GINA CHIN &
ASSOCIATES, INC. v. FIRST UNION BANK
June 5, 1998
Record No. 971463
GINA CHIN & ASSOCIATES, INC.
FIRST UNION BANK
OPINION BY JUSTICE ELIZABETH B. LACY
FROM THE CIRCUIT COURT OF ARLINGTON COUNTY
Benjamin N.A. Kendrick, Judge
Present: All the Justices
Gina Chin & Associates, Inc. (Chin) filed a motion for
judgment against First Union Bank alleging that First Union was
negligent when it accepted checks drawn on Chin’s accounts
bearing both forged signatures of the drawer and forged
indorsements of the payees. The trial court sustained First
Union’s demurrer and entered summary judgment. We awarded Chin an
appeal, and we will reverse the judgment of the trial court
because we conclude that Chin’s motion for judgment pled a cause
of action pursuant to Sec.8.3A-404 and 405 of the
Uniform Commercial Code, Code Sec.8.1-101 through 8.11-108
In reviewing a case decided on a demurrer, we accept as true
the facts alleged in the motion for judgment and all reasonable
inferences to be drawn therefrom. Adkins v. Dixon, 253 Va.
275, 277, 482 S.E.2d 797, 799 (1997). Chin, a food wholesaler,
maintained checking accounts at Signet Bank and Citizens Bank of
Washington, D.C. (the drawee banks). During 1994 and 1995, an
employee of Chin, Amie Cheryl Lehman, forged the signature of one
of Chin’s officers on a number of checks that were payable to
Chin’s suppliers. Lehman then forged the payees’ indorsements
and, with the assistance of a First Union teller, deposited the
checks in an account which she held at First Union. The drawee
banks then paid the checks and debited a total amount of
$270,488.72 from Chin’s accounts.
First Union asserts that, under the UCC, it is amenable to
suit only by the drawee banks based on a breach of warranty of
title theory. Sec.8.4-207.1. 
Chin’s sole cause of action, according to First Union, is
against the drawee banks for improperly charging Chin’s accounts
for the amount of the forged checks. See
Sec.8.4-401, -406. Under First Union’s interpretation of
Sec.8.3A-404 and 405, Chin does not have a cause of
action against it pursuant to those sections because they only
apply to instances involving a forged indorsement of the payee
and not to the circumstances where both the payee’s indorsement
and the signature of the drawer were forged.
While First Union correctly states that the UCC provides a
drawer with a cause of action against a drawee bank that charges
a drawer’s account based on checks containing a forged signature
of the drawer, its conclusion that Sec.8.3A-404 and
405 cannot be utilized by a drawer against the depositary
bank in a double forgery situation is erroneous.
Sections 8.3A-404 and -405 were part of the 1992 revisions to
the UCC. Revised Sec.8.3A-404(b) provides that where the
payee on a check is fictitious or not the person intended to have
an interest in the check by the person determining to whom the
check is payable, a forged payee’s indorsement on the check is
nevertheless effective for one who takes the check in good faith.
 Similarly, where an employee
vested with the responsibility for processing, signing, or
indorsing the employer’s check makes a fraudulent indorsement of
such check, revised Sec.8.3A-405 continues the prior
provision’s rule that the indorsement is effective if taken or
paid in good faith. However, both revised sections provide that
if the person taking the check fails to exercise ordinary care,
"the person bearing the loss may recover from the person
failing to exercise ordinary care to the extent the failure to
exercise ordinary care contributed to the loss."
The revisions to Sec.8.3A-404 and 405 changed the
previous law by allowing "the person bearing the loss"
to seek recovery for a loss caused by the negligence of any
person paying the instrument or taking it for value based on
comparative negligence principles. The concept of comparative
negligence introduced in the revised sections reflects a
determination that all participants in the process have a duty to
exercise ordinary care in the drawing and handling of instruments
and that the failure to exercise that duty will result in
liability to the person sustaining the loss. Nothing in the
statutory language indicates that, where the signature of the
drawer is forged, the drawer cannot qualify as a "person
bearing the loss" or that the drawer is otherwise precluded
from seeking recovery from a depositary bank under these
sections. In the absence of any specific exclusion, we conclude
that the sections are applicable in double forgery situations.
This conclusion is consistent with Comment 2 of the Official
Comments to Sec.8.3A-404, which states that subsection (b)
"also applies to forged check cases." Another
commentary also concludes that Sec.8.3A-404 applies to double
forgery situations. Remarking that under the previous law, double
forgery cases were treated solely as forged drawer’s signature
cases, allowing the depositary bank to avoid liability, the
commentary concludes that the result under the revised section
In fictitious payee double forgeries under the
Revision, some of the ultimate loss will end up on the
shoulders of the company that hired the dishonest
bookkeeper and failed to supervise the miscreant. The
rest will be shouldered by the depositary bank for [its] negligence . . . .
Barkley Clark & Barbara Clark, The Law of Bank
Deposits, Collections and Credit Cards 12.07[b] (rev.
Accordingly, we hold that Chin was not precluded from
asserting a cause of action against First Union pursuant to
Sec.8.3A-404 or -405. In light of this conclusion, we next
examine Chin’s motion for judgment to determine whether it is
sufficient to state a cause of action under these sections.
Chin seeks recovery for a loss sustained as a result of the
negligent actions of First Union. Chin alleged that its employee,
Lehman, forged both its signature and the indorsement of the
payees on a number of checks and, with the cooperation of an
employee of First Union, deposited the checks into Lehman’s
account at First Union. The motion for judgment specifically
alleged that the acceptance of the forged checks by First Union
for payment "was negligent and was in contravention of
established banking customs and standards" and "was due
to the negligent failure of First Union Bank to supervise its
employee." The pleading further asserts that this negligence
caused Chin to suffer a loss of over $270,000.
These allegations are sufficient to state a cause of action
against First Union pursuant to Sec.8.3A-404 and 405.
Accordingly, the trial court erred in sustaining First Union’s
demurrer. The judgment of the trial court is reversed and the
case is remanded for further proceedings.
Reversed and remanded.
 First Union also argued on
brief and in oral argument that Chin cannot maintain a cause of
action against it for conversion. First Union is correct, see
Sec.8.3A-420; however, Chin is not asserting a cause of
action for conversion in this appeal.
 The person whose intent
determines to whom an instrument is payable includes a person who
forges the drawer’s signature. See Sec.8.3A-110(a).