Unauthorized Indorsements. Mowatt worked as a bookkeeper for the ...

[lb_gilbert]

Unauthorized Indorsements. Mowatt worked as a bookkeeper for the law firm of McCarthy, Kenney & Reidy, P.C., which had several branch offices in the Boston area. Part of Mowatt's job involved preparing checks payable to the partners in other offices for the authorized signature of a partner of the firm. On numerous occasions, Mowatt wrote such checks with no intention of transmitting them to the payee-partners. Instead, after they had been signed by an authorized partner, Mowatt forged indorsements on the checks and then either cashed them or deposited them in one of three bank accounts that he had opened for this purpose. The fraudulent scheme went on for a year and a half, and when the forgeries were finally discovered, the law firm demanded that the bank credit its account with the full amount of loss that it had sustained as a result of the forgeries. The bank refused to do so, and the law firm brought an action against the bank. Which party had to bear the loss arising from the forgeries, the law firm or the drawee-bank? Discuss.

Question 2

In Guz v. Bechtel National, where Guz sued for breach of an implied contract to be terminated only for good cause and for breach of the implied covenant of good faith and fair dealing after he was fired by Bechtel National during a time of high profits, the supreme court held that Bechtel could:
 a. fire Guz without reason because he had not worked for Bechtel for more than 25 years b. not fire Guz without reason because he had worked for them for over 20 years
  c. fire Guz without cause because there was insufficient evidence of an implied contract of continued employment
  d. not fire Guz without cause because there was clear evidence of an implied contract of continued employment
  e. none of the other choices are correct

[mmj22343]

Answer to Question 1

Unauthorized indorsements
This case was decided under the unrevised UCC 3-405 . Under that section, the law firm had to bear the loss. The court emphasized that when an indorsement is forged, generally the bank that first paid on the check will bear the loss. But it also pointed out that UCC 3-405(1)(c) provided an exception to this rule. This section places the loss on the drawer when an employee supplies him with the name of the payee intending that the named payee have no interest in the check and an indorsement is forged in the name of the named payee. The court held that the forged indorsements in this case fell under this exception. Mowatt had never intended the payee-partners to have any interest in the checks payable to them and forged their names when indorsing the checks. The court stated that the reasons for the fictitious payee rule were that the employer is normally in a better position to prevent such forgeries by reasonable care in the selection and supervision of his employers, or, if he is not, is at least in a better position to cover the loss by fidelity insurance. To the law firm's contention that the bank's negligence in paying checks over forged indorsements precluded it from asserting the fictitious payee rule as a defense, the court responded that any negligence on the part of the bank was immaterial and did not affect the applicability of the fictitious payee rule.
The revised Article 3 includes a comparative negligence standard that may have been applied to allocate the loss differently. Under UCC 3-405(b), if a bank fails to exercise ordinary care in paying or taking an instrument and that failure substantially 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    contributed to the loss. A failure to exercise ordinary care is determined in light of all the circumstances relating to the bank's conduct with respect to the bank's collection of the check and must contribute substantially to the loss. In this case, the law firm contended that the bank had been negligent in paying the checks over the forged indorsements. If the bank was negligent, it may have been liable for all or part of the loss.

Answer to Question 2

c