Martin Silver is a practicing attorney with offices in Hauppauge, N.Y. He was a flooring installer before and during the time he went to law school and has since represented numerous industry people and companies. To contact him, call 631-435-0700.
Checks & unauthorized endorsements
The Uniform Commercial Code, at Section 3-404 states, in part, "Any unauthorized signature is wholly inoperative as that of the person whose name is signed unless he ratifies it..." This rule applies when the unauthorized signature is made on the signature line of a "stolen" check when the thief makes that check out to himself and forges the name of the person authorized to sign it, or where a thief takes a check after it has been properly signed and made payable to a third party and, without the consent of that third party, endorses and cashes the check for his own benefit.
This means one who loses either a checkbook or a check that has been signed after being made payable to an individual or company, need not be too concerned. If someone should find such a check and sign it without anyone's authorization, the bank that pays it, the one it is drawn against, will be on the hook so long as they are promptly notified after the forgery has been detected.
In one recent case a general contractor looked to this section for protection after one of his subcontractors, on the pretext of doing him a favor, picked up four checks made payable and intended by the owner to be delivered to the general contractor. Rather than deliver them, however, the subcontractor signed the general contractor's name on the back and brought them to his own bank, which accepted them for deposit into the subcontractor's account. The checks totaled $13,000.
At this point, the actions of the subcontractor were covered by the above section of the law making the bank that paid the checks responsible. We should note here, even though the bank may be required to pay the check a second time, in the manner in which it was intended, it does not affect the bank's right to proceed against the subcontractor both civilly and criminally for fraud.
In the interest of getting the job completed however, this general contractor, even though aware of his subcontractor's "fraud," chose not to say anything to anybody at that time. Instead the job continued, and over the next several months he actually paid that same subcontractor over $70,000 for his work. At no time when these payments were paid did the general contractor tell the subcontractor he was making a deduction of $13,000, representing the amount of payment the subcontractor received on the "forged" checks.
When the job was finally complete and the general contractor had been paid, he went to the owners and their bank demanding they make good on the checks that were cashed over an authorized endorsement. "Too late," said the court. As a result of the inaction of the general contractor in his failure to tell anyone for many months after he discovered the fraud, he was deemed to have "ratified" and adopted the act of the subcontractor.
What about the fact the owner negligently gave the checks in question to the subcontractor? According to the court, in light of the later "ratification" by the general contractor, this could not be revoked. Thus, the general contractor's silence, for whatever reason, prevented him from attempting to recover the amount of the forged checks from either the owner or the bank. But, what about the subcontractor? He committed a fraudulent act and thus, he could probably be held responsible in a civil lawsuit, if he was still in business and if the business had any assets. He would also be subject to criminal charges of forgery.
Edited by Admin 4/21/2008