-hand corner; a blank line
following the words "Pay to the order of'; a blank line for the amount
of the instrument; a blank for the date; a blank in the lower right-hand
corner for the signature of the drawer (Acme); and the words
"BROWN CITY BANK," the drawee, on the top. The second type of
instrument is the same as the first except for the words "Pay to" instead
of "Pay to the order of' on its face.
On March 4, 1969, Joe Jones, a night janitor at Acme, stole 30 of
each type of instrument together with a stamp which Acme used to sign
the above instruments. Thus equipped, he wrote in the name of
"James Johnson" (a friend whose identification he had stolen) after the
words "Pay to the order of' or "Pay to" on the face of each instrument,
filled in amounts varying from 25 dollars to 250 dollars, filled in the
date, and stamped each one with the stamping device. He then cashed
all of these instruments at various branches of the First National Bank
(placing the words "Pay to the First National Bank" on the back),
indorsing each one on the back in the name of James Johnson and using
the stolen identification. After collecting the proceeds, he was off to
parts unknown.
The First National Bank (hereinafter FNB) , after cashing the stolen
instruments for Jones, presented them for payment to the Brown City
Bank (hereinafter BCB).
The remainder of the article will focus upon the two following questions:
(1) If the drawee Bank (BCB) refuses to pay the instruments and
returns them to FNB after having held them for twenty-four hours, does
FNB have recourse against Acme?4
Since, as has been noted, there are few Judicial decisions interpreting Articles 3 and 4,
the familiar comparison of appellate cases is virtually impossible. The natural alternative-a theoretical discussion-is also unattractive for several reasons. First, theoretical discussions of already abstruse problems, such as "holder in due course," tend to
compound rather than reduce the confusion of the general reader. Second, a major
purpose of this article is to demonstrate the interrelationship between various problems.
Relationships can be alluded to, but hardly demonstrated in a theoretical discourse. The
hypothetical, on the other hand, will hopefully serve as a thread tying individual problems to one another, and as a referent permitting a more realistic investigation of issues.
4 The liability of Jones will not be discussed since he has absconded. Of course,
if he were present and not judgment proof, he would suffer the ultimate loss. See
\JNIFORM <;:QMMERCIAL <;:ODE §§ ~-417, 4-207. Ulereinafter the Code sections will be
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FORGERIES UNDER THE UCC
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(2) If BCB pays the instruments in violation of a stop payment
order may it recover the money from FNB or charge Acme's account
with the loss?
cited by section number only.] As far as BCB is concerned, § 3-409(1), which provides that a "drawee is not liable on the instrument until he accepts it," relieves it of
possible liability to FNB since BCB did not accept or certify the checks. Section
3-410(i) provides that:
Acceptance is the drawee's signed engagement to honor the draft as presented.
It must be written on the draft, and may consist of his signature alone . . . .
Section 3-411(1) states in part that: "Certification of a check is acceptance." In
addition, BCB did not convert the instruments within the meaning of § 3-419(1)(a)
since there was no demand by FNB to return them; and BCB did not "finally pay" the
instruments within § 4-213(1), which provides:
(1) An item is finally paid by a payor bank when the bank has done any of
the following, whichever happens first:
(a) paid the item in cash; or
(b) settled for the item without reserving a right to revoke the settlement
and without having such right under statute, clearing house rule or
agreement; or
(c) completed the process of posting the item to the indicated account of
the drawer, maker or other person to be charged therewith; or
(d) made a provisional settlement for the item and failed to revoke the
settlement in the time and manner permitted by statute, clearing
house rule or agreement.
Upon a final payment under subparagraphs (b), (c), or (d) "the payor bank
shall be acconntable for the amount of the item.
[BCB is a "payor bank" under § 4-105(b). See Farmers Coop. Livestock Mkt., Inc. v.
Second Nat'l Bank, 427 S.W.2d 247, 5 UCC Rept. Servo 88 (Ky. 1968); Stone & Webster Eng'r Corp. v. First Nat'l Bank & Trust Co., 345 Mass. 1, 184 N.E.2d 358, 1 UCC
REp. SERvo 195 (1962).] [All case citations will contain a reference to H. FISCHER &
J. WILLIS, U.C.C. REp. SER. since many readers will have access to those volumes.]
More specifically, BCB had, under § 4-301(1), a right to revoke, before its "midnight deadline," any settlement it made with FNB; BCB availed itself of this right by
refusing to pay and returning the instruments to FNB within 24 hours. See § 4-301,
which provides in part:
(1) Where an authorized settlement for a demand item . . . received by a
payor bank othenvise than for immediate payment over the counter has been
made before midnight of the banking day of receipt the payor bank may revoke the settlement and recover any payment if before it has made final payment (§ 4-213(1» and before its midnight deadline it
(a) returns the item; or
(b) sends written notice of dishonor or nonpayment if the item is held
for protest or is otherwise unavailable for return.
(4) An item is returned:
(a) as to an item received through a clearing house, when it is delivered to the presenting or last collecting bank or to the clearing
house or is sent or delivered in accordance with its rules; or
(b) in all other cases, when it is sent or delivered to the bank's customer
or transferor or pursuant to his instructions.
See also § 4-213, Comment 4; Douglas v. Citizens Bank, 244 Ark. 168, 424 S.W.2d 532,
5 UCC REP. SERVo 189 (1968).
Section 4-104(I)(h) which defines "midnight deadline" as "midnight on [the bank's]
next banking day following the banking day on which it receives the relevant item or
notice or from which the time for taking action commences to run, whichever is later."
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I
RECOURSE By FIRST NATIONAL BANK AGAINST ACME
IF BROWN REFUSES TO PAY
In order. to come within the protective provisions of Article 3 of the
Code, FNB must first show that the instruments are negotiable. [j
Section 3-104(1) lists the prerequisites of negotiability, the first of
which is that the writing "be signed by the maker or drawer."6 This
requirement can be satisfied "by the use of any name, including any trade
or assumed name, upon an instrument, or by any word or mark used in
lieu of a written signature."7 The second prerequisite is that the writing
"contain an unconditional promise or order to pay a sum certain in
money and no other promise, order, obligation or power. . . except as
authorized by this Article. . . ."8 The writing also must "be payable
on demand or at a definite time."D The final criterion, that the writing
On the ambiguity of this definition see Mellinkoff, The Language of the Uniform
Commercial Code, 77 YALE L.J. 185, 188 (1967).
Section 4-104(1)(j) defines "settle" as: "[T]o pay in cash, by clearing house settlement, in a charge or credit or by remittance, or otherwise as instructed. A settlement
may be either provisional or final. . . ."
[j See § 3-102(1)(e).
See also Associates Discount Corp. v. Elgin Organ Center,
Inc., 375 F.2d 97, 4 UCC REP. SERVo 36 (7th Cir. 1967). On the ambiguity of
§ 3-102(I)(e), see Mellinkoff, supra note 4, at 193-95.
A writing need not be negotiable to come within Article 4 since that Article generally applied to "items," defined in § 4-104(1)(g) as "any instrument for the payment
of money even though it is not negotiable. . . ." Note that § 4-102(1) provides:
To the extent that items within this Article are also within the scope of
[Article] 3 . . ., they are subject to the provisions of [that Article]. In the
event of conflict the provisions of this Article govern those of Article 3 . . • .
