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Travelers Indemnity Company v. Good

325 N.J. Super. 16, 737 A.2d 690 (App. Div. 1999)

BANKS; UCC; CHECKS—For a payor bank to escape liability for a forged check, it must establish that it acted in accordance with reasonable commercial standards and exercised ordinary care. Having an acceptable set of procedures is not enough; an injured party is entitled to discover whether the bank’s daily practice comports with its policy.

Over a period of three months, a law firm’s bookkeeper forged the name of an authorized signatory on eight checks drawn on the firm’s trust account. Seven of the checks were paid by the bank until the fraud was reported to the bank by the law firm. Pursuant to the terms of its fidelity insurance policy, the firm was compensated for the loss. In this suit, the insurance company alleged that the bank failed to exercise ordinary care and failed to act in accordance with the reasonable commercial standards of the banking industry in its handling of the checks. The undisputed facts revealed that the bank’s check clearing policy for checks which passed through its central processing unit required verification of the signature on any check in excess of $5,000. The bank provided training to its employees in that department and mentors were assigned to employees to supervise and assist in the verification process. The lower court found that the law firm had not reviewed its first month’s statement and had it done so, it would have detected the forgeries and could have taken appropriate action to prevent the issuance of two of the checks. As to those checks, the bank was without fault. As to the remaining checks, the lower court identified the controlling issue to be whether the bank acted in a commercially reasonable manner. The bank obtained summary judgment with respect to the argument of the indemnity insurance company that it was entitled to discovery to determine whether reasonable care had been taken. The relevant portion of the Uniform Commercial Code establishes a comparative negligence test in which losses are allocated between the customer and the bank if each has failed to comply with its respective duties. Under N.J.S. 12A:3-406, “[a] person whose failure to exercise ordinary care substantially contributes to ... to the making of a forged signature on an instrument is precluded from asserting the ... forgery against the person who, in good faith pays the instrument or takes it for value or for collection.” “. if the person asserting the preclusion fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to the loss, the loss is allocated between the person precluded and the person asserting the preclusion according to the extent to which the failure of each to exercise ordinary care contributed to the loss.” The phrase, “substantially contributes” is read to be “a substantial contribution to the forgery rather than the negligence that must be substantial.” “For a payor bank to escape liability, it must establish that it acted in accordance with reasonable commercial standards and exercised ordinary care.” “A bank must use reasonable and proper methods to detect forgeries, but ‘the tellers and bookkeepers of the bank are not held to a degree of expertness which a handwriting expert possesses.’” Viewing the record in the light most favorable to the indemnity company, the Court concluded that summary judgment was entered prematurely. The undisputed facts of record did not clearly establish that the law firm’s negligence barred all recovery for the loss. Although the indemnity company did not contest the reasonableness of the check verification procedure for checks processed through a central processing unit, “it was entitled to explore whether the daily practice comports with the policy.” The indemnity company was also entitled to explore whether the training provided for bank employees was reasonably calculated to discover forged signatures. Lastly, under the applicable statute, the burden of proving failure to exercise ordinary care is on the person asserting the preclusion. If the person asserting the preclusion fails to exercise ordinary care in paying or taking the instrument, then the burden of proving failure to exercise ordinary care on the maker is placed on the bank.


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