Brief Fact Summary. This is an appeal of the trial court’s holding that the defendant is not responsible for fraudulent check transactions. An employee of the plaintiff stole scaling slips and used the slips to obtain checks which he cashed with fraudulent endorsements. The plaintiff is suing the defendant bank to recover the amount procured by the fraud. Synopsis of Rule of Law. “Any person who by his negligence substantially contributes to the making of an unauthorized signature is precluded from asserting the lack of authority against a drawee or other payor who pays the instrument in good faith and in accordance with the reasonable commercial standards of the drawee’s or payor’s business.”
Issue. Was the trial court correct in holding that the defendant was not liable for paying checks with forged endorsements?
Held. No. The case was decided by the construction and application of U.C.C. Section: 3-406 which states “Any person who by his negligence substantially contributes to the making of an unauthorized signature is precluded from asserting the lack of authority against a drawee or other payor who pays the instrument in good faith and in accordance with the reasonable commercial standards of the drawee’s or payor’s business.” The Official Comment of Section: 3-406 states “No attempt is made to specify what is negligence, and the question is one for the court or jury on the facts of the particular case.” Considering this, the court found that several of the plaintiff’s practices regarding the scaling slips is sufficient to support the trial judge’s determination that it substantially contributed to the making of the unauthorized signatures. The court sites the trial court’s comment that the conduct was “not difference than had the plaintiff simply given Albers a series of check signed in blank for hi s unlimited, unrestricted use.”
Discussion. The court held that the plaintiff was negligent for several reasons. First, the record showed that pads of the plaintiff’s blank logging slips were left in areas of the mill where they were easily accessible to any hauler. Additionally, Albers was given whole pads of the logging slips to use as he chose. Second, the printed scaling slips were not consecutively numbered which allowed unauthorized use of scaling slips to go unnoticed. Third, when the company became concerned about the unauthorized use of scaling slips the plaintiff required its own personnel to initial the slips. This policy was rarely enforced. The court found that the “principal default of the plaintiff, however, was its failure to use reasonable diligence in insuring honesty from its log haulers including Emory Albers.” Fourth, the haulers were permitted to deliver both the original and the duplicate of the scaling slip to the company office. If the plaintiff had retained possession of the origina l slip it could have assured that no unauthorized disbursements were made. Finally, the company regularly entrusted the checks to the haulers to deliver to the payees. The court stated that each of these incidents alone may not have constituted negligence, but all the elements viewed together was sufficient to support a finding of negligence.