The Cheque With Two Signatures and a Forged Endorsement
Halcyon Interiors Inc. draws a cheque for $75,000 on its account at Meridian Bank, payable to 'Ridgeway Contracting.' The cheque is signed by Halcyon's controller, who has authority to sign alone up to $50,000 and jointly with the CFO above that amount; the CFO's signature is absent. Ridgeway's bookkeeper endorses the cheque 'Ridgeway Contracting' and deposits it into a personal account at Second Chance Credit Union, forging the second signature. Second Chance presents the cheque to Meridian, which pays it without examining the signatures. Halcyon discovers the loss three months later and demands that Meridian recredit its account. Meridian points to the drawer's negligence and to the fact that Halcyon's own controller signed a cheque beyond her authority.
1. Is Meridian liable to Halcyon for paying a cheque with a missing required signature?
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Likely yes, subject to the drawer's own negligence. A bank may charge its customer's account only for a cheque 'properly payable.' A cheque requiring two signatures that bears only one is not properly payable, and a bank that pays it is liable to the customer for the amount, even if the signer had actual authority to sign alone for smaller amounts. The drawer's internal delegation does not change the mandate the bank holds; the bank is held to the signature card and resolutions it has on file.
The bank has a comparative-fault defense. If the customer's negligence substantially contributed to the forgery or alteration, the customer may be precluded from asserting the claim, but only to the extent the bank's own failure to exercise ordinary care contributed. Here the controller signed a cheque beyond her authority, which is the customer's internal control failure; Meridian's failure to compare signatures is the bank's failure. The exam answer should apportion: the bank's failure to examine signatures is a breach of ordinary care, and the customer's failure to supervise signing authority is contributory. The result is often shared loss rather than a clean win for either side.
Timing matters. The customer must report the unauthorized signature promptly, typically within a short statutory period (often one year for the customer's claim, and much shorter for the bank to recover from a prior endorser). Halcyon's three-month delay is likely within the reporting window but should be checked against the applicable statute.
2. What is Second Chance Credit Union's position on the forged endorsement, and can it recover from Ridgeway?
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Second Chance took the instrument through a forged endorsement. A forged endorsement is wholly inoperative; it passes no title to the instrument. Second Chance therefore is not a holder and cannot be a holder in due course as to that endorsement, even if it took in good faith and for value. As a depositary bank, it may have warranty liability to Meridian: it presents the cheque and warrants that it has good title and that all signatures are genuine or authorized. When Meridian pays and later discovers the forgery, Meridian can claim against Second Chance on those presentment warranties.
Second Chance's recourse against Ridgeway is complicated by the fact that the forgery was by Ridgeway's own bookkeeper. Ridgeway's own employee forged the endorsement, so Ridgeway may be precluded from denying the signature under the 'impostor' or 'fictitious payee' doctrines if the bookkeeper had authority to supply the name of a payee. If the bookkeeper was entrusted with the cheque and the fraud was within the scope of that entrustment, the loss may fall on Ridgeway as the employer rather than on the bank. That is the key exam pivot: the forged endorsement rule is default, but the employer-entrustment rule shifts the loss to the drawer/employer who hired the forger.
Second Chance should also consider conversion liability: a bank that pays on a forged endorsement may be liable in conversion to the true owner.