SUN SAND INC v. UNITED CALIFORNIA BANK

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Court of Appeal, Second District, Division 5, California.

SUN'N SAND, INC. and Dupants, Inc., Plaintiffs and Appellants, v. UNITED CALIFORNIA BANK, Defendant and Respondent.

Civ. 45789.

Decided: April 07, 1976

George DeRoy of Hochman, Salkin & DeRoy, Los Angeles, for plaintiffs and appellants. Gendel, Raskoff, Shapiro & Quittner by Richard S. Berger, Los Angeles, for defendant and respondent.

This appeal is taken from an order of dismissal entered after respondent's general demurrer to appellants' second amended complaint was sustained without leave to amend. The allegations of the complaint center on events involving appellants, Sun 'N Sand, Inc. and Dupants, Inc. (described in the complaint as ‘sister corporations'); appellants' employee, Eloise Morales; respondent, United California Bank; and co-defendant, Union Bank. Appellants maintained checking accounts with Union Bank; Morales maintained a ‘bank’ account with respondent, United California Bank.

Appellants allege the following facts in their complaint: As a duty of her employment, Morales was charged with the preparation of checks each of which had to be signed by an officer of appellants. Over a three-year period, Morales prepared checks, for signature by appellants' officers, payable to respondent. These checks, each representing a different, small amount, were issued by appellants in the belief that respondent was owed the money represented by the checks; but, as appellants further allege, no such amounts were in fact owed to respondent. After obtaining an authorized signature on the checks, Morales raised the amount of each check. She then presented each of the checks to respondent who ‘transferred, or caused or permitted to be transferred, the said checks to ELOISE MORALES, which said checks were then deposited in her account with [respondent].’ An explanation does not appear in the complaint as to the circumstances under which checks made payable to respondent were ultimately deposited into Morales' account. A total of $34,757.93 in checks was negotiated by Morales on the following dates and in the following amounts:

Each of the checks was presented by respondent to Union Bank which paid the checks and charged appellants' account in each instance for the stated amount. Appellants allege that they did not discover Morales' actions until June 23, 1973 and that they were unable to make such discovery prior to that time ‘because ELOISE MORALES [had] destroyed portions of the records and manipulated others, so as to make it impossible for [appellants] to discover said mistake.’

Appellants instituted the present action by filing their original complaint on March 4, 1974. Respondent's general demurrers to appellants' original and first amended complaints were sustained by the trial court with leave to amend. After appellants filed their second amended complaint, they stipulated with respondent (1) that respondent's general demurrer to the first amended complaint could be deemed to be its general demurrer to appellants' second amended complaint and (2) that appellants could not amend beyond their second amended complaint. The stipulation was filed on October 4, 1974. On that same date, the trial court sustained respondent's demurrer without leave to amend ‘for the reasons set forth in points and authorities in support of [the] demurrer to [the] First Amended Complaint and in particular and in addition, because [respondent], as payee, owed no duty to [appellants] which was breached.’ It is uncontroverted by appellants that the trial court also ‘judicially noticed the fact that it is the custom and practice of banking institutions to render to their customers monthly statements of account on commercial checking accounts.’

In their second amended complaint, appellants seek damages of $34,757.93 from respondent based on the following causes of action: (1) that appellants issued and allowed payment of the checks by mistake; (2) that respondent breached its warranty of good title to appellants by transferring the checks to Morales; (3) that respondent breached its warranty of good title to appellants by endorsing and obtaining payment on the checks; (4) that respondent's failure to advise appellants that neither it nor Morales had any right, title, or interest in the money or checks constituted fraudulent misrepresentation; (5) that respondent was negligent in permitting and authorizing the deposit of the checks into Morales' account; and (6) that respondent, in its capacity as collecting bank, was liable based on the alteration of the checks and their deposit into Morales' account with respondent.