In addition, a writing may be outside of Article 3 and still have certain attributes
of negotiability since § 3-104, Comment 2 states: "[N]othing in this section is intended to mean that in a particular case a court may not arrive at a result similar to
that of negotiability by finding that the obligor is estopped by his conduct from asserting
a defense against a bona fide purchaser. Such an estoppel rests upon ordinary principles of the law of simple contract; it does not depend upon negotiability. . .." See
Leary, Commercial Paper in ABA UNIFORM COMMERCIAL CODE HANDBOOK 87, 89
(1964).
6 Section 3-104(I)(a).
7 Section 3-401(2). See also § 1-201(39) which provides: "'Signed' includes any
symbol executed or adopted by a party with present intention to authenticate a writing,"
8 Section 3-104(1)(b).
Subsequent Sections explicate this Section by providing
when certain facts do or do not make a promise or order conditional (§ 3-105); when
the amount payable is a sum certain (§ 3-106); when an instrument is payable in
money (§ 3-107); and what terms when inserted or omitted do not affect negotiability
(§ 3-112).
9 Section 3-104(1)(c). This requirement can be met despi\e the inclusion of an
acceleration clause or certain options to extend the maturity date (.§ 3-109) and even if
no time for payment is stated, in which case the instrument would be payable on demand
(§ 3-108).
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FORGERIES UNDER THE UCC
663
be "payable to order or to bearer,"10 includes, as order paper, such
instruments as those payable to the order of a payee, an estate, an
office or officer, or a partnership;l1 as bearer paper the definition
encompasses such instruments as those payable to cash, a specified
person or bearer, or any other indication which does not purport to
designate a specific payee. 12
As far as the instruments involved in the hypothetical (hereinafter
occasionally referred to as the problem) are concerned, the first type
appears to satisfy the standards of negotiability and, thus, would fall
within Article 3; in fact, they are "checks."13 Although the second
type of instrument does not meet the prerequisites of Section 3-104
because it is not "payable to order or to bearer,"14 Section 3-805 provides:
This Article applies to any instrument whose terms do not preclude
transfer and which is otherwise negotiable within this Article but which
is not payable to order or to bearer, except that there can be no holder
in due course of such an instrument. (Emphasis added.)
Therefore, even though these latter instruments (hereinafter referred
to as Section 3-805 instruments) are non-negotiable, all of the provisions of Article 3 are applicable to them, with the exception that there
can be no holder in due course of the instruments. 15
The drawer of a negotiable or Section 3-805 instrument makes the
following "contract of engagement" on the instrument:
The drawer engages that upon dishonor of the draft and any necessary
notice of dishonor or protest he will pay the amount of the draft to the
holder or to any indorser who takes it Up.16
10 Section 3-104(I)(d).
Section 3-110.
Section 3-111.
13 Section 3-104(2)(b).
14 Section 3-104(1)(d). See Strauss v. State, 113 Ga. App. 90, 147 S.E.2d 367,
3 DCC REp. SERVo 360 (1966). On pre-Code law see W. BRrITON, BILLS AND NOTES
22-26 (2d ed. 1961). That fact that the indorsements do not contain "order" or "bearer"
terms does not affect the negotiability of the instruments. See § 3-202, Comment 4; cf.
§ 3-204.
15 See Faulkner v. State, 445 P.2d 815, 5 DCC REp. SERVo 1091 (Alas. 1968);
Comet Check Cashing Service, Inc. V. Hanover Ins. Group, 5 DCC REp. SERVo 852 (Civ.
et., N.Y. County, N.Y. 1968); Northerlin Co., Inc. V. Rauch Constr. Corp., 4 DCC
REP. SERVo 320 (Sup. Ct, N.Y. County, N.Y. 1967); Note, Liabilities of the Transferor
of Non-Negotiable Instruments Under the Proposed Commercial Code, 98 U. PA. L.
REv. 213, 214 (1949). As to whether the instruments are within Article 4, see note
5 supra.
16 Section 3-413(2).
11
12
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When a person's name, however, is inserted without authority on an
instrument where the drawer's signature usually goes, such person will
not be considered the drawer unless he ratifies or is precluded from
denying the signature via words or conduct amounting to estoppe1. 17
The signature, however, will operate as that of the unauthorized signer
and he will be considered the drawer. 1s In terms of the problem, this
means that initially Jones will be considered the drawer of the instruments since, "without authority,"19 he affixed Acme's name thereon. 2o
Therefore, since Acme had not authorized Jones to make Acme's
signature, Acme will not be liable to FNB as the drawer of the instrument. Failure to utilize due care by the "drawer," however, may
estop him from denying the lack of authority with regard to the forgeries under Section 3-406, which provides:
Any person who by his negligence substantially contributes to a material alteration of the instrument or to the making of an unauthorized
17 See
§ 3-404(1), which provides:
Any unauthorized signature is wholly inoperative as that of the person whose
name is signed unless he ratifies it or is precluded from denying it; but it operates as the signature of the unauthorized signer in favor of any person who in
good faith pays the instrument or takes it for value.
1S See § 3-404, Comment 2, which states in part that one who signs another's
name without authorization is liable "on the instrument in the capacity in which he
has signed." The fact that a forger may be considered the drawer should not, however,
be taken too literally, since, if it were, some Sections would make no sense. For example,
§ 3-417(I)(b)(ii) provides that a "drawer" cannot, in certain situations, recover for
breach of warranty when the "drawer's" signature has been forged. If the draftsmen
really meant "drawer" in § 3-417(1)(b)(ii), this provision would be saying that the
forger cannot recover for breach of warranty; this is so because, by virtue of § 3-404
(1), a forged signature is ''wholly inoperative as that of the person whose name is
signed." (Throughout this article the use of quotation marks around the term "drawer"
will indicate that reference is to the account holder.)
19 "Unauthorized" in that Jones had neither actual nor apparent authority to
sign Acme's name. See § 1-201(43) which provides: "'Unauthorized' signature or
indorsement means one made without actual, implied, or apparent authority and includes a forgery." Compare this conclusion with Jenkins v. Evans, 31 App. Div. 2d
531, 295 N.Y.S.2d 226, 5 UCC REp. SERvo 1185 (1968). See also § 3-404, Comment 1.
20 See § 3-401(1), which provides that: "No person is liable on the instrument
unless his signature appears thereon." Cf. Harris v. Harris, 428 Pa. 473, 239 A.2d
783, 5 UCC REP. SERVo 148 (1968); Britton, Defenses, Claims of Ownership and
Equities-A Comparison of the Provisions of the Negotiable Instruments Law with
Corresponding Provisions of Article 3 of the Proposed Commercial Code, 7 HASTINGS
L.J. 1, 5-8 (1955).
I use the word "initially" in the accompanying sentence in the text because, as
§ 3-404(1) provides, the signatures may operate as those of Acme, if Acme is "precluded from denying" them. Such a preclusion may occur via § 3-406 which will be
discussed infra. Section 3-404(1) is set out in note 17 supra.
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FORGERIES UNDER THE
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665
signature is precluded from asserting the alteration or lack of authority
against a holder in due course or against a drawee or other payor who
pays the instrument in good faith and in accordance with the reasonable
commercial standards of the drawee's or payor's business.
FNB probably would have little difficulty in showing a failure to utilize
ordinary care on the part of Acme in the hiring of Jones, or carelessness
amounting to negligence in leaving its signature stamp and blank checks
in such a place that Jones had easy access to them, particularly in light
of Section 3-406, Comment 7, which states in part:
The most obvious case [of negligence which contributes to a forgery] is
that of the drawer who makes use of a signature stamp or other automatic signing device and is negligent in looking after it.21
However, even if a "drawer" has been negligent to the extent of substantially contributing to a forgery or forgeries, the possessor of the instrument will not be protected under Section 3-406 unless he is a "holder
in due course. . . drawee or other payor who pays the instrument in
good faith and in accordance with the reasonable commercial standards
of the drawee's or payor's business." Therefore, whether a nondrawee bank that cashes an instrument with the payee's name forged
can take advantage of Section 3-406 will depend on whether the bank
is a "holder in due course" or "other payor."
