UCC Ping Pong - Who Wins?

by Sam Ott and Mary Beth Guard, BOL Gurus

We chose to highlight the recent case of Kaskel v. Northern Trust Co. not because its holding is particularly noteworthy, but because it illustrates that issues are rarely black and white when it comes to check disputes. The Uniform Commercial Code Articles 3 and 4 have general principles, but how each of those principles will come into play, how they will be applied, and what result they lead to, often depends upon a complex interplay of facts and law. Each case is very fact specific and must be closely reviewed to determine the nature and timing of the circumstances that gave rise to the disagreement. Who did what and when. Those are the important questions, because a court's decision will turn on precisely what the facts are.

For example, the general rule is that a check which is neither endorsed by the payee nor deposited into the payee's account is not properly payable. If the drawee bank pays an item that is not properly payable, it can be liable to its customer, the drawer. But that is not always the case, as you will see in the court decision described below.

The purpose of this article is to help you see the types of arguments used, and defenses raised, in a UCC-type case. If there's a moral to the story, it might be "Don't cave in too quickly. The law may actually be on your side."

Plus, we wanted to point you to the wealth of resources available on BOL on check dispute-related matters, so you'll find a collection of links below as well.

In the 7th Circuit case of Kaskel v. Northern Trust Co., a widow loaned money via a check to an apparent scam artist who promised to pay her a high rate of interest on the funds. The check was given to the entity's agent, but never got endorsed by the entity who was the payee. It was instead given to a third party who endorsed it and deposited the check into a personal account. The widow's bank, pursuant to UC 4-406(a), did not provide the original check or a copy in the bank statement. The loan was not repaid and a limited amount of interest was paid to the widow.

The widow filed suit, contending the bank violated its contract to disburse funds in her account to only the payee or the proper endorsee of her check. The bank argued that she had ratified the transaction by accepting partial interest payments after she learned of the faulty endorsement. The Seventh Circuit Court of Appeals held that by accepting the interest payments without warning the bank that it had violated its obligation to its customer by paying the check, the widow gambled on the investment turning out well and could not recover against the bank.

Other resources relating to check disputes: