By Craig W. Smith, J.D., Author, CCH Deposit Law Notes.
As a rule, a bank will be liable to its customer if it pays a check over the customer’s forged facsimile signature unless the customer has signed a facsimile signature resolution shifting the burden of loss from the bank to the customer.
A cardinal rule under the Uniform Commercial Code is that a payor bank may only debit a drawer’s account for checks that are properly payable. Moreover, the UCC states that a check is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and the bank. Consequently, a check generally is not properly payable if it does not bear the drawer’s authorized signature (Revised UCC § 4-401(a)).
An authorized signature may take various forms. For instance, a signature may be made by the use of any name including a trade or assumed name. A signature may be made by a word or mark or symbol adopted by a person as his or her authentic signature. Or a signature may be made by a device or machine (Revised UCC § 3-401(b)).
When a signature is made by a device or machine, it is commonly referred to as a facsimile signature. Depositors use facsimile signature machines to expedite the signing of a substantial volume of checks at a reduced cost. Before a financial institution permits checks to be signed by facsimile signature, however, it should obtain a resolution or agreement from its customer shifting the loss resulting from the payment of forged checks to the customer. This is because forged facsimile signatures are virtually impossible to detect and easy to counterfeit.
As previously discussed, the UCC is clear that a person is not liable for the payment of an instrument unless the person signed the instrument or authorized someone else to sign the instrument on his or her behalf (Revised UCC § 3-401(a)).
Regardless of this rule of law, can a bank by agreement shift the loss for the payment of a check bearing a forged facsimile signature back to the customer? In other words, can an agreement turn a check bearing a forged facsimile signature into a properly payable item? The answer appears to be yes.
This is because an item is considered properly payable under the UCC if it conforms to the terms of a contract between the bank and its customer regulating the circumstances under which an item is considered properly payable. Specifically, the UCC states that a check is properly payable if it is in accordance with any agreement between the customer and the bank (Revised UCC § 4-401(a)).
Consequently, as illustrated in the following recently decided case, a bank may escape liability for its payment of counterfeit checks bearing a customer’s forged facsimile signature if the bank and customer have agreed that the bank can honor checks purporting to bear the customer’s facsimile signature.
THE FACTS. Addison Wesley Longman, Inc., a publishing company, maintained several accounts with Bank of America. Between February 4 and 28, Bank of America paid seven counterfeit checks drawn on one account bearing the forged facsimile signature of Addison’s Chief Financial Officer, Ronald N. Woodward. The checks were payable to Orlando Cesar and totaled $322,438. When Addison discovered the counterfeit items, it demanded reimbursement from the bank. The bank refused the demand and Addison’s insurance carrier, Spear Insurance Company, reimbursed Addison for its loss. Spear then sued the bank for the forged items.
THE ARGUMENTS. Spear argued that because the seven checks bore Woodward’s forged facsimile signature they were not properly payable and payment and charge of the checks against Addison’s account was unauthorized and improper. In support of its position, Spears pointed out that the UCC states that a person is not liable on an instrument unless the person signed the instrument.
Bank of America responded stating that although the checks were forged they were still properly payable pursuant to the parties’ agreement. The bank noted that Addison expressly authorized the bank to pay checks bearing facsimile signatures resembling the authorized signatures on file with the bank, whether or not Addison issued the checks. In reliance upon its argument, the bank noted that the UCC states that an item is properly payable if it conforms to an agreement between a bank and its customer regulating when and how a check will be properly payable.
THE COURT DECISION. The court first stated that there was a facsimile signature agreement between Addison and the bank. It further noted that the agreement is clear and unambiguous and provides that the bank is authorized and directed to honor checks bearing or purporting to bear a facsimile signature regardless of by whom or by what means the facsimile signature may have been placed on such checks, if the facsimile signature resembles the facsimile specimens filed with the bank. The court then observed that it is undisputed that the facsimile signature on the counterfeit checks closely resembles the facsimile signature of Woodward on the signature specimen. Consequently, the court ruled that the facsimile agreement was a valid and enforceable contract exonerating the bank from liability for Addison’s losses. Spear Insurance Co. v. Bank of America, N.A., 40 UCC Rep Serv 2d 807 (IL 2000).
Remember, as a rule a bank will be liable to a customer if it pays checks over the customer’s forged facsimile signature. However, according to the ruling in the Spear Insurance Co. case a bank may shift liability for the payment of checks bearing forged facsimile signatures to the customer under the terms of a facsimile signature resolution. Thus, to avoid unnecessary losses a bank should require a customer who desires to sign checks with a facsimile signature to enter into an agreement absolving the bank from liability in the event it pays checks bearing forged facsimile signatures.