FNB must qualify as a "holder" before it can be considered "holder
in due course"22 under Section 3-406. At this point a seemingly simple
problem becomes obscured by conflicting Code Sections. "Holder"
is defined in Section 1-201(20) as "a person who is in possession of
. . . an instrument . . . drawn, issued or indorsed to him or to his
order or to bearer or in blank." On its face this definition would
include some persons who were not holders under pre-Code law, such
as a taker from a thief who has signed the owner-payee's name on the
back of an order instrument.23
Cf. Gast v. American Cas. Co., 99 N.J. Super, 538, 248 A.2d 682, 5 UCC
SERVo 155 (1968); Gresham State Bank V. 0 & K Constr. Co., 231 Ore. 106,
370 P.2d 726, clarified 011 denial of rehearing, 231 Ore. 129, 372 P.2d 187, 1 UCC REp.
SERV.276 (1962); Thompson Maple Prods., Inc. V. Citizens Nat'! Bank, 211 Pa. Super.
42,234 A.2d 32, 4 UCC REp. SERVo 624 (1967); Jackson v. First Nat'! Bank, 55 Tenn.
App. 545, 403 S.W.2d 109, 3 UCC REp. SERVo 630 (1966); Britton, supra note 20, at
18-20; Comment, infra note 36, at 461-62.
22 Section 3-302(1) provides: "A holder in due course is a holder . . . •"
(Emphasis added.)
23 Such a taker would be a holder within § 1-201(20) since he would be "in
possession of. . . an instrument .•• indorsed. . . in blank."
21
REP.
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The definition of holder in Section 1-201 (20), however, appears to
conflict with Section 3-202, which states in part:
Negotiation is the transfer of an instrument in such form that
the transferee becomes a holder. H the instrument is payable to order
it is negotiated by delivery with any necessary indorsement. . .
(2) An indorsement must be written by or on behalf of the holder.
(Emphasis added.)24
(1)
Comment 1 to Section 3-202, which states that "negotiation is . . . a
special form of transfer, the importance of which lies entirely in the fact
that it makes the transferee a holder," implies that one may become
a holder within Article 3 only through the process of negotiation. 2 [; This
interpretation is reinforced by the preamble to Section 1-201 which provides that general definitions are subject to qualification by additional
definitions found in specific articles. 26 Finally, if Sections 1-201 (20)
and 3-202 are treated as non-conflicting, a major change from preCode law would be affected; such an interpretation is unlikely in that
the Comments make no mention of such a departure. 27
See also § 3-301.
25 See White, Some Petty Complaints About Article Three, 65 MICH. L. REV. 1315,
1319, 1327 (1967). See also Mellinkoff, supra note 4, at 192-93.
26 A contrary interpretation would also conflict with the intent of the Code authors in drafting § 3-204(1). Assume D draws a draft payable to bearer and issues it
to P; P in turn "specially" indorses it to X ("Pay X or order") and delivers it to X;
X then delivers it to Y without any further indorsement. Under § 1-201(20) Y would
be a holder since he is "in possession of . . . an instrument . . . issued . . . to
bearer." Section 3-204(1) provides however, that an indorsement is necessary to negotitate a specially indorsed instrument. Although this latter section may not, on its face,
rule out the argument that Y can be a holder within § 1-201(20), if Y were a holder, D
would be liable to him on the instrument despite the absence of a "necessary" indorsement, which is contrary to the draftmen's intent as expressed in § 3-204, Comment.
See also § 3-201(3). Cf. Britton, Transfers and Negotiations Under the Negotiable
Instruments Law and Article 3 of the Uniform Commercial Code, 32 TExAs L. REV. 153
(1953) Leary, supra note 5, at 106-07.
27 See Stone & Webster Eng'r Corp. v. First Nat'l Bank & Trust Co., 345 Mass. 1,
184 N.E.2d 358, 1 UCC REP. SERVo 195 (1962); Mellinkoff, supra note 4, at 192-93;
White, supra note 25, at 1327. Cf. W. BRfITON, supra note 14, at 117, 250, 395;
Britton, supra note 26, at 157-59.
The reader should also be aware of § 1-102, which states in part:
(1) This Act shall be liberally construed to promote its underlying purposes and policies.
(2) Underlying purposes and policies of this Act are
(a) to simplify, clarify and modernize the law governing commercial
transactions;
(b) to permit the continued expansion of commercial practices through
custom, usage and agreement of the parties;
(c) to make uniform the law among the various jurisdictions.
This section should be kept in mind throughout this article. See also § 1-106.
24
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If this analysis is correct and Section 3-202 is construed to override
Section 1-201(20), FNB would not be a holder28 of the first type of
instruments (checks) because they were not payable to the order of
Jones, Jones was not authorized to sign Johnson's name, and there was
no delivery to Jones. 29 The same conclusion can be reached with regard to the Section 3-805 instruments even though they were not payable to "order," since the Comment to Section 3-805 states in part:
"Such a check [one reading 'Pay A'] passes by indorsement and delivery." (Emphasis added.)30
Since FNB is also not a drawee, its only other possibility of qualification under Section 3-406, and recourse from Acme for its negligence,
is as an "other payor." FNB will probably not be considered an "other
payor" for the following reasons: Although the Code nowhere defines
a "payor," the term "generally has reference to a person who discharges
a bill or note surrendered to him as distinguished from a person who
28 The mere fact that FNB is a bank, and possibly a collecting bank, or, more
specifically, a depositary bank [See §§ 4-105(a), (d)], would not prevent FNB
from being a holder. See § 4-201(1). See also Tidwell v. Bank of Tifton, 115
Ga. App. 555, 155 S.E.2d 451, 4 uee REp. SERvo 414 (1967); Waltham Citizens
Nat'l Bank v. Flett, 353 Mass. 696, 234 N.E.2d 739, 5 uee REp. SERVo 186 (Sup. Jud.
Ct. 1968); Farmers & Merchants Nat'l Bank v. Boardwalk Nat'l Bank, 101 N.J. Super.
528, 245 A.2d 35, 5 uee REp. SERVo 575 (1968); Citizens Nat'l Bank v. Fort Lee
Sav. & Loan Ass'n, 89 N.J. Super. 43, 213 A.2d 315, 2 uec REp. SERV. 1029 (1965);
eole v. First Nat'l Bank, 433 P.2d 837, 4 uec REp. SERVo 959 (Wyo. 1967); Annot.,
18 A.L.R.3d 1376, 1381, 1388-91 (1968).
29 "Delivery" is defined in § 1-201(14) as a "voluntary transfer." See Mellinkoff, supra note 4, at 192-93; White, supra note 25, at 1316-27.
It could be argued that § 3-203 militates against this conclusion; § 3-203 provides:
Where an instrument is made payable to a person under a misspelled name or
one other than his own he may indorse in that name or his own or both; but
signature in both names may be required by a person paying or giving value
for the instrument.
