The California Court of Appeals, Fourth Appellate District, recently determined that check cashing companies do not qualify as "banks" for purposes of liability for check forgery, and thus held that the first bank to process a check already cashed at a check cashing company is responsible for ensuring that any endorsement on that check is proper.
A copy of the opinion is available at http://www.courts.ca.gov/opinions/documents/G049028.PDF.
An employee stole checks from her employer, forged the signature of an officer of the employer, and cashed the checks at various check cashing companies. When the employer discovered the scheme, it sued, among others, the three check cashing companies and the banks which received the checks from the check cashing companies.
The banks argued that they were only processing checks that had already been negotiated by the check cashing companies, and therefore were entitled to reply on the check cashing companies’ acceptance of the forged endorsements on the checks. The lower court agreed, and sustained the demurrers of the banks. The employer appealed.
As you may recall, a depository - or "first bank" - in a chain of collection of a check is responsible for verifying the endorsements on a given check to make sure they are proper - whereas subsequent banks in a chain of collection may rely on the forwarded checks. Feldman Const. Co. v. Union Bank (1972) 28 Cal. App. 3d 731, 736. A "first bank" may be sued under California Commercial Code Sec. 3405 for an alleged failure to exercise due care in processing a check and accepting the endorsements. See Lee Newman, M.D., Inc. v. Wells Fargo Bank (2001) 87 Cal. App. 4th 73, 79.
On appeal, the dispute turned on whether the check cashing companies were in fact the "first banks" in the chain of collection.
The Court determined that the check cashing companies did not quality as banks, and thus held that the banks in question were subject to the "first bank" requirements discussed above.
In reaching this conclusion, the Court began by analyzing the statutory definition of various types of banks in the California Uniform Commercial Code (the "UCC") - noting that "the code's focus on the collection process is strongly suggestive that check cashing companies are not 'banks,' because by definition no check cashing service will ever be a payor bank..."
Further, the Court observed the check cashing companies never take deposits - a practice that the Court termed "fundamental" to the business of banking.
Accordingly, the Court held that "the check cashing companies in this case are not depositary first banks. Ergo, the three conventional banks who took checks from those check cashing companies are first banks and therefore...subject to the duty of care provided for in Section 3405."
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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