Hoppy steals two checks from Eagle Retail Stores, Inc.: a blank check and a check payable to the order of General Supplies Company (GSC), drawn on Eagle's account with First National Bank. Hoppy forges Eagle's signature on the blank check and makes it payable to himself. Hoppy forges GSC's indorsement on the back of the check payable to GSC, and adds "Pay to the order of Hoppy." At Friendly Credit, Inc., Hoppy indorses the back of both checks with his own name and gives them to Friendly for cash. Friendly does not know about the theft or the forged signatures and presents the checks to First National, which pays them. Eagle, which was not negligent, discovers the forgeries and asks First National to recredit its account. Who suffers the loss on each check?

Question

What will be an ideal response?

Answer 1

First National will suffer the loss of the amount on the blank check unless it can recover from Hoppy. Friendly will suffer the loss on the amount on the check with the forged indorsement of GSC unless Friendly, too, can recover from Hoppy. When the signature of a drawer is forged, the drawer has not been negligent, and the drawee bank pays the check over the forged signature, the party who bears the loss is the drawee bank. The bank has a right to recover from the party who forged the signature, or from any party who does not take the check in good faith and for value, or who changes his or her position in reliance on payment or acceptance. Here, regarding the blank check, Eagle, the drawer, was not negligent, its signature was forged, and First National, the drawee bank, paid the check over the forged signature. (First National cannot recover from Friendly on the basis of a breach of a presentment warranty, because Friendly warranted only that it did not know the drawer's signature was forged.) First National has a right to recover from Hoppy, but in most cases, actual recovery from a thief is a remote possibility. Because Friendly took the check in good faith and for value, First National does not have a right to recover the amount of this check from Friendly. A bank that pays a customer's check bearing a forged indorsement must recredit the customer's account. A forged indorsement does not transfer title, however, and so whoever takes a check with a forged indorsement cannot become a holder and will likely suffer a loss on the check. (A subsequent transfer of the check breaches the presentment warranty that in effect there are no unauthorized indorsements.) In this problem, First National must recredit Eagle's account, but First National can recover the amount from Friendly, who did not acquire title to the check and thus did not become a holder. Friendly has a right to recover from Hoppy, but again actual recovery is unlikely.