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Court of Appeal, Second District, Division 2, California.

Abraham COOPER et al., Plaintiffs and Appellants, v. UNION BANK et al., Defendants and Respondents.

Civ. 39444.

Decided: August 07, 1972

Stell & Levine, Arthur S. Levine, Los Angeles, for plaintiffs and appellants. Ernest S. Gould, Los Angeles, for Union Bank and Security First National Bank, defendants and respondents. Robert F. Strange, Los Angeles, for First Western Bank and Trust Company, defendant and respondent. Cosgrove, Cramer, Rindge & Barnum, L. P. McElhaney, Los Angeles, for Crocker Citizens National Bank, defendant and respondent.

The various named individual plaintiffs in this action are members of a joint venture doing business as ‘The 3850 Santa Barbara Bldg.’ In addition, Joseph Stell, a member of this joint venture, was joined as a plaintiff in his individual capacity.

The joint venture and Mr. Stell commenced this action for ‘conversion and forgery’ naming as defendants City National Bank, First Western Bank and Trust Co., Bank of Finance, Crocker Citizens National Bank, Union Bank, Security First National Bank, numerous Does and Bernice Ruff.

Plaintiff Joseph Stell is an attorney at law and defendant Bernice Ruff was his secretary. The action arose out of Ruff's activities while serving in that capacity in which she forged endorsements on and converted the proceeds of a number of checks which for differing reasons found their way to Mr. Stell's office.

During the course of the proceedings in the court below the complaint was dismissed as to Bernice Ruff, Bank of Finance and City National Bank.

Following a nonjury trial judgment was in favor of defendants First Western Bank and Trust Co. (First Western), Union Bank (Union), Crocker Citizens National Bank (Crocker) and Security First National Bank (Security).

Plaintiffs appeal.

The checks involved comprised four separate groups. Group 1 consisted of fourteen rent checks, each in the amount of $560.55 made by tenants of ‘The 3850 Santa Barbara Bldg.’ payable to plaintiff Joseph Stell as a representative and member of the joint venture.

Group 2 consisted of six checks representing interest payments on an account which Mr. Stell maintained in his capacity as a receiver for the Orange County Superior Court.

Group 3 consisted of eight checks from various investment firms payable to an elderly female client whose financial affairs were managed by Mr. Stell.

Group 4 consists of a single check payable to Mr. Stell in the amount of $192.00 for legal services rendered to a client.

In 1963, Bernice Ruff was insolvent and involved in litigation instituted by her creditors. She engaged plaintiff Stell as her attorney. During this relationship Stell learned that Ruff's financial difficulties were the result of gambling losses.

Shortly thereafter, Stell hired Ruff as secretary and bookkeeper.

Miss Ruff advanced from secretarial duties to maintenance of records for the medical building joint venture and for the account of the elderly client earlier mentioned. She not only maintained the joint venture records but made out financial statements to apprise the members of the financial progress of the joint venture and also pressed slow-paying tenants.

While the evidence concerning internal office procedures is in conflict, we view it in the light most favorable to the judgment. That view reflects that the supervision which Miss Ruff received from Mr. Stell as to her bookkeeping was practically nonexistent. He lever reviewed the books, never checked the bank reconciliation of deposits on the joint venture account or the receivership. Only during an annual examination made for tax return purposes performed by Mr. Finkel, a CPA member of the joint venture, were Miss Ruff's records reviewed and even then her entries were accepted without any checking for accuracy or veracity.

Beginning on December 14, 1965, and continuing for successive months through June 9, 1966, Ruff took seven of the rent checks, forged Stell's endorsement, and cashed them at the 8th and Hill office of Union.

From July 20, 1966 to January 11, 1967, Ruff took the next seven monthly rent checks, forged Stell's endorsement and deposited them to her own personal account which she maintained at the 8th and Hill office of Crocker.

All fourteen checks were forwarded for collection to First Western, the drawee or payor bank which paid each of the checks.

The first of the so-called interest checks (group 2) was cashed by Ruff on October 4, 1965 at Union. Again she forged Stell's endorsement. This process was repeated on December 31, 1965 and April 1, 1966. On June 30, 1966, she cashed the fourth interest check at a bank not here involved. Finally, on September 30, 1966, and January 19, 1967 she deposited the remaining two checks of this group to her own account at Crocker. In each instance the endorsement was forged.

All six of these checks were forwarded for collection to Crocker's Hawthorne-Artesia Branch where the maker maintained an account and where they were ultimately paid.

Starting with October 25, 1966, and continuing through January 16, 1967, the eight checks payable to Mr. Stell's elderly client (group 3) were taken by Miss Ruff on their arrival at Mr. Stell's office, the payee's signature was forged and thereafter they were deposited at monthly intervals in her personal account at Crocker.

