In Concord Servicing Corp. v. JPMorgan Chase Bank, N.A., No. CV-12-00438-PHX-JAT (Dist. Az. June 24, 2014), the U.S. District Court, District Arizona, determined that an individual’s status as employee or agent of a non-party to the issuance or negotiation of checks (negotiable instruments) does not preclude him from also serving as the issuer’s agent or “employee” for purposes of UCC §3-405, entitling the bank to assert the statute’s exception to liability for payment of items “not properly payable” (UCC §4-401). The case is believed to be one of first impression outside the insurance industry context.

Plaintiff issued and the bank paid 221 checks in dispute (totaling approximately $2 Million) between January 2009 and February 2011.  The plaintiff is a loan servicing provider that acted as loan servicer for a group of non-party companies (collectively, “Costamex”) engaged in the marketing and selling of timeshare memberships. As Costamex’s loan servicer, plaintiff issued refunds to Costamex’s customers utilizing a bank account it held at the bank (the drawee).

During the times in question one Victor Aguilar was employed by Costamex, and was plaintiff’s primary contact for its servicing of accounts for Costamex. Costamex authorized Aguilar to direct plaintiff to issue refunds to Costamex’s customers, and Aguilar directed plaintiff to issue the 221 checks (the “Refund Checks”). He supplied the names of the payees and dollar amounts for all Refund Checks, and asked plaintiff to send them to him instead of to the payees, indicating he needed to attach “additional paperwork” for the payees. Plaintiff issued the checks without determining whether the refunds were owed, and sent them to Aguilar.

Plaintiff and Costamex maintained separate computer systems to track transactions on Costamex’s customer accounts, including refund checks, on a daily basis. During the times in question, Plaintiff gave Aguilar access to its system to compare its data with Costamex’s and verify that the systems accurately reflected Costamex’s transactions (reconciling the transactions).

The bank provided monthly account statements to plaintiff during all times, identifying all checks paid against the Refund Account and including images of both sides of the checks. The bank also made that information available to plaintiff through online banking. While plaintiff reconciled its statements, it acknowledged that it never reviewed copies of its paid checks.

When plaintiff first reviewed some of the Refund Checks in February 2011, it discovered that although the checks were payable to various Costamex customers, they had been indorsed and deposited into a single Mexican bank account. Plaintiff subsequently filed suit in January 2012, alleging that the Refund Checks bore forged indorsements and were not properly payable.

In considering UCC §3-405, the court rejected plaintiff’s argument that the statute was inapplicable because Aguilar was Costamex’s employee, and not plaintiff’s agent or employee. The court agreed with the bank that the facts of the case were similar to those in Guardian Life Ins. Co. of America v. Chemical Bank, 666 N.Y.S.2d 897 (N.Y. Sup. Ct. 1997), in which that court applied 3-405 to a third-party insurance agent who had been given responsibility with respect to the insurer’s checks. The court noted that Aguilar’s instructions were sufficient to cause plaintiff to issue checks according to payees and amounts he specified, and that plaintiff could have exercised reasonable control over the checks by sending them to the payees but failed to do so. After noting the underlying UCC policy that “the loss resulting from a forged indorsement should fall upon the party best able to prevent it,” the court found that Aguilar’s status as a person authorized by plaintiff, through its relationship with Costamex, to supply the information for plaintiff’s preparation of checks was sufficient to render him an agent for purposes of §3-405, and as an agent of plaintiff, he was an “employee” of plaintiff within the meaning of the term as defined in §3-405.

The court also agreed with the bank that it proved plaintiff entrusted Aguilar with “responsibility” over the items for purposes of  §3-405, and proved its “good faith” in paying the items through automated means. On the finding of good faith, the court further agreed with the bank, inter alia, that its observance of reasonable commercial standards of fair dealing did not mandate that it review payee indorsements.

The court awarded the bank summary judgment, and denied plaintiff’s motion for partial summary judgment.

Hirsch & Westheimer, PC represented the bank in this suit (and previously represented the primary depositary bank, obtaining dismissal of all claims against it).

No information in this article is intended to constitute legal advice.  For specific legal advice, please contact an attorney.

If you have questions about the application of UCC Section 3-405 in embezzlement matters, please contact Rupert F. Barron.