To resolve the issue of whether the trial court erred in sustaining respondent's demurrer and dismissing the action, we must determine whether appellants' complaint states a cause of action against respondent. Even if a cause of action is stated, we must then consider whether the action is bared by any applicable statute of limitations.

Appellants' second and third causes of action are based on provisions of the California Uniform Commercial Code. Specifically, appellants' second cause of action is based upon warranties on presentment and transfer as provided for in section 3417, subdivision (1)(a), of the California Uniform Commercial Code. That section, which is contained within Division 3 of the Code governing ‘Commercial Paper’ (Cal.U.Com.Code § 3101), provides: ‘(1) Any person who obtains payment or acceptance and any prior transferor warrants to a person who in good faith pays or accepts that [¶](a) He has a good title to the instrument or is authorized to obtain payment or acceptance on behalf of one who has a good title; . . .‘1 In their third cause of action, appellants state that respondent is liable for breach of warranty of title under section 4207, subdivision (1)(a), within Division 4 of the California Uniform Commercial Code governing ‘Bank Deposits and Collections' (Cal.U.Com.Code § 4101), which provides: ‘(1) Each customer or collecting bank who obtains payment or acceptance of an item and each prior customer and collecting bank warrants to the payor bank or other payor who in good faith pays or accepts the item that [¶](a) He has a good title to the item or is authorized to obtain payment or acceptance on behalf of one who has a good title; . . .’

Appellants have pleaded both of these sections, despite the similarity of their provisions, as a result of varying their statement of the capacity in which respondent acted during the transactions with Morales. In their second cause of action, appellants allege that respondent was liable as ‘payee’; the third cause of action, however, is predicated upon the allegation that respondent acted as ‘collecting bank.’ Such a variance in allegations apparently stems from respondent's allegedly being the named payee on the face of each check in addition to acting as the conduit through which funds were collected on behalf of Morales' account.2 (See Cal.U.Com.Code § 4105).3

Although the language of section 3417 allows appellants a direct cause of action against respondent, as payee, section 4207 does not specifically provide for a direct action by a drawer against a collecting bank. However, in Allied Concord etc., Corp. v. Bank of America, 275 Cal.App.2d 1, 80 Cal.Rptr. 622, the court held that, despite the absence of statutory language so providing and prior California law to the contrary, on third party beneficiary principles the benefit of warranties given by a bank which negotiates a check on a forged indorsement extends by implication to the drawer of the check. In light of the actions permitted under sections 3417 and 4207 and appellants allegations of respondent's negotiation of the checks and its status during the transactions, we find that under either section 3417 or section 4207 of the California Uniform Commercial Code, appellants have stated a cause of action against respondent. Although it may be argued that application of subdivision (1)(a) of either section 3417 or section 4207 may be limited to cases where a forged indorsement is involved (see, Cal.U.Com.Code, § 3417, U.Com.Code Com. 3, Cal.Com. 3 (23B West's Ann.Com.Code, p. 380); Cal.U.Com.Code, § 4207, U.Com.Code Com. 1, Cal.Com. 1 (23B West's Ann.Com.Code, p. 576), appellants have alleged facts sufficient to state a cause of action under subdivision (1)(c) of either section 3417 or section 4207.4

Our next inquiry, therefore, is whether either cause of action is barred by any applicable statute of limitations. In this regard, the court in Allied, supra, noted that since a collecting bank is secondarily liable and a drawee bank primarily liable to the drawer, the collecting bank is entitled to the defenses which the drawee bank could assert against the drawer. On the basis of this analysis, the court held that suit in California by the drawer ‘on contract principles is barred by the one-year statute of limitation [provided for by section 4406 of the California Uniform Commercial Code5 ], whether brought against the drawee bank, the collecting bank, or the depositary bank.’ (Id. at 7, 80 Cal.Rptr. at 626.)