The single check (group 4) bearing a forged endorsement was cashed by Ruff at Union on February 20, 1967. This check was forwarded for collection to Security who paid it.

On June 14, 1968, Miss Ruff pleaded guilty to two counts of forgery relating to certain of the above described checks. She received a suspended state prison sentence.

Stell has been assigned or become subrogated to the rights of the payees on the checks in groups 2 and 3. None of the drawers of the checks are parties to the action. Thus this case deals with the banks' tort liability for conversion and does not concern the contractual relationships between the banks nor between the banks and their customers.

With respect to the forgeries of which Miss Ruff was convicted, a handwriting expert from the Los Angeles Police Department testified during the trial of this case that the forgeries were so skilled that a layman would not be able to detect them as forgeries.

Thus it is undisputed that each of the defendant banks acting in varying capacities paid out on each of the checks on the basis of a forged endorsement. It is further undisputed that at no time did Stell directly authorize Ruff to place his endorsement on the checks or to retain any of the proceeds.

It must also be pointed out, however, that all of the checks were regular on their face and carried no telltale signs of falsity nor any evidence of tampering or alteration that might excite suspicion. The trial court found and the evidence bears out the fact that the defendant banks were at all times unaware of the forged character of the endorsements and thus acted in good faith in dealing with the checks. Nor did any of the defendant banks retain any of the proceeds from the checks, such proceeds having been delivered to Ruff.

Commercial Code section 3419 provides in part:

‘(1) An instrument is converted when . . . (c) It is paid on a forged indorsement. . . . (3) . . . a representative, including a depositary or collecting bank, who has in good faith and in accordance with the reasonable commercial standards applicable to the business of such representative dealt with an instrument or its proceeds on behalf of one who was not the true owner is not liable in conversion or otherwise to the true owner beyond the amount of any proceeds remaining in his hands.’

Commercial Code section 3406 provides:

‘Negligence Contributing to Alteration or Unauthorized Signature. Any person who by his negligence substantially contributes to a material alteration of the instrument or to the making of an unauthorized signature is precluded from asserting the alteration or lack of authority against a holder in due course or 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 trial court concluded, despite a prima facie case of conversion having been made out by plaintiffs, that pursuant to the provisions of Commercial Code sections 3406 and 3419(3) the defendant banks had complete defenses in that they had acted in good faith and had paid each and all checks in accordance with reasonable commercial standards applicable to the banking business.

The findings of the trial court on the issue of plaintiffs' negligence were as follows:

‘Plaintiffs were and each of them was, negligent at least by April 1, 1966, in not discovering that Defendant Bernice Ruff had been placing the unauthorized endorsements of the payees on said checks and obtaining the proceeds of said checks for her own benefit and not otherwise; and Plaintiffs said negligence substantially contributed to the making of the unauthorized endorsements on each of the said checks that were accepted and paid after April 1, 1966 by the respective Defendants herein.’

‘Joseph Stell was not negligent in failing to prevent or discover the forgeries of the following checks: The Buena Vista Receiver checks [group 2], the Rebecca Smithson checks [group 3], and the R. C. Schoak check [group 4].’

In view of plaintiffs' patent negligence which began with the hiring of Ruff in the first instance such findings are more beneficial to plaintiffs than the evidence would appear to warrant. However, as we shall see, the effect of these findings is not fatal to defendants' position.

Plaintiffs' contentions on appeal focus primarily upon the alleged failure of defendants to establish their lack of negligence and their compliance with commercial standards as required by the code.

Additionally, plaintiffs contend that section 3419(3) is inapplicable to defendants who acted in the capacity of payor or drawee banks.

The trial court found that defendants did pay out on all of the checks in accordance with reasonable commercial standards applicable to the banking business or in other words that defendants were not negligent. Plaintiffs contend that such findings are unsupported by the evidence. Thus we must examine the record to determine if there is any substantial evidence to support such findings. In so doing we adopt a view of the evidence most favorable to support of the judgment.


In each instance Union acted in the capacity of a depositary or collecting bank.

Plaintiff Joseph Stell has been engaged in the practice of law for many years in Los Angeles and has maintained numerous accounts at the Union Bank. He was well known at Union Bank as was his signature. Bernice Ruff was well known by the employees of the bank as his secretary. She did, as the trial court found, conduct banking business for Stell several times a week from 1964 to March of 1967.

Union, through the testimony of a number of witnesses including a teller of twenty-five years experience outlined its policies and practices. Tellers were trained to recognize and remember signatures. To assist this recognition, customers were required to patronize certain tellers according to the initial letter of their surnames when they were cashing checks. Techniques for comparison of check signature and signature card were taught to trainee tellers.

Checks presented by second or subsequent endorsers would never be cashed unless presented by a known customer. With reference to the present situation, an expert witness for Union testified that a secretary would qualify as an ‘established customer’ if the teller recognized the payee's signature on the check and knew the secretary as his employee.

