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Schrier Brothers v. Golub

123 Fed.Appx. 484, 2005 WL 280733 (3d Cir. 2005) (Unpublished)

BANKS; CHECKS; CONVERSION—Where a bank customer’s employee who has been entrusted with responsibility with respect to checks payable to his or her employer endorses those checks and takes the money, the depository bank has no liability unless it failed to act in good faith or without using ordinary care.

A bank customer sued a bank and others seeking damages for the conversion of six checks payable to itself, the customer. One of its own employees “fraudulently indorsed checks collected from his customers and deposited them into his own commercial account with [the bank].” This was possible because the employee’s duty as a salesperson included locating the customers and servicing 50 customers by taking orders and selling products. Although most of the company’s customers paid for orders by mailing a check to the company, some tendered “payment by check or cash to salespersons, like [the employee in question], or to the drivers who delivered orders.” When salespersons, like this particular employee “accepted payments, however, they were instructed to send them directly to the [company’s] lockbox by express mail, as salespersons did not necessarily return to the office each day.” Payment to salespersons was not encouraged by the company, but was an available method for smaller customers. One month, this particular sales person received six checks made payable to his employer. Instead of mailing the checks to the lockbox, he deposited them into his own bank account. He endorsed each check with his employer’s name, but used the account number of his own company. The bank accepted the checks, deposited them into the employee’s own account. The banks upon which the checks were written made payment to the employee’s bank for the face amount of the checks.

The lower court concluded that the employee “did not have ‘responsibility’ for the checks because he had limited access to them and was ‘merely authorized ... to forward ‘customer checks to the lockbox,’ but did not have ‘continuing access to the checks needed to cover [his] tracks.’” Consequently, according to the lower court, because the salesperson “simply had access to the checks, not responsibility for them,” the Uniform Commercial Code (UCC) did not shift the loss to his employer and the bank was liable for conversion of the checks. The bank appealed.

Under the UCC, “[a]n instrument is ... converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment.” Normally, a bank bears the risk “when it makes or obtains payments on a fraudulently indorsed check.” However, a section of the UCC shifts the burden of loss “to the named payee of a fraudulently endorsed check when the bank has acted in good faith and the indorsement is made by an employee of payee entrusted with ‘responsibility for the check.’ ‘Responsibility’ is defined under the same section.” Within its definition, responsibility includes authority to sign or indorse instruments on behalf of the employer, prepare instruments for issue in the name of the employer, supply information as to the names and addresses of payees, and, the ability to “control the disposition of instruments to be issued in the name of the employer; or act otherwise with respect to instruments in a responsible capacity.” Importantly, “‘[r]esponsibility’ does not include authority that merely allows an employee to have access to instruments or blank or incomplete instrument forms that are being stored or transported or are part of incoming or outgoing mail, or similar access.” There was no question that the employee fraudulently endorsed the check. If the employee were “entrusted with responsibility for the checks, then his employer [the company] might bear the loss of fraud, depending on whether [the bank] acted in good faith and exercised ordinary care. If he was not an employee with responsibility, then [the bank would bear] the loss under the UCC.” Thus, based on the foregoing, the Court disagreed with the lower court’s conclusion that the company “merely authorized [its employee] to forward customers’ checks to the lockbox,” and therefore “that he had access to the checks, but not responsibility for them.” The “regularity and authorization of [the employee’s] practice of accepting checks coupled with the relative lack of control [his employer] exercised over this practice led the Appellate Division to conclude that the employee acted in a ‘responsible capacity’ with respect to the checks, and, consequently, that the employee had been entrusted with ‘responsibility’ with respect to the checks. Therefore, the risk of loss should fall on the employer rather than the bank who takes the check or pays it, if the bank was not negligent in the transaction.” This then required the case to be remanded to the lower court for determination as to whether the bank acted in good faith, and if so, if it exercised ordinary care.


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