However, it would seem that this Section is not applicable in that it was designed, as
its caption and Comments imply (see § 1-109 which provides that "Section captions are
parts of this Act"), for another type of situation. See Watertown Fed. Sav. & Loan
Ass'n v. Spanks, 346 Mass. 398, 193 N.E.2d 333, 1 uec REP. SERVo 229 (1963).
ct. W. BRITION, supra note 14, at 106; Britton, supra note 26 at 160-6l.
One importance of the determination as to whether such a taker is a holder lies
in the fact that the drawer's liability runs only to that class of persons. See § 3-413(2).
See also James Talcott, Inc. v. Fred Ratowsky Associates, Inc., 38 Pa. D. & C.2d 624,
2 uee REp. SERVo 1134, 1140 (1965). In addition, § 3-414(1) provides:
Unless the indorsement otherwise specifies .•. every indorser engages that upon dishonor and any necessary notice of dishonor and protest he will pay the
instrument according to its tenor at the time of his indorsement to the holder
or to any indorser who takes it up. • • . (Emphasis added.)
Section 3-603(1) provides:
The liability of any party is discharged to the extent of his payment or satisfaction to the holder. (Emphasis added.)
30 Ct. Note, supra note 15, at 215-18.
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purchases a negotiable instrument and continues it in circulation."81
In addition, Section 4-105(b) defines "payor bank" as the bank "by
which an item is payable," and that would be the drawee. 82 Section
3-406, Comment 2 states: "The section extends. . . to the protection
of . . . payors who may not technically be drawees." (Emphasis
added.)33 The use of the word "payor" in Section 3-406 when placed
in the context of "drawee or other payor" (emphasis added) implies
that the draftsmen did not intend "transferees" to qualify as payors. M
At this pont the circular aspect of the problem becomes apparent.
The remedy of Section 3-406 is not available to one who is not a holder
in due course and FNB is not a holder under Section 3-202. 35 Consequently the policy of placing the risk of forgery on the party who makes
the forgery possible through his negligence may be frustrated if the Code
is read too narrowly.
Since it is only Jones' forgery of Johnson's indorsement as the payee
which prevents FNB from becoming a holder via the process of negotiation,36 a narrow interpretation is dependent upon Acme's ability to
assert the forged indorsement. Is such an interpretation justified?
Viewing Section 3-406 ~lone, it is arguably a rare case where a drawer's
negligence "substantially contributes" to the forgery of an indorsement. 87 For example, if Smith drew a check to Williams, but negligently
31 48 IOWA L. REv. 1077, 1078 (1963). Cf. Britton, supra note 20, at 18·20.
Compare Glickman, The Payor as a Holder Under Articles Three and Four of the
Uniform Commercial Code, 42 NOTRE DAME LAW. 176, 199-201 (1966) with W.
BRITION, supra note 14, at 393.
32 See Phelan v. University Nat'l Bank, 85 Ill. App. 2d 56, 229 N.E.2d 374, 4
UCC REP. SERVo 635 (1967); Farmers Coop. Livestock Mkt., Inc. v. Second Nat'! Bank,
427 S.W.2d 247, 5 UCC REP. SERVo 88 (Ky. App. 1968); Stone & Webster Eng'r Corp.
V. First Nat'! Bank & Trust Co., 345 Mass. 1, 184 N.E.2d 348, 1 UCC REp. SERVo 195
(1962).
33 Section 3-406, Comment 6 may be read to support a contrary conclusion, however, since it seems to say that "any bank" must observe "reasonable commercial slandards." (Emphasis added.)
34 Cf. Gresham State Bank V. 0 & K Constr. Co., 231 Ore. 106, 370 P.2d 726,
clarified on denial of rehearing, 231 Ore. 129, 372 P.2d 187, 1 UCC REp. SERVo 276
(1962) (a store which cashed checks was a payor), cited with approval in Salsman v.
National Community Bank, 102 N.J. Super. 482, 246 A.2d 162, 5 UCC REP. SERVo 779
(1968), criticized in 48 IOWA L. REv. 1077 (1963).
35 See 48 IOWA L. REv. 1077, 1079·80 (1963).
36 Section 3-202. When the only unauthorized signature is that of the "drawer,"
one can be a "holder." See Comment, Allocation of Losses From Check Forgeries
Under the Law of Negotiable Instruments and the Uniform Commercial Code, 62
YALE LJ. 417, 455·60 (1953). However, the circularity of § 3-406 would still exist in
many other cases.
37 The "rare" case would be the example cited in § 3-406, Comment 7, i.e., the
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FORGERIES UNDER THE UCC
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gave it to Green and Green forged Williams' name, could it be said
that Smith's negligence substantially contributed to Green's forgery?
Is not Section 3-406 basically limited to negligence with regard to mistakes or omissions on the instrument?38 A counterargument based
on the practicalities of the situation where a thief steals blank checks
and forges both the "drawer's" and the payee's signatures, however, is
that if Section 3-406 estops the "drawer" from asserting the unauthorized signing of his name, it should be immaterial that the wrongdoer also
forged the name of the payee. In other words, if the culprit had used
his own name as payee, instead of a pseudonym, there would not be a
question of forged indorsement; the result should be no different if he
chooses to use the name of a person whom he never intended to re.
ceive the instrument.39
If Section 3-405 is read in conjunction with Section 3-406, policy
seems to weight the scales in favor of a broad interpretation of "holder"
in the latter section. Section 3-405 provides in part:
(1) An indorsement by any person in the name of a named payee
is effective if
(b)
a person signing as or on behalf of a maker or drawer
intends the payee to have no interest in the instrument . . . .40
This provision was apparently designed to cover the so-called "fictitious
negligent mailing by the drawer of an instrument to the wrong person having the same
name as the payee. See Park State Bank v. Arena Auto Auction, Inc., 59 ill. App.
2d 235, 207 N.E.2d 158,2 UCC REp. SERVo 903 (1965).
38 See Comment, supra note 36, at 461-62 (This Comment contains an excellent
discussion of the policies behind loss allocation); But see Thompson Maple Prods., Inc. v.
Citizens Nat'l Bank, 211 Pa. Super. 42, 234 A.2d 32, 4 UCC REp. SERVo 624 (1967),
noted ill 17 CATH. U.L. REv. 349 (1968); Gresham State Bank v. 0 & K Constr. Co.,
231 Ore. 106, 370 P.2d 726, clarified on denial of rehearing, 231 Ore. 129, 372 P.2d
187, 1 UCC REp. SERVo 276 (1962).
39 See note 36 supra.
40 If this subparagraph is read literally the indorsement would not be forged, in
which case the possessor would be a holder, since: (1) the thief was "signing as . . .
a . . . drawer" (see the phrase following the semi-colon in § 3-404(1), which is set
out in note 17 supra and text accompanying note 18 supra); and (2) he appparentIy
intended the payee "to have no interest" in the instrument.
Notice that if the person whose name was inserted on the instrument without
authorization where the drawer's signature belongs was not precluded from asserting
the forgery of his signature under § 3-406, then the question of the applicability of
§ 3-405 would be immaterial with respect to that person's liability. This is so because
even though there may not be a "forged" indorsement, the person whose name was
forged is not the drawer and, thus, is not liable on the instrument. See text accompanying note 18 supra.