Two officers of Union also testified that Union policy would ordinarily permit encashment of a check made payable to a known customer, endorsed by that customer and presented by a known secretary of the customer.

If the check were drawn on a bank other than Union, the Union officer to whom the check would be referred by the teller would merely check the amount. In certain cases he might check with the drawee bank to ensure that sufficient funds were on deposit to cover the check. This Union policy was established as being consistent with the practices and policies of all banks and in accord with reasonable commercial standards. Further, the actions of Union here were consistent with its established policies.

The trial court found that Union did not attempt to verify the authenticity of the endorsements prior to cashing the checks in question. Plaintiffs contend that Union had ample opportunity to so verify and that such failure was negligence.

While it is true that Stell's signature was on file at the bank it would be unreasonable to expect a teller to check each endorsement against such signature card.

In any event, the evidence here supports the conclusion that the forgeries were so skillful that such a check would probably have been unproductive. Furthermore, given Ruff's well known position as Stell's secretary and the frequency of her contacts with the bank as his representative it would have been unreasonable to risk offending a long-time customer and busy attorney by repeated telephone calls to verify the validity of the signatures.

No hard and fast rule can be prescribed for the determination of whether a bank is or is not negligent within a given frame of reference. Each case must rest upon its own facts. Furthermore, this court will not substitute its judgment for that of the trial court when the latter's is supported by evidence and reason.


As noted earlier, Crocker played two roles in connection with the questioned checks. First, as to seven of the group 1 checks, two of the group 2 checks, and eight of the group 3 checks, Crocker was a depositary or collecting bank. As to all six of the group 2 checks, Crocker was a payor-drawee bank.

As to Crocker's activities as a depositary or collecting bank a much closer factual question is presented than was the case with Union. However, we have concluded that the evidence does support the trial court's findings in favor of Crocker.

On July 14, 1966, Ruff opened an account at Crocker with an initial deposit of $105. She was identified to the bank by a Mr. Leemon, attorney at law and a reliable customer of Crocker. Mr. Leemon's name appears on the signature card as a reference. It can be reasonably inferred that Crocker was under the impression that Ruff worked for Leemon. In any event, the trial court found that Crocker did not know that she worked for Stell.

Six days after opening the account, Ruff made a deposit of the first forged check. Crocker placed a ‘hold’ on the account until this check went through without trouble. In connection with subsequent deposits, Crocker employees would simply refer to the signature card and the balance statements of the account. The balance was regularly a nominal one. Obviously each of the checks presented ‘cleared’ because as the trial court found all checks were paid and returned to the maker without any notification by the makers or by any payee or endorser of any irregularity.

Crocker thus relied on a verification of Ruff's status by a known customer and the fact that Ruff herself was a customer with an apparently satisfactory account. They also relied on careful examination of the check to determine its freedom from any defect or any irregularity. Further, the fact that the drawers of most of the checks were financial institutions and that their checks were known in the banking community as ‘good money’ was accorded great weight by Crocker.

In the case of Crocker as a collecting bank, further support of the trial court judgment is again to be found in evidence of the practices followed by other banks in the community. Crocker, as in the case of Union, utilized witnesses of many years' experience in the banking business. All such witnesses could be said to be experts. The sum total of their averments was that Crocker's policies and practices adhered to standards which were common to all banks both in the community and in the country.

Plaintiffs rely heavily on Union Tool Co. v. Farmers', etc., Nat. Bank, 192 Cal. 40, 218 P. 424. In that case judgment for a depositor against his bank was affirmed where the bank paid on checks altered by erasing the payee's name and substituting another payee and endorsing the substituted name. That case is clearly distinguishable since here we are not concerned with the duty of a drawee bank to its depositor but rather with the duty owed to a payee by a collecting-depositary bank. The present case may further be distinguished in that all checks were regular on their face with no signs of infirmity. Unlike the Union Tool case, we have here no crude forgery. In a world where ‘bearer paper’ is king, the speed of the usual daily business does not permit miscroscopic scrutiny of each signature. Good faith must be presumed when the exigencies of the situation do not say otherwise. The payees of the checks in question were unknown to Crocker and there was no reasonable way in which it could verify the endorsements. On the issue of negligence, the general rule that every person who is exercising ordinary care has a right to presume that every other person will perform his duty and obey the law, would seem to apply here. (See Tucker v. Lombardo, 47 Cal.2d 457, 303 P.2d 1041; Porter v. California Jockey Club, Inc., 134 Cal.App.2d 158, 285 P.2d 60.

The precautions to be taken must be considered in the light of real world transactions and business efficiency. The heavy dollar and check volume of urban commercial banks is a factor to be considered when looking at the procedures followed in any given case. In the instant case there was evidence that each bank would handle an average of some five or six thousand checks each day, and at least fifty per cent of the checks would carry more than one endorsement.

