Metropolitan News-Enterprise


Monday, November 10, 2014


Page 1


Court of Appeal Rules:

Banks for Check-Casher May Be Liable to Check-Theft Victim




A bank that accepts checks from a check-cashing company owes a duty of care to the original recipient of the check, the Fourth District Court of Appeal ruled Friday.

Div. Three reinstated a suit by a company in Orange County that claims a former employee used forged endorsements to cash about $650,000 worth of stolen checks at three different check cashing companies, which in turn deposited the checks into three different banks. The banks claimed the check-cashing companies had the sole duty of care, but Justice William Bedsworth, writing for the Court of Appeal, disagreed.

The justice cited Commercial Code §3405, which provides in part that where a check or other instrument is fraudulently endorsed and presented for payment and “the person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure contributes to loss resulting from the fraud, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.”

That duty of care, Bedsworth explained, is traditionally imposed on “first banks,” whereas banks that receive the check down the line are entitled to rely on the first bank’s judgment in honoring the check.

Citing prior cases, he wrote:

“In this case the three banks were the first banks to process the checks through the banking system, and, as ‘first banks,’ they had a duty of care in the processing of those checks ‘to make certain all endorsements are valid; banks subsequently taking the paper have a right to rely on the forwarding bank,’” Bedsworth wrote.

Three Banks

The ruling revives HH Computer Systems, Inc.’s suit against US Metro Bank, Wilshire State Bank, and Pacific City Bank. The Santa Ana-based company is a salvager of computer parts, and is seeking to recover on about 300 checks it says were stolen in 2011 and 2012 by its then-accounting manager, Jennifer Kim.

Kim, according to the complaint, was supposed to list all incoming checks using the company’s accounting software, then deposit them in HH’s account at Hanmi Bank. Instead, the company alleges, she illegibly endorsed each check, cashed the checks at three local check-cashing services, and pocketed the money until the company discovered the scheme.

The company sued the three banks, its own bank, Kim, and the check-cashing services. The appeal ruled on Friday concerned only the three banks, whose demurrers were sustained by Orange Superior Court Judge Derek Hunt.

The case “presents a distressingly common scenario,” Bedsworth wrote, citing a 2013 Orange County Lawyer article by San Francisco attorney—and frequent MetNews contributor—David Cook. The article, entitled Robbed by Your Employees, warned against a number of schemes that have plagued businesses, including law offices, and warned that “[t]he person getting stuck with the bounced check is very angry and will sue.”

‘Loose Sense’

Bedsworth acknowledged that “check cashing companies can feel like banks in a loose sense of the word,” explaining:

“A customer takes a check written on someone’s account at a bank and gets money for it.  Real banks do that all the time.  But so do liquor stores and markets and desperate landlords. We acknowledge that the role of check cashing companies in the general American economy has grown tremendously over the past 20 or so years.  They facilitate financial services for large numbers of people who are not now connected to traditional banking institutions, and treating them as ‘“banks’ would be consistent with the general bank deregulation of the late 1990’s which broadened the list of institutions who, in effect, could act as banks.”

The justice, however, cited two policy reasons why check cashing companies should not be treated as banks under §3405—the “ineluctable” conclusion that they are not banks, as defined by the Commercial Code, and the fact that they do not accept deposits and thus do not function as banks.

Bedsworth went on to reject the argument that the decision will impose an impossible burden on banks in the defendants’ position:  

“In fact, our decision articulates no more of a burden even on first banks than they already have. That burden is a light one: (a) It only affects first banks which have check cashing companies as customers, and even then it only applies (b) to those checks presented by check cashing companies to their own banks which are made out to a business or corporation.  Those checks appear to represent a tiny percentage of something less than four percent of check cashing companies’ total business.  And even as to that tiny percentage, check cashers and their banks can protect themselves by the simple expedient of the check casher obtaining a written authorization from any business or corporation to whom a check is payable that the business or corporation has authorized a given individual to sign checks on its behalf.”

The justice added that §3405 imposes comparative negligence liability, so the banks may press their argument that HH, which did not discover the scheme until nearly two years after it began, should bear a major part of the loss.

The case is HH Computer Systems, Inc. v. Pacific City Bank, 14 S.O.S. 5020.


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