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payee" situation, where, for example, an agent who is authorized to
sign the drawer's name (for example, the treasurer of a corporation)
makes out and signs an instrument in the name of a payee whom the
agent never intended to receive the instrument, indorses it in the name
of that payee,41 cashes it, and makes off with the proceeds.42 However,
the purpose of Section 3-405 is to place liability upon the employer when
he "is. . . in a better position to prevent such forgeries. . . or. . . is
at least in a better position to cover the loss by fidelity insurance
. . . ."43 Also, there would be no question of a forged indorsement
if the thief had made the check payable to himself. Thus, there appears
to be no compelling reason for arriving at a different result merely
because he makes it payable to someone whom he never intended to
get the instrument.44
Another possible answer to the conundrum is simply to assume that
the draftsmen did not mean "holder in due course" in Section 3-406; in
41
A co-conspirator might also indorse since § 3-405(1) says "any person."
See, e.g., § 3-405, Comment 3(d)-(g). Although example "c" in Comment 3
may seem applicable to the double forgery case, it is doubtful whether such was intended by the draftsmen. Cf. Phoenix Die Casting Co. v. Manufacturers & Traders
Trust Co., 50 Misc. 2d 152, 269 N.Y.S.2d 890, 3 UCC REP. SERVo 519 (1966);
First Pa. Banking & Trust Co. v. Montgomery County Bank & Trust Co., 29 Pa. D. &
C.2d 596, 1 UCC REp. SERVo 291 (1962); Leary, supra note 5, at 114; Comment,
The Fictitious Payee and the UCC-The Demise of a Ghost, 18 U. CHI. L. REV. 281
(1951); Comment, supra note 36, at 428-29, 451-52, 455, 465-68. But c/. Britton,
supra note 20, at 27-31.
Section 3-405 differs from pre-Code law in that it does not make instruments
which are within its ambit "bearer" paper. See § 3-405, Comment 1.
43 Section 3-405, Comment 4. Although the quotation in the text is contained in
the Comments' discussion of § 3-405(1)(c), dealing with "padded payroll" cases, it is
arguably equally applicable to § 3-405(1)(b). Section 3-405(1)(c) is set out in note
44 infra.
44 In addition, § 3-405(I)(c), if read literally, would lead to results in some situations which the draftsmen may not have intended, for example, where a name is supplied
to the drawer by an employee who has no connection whatsoever with his employer's
check writing process, such as a janitor. This case, however, might come within
§ 3-405(1) (a) and, thus, present no real problem. See E. FARNSWORTII & J. HONNOLD,
CASES AND MATERIALS ON COMJ."\1ERCIAL LAW 304 (1968). Cf. Leary, supra note 5,
at 115-16; Comment, Resolution of Padded Payroll Cases by the Uniform Commercial
Code: A Pandords Box, 9 B.C. IND. & COM. L. REv. 379 (1968).
Sections 3-405(I)(a) and (c) provide:
(1) An indorsement by any person in the name of the named payee is effective if
(a) an impostor by the use of the mails or otherwise has induced the
maker or drawer to issue the instrument to him or his confederate in
the name of the payee; or
42
(c) an agent or employee of the maker or drawer has supplied him with
the name of the payee intending the later to have no such interest.
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at least some situations they must have meant "transferee in
due course."45 This conclusion is supported by the following sentence
in Section 3-406, Comment 7: "It [3-406] extends to negligence which
contributes to a forgery of the signature of another, as in the case where
a check is negligently mailed to the wrong person having the same name
as the payee." The case hypothesized in this statement occurs, for
example, where Davis owes some money to Sam Smith in New York,
but by mistake Davis mails his check (drawn on Gotham Bank and
payable to the order of Sam Smith) to a Sam Smith in Chicago, the Chicago Smith indorses the check and transfers it to Allen, and Allen, after
dishonor by Gotham Bank, seeks payment from Davis. Since the Comment implies that Davis must pay Allen even though there is a "forged"
indorsement46 and Allen is not a holder,47 the draftsmen could not have
intended that one must be a "holder in due course" to take advantage
of Section 3-406. Therefore, any possessor is entitled to the protection
of negligence provision if he can satisfy the "due course" requirements. 48
45 But compare this hypothesis with James Talcott, Inc. v. Fred Ratowsky
Associates, Inc., 38 Pa. D. & C.2d 624, 2 uec REp. SERVo 1134, 1140 (1965).
46 Park State Bank v. Arena Auto Auction, Inc., 59 ill. App. 2d 235, 207 N.E.2d
158, 2 uec REp. SERVo 903 (1965).
47 See §§ 3-202(1), (2), which are set out in the text at note 24 supra.
48 "Due course" standards are well delineated and beyond the scope of this article. In general, to be in "due course," one must have taken (1) for value, (2) in
good faith, (3) and without notice that the instrument is overdue or has been dishonored, or that any defense against or claim to it on the part of any person exists.
See generally §§ 3-302(1), 3-303, 4-208(1), 4-209 with regard to "value."
The "without notice" requirement of taking in due course, appears to be in part
subjective and in part objective since one may have notice of a fact if "he has actual
knowledge of it," or "he has reason to know that it exists." See §§ 1-201(25)(a),
(c) (emphasis added).
With regard to the "good faith" prerequisite, since the test appears to be subjective
in that § 1-201(19) defines "good faith" as "honesty in fact," knowledge by a transferee of any infirmities with respect to the instrument would render him a bad faith
taker. The acquisition of such knowledge may revolve around § 1-201(27), which
reads:
Notice, knowledge or a notice or notification received by an organization
is effective for a particular transaction from the time when it is brought to the
attention of the individual conducting the transaction, and in any event from
the time when it would have been brought to his attention if the organization
had exercised due diligence. An organization exercises due diligence if it
maintains reasonable routines for communicating significant information to the
person conducting the transaction and there is reasonable compliance with the
routines. Due diligence does not require an individual acting for the organization to communicate information unless such communication is part of his
regular duties or unless he has reason to know of the transaction and that
the transaction would be materially affected by the information.
Section 1-201(26) provides:
•
A person "notifies" or "gives" a notice or notification to another by taking
such steps as may be reasonably required to inform the other in ordinary
course whether or not such other actually comes to know of it. A person
"receives" a notice or notification when
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Either solution would mean that the use of Section 3-406 will apparently not be denied to FNB with regard to the first type of instruments
(checks) merely because it may not have been a holder.49 Section
3-805 instruments, however, present more of a problem because, by
virtue of Section 3-805,50 FNB cannot be a holder in due course of
them. Therefore, since the availability of Section 3-406 depends upon
whether FNB was a "holder in due course," it would logically seem that
FNB cannot utilize that Section to collect from Acme. But the solution is not that simple because, as concluded in the preceding paragraph, the authors of the Code must not have meant "holder in due
course" in Section 3-406-"transferee in due course" was apparently
intended. Thus, a question arises: can FNB come within Section
3-406 if FNB can qualify as a "transferee in due course" on the basis
that Section 3-805 says nothing about one not being able to be a "transferee in due course," or does the Section 3-805 exception also cover a
"transferee in due course," in that the drafting error is twofold? In
resolving this dilemma one can formulate his own conclusion, aided
(a) it comes to his attention; or
(b) it is duly delivered at the place of business through which the contract was made or at any other place held out by him as the place
for receipt of such communications.
On the good faith requirement, see Farmers & Merchants Nat'l Bank v. Boardwalk
Nat'l Bank 101 N.J. Super. 528, 245 A.2d 35, 5 UCC REP. SERvo 575 (1968); Note,
Notice and Good Faith Under Article 3 of the Uniform Commercial Code, 51 VA. L.
REv. 1342, 1356-59 (1965); 28 MD. L. REV. 145, 152-53 (1968). See also Leary, supra
note 5, at 109-12.
