HH Computer Systems v. Pacific City Bank

This appeal arose from a judgment entered after a demurrer by three banks to plaintiff’s second amended complaint was sustained without leave to amend. The three banks were US Metro Bank, Wilshire State Bank, and Pacific City Bank. An employee of a corporation with responsibility to gather incoming checks made payable to the corporation and deposit those checks into the corporation’s bank account (in this case, the corporation’s accounting manager) stole some of the incoming checks and took them to a check cashing service where she forged the signature of one of the officers of the corporation and received hard cash in return. After discovery of the thefts, the corporation fired the accounting manager and tried to recoup at least some of its losses. In this case, the corporation’s recoupment effort included suing its own bank, the three check cashing services where the employee took the checks, and the three banks which received those checks from the check cashing services for deposit into those companies’ own accounts. The legal issue presented in this appeal was one of first impression in California: Does the interposition of the check cashing services between (a) the employee who stole the checks and (b) the three banks who took the checks from three check cashing companies and credited the accounts of those check cashing companies, relieve the banks of all duty of care under section 3405 of California’s Commercial Code? The Court of Appeal concluded the answer was no: 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 [were] valid; banks subsequently taking the paper have a right to rely on the forwarding bank.’” Check cashing companies are not banks, and should not be treated as banks for purposes of California’s Uniform Commercial Code.View "HH Computer Systems v. Pacific City Bank" on Justia Law