Fraudulent Checks Pose Real Risks for Banks

James T. Shearin
Fairfield County Business Journal
November 8, 2014

Judge Brian Fischer of the Connecticut Superior Court recently issued a ruling in Red Law Firm, LLC vs. Webster Bank, 2014 WL 1011940 (Conn. Super. Feb. 7, 2014) that may have significant implications for the banking industry. 

The Red Law Firm alleged in its complaint that Webster Bank was presented with a check in the amount of $15,000 bearing the names of three joint payees, one of which was the plaintiff law firm, a Webster Bank customer.  The check was fraudulently endorsed with forged signatures.  The individual presenting the check was an improper payee who was not entitled to enforce the check or receive payment. 

In the first count of its Complaint, the Red Law Firm asserted that Webster Bank was liable under the Uniform Commercial Code, Conn. Gen. Stat. §42a-3-420, which makes banks liable for conversion when, among other things, they make payment on an instrument to a person not entitled to received payment.  Webster Bank argued this count should be stricken because the Plaintiff did not meet the statutory requirement of receiving the delivery of the check either directly or through an agent.  The Court denied Webster’s motion on procedural grounds.

The second count of the complaint claimed that Webster Bank had negligently cashed the check.  The Bank argued that the claim should be stricken because the check was neither drawn on the plaintiff’s account nor deposited to it.  The Bank reasoned that to impose a duty on it for negligence in simply cashing the check would make its liability limitless and violate public policy.

The Court first surveyed the available case law and noted that prior decisions recognized that banks owed a general duty of care to their customers, but that duty arose out of a bank’s contract with its customer and involved a transaction with the customer.  In this case, the Court noted, there was no transaction in which the plaintiff was involved, the money was not deposited to or drawn from its account, and there was a contractual duty covering the Banks claimed obligation to ascertain the identity of third parties presenting checks for payment that was alleged to have been violated.  However, that did not stop the Court from holding that the negligence claim was viable.  For the first time in Connecticut, Judge Fischer held that a bank could be held liable for common law negligence if it did not take steps to identify the proper payee and instead disbursed funds to the wrong person.

Judge Fischer concluded that the harm to the rightful payee of the check was foreseeable.  He further held that public policy encouraged banks to take basic steps to ensure that negotiated instruments are presented for payment by authorized persons and that imposing what it calls a “simple requirement” would discourage fraud.  The Court was unpersuaded that imposing such a would give rise to increased litigation.  It believed the burden could be satisfied simply by obligations reviewing the endorsement and requesting some form of credible identification, although it did not specify what that identification might be.  Finally, the Court rejected the notion that the Uniform Commercial Code, Conn. Gen. Stat. §42a-3-420, should exclusively define this area of law, holding that Connecticut permits a party to assert both common law and Uniform Commercial Code claims against banks to address the same wrongful actions. 

The Red Law Firm holding goes where no Connecticut decision has gone before.  While the plaintiff law firm was a customer of the Bank, the decision did not turn on that fact.  Rather, liability would apparently attach even if the Bank had opted to cash the check having no customer relationship with any of the payees. 

In the end Red Law Firm the decision will require banks to be extra vigilant about cashing checks, ferreting out forged endorsements and questioning whether the party presenting the check is truly entitled to receive payment, regardless of whether the complaining party could otherwise meet the standing requirements under Conn. Gen. Stat. §42a-3-420.          

James T. Shearin is Chairman of Pullman & Comley, LLC and represents clients in the areas of commercial and business, intellectual property, Internet piracy and computer crimes, banking, securities, antitrust, products liability and general civil litigation. Reprinted with permission from the November 2014 issue of the Fairfield County Business Journal.