FNB's status as a "holder" in due course, then, will depend upon the knowledge
or notice available to it when it pays the forger. While the drawee bank receives a
written stop payment order, other banks may receive a less formal circular. Quaere,
can it be said that a bank which receives many circulars containing the descriptions of many instruments, is negligent when it fails to take immediate notice of the
invalidity of those instruments.
Note that § 4-106 (Supp. 1967) provides:
A branch or separate office [maintaining its own deposit ledgers] is a
separate bank for the purpose of computing the time within which and determining the place at or to which action may be taken or notices or orders
shall be given under this Article [Article 4] and under Article 3.
Section 3-304(6) states:
To be effective notice must be received at such time and in such a manner as to give a reasonable opportunity to act on it.
See also § 1-201(25), Comment 25; 48 IOWA L. REv. 1077-78, 1080-82 (1963); W.
BRrITON, supra note 14, at 244-49; Britton, Holder in Due Course-A Comparison of
the Provisions of the Negotiable Instmments Law with those of Article 3 of the Proposed Commercial Code, 49 Nw. U.L. REV. 417, 430-32 (1954); Fagan, Notice and
Good Faith in Article 3 of the U.C.C., 17 U. Prrr. L. REv. 176, 182-87 (1956); Penney,
Bank Statements, Cancelled Checks, and Article Four in the Electronic Age, 65 MICH.
L. REv. 1341 (1967).
49 See text accompanying notes 28-29 supra.
50 Section 3-805 is set out in the text following note 14 supra.
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only by the suggestion that perhaps the Code authors, when they used
the phrase "holder in due course" in Section 3-805, were merely speaking of one not able to take free of personal defenses51 when no negligence is involved. Thus, FNB should come within the protection of
Section 3-406 regardless of the form of the instrument. 52 This conclusion is buttressed by the logic that although one who takes an
instrument that contains no words of negotiability should know that
he will not be able to take free of existing defenses, he does not
necessarily have reason to believe that he will also be subject to infirmities which are the result of another party's negligence. 53
IT
REMEDIES OF BROWN CITY BANK AFTER PAYMENT
TO FIRST NATIONAL BANK
Double forgeries raise significant problems for drawee banks which pay
on the forged instruments. Since, absent any negligence, a drawee
bank cannot charge the account of its customer when it pays a forged
instrument, 54 such bank will usually attempt to recover back its payment. l:m It will not be successful if the person or bank paid falls within
Section 3-418, which provides in part:
Except for . . . liability for breach of warranty . . ., payment or acceptance of any instrument is final in favor of a holder in due course,
51 See § 3-305 which deals with the rights of a holder in due course, and § 3-306
which deals with the rights of one not a holder in due course.
52 Cf. Comet Check Cashing Serv., Inc. v. Hanover Ins. Group, 5 UCC REp.
SERVo 852 (Civ. Ct. N.Y. 1968); Northerlin Co. v. Rauch Constr. Corp., 4 UCC REp.
SERVo 320 (Sup. Ct. N.Y. 1967).
53 Cf. Leary, supra note 5, at 87, 128.
54 See §§ 3-404(1), 4-401(1). The latter provides: "As against its customer, a
bank may charge against his account any item which is otherwise properly payable
from that account even though the charge creates an overdraft." But cf. Weist v. First
Citizens Nat'l Bank, 10 Lyc. County L. Rep. 125, 3 UCC REp. SERVo 875 (Pa. C.P.
1966). See also Stone & Webster Eng'r Corp. v. First Nat'l Bank & Trust Co., 345 Mass.
1, 184 N.E.2d 358,1 UCC REp. SERvo 708 (1963); Philadelphia Title Ins. Co. v. FidelityPhila. Trust Co., 419 Pa. 78, 212 A2d 222, 2 UCC REp. SERvo 1011 (1965); Thompson
Maple Prods., Inc. v. Citizen's Nat'l Bank, 211 Pa. Super 42,234 A2d 32, 4 UCC REp.
SERVo 624 (1967); 63 Op. Ky. Att'y Gen. 825 (1963); Huggins & Phemister, Bank
Deposits and Collections, in ABA UNIFORM COMMERCIAL CODE HANDBOOK 129, 149
(1964); Note, The Doctrine of Price v. Neal Under Articles Three and Four of the
Uniform Commercial Code, 23 U. PrIT. L. REV. 198 (1961); Annot., 23 AL.R.3d 932,
1001 (1969); Comment, supra note 36 at 420-24.
55 The following discussion in the text applies to any type of "final payment" by
the drawee bank within § 4-213(1), set out in note 4 supra. For the sake of simplicity,
however, it will be assumed that the drawee paid via cash.
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or a person who has in good faith changed his position in reliance on
the payment. 56
In the hypothetical, whether FNB qualifies as a "holder in due
course" within the above provision is dependent upon whether FNB
was even a holder. 57 Recalling that a similar problem was encountered
under Section 3-406 and that it was there concluded that the draftsman
must have meant "transferee in due course" in at least some situations, liS
the same determination can probably be made with regard to Section
3-418. 59 Thus, as to the first type of instruments, it seems that FNB
may fall within the latter provision if it can satisfy the "due course"
standards. 60 Whether such is also true of the Section 3-805 instruments
will depend on the answer to similar questions posed in the context of
Section 3-406. 61
56 See Note, supra note 54, at 207-08. See also Murphey, Uniformity, Forged
Endorsements, and Comprehension-Some Observations on the Uniform Commercial
Code for Mississippi, 35 MIss. L.J. 356, 365 (1964).
57 See note 22 supra.
58 See text accompanying notes 45-48 supra.
59 The reasons for this conclusion will be discussed infra when §§ 4·207(1)
and 3-417(1) are analyzed. See note 69 infra. It should also be noted that §§ 3-406
and/or 3-405, which will be examined infra, may render the distinction immaterial
since FNB may be able to show that it was a "holder in due course" if it can bar the
assertion of the ''forgeries.''
60 On "due course" holding, see note 48 supra.
61 See text following note 49 supra.
Note that the question of whether FNB is a holder in due course may be crucial to
BCB if it wishes to assert a claim against the "drawer" under § 4-407(a) in any instance
where the drawee cannot recover from a person it has paid and a failure to act in
accordance with reasonable commercial standards (by, for example, ignoring a stop
order) removes the drawee's remedy of § 3-406 against the "drawer." Section
4-407(a) provides:
If a payor bank has paid an item over the stop payment order of the
drawer or maker or otherwise under circumstances giving a basis for objection
by the drawer or maker, to prevent unjust enrichment and only to the extent
necessary to prevent loss to the bank by reason of its payment of the item,
the payor bank shall be subrogated to the rights
(a) of any holder in due course on the item against the drawer or
maker. . . .