With respect to the applicability of section 4406 to an action brought under section 3417, the Official Comments on the Uniform Commercial Code note that sections 3417 and 4207 are ‘identical in substance’ (Col.U.Com.Code § 4207, Uniform Code Comment 1) and that for items involved in the bank collection process, section 4207 contains warranties corresponding to those provided in section 3417 (Cal.U.Com.Code § 3417, Uniform Code Comment 1). Further, according to section 3103 of the Code, ‘[t]he provisions of this division [3] are subject to the provisions of the division on bank deposits and collections (Division 4) . . ..’ In the California Code Comments, this provision is construed as follows: ‘This means, for example, that an item of commercial paper which is also in the course of bank collection is subject to both Division 3 and Division 4 but where there is a conflict between the provisions of either Division, Division 4 prevails.’ (Cal.U.Com.Code § 3103, California Code Comment 2.) In the instant case, where respondent was payee, but acted as collecting bank for the deposit, we conclude that appellants' causes of action against respondent based on sections 3417 and 4207 are subject to the one-year statute of limitations provided for in section 4406, subdivision (4). Since this limitations period operates regardless of the care or lack of care of the customer or the bank, appellants are precluded from asserting the defect as to those items sued upon more than one year after the time monthly statements were made available to them. (Cal.U.Com.Code § 4406, subd. (4); see, Kiernan v Union Bank, 55 Cal.App.3d 111, 127 Cal.Rptr. 441.)

Appellants are correct, however, in asserting that the 14-day limitations period provided for in subdivision (2) of section 4406 does not apply in the absence of an affirmative response by respondent alleging facts which would establish that appellants' action or inaction fell below the standard of care required by subdivision (1) of section 4406.6 Further, under section 4207, subdivision (4), of the California Uniform Commercial Code, the reasonableness of the time within which a claim for breach of warranty is brought is measured from the time a ‘person claiming learns of the breach.‘ Suit by appellants less than one year after ‘discovery‘ of the defect in title to the checks cannot be deemed unreasonable as a matter of law under section 4207, subdivision (4).

Since the underlying defect in title and appellant's sixth cause of action stem from the alteration of the checks,7 the following provision of section 340 of the Code of Civil Procedure is also applicable: ‘Within one year: . . . 3. An action . . . by a depositor against a bank for the payment of a forged or raised check . . ..’ Using the contract principles relied upon by the court in Allied, supra, this defense would extend to a collecting bank, in which capacity respondent is being sued under appellants' sixth cause of action.8 Since the one-year statute of limitations provided for in section 4406, subdivision (4), of the California Uniform Commercial Code is ‘consistent’ with section 340, subdivision 3, of the Code of Civil Procedure (Cal.U.Com.Code § 4406, California Code Comment 6), we find that these limitations periods began to run, not from the time of the discovery of the alterations, but from the time of the wrongful payments. (California Vegetable Union v. Crocker Nat. Bank, 37 Cal.App. 743, 174 P. 920.) Therefore, appellants' recovery under either their second, third, or sixth cause of action is barred on all but one of the checks negotiated by Morales.

In their fifth cause of action, appellants allege that respondent, as payee, was negligent in permitting the deposit of the checks into Morales' account.9 An obstacle to appellants' stating this cause of action would be the absence of a duty of care owed by respondent to appellants. However, the question of whether such a duty was owed in the instant case was answered in Pacific Indemnity Co. v. Security First Nat. Bank, 248 Cal.App.2d 75, 56 Cal.Rptr. 142.10

In Pacific Indemnity, the plaintiff had appealed from a judgment denying it any recovery from the defendant bank. The record revealed the following facts: Credit Managers Association of Southern California was engaged in the business of administering the affairs of businesses which had made assignments to it for the benefit of their creditors. In the course of settling the indebtedness of its clients, Credit Managers would issue checks made payable to the order of their clients' creditors.