In summation, as to both Union and Crocker, the test as embodied in the statutory language is simply whether the conduct of each was, under the circumstances, reasonable according to prevailing banking standards.

Contrary to plaintiffs' contentions no single factor or combination of factors can be said to constitute a necessary formula to be applied in each case in the determination of reasonable bank conduct.

The banks' duty is not an absolute one of discovering a forgery, it is a duty to take precautions which might disclose the forgery and which are reasonable under the circumstances.

Plaintiffs have asked us to define reasonable commercial standards by establishing as a matter of law certain specific procedures which all banks would be required to follow.

In declining such request we analogize to the field of medical malpractice. There the courts have been wisely unwilling to demand more of a physician than that he measure up to the average and reasonable skill of his brother professionals in the community. They have carefully avoided setting up the specific ways and means of effecting a course of curative therapy. Herein lines the answer to plaintiffs' contention that the opinion evidence proffered by banking experts, to the effect that the banks here followed reasonable commercial standards, was insufficient to support the judgment.

It would be a rare case in which the trier of fact could determine what constitutes reasonable banking practices unaided by expert testimony.

As to those checks of group 1 cashed prior to April 1, 1966, and the checks of the other group, the finding of no negligence on the part of defendants provides them with the defense of Commercial Code section 3419(3), in their capacity as collecting or depositary banks, in spite of the trial court's findings of no negligence on the part of plaintiffs.

As to the group 1 checks cashed after April 1, 1966, defendants were within the purview of either 3406 or 3419(3).


First Western and Security were solely acting as drawee or payor banks. Crocker also was a drawee-payor bank as to certain checks.

All checks were received by the drawee-payor banks with the usual prior endorsement guarantee of the collecting or depositary banks.

The trial court found that each of the drawee-payor banks acted in good faith and in accordance with reasonable commercial standards in reliance on the regularity of the checks and the prior endorsement guarantee.

The principles stated in regard to the collecting-depositary banks apply with equal force here.

Plaintiffs assert that the affirmative defense of Commercial Code section 3419(3) is not applicable to a drawee-payor bank since such a bank does not act as a representative in paying on the checks.

The application of this section is only critical in connection with the group 1 checks cashed prior to April 1, 1966, and the checks in groups 2, 3 and 4 because of the court's finding of no negligence on the part of plaintiffs. Commercial Code section 3419(3) applies in the absence of negligence on the part of plaintiffs. In the case of the group 1 checks cashed after April 1, 1966, section 3406 applies.

The trial court concluded, and we think properly so, that the language of section 3419(3) is broad enough to cover payor-drawee banks.

California Commercial Code section 1201(35) defines ‘representative’ as follows: “Representative' includes an agent, an officer of a corporation or association, and a trustee, executor or administrator of an estate, or any other person empowered to act for another.'

A drawee-payor bank is a representative of the depositary or collecting bank which forwards a check for collection.

‘Where checks are sent directly to the drawee bank for collection, a double agency is imposed on such drawee-payor bank. It becomes the agent of the drawer for the purpose of paying the check, provided the drawer has sufficient funds on deposit, and it also becomes the agent of the holder for the purpose of giving the proper notices to the drawer and endorsers in case the drawer does not have sufficient funds.’ (8 Zollmann, Banks and Banking, Section 5581, p. 328.)

‘The final step made, by probably what is the weight of authority today, is direct recognition that the drawee acts as agent of the holder for the purpose of presentment to itself for payment, with resulting duties to the holder to make due and proper presentment.’ (Prof. Delony ‘The Presentment Problem in the Collection of Checks through Banks,’ 10 University of Florida L.R. (1957), pp. 382, 435–443.)

Prior to the enactment of Commercial Code section 3419(1)(c), the payee of a check had no standing to maintain an action in conversion against a drawee-payor bank when the instrument was paid on a forged endorsement. (See Jones v. Bank of America, 49 Cal.App.2d 115, 121 P.2d 94.) The payee, however, could maintain such an action in conversion against a depositary or collecting bank. (See Fabricon Products v. United California Bank, 264 Cal.App.2d 113, 70 Cal.Rptr. 50.)

Thus it is clear that the enactment of section 3419(1)(c) created a new cause of action in California. There is no basis for concluding that the Legislature intended by this new enactment to deny to a drawee-payor bank the same defenses which would be available to a depositary or collecting bank, especially since the statute itself contains no exclusionary language.

We conclude that the effect of section 3419(3) is to make applicable to commercial paper the general rule that a person who deals in good faith with the property of another is not liable for conversion.

The judgment is affirmed.

COMPTON, Associate Justice.

HERNDON, Acting P. J., and FLEMING, J., concur.

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