From classic employee embezzlement to outright theft and forgery, the number of incidents of dishonest and illegal activity related to checks and other negotiable instruments has increased in recent years in southwest Louisiana.  Generally, the perpetrators of these activities are eventually identified and prosecuted in some fashion.  While these individuals may pay a debt to society through the criminal system, they frequently contribute little or nothing to the civil damages which resulted from their willful acts.  The money acquired from the fraud was usually eaten, drunkor gambled away.  Regardless of the cause, the money simply disappears over a very short time and tangible property worthy of seizure almost never remains.

Consequently, the cause of damage is treated like an accident and the loss is almost universally borne by the bank customer (drawer), the payor bank (drawee), or the bank where the items were taken for collection (depositary bank).   The respective liabilities of these parties, are established by Article 3 of the Uniform Commercial Code (UCC) which was adopted by Louisiana and effectively displaces all other Louisiana claims and causes of actions with respect to negotiable instruments.

According to the UCC, in a typical situation where someone steals or has access to the drawer’s checkbook and writes himself a check, the bank customer (drawer) has a claim against his own bank (drawee) for paying the unauthorized instrument.  This claim is, however, subject to defenses.  Specifically, the payor bank (drawee) can avoid or reduce its liability by proving that the bank customer (drawer) failed to exercise ordinary care with respect to the checks and/or failed to timely review his bank statements. 

The payor bank (drawee) could also potentially have a breach of warranty claim against the depositary bank if certain conditions existed at the time of transfer or presentment to the payor bank (drawee).  The UCC does not recognize a drawer’s claim against the depositary bank.

Despite this relatively simplistic liability setup, widespread confusion exists in Louisiana, even among lawyers, regarding actionable claims and appropriate causes of action.  Lawyers often file scattergun lawsuits on behalf of the drawer.  Non-UCC claims and even UCC claims against the wrong parties are not uncommon.  Perhaps this is due to a general lack of understanding, or it could be merely over aggressive litigation tactics.  Whatever the cause, the fact that there are relatively few Louisiana Court of Appeals or Supreme Court decisions interpreting the liability provisions in check fraud cases certainly allows this situation to persist.  Recently, the 3rd Circuit Court of Appeals has taken a positive step in correcting this issue with its decision in Innovative Hospitality Systems, LLC vs. ABE’s Inc., etc. (La. App. 3rd Cir. 12/8/10)  __ So. 3d __, 73 UCC Rep. Serv. 2d 251, 2010 WL 4961809.

In this case, the checking account owner (drawer) at payor bank (drawee) filed suit against the depositary bank seeking recovery of funds paid out in 108 fraudulent checks written on the drawer’s account at the payor bank.  The depositary bank filed exception of no cause of action.  The 14th Judicial District Court, Calcasieu Parish, No. 2008-1677, Judge Wilford D. Carter, granted exception and dismissed the suit.  The drawer appealed. 

Writing the opinion of the Court, Judge David Painter held that:  1) the depositary bank that accepted deposit of fraudulent checks owed no duty to account owner, i.e., the drawer, in form of a statutory presentment warranty; 2) account owner’s remedy for amount of fraudulent (and altered) checks charged against owner’s account was against its own bank, i.e., the drawee bank; and 3) the UCC displaces the Louisiana law applicable to negligent acceptance, payment or presentment of a forged check by a depositary bank prior to its enactment.  Therefore any negligence-based action asserted by drawer in its petition has been displaced by the UCC and therefore does not support a cause of action against the depositary bank.

With this case available, Louisiana trial courts no longer have to accept the statutory interpretations of the UCC from other jurisdictions with respect to the depositary banks’ liability to the drawer.  Hopefully, attorneys will eventually recognize this principle and omit these erroneous claims against depositary banks from their original petitions. .  This would produce less overall litigation for banks and swifter resolution of contested matters through trial or settlement.

The Stockwell Sievert attorneys involved in obtaining this decision from the Third Circuit were Stephen C. Polito, H. Alan McCall, and Stephen D. Polito.

by: Stephen D. Polito