Accepting the fact that BCB might be able to utilize § 4-407 (a) as to instruments of
the first type (checks), it would seem that the latter subsection is not available as to
§ 3-805 instruments, since § 4-407(a) only subrogates a payor bank to the rights of a
"holder in due course on the item against the drawer" (emphasis added), and Section
3-805 provides that one cannot be a holder in due course of a "Pay to" instrument. In
addition to the possibility that the draftsmen did not mean "holder in due course" in
§ 4-407(a), it might be contended that the exception of § 3-805 does not apply to
Article 4 in that the latter Section implies that one cannot be a holder in due course
of such an instrument wfthin Article 3. However, this interpretation seems to be dis.
pelled by § 4-102(1). In any event, if Acme would be precluded from asserting the
forgeries, FNB would have been a "holder" and BCB would not have to rely on § 4-407
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Even if the one who is paid by the drawee bank is a holder in due
course, or has in good faith changed his position in reliance on the
payment, the drawee will still be able to recover back its payment if
such person has breached one of the warranties delineated within Sections 4-207 or 3-417. 62 The pertinent part of Section 4-207 reads:
(1) Each customer or collecting bank who obtains payment . . . of
an item . . . warrants to the payor bank . . . who in good faith pays
. the item that
(a) he has good title to the item or is authorized to obtain payment or acceptance on behalf of one who has good title;63
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
(i) to a maker with respect to the maker's own signature; or
(li) to a drawer with respect to the drawer's own signature, whether or not the drawer is also the
drawee; or
(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. . . .64
The first obstacle which a drawee bank must surmount in order
to have the benefit of the above warranties is to have paid in "good
faith," which would seem to require that such bank had no knowledge of any reason why it should not pay the instrument.65 As(a) since § 4-407(b) subrogates a payor bank "to the rights . . . of . . . any . . .
holder. . . against the drawer."
62 See Murphey, supra note 56, at 365; Note, supra note 54, at 207-08; Comment,
supra note 36, at 454-55.
Although §§ 4-207 and 3-417 are similar, if they conflict § 4-207 will prevail
because of § 4-102(1), note 5 supra, and 3-103(2). Thus, 4-207 is quoted in the
text.
63 Section 3-417(1) (a) is almost identical. See Huggins & Phemister, supra
note 54, at 143.
64 Section 3-417(1)(b) is almost identical to and is a codification of the principle
laid down in Price v. Neal, 3 Burr. 1354, 97 Eng. Rep. 871 (K.B. 1762). See First
Nat'l City Bank v. Altman, 3 UCC REP. SERVo 815 (N.Y. Sup. Ct. 1966); § 4-207,
Comment 1; § 3-417, Comment 4; § 3-418, Comment 1; W. BRITTON, supra note 14,
at 375-88; Huggins & Phemister, supra note 54, at 143; Leary, supra note 5, at 117-18;
Note, supra note 54, at 207-08; Comment, supra note 36, at 454-55.
65 See § 1-201(19) and note 48 supra. When the "drawer's" name has been affixed
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suming that a drawee's payment was in "good faith," recovery can be had
for breach of warranty when the "drawer's" signature alone has been
forged if the person paid had knowledge that such signature was
unauthorized when he obtained payment from the drawee. 66 If, however, the person who was paid is a "holder in due course" rather than
merely one who in good faith changed his position in reliance,67
he may not give the basic warranty of Sections 4-207(1)(b) or 3-417
(1)(b) but may gain extra protection via the "holder in due course"
exceptions68 to those sections. In the context of a drawee bank seeking
recovery, however, this offers little solace to FNB because the only
possible exceptions are Section 4-207(1)(b)(iii) or Section 3-417(1)
(b)(iii), which are operative only "if the holder in due course took the
draft after [an] acceptance" by the drawee or "obtained [an] acceptance
without knowledge that the drawer's signature was unauthorized," the
latter requirement being identical to the basic warranty.oo
to the instrument without authorization, two issues may arise: (1) Did the drawee act in
bad faith since it paid over a forgery of its customer's signature, a copy of which it must
have had on file? (2) As to any instrument paid after the customer issued a stop
payment order, did not the payor bank have the requisite knowledge? The answer to
the first question appears to be in the negative since otherwise a drawee could never
recover under a § 4-207(I)(b), or § 3-417(I)(b) warranty unless the forgery were impossible to detect via a comparison, and this does not seem to be what the draftsmen
intended. Another question is whether such a failure on the part of a drawee bank
would be negligence. See §§ 3-406 and 4-406(3). See also note 61, supra. See
Note, supra note 54, at 201, 212; Comment, supra note 36, at 441, 464-65. But cf.
Jackson v. First Nat'l Bank, 55 Tenn. App. 545, 403 S.W.2d 109, 3 UCC REP. SERVo
630 (1966). As to the second inquiry, the answer is also arguably in the negative
because a contrary construction would mean that a payor bank might not be able
to utilize § 4-407 when it has paid over a stop order and the drawer's signature has
been forged. See Comment, supra note 36, at 460.
66 See § 4-207(1)(b) in text following note 65 supra.
This demonstrates that it
is apparently possible for one to be a non-holder in due course within § 3-418 (see
text at note 56 supra) because he had notice (reason to know) of infirmities when he
took, but still not be liable to a drawee for breach of warranty if such person can
qualify within § 3-418 as one "who in good faith changed his position in reliance on
the payment" (took without knowledge) and if he obtained no knowledge between the
time of taking and payment But cf. First Nat'l Bank V. Altman, 3 UCC REp. SERVo
815 (N.Y. Sup. Ct. 1966).
67 See § 3-418.
68 See § 4-207 in text following note 63 supra.
00 See § 3-417, Comment 4. Additional protection may be available, however, if
it was a maker or drawer who was seeking recovery of his prior payments. This is so
because the exceptions of §§ 4-207(I)(b)(i), (ii) and 3-417(I)(b)(i), (ii) differ
from the basic warranty in that they apply to a holder in due course (took without
knowledge or notice) even if he has knowledge when he obtains payment. The preceding statement is questionable, however, because in order for a holder in due course
to have the benefit of these exceptions he must act in "good faith" when he gets paid.
But to conclude otherwise would render the exceptions of §§ 4-207(I)(b)(i), (ii) and
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When the forgery is that of the payee's name rather than that of the
"drawer," however, a drawee bank which has paid may recover for
breach of the warranty of good title70 irrespective of whether the person paid is a holder in due course or whether he lacked knowledge of
the forgery when he obtained payment. 71 Thus, the success of a
drawee in recovering a payment when the instrument contains an unauthorized signature may depend on whether the forgery is that of the
"drawer's" name or of an indorsement.
A problem arises when the person who was paid has taken from a
thief who has forged both the drawer's and the payee's signature, and
3-417(1)(b)(i), (il) much less meaningful. See also Leary, supra note 5, at 117 n.88b;
Mellinkoff, supra note 4, at 219-20; Note, supra note 54, at 209-10.
In note 59 supra it was stated that the reasons for the conclusion that the draftsmen probably meant "transferee in due course" in § 3-418 (finality of payment) rather
than "holder in due course" would be discussed. If "holder in due course" were intended, certain results for which the Code authors were striving arguably would not
occur. For example, the draftsmen, as stated in Comment 5 to §3-417, intended §§ 4207(1)(c)(iii) and 3-417(1)(c)(iii) to codify the decision in the case of Wells Fargo
Bank & Union Trust Co. v. Bank of Italy, 214 Cal. 156, 4 P.2d 781 (1931). In Wells
Fargo, after the name of the payee had been changed by a thief, the check was certified and transferred to the defendant (who took without notice of the alteration)
with an indorsement in the name of the "new payee," followed by payment to the defendant by the plaintiff-drawee. The court held that plaintiff could not recover its
payment from the defendant. The Code purportedly codifies this decision in §§
3-418, 4-207(1)(c)(iii), and 3-417(1)(c)(iii) by providing that a holder in due
course does not warrant to a drawee upon payment that the instrument has not been
altered if the alteration was made prior to an acceptance and the holder in due course
took after acceptance. Since one must be a "holder in due course" in order to take advantage of this exception, and the defendant in Wells Fargo appears not even to have
been a holder, the Code in §§ 3-418, 3-417(1), and 4-207(1) probably did not mean
"holder in due course." [A somewhat similar problem may exist in § 3-417(2).]