During a 37-day period, beginning on August 7, 1962, Nolan Brown, an employee of Credit Managers who was occasionally charged with the preparation of these checks for signature by Credit Managers' officers, caused six checks to be drawn against his employers' account with Union Bank. All six checks were made payable to the defendant, Security First National Bank, and were imprinted with the drawer's name and its officers' signatures. The parties stipulated that Brown had forged these signatures. The amounts, totalling $23,079.59, had been placed on the checks by means of a ‘check writing machine,’ and, as was Credit Manager's practice, a statement of the purpose for which each check was purportedly made payable to the defendant appeared on the face of each check in the upper left-hand corner. Brown testified that the terminology had been “made up entirely by [him] in order to get the check issued by the Credit Managers Association” (Id. at 81, 56 Cal.Rptr. at 146) and that he never intended the defendant bank to have any interest in the proceeds of the checks.

As to the actions of Credit Managers and the defendant with respect to negotiation of the checks, ‘[n]o evidence was introduced tending to establish that the protective procedures adopted by Brown's employer were unreasonably lacking in care or failed to conform with business practices generally prevailing or reasonably to be expected of it.’ (Id. at 82, 56 Cal.Rptr. at 146.) However, it was established that the tellers at the bank had not required Brown to sign the checks when presented nor had they inquired as to Brown's position with Credit Managers or his authority to direct the disposition of the proceeds of checks made out to their employer. The court noted that ‘[a]pparently they also ignored the directions contained upon the face of the check[s] since in the usual case where the bank is not the payee it would be of no concern to it why the drawer of a check was making payment to some third party payee.’ (Id. at 84, 56 Cal.Rptr. at 148.) Each teller also testified to having failed to observe the bank's rule that any check of $500 or more (sums which each check negotiated by Brown represented) was to be placed in a box on a separate shelf (the ‘large item bin’) and approved by the manager. Such approval and examination by the manager was usually accomplished within the same day. The court concluded that observance of the rule ‘almost certainly would have disclosed Brown's illegal activities immediately following his presentment of the first check.’ (Id.)

Upon discovery of Brown's actions, Credit Managers was able to recover $15,460.07 from him. The plaintiff, surety for Credit Managers upon a standard form of employee fidelity bond, paid Credit Managers $7,691.52 under its policy and thereafter instituted the action seeking recovery of this amount from the defendant bank.

On the basis of these facts, the court in Pacific Indemnity stated that the question before it was whether “a bank which has received a check presented to it by an employee of the drawer and drawn payable to the order of the bank for a specified purpose as indicated upon its face, [may] retain the proceeds thereof after it has credited an equal amount from its own funds to the employee's personal account at his request and has permitted him to make withdrawals therefrom?” (Id. at 79, 56 Cal.Rptr. at 145.) The court found that ‘[a]bsent some showing of ostensible authority on the part of the employee, such question, of course, must be answered in the negative.’ (Id.) In so doing, the court reversed the trial court's findings that the fictitious payee rule applied (which rule would have made the checks bearer paper and the bank's acceptance of the paper for deposit in Brown's personal account proper), that the defendant bank had no duty to inquire as to the purpose of the checks, and that Credit Managers, not the bank, was negligent.

The court in Pacific Indemnity held that the checks were made to an actual payee, the bank, and that ‘neither present Commercial Code section 3405 nor former Civil Code section 3090 ever was designed to protect the payee named therein if the check was in fact delivered to him and he received the sums specified therein under circumstances which neither entitled him to retain such funds nor to divert them to some other person.‘ (Id. at 93, 56 Cal.Rptr. at 154; emphasis original.) The court quoted the following passages from American Jurisprudence 2d and Corpus Juris Secundum:

“It is generally held that a check or draft drawn to the order of a bank precludes the diversion of the proceeds of it to a use other than that of the drawer, and that such diversion can be justified only by proof of authority from the drawer. It is held to be immaterial that the drawer may have been negligent in signing the check, and inquiry will not protect the bank where it is made only of the person tendering the check. Thus it appears that a drawee bank which is also the payee is liable to the drawer for paying the check to a third person or to the drawer's agent who has no actual or apparent authority from the drawer to collect its proceeds, or for diverting its proceeds to uses other than those of the drawer, without specific instruction from the drawer to that effect; but that if the drawer has clothed his agent with apparent authority to receive the proceeds of such check, the bank is not negligent in, and is not liable to the drawer for, paying, in reliance upon such apparent authority, the proceeds of such check to such agent, or appropriating them to uses directed by the agent contrary to his actual authority, if the agent should misappropriate such proceeds.' (10 Am.Jur.2d, Banks, § 560, pp. 529–530.)

“Where a check is drawn to the order of a bank to which the drawer is not indebted, the bank is authorized to pay the proceeds only to persons specified by the drawer; it takes the risk in treating such a check as payable to bearer and is placed on inquiry as to the authority of the drawer's agent to receive payment.' (9 C.J.S. Banks and Banking § 340, p. 683.)‘ (Id. at 93-94, 56 Cal.Rptr. at 154.)

As to the defendant bank's duty to Credit Managers, the court concluded that ‘[s]ince the evidence so clearly reflects the negligence of respondent's tellers in violating the rules of care established by it [citation], particularly with regard to the placement of these checks in the ‘large item bin’ where they would have come to the immediate attention of the bank's manager, and the complete failure of the [defendant bank] to make inquiry of Brown concerning his authority to divert the proceeds of these checks to his personal account, it is apparent that the [trial] court's conclusion concerning [the defendant's] lack of negligence is based solely upon its preceding erroneous conclusion that these checks were ‘bearer’ instruments. . . . As previously indicated there was no evidence presented sufficient to support a finding that by reason of the prior conduct of the parties [the defendant] bank relied, or could have relied, upon any ostensible authority in Brown to direct that the proceeds of checks drawn by his employer in favor of [the defendant] should be applied to his own personal account. [¶] In addition, ‘It appears obvious that a purchaser of a negotiable instrument takes it with notice of all the facts recited on its face.’ [Citation.] Here, the notations on the face of the checks belied any right Brown might have asserted as to the proceeds of these instruments.' (Id. at 98–100, 56 Cal.Rptr. at 157–158.) The court held that as the bank was therefore liable to the drawer, it was liable to the plaintiff asserting its right of subrogation.

In his concurring opinion, Justice Fleming added: ‘In taking money IN the bank need exercise very little caution or formality. . . . But in paying money OUT the bank is required to exercise all the caution demanded of it as the custodian of other people's money. . . . When the bank permitted moneys or credits to come into its possession, it came under a duty to disburse them under proper authority, and for its failure to do so it may be held liable.’ (Id. at 101–102, 56 Cal.Rptr. at 159.)

Adopting the decision in Pacific Indemnity as precedent, we conclude that appellants have alleged facts sufficient to state a cause of action against respondent for negligence and that, therefore, the trial court's finding that respondent, ‘as payee, owed no duty to [appellants] which was breached’ was erroneous. In the instant case, respondent was presented with checks on which it was the named payee. Each check, representing a large amount, was presented by a third party, Morales, and signed by the drawer, appellants. There is no indication that Morales possessed or asserted any authority, actual or apparent, to direct the disposition of the proceeds of the check or that she demonstrated any entitlement to those proceeds. In light of this alleged situation, certainly some action should have been taken by respondent, as payee, to insure that such large amounts were diverted to the proper person. Although the checks bore no distinguishing marks, statements of purpose, or forged signatures, these facts are not controlling where the circumstances show that, at the very least, respondent should have investigated whether any debt was owed to it by appellants and should have inquired as to the authority of Morales to receive the proceeds of the checks. There was sufficient time for respondent to make such inquiry and investigation where the check-depositing episode continued for a three-year period. Thus, under the facts alleged, respondent, as payee, owed a duty of care to appellants which was breached by their inaction. Appellants' action was timely as to all items sued upon with the exception of the checks dated February 6, 1970, October 2, 1970, and January 13, 1971 in the amounts of $5,767.85, $3,545.48, and $4,143.43, respectively. (Code Civ.Proc., § 338, subd. 3.) We note, however, that our holding does not preclude respondent from raising any appropriate defense in its answer or during trial.11

With respect to appellants' cause of action for mistake, the general rule is that money paid under a mistake of fact may be recovered. This rule is based upon the principle that money paid through misapprehension of facts in equity and in good conscience belongs to the person who paid it. (87 A.L.R. 649–650.) Further, a plaintiff, “even if negligent, may recover if his act has not changed the position of an innocent defendant to his detriment.” (National Bank of California v. Miner, 167 Cal. 532, 537, 140 P. 27, 30, quoting from, National Bank of Commerce v. National Mechanics Association, 55 N.Y. 211, 213; see also, Frontier Refining Co. v. Home Bank, 272 Cal.App.2d 630, 635–636, 77 Cal.Rptr. 641.) In the present case, appellants have pleaded facts sufficient to entitle them to relief for mistake. In addition to their statement that the checks were issued in the mistaken belief that respondent was owed the proceeds, the alleged facts indicate that respondent's participation in negotiating the checks may have furthered the loss suffered by appellants. There is also no showing that respondent's change of position is irrevocable (i. e., that Morales has withdrawn the checks deposited by respondent in her account). Again, however, respondent may avail itself by answer or at trial of any applicable defense. The principle for recovering under mistake is equitable in nature and, thus, equitable defenses are available to respondent; the actions of both parties should be examined to determine, for example, whether appellants are estopped from asserting their mistake as to any of the items sued upon. (See Security, etc., Bk. v. Southern, etc., Bk., 74 Cal.App. 734, 741–742 [241 P. 945]; Leonard v. National Bank of W. Va. at Wheeling, 150 W.Va. 267 [145 S.E.2d 23, 27–29].) Since appellants allege that they did not discover their mistake until June 23, 1973, their cause of action relative to all items sued upon is not barred by the statute of limitations. (Code of Civ.Proc. § 338, subd. 4.)

We conclude, however, that the facts alleged in appellants' complaint are insufficient to state a cause of action against respondent for fraudulent misrepresentation. Although appellants allege that respondent ‘had full knowledge that it was payee on the checks' and ‘knowingly failed to advise [appellants of] the circumstances', there is no allegation that respondent specifically knew of Morales' fraudulent scheme or that respondent intended to deceive appellants by failing to advise them of ‘the circumstances.’ (3 Witkin, Cal.Procedure, Pleading, §§ 586, 588, at pp. 2224–2227.) To state a cause of action for fraud, facts, not conclusions, supporting that cause of action must be pleaded clearly and specifically. (Davis v. Rite-site Sales Co., 8 Cal.2d 675, 681 [67 P.2d 1039]; Zumbrun v. University of Southern California, 25 Cal.App.3d 1, 8 [101 Cal.Rptr. 499, 51 A.L.R.3d 991].)

The judgment (order of dismissal) is reversed.

FOOTNOTES

1.  ‘Person’ is defined by the Commercial Code as ‘an individual or an organization.’ (Cal.U.Com.Code § 1201, subd. 30.)

2.  We recognize the permissibility of pleading ‘inconsistent counts.’ (3 Witkin, Cal.Proc., Pleading, §§ 290–292, pp. 1965–1967.)

3.  Under section 4105, subdivision (d), of the California Uniform Commercial Code, a ‘collecting bank’ is defined as ‘any bank handling the item for collection except the payor bank.’ The banks defined by, and included within, section 4105 generally ‘exclude a bank to which an item is issued, as such bank does not take by transfer except in the particular case covered where the item is issued to a payee for collection, . . .’ (Cal.U.Com.Code § 4105, Uniform Code Comment 1.)

4.  Subdivision (1)(c) of either of these sections essentially provides that the ‘person’ or ‘collecting bank’ also warrants that the instrument or item has not been ‘materially altered.’ This warranty is not given to the maker or drawer of the draft if the ‘person’ or ‘collecting bank’ is a ‘holder in due course.’ Under the facts alleged in the instant case, respondent could not qualify as a holder in due course because it did not take the instrument or item ‘for value.’ (Cal.U.Com.Code, §§ 3302, subd. (1), 3303.)

5.  Section 4406 of the California Uniform Commercial Code provides in pertinent part:‘(1) When a bank sends to its customer a statement of account accompanied by items paid in good faith in support of the debit entries or holds the statement and items pursuant to a request or instructions of its customer or otherwise in a reasonable manner makes the statement and items available to the customer, the customer must exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and must notify the bank promptly after the discovery thereof.‘(2) If the bank establishes that the customer failed with respect to an item to comply with the duties imposed on the customer by subdivision (1) the customer is precluded from asserting against the bank‘(a) His unauthorized signature or any alteration on the item if the bank also establishes that it suffered a loss by reason of such failure; and‘(b) An unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank after the first item and statement was available to the customer for a reasonable period not exceeding 14 calendar days and before the bank receives notification from the customer of any such unauthorized signature or alteration.‘(4) Without regard to care or lack of care of either the customer or the bank a customer who does not within one year from the time the statement and items are made available to the customer (subdivision (1)) discover and report his unauthorized signature or any alteration on the face or back of the item or any unauthorized indorsement, and if the bank so requests exhibit the item to the bank for inspection, is precluded from asserting against the bank such unauthorized signature or indorsement or such alteration. The burden of establishing the fact of such unauthorized signature or indorsement or such alteration is on the customer.. . . . .'

6.  We also note that the preclusions under subdivision (2) of section 4406 do not apply, despite a customer's negligence, it the customer can show that the bank fell below the standard of care required of it. (Cal.U.Com. Code § 4406, Uniform Code Comment 4; Atlas Vegetable Exchange, Inc. v. Bank of America, 10 Cal.App.3d 868, 89 Cal.Rptr. 274.)

7.  We assume that a cause of action for ‘altered checks' exists independently of those causes of action based on the warranty provisions of the California Uniform Commercial Code. (See, Cal.U.Com.Code § 1103.)

8.  Although it is not entirely clear from their complaint in what capacity appellants are suing respondent for payment of ‘altered checks,’ in their opening brief appellants state: ‘The Sixth Cause of Action sets forth a claim against UCB, in its capacity as collecting bank, on account of alterations, but is probably barred by appropriate limitations periods, as to all but one check, in the amount of $2,293.41, issued March 15, 1973. Its inclusion is based upon the Court's jurisdiction to consider a claim in such amount, as pendant to other claims within its jurisdictional amount.‘

9.  ‘Unless displaced by the particular provisions of this code, the principles of law and equity, . . . shall supplement its provisions.’ (Cal.U.Com.Code § 1103.) Where the California Uniform Commercial Code provisions did not either establish or negate a bank's liability, allegations of negligence were considered in Wright v. Bank of California, 276 Cal.App.2d 485, 81 Cal.Rptr. 11.

10.  In Pacific Indemnity, three opinions were filed: an opinion of the Court (Herndon, J.), a concurring opinion (Fleming, J.), and a dissenting opinion (Roth, P. J.).

11.  Our holding, of course, merely relates to whether appellants have stated a cause of action for negligence against respondent. Certainly, the production of the cancelled checks, or evidence of any statements made by Morales to respondent or of the means by which she concealed her wrongful activity from appellants, will aid in determining the respective rights of the parties. Further, while we do not decide the applicability of the following section to the instant case, it should be noted that section 3406 of the California Uniform Commercial Code provides: ‘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.’ (See also Allied Concord etc. Corp. v. Bank of America, 275 Cal.App.2d 1, [80 Cal.Rptr. 622].)

STEPHENS, Acting Presiding Justice.

ASHBY and HASTINGS, JJ., concur.