Nick steals two checks from Pauline-a blank check and a check payable to the order of Retail Outlets Company, drawn on Pauline's account with State Bank. Nick forges Pauline's sig-na-ture on the blank check and makes it payable to himself. Nick forges

Question

Retail Outlets's indorsement on the back of the check payable to Retail Outlets, and adds "Pay to the order of Nick." At United Credit Union, Nick indorses the back of both checks with his own name and gives them to United for cash. United does not know about the theft or the forged signatures and presents the checks to State Bank, which pays them. Pauline, who was not negli-gent, discovers the forgeries and asks State Bank to recredit her ac-count. Who suffers the loss on each check?

Answer 1

State Bank will suffer the loss of the amount on the blank check unless it can recover from Nick. United will suffer the loss on the amount on the check with the forged indorsement of Retail Outlets unless the credit union, too, can recover from Nick.
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 ac-ceptance.

Here, regarding the blank check, Pauline, the drawer, was not negligent, her signature was forged, and State Bank, the drawee bank, paid the check over the forged signature. (State Bank cannot recover from United on the basis of a breach of a pre-sentment warranty, because United war-ranted only that it did not know the drawer's signature was forged.) State Bank has a right to recover from Nick, but in most cases, actual re-covery from a thief is a remote possibility. Because United took the check in good faith and for value, State Bank does not have a right to recover the amount of this check from United.

A bank that pays a customer's check bearing a forged indorsement must recredit the cus-tomer's account. A forged in-dorsement 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 in-dorsements.)

In this problem, State Bank must recredit Pauline's ac-count, but State Bank can recover the amount from United, who did not acquire title to the check and thus did not become a holder. United has a right to recover from Nick, but again actual recovery is unlikely.

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