Sections 4-207(1)(a), in text following note 62 supra and 3-417(1)(a) further
complicate the problem when the name of the payee is changed. It could be argued
that §§ 4-207(1)(c) and 3-417(1)(c) should only apply to an alteration of the
amount of an instrument and not to the alteration of the name of the payee, irrespective of what the draftsmen may have intended. See § 3-407. For a more extensive
discussion of this entire problem see White, supra note 25, at 1328-33. See also
Britton, supra note 20, at 35-52; Note, supra note 54, at 212-13.
70 See text preceding note 63 supra.
71 See § 3-417, Comment 3, which reads in part:
Subsection (1)(a) retains the generally accepted rule that the party who accepts or pays does not "admit" the genuineness of indorsements, and may recover from the person presenting when they tum out to be forged.
Cf. Stone & Webster Eng'r Corp. v. First Nat'l Bank & Trust Co., 345 Mass. 1, 184
N.E.2d 358, 1 UCC REp. SERvo 195 (Sup. Jud. Ct. 1962); Ervin v. Dauphin Deposit
Trust Co., 84 Dauph. 280, 38 Pa. D. & C.2d 473, 3 UCC REP. SERVo 311 (1965);
First Penn. Banking & Trust Co. v. Montgomery County Bank & Trust Co., 29 Pa. D.
& C.2d 596, 1 UCC REp. SERVo 291 (1962); 63 Op. Ky. Att'y Gen. 325 (1963), 1
UCC REp. SERVo 708 (1963); Murphey, supra note 56, at 365; Comment, supra
note 36, at 457-58.
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a warranty has not been breached with regard to the fonner. From a
literal reading of both Sections 4-207 (1) and 3-417 (1), it would appear
that since the paragraphs are joined by "and," the warranties should be
read disjunctively; therefore, the breach of anyone would be sufficient
to place liability on the person paid. It is questionable, however,
whether these Sections should be so read in this situation. To do so
would result in the shifting of liability between the drawee and the person
paid merely on the "whim" of the wrongdoer, since if a person forged
the name of the drawer and made the checks payable to himself, rather
than to the order of another, a "good title" warranty would not have
been breached. Such a distinction is tenuous because the policies behind
placing the loss of the drawee when he pays over the forgery of his
customer's signature72 seem equally applicable when a forgery of an
indorsement also occurs on the same instrument. 73
72 One of the policies is that a drawee should know his drawer's signature and if
the drawee fails to recognize it and pays, he should suffer the loss. See § 3-417, Comment 4. It would seem that this policy is not altered merely because there also
existed a forged indorsement, i.e., if the drawee had spotted the forgery of his customer's signature there would have been no payment. However, it might be argued
that, even assuming this is true, such should not be the case where the forgery of the
"drawer's" signature was perfect since no amount of care by the drawee would have
revealed the forgery. Although this argument may appear to have some merit, knowledge of the "drawer's" signature is not the only policy underlying the placing of loss on
the drawee when it pays over a forgery of its customer's signature. See § 3-418, Comment 1.
73 Compare this statement with the text accompanying notes 38-39 supra.
It
conld be said that the loss would not be shifted between the payor and person paid
merely on the ''whim'' of the wrongdoer if the payor suffers the loss when the instrument
is payable to the wrongdoer but not when it is payable to a third person, since the
person paid should know his indorser and, therefore, should suffer the loss in the latter
situation. However, that goes to the questions of "good faith" and "notice" on the
part of tlie person paid. See § 3-418, Comment 4:
The section rejects decisions under the original Act permitting recovery
[by the drawee] on the basis of mere negligence of the holder in taking the
instrument. If such negligence amounts to a lack of good faith as defined in
the Act (§ 1-201) or to notice under the rules (§ 3-304) relating to notice
to a purchaser of an instrument, the holder is not a holder in due course
and is not protected; but otherwise the holder's negligence does not affect the
finality of the payment or acceptance.
But cf. First Nat'1 City Bank v. Altman, 3 DCC REp. SERVo 815 (N.Y. Sup. Ct. 1966).
See also Note, supra note 54, at 210.
Another contention, similar to one advanced earlier in connection with a different
question (see text accompanying notes 40-44 supra), with which the person paid might
strengthen his position would be based on § 3-405(1)(b). It might be desirable to
interpret § 3-405(1)(b) literally in this situation. Notice, however, that if this argument is successfnl, the result-drawee suffers loss-will be contrary to what usually
occurs when § 3-405 (1) (b) is operative-drawer suffers loss.
Although under pre-Code law a drawee who paid suffered the loss when there was
such a double forgery, whether the same result will be reached under the Code is open
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1969]
FORGERIES UNDER THE
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ill
CONCLUSION
Although no conclusion may be possible with respect to the hypothetical
itself-other than that as to certain instruments the loss might fall on
Acme, as to others on BCB, and as to some on FNB-the foregoing
analysis has hopefully served to identify some of the problems implicit
in the language and structure of Articles 3 and 4, and demonstrate
the interrelationship of various Code provisions. For example: Who is
this person called a "holder"? Is he the only one who can be a
"holder in due course"? What is meant by "due course"? Must a person be a "holder in due course" to take advantage of Section 3-406?
Does Section 3-805, which prevents one from being a "holder in due
course" of certain types of instruments, also prevent him from being a
"holder in due course" within Sections 3-406, 3-418, 4-207(1), 3417(1), and 4-407(a)?
The men who drafted the Uniform Commercial Code had as their
objectives the integration of the law of commercial transactions into one
complete statement, the improvement of the law so as to provide better
guidelines for commercial undertakings, and the accomplishment of a
simplification of commercial law so that it could be more readily understood and more easly applied. Despite the fact that the end product
has been one of the great contributions to the law in recent years,
many questions remain unanswered because of the impossibility of
anticipating all of the problems which could arise. This shortcoming
is compounded by a difficulty inherent in any statutory scheme-the
necessity of considering the Code in its totality and interrelating the
different sections which may bear upon any single problem. No problem in the law of commercial paper can be considered in a vacuum;
the resolution of each involves coordinating many different statutory
provisions. When this consideration is coupled with the complexities
which abound in the field of negotiable instruments. (even if only
to question. See generally W. BRlTION, supra note 14, at 432; Britton, supra note 20,
at 27-31; Note, supra note 54, at 211; Comment, supra note 73, at 455-56. See also May
Dep't Stores Co. v. Pittsburgh Nat'l Bank, 374 F.2d 109, 4 UCC REp. SERVo 39 (3d
Cir. 1967); United States V. First Nat'l Bank, 263 F. Supp. 298, 4 UCC REP. SERv. 89
(D. Mass. 1967) (involving postal money orders with two forgeries; however, the court
did not discuss the "forged" indorsements); Pacific Indem. CO. V. Security First Nat'l
Bank, 248 Cal. App. 2d 75, 56 Cal. Rptr. 142,4 UCC REP. SERVo 392 (1967); Phoenix
Die Casting CO. V. Manufacturers & Traders Trust Co., 50 Misc. 2d 152, 269 N.Y.S.2d
890, 3 UCC REp. SERVo 519 (1966); First Pa. Banking & Trust CO. V. Montgomery
County Bank & Trust Co., 29 Pa. D. & C.2d 596, 1 UCC REp. SERv. 291 (1962).
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from the standpoint of untangling a factual situation), many uncertainties appear-uncertainties which the courts must eventually resolve. It is hoped that the analysis which has been presented will assist
in pointing up some potentially troublesome issues and facilitating the
search for cogent solutions.
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