State Security Check Cashing, Inc. v. American General Financial Services

Citations: 972 A.2d 882; 409 Md. 81; 69 U.C.C. Rep. Serv. 2d (West) 683; 2009 Md. LEXIS 193Docket: 105 September Term, 2008

Court: Court of Appeals of Maryland; June 9, 2009; Maryland; State Supreme Court

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In the case of State Security Check Cashing, Inc. v. American General Financial Services, the Maryland Court of Appeals addressed the liability for a check cashed by an imposter. The imposter, posing as Ronald E. Wilder, successfully obtained a loan of $18,000 from American General by providing falsified personal information and documentation. On June 22, 2007, after the loan was approved, the imposter received a check drawn on Wachovia Bank, payable to Wilder. Later that day, the imposter presented the check at State Security Check Cashing, where the employee, Wanda Decker, followed verification protocols, including checking the driver's license and loan documents, and confirmed the validity of the check with compliance officer Joel Deutsch. After these checks were completed, the check was cashed for a fee of 3-5% of its value.

The court concluded that, under Maryland's Commercial Law Article 3-404, the issuer of the check (American General) is liable for the face amount of the check despite the fraudulent circumstances, as the check cashing business followed appropriate verification procedures.

On 25 June, Ronald E. Wilder reported to American General that an imposter had applied for a loan in his name. He completed an Affidavit of Forgery, prompting Branch Manager Thurman Toland to contact Wachovia Bank, where he learned the $18,000 check had not yet been presented for payment and subsequently placed a stop payment on it. State Security filed a civil claim against American General for the check's face value plus interest, asserting it was a holder in due course and received the check in good faith. During a bench trial on 3 December 2007, testimonies revealed that if State Security had verified the check's issuance on 22 June, it would have confirmed its legitimacy. Additionally, it was unclear if State Security's thumbprint ID system was operational when the imposter cashed the check, and American General did not contact any references provided by the imposter before issuing the check. On 19 December 2007, the District Court ruled in favor of American General, stating that State Security could have prevented the loss by withholding payment until the check cleared. The court noted that State Security, which charged a fee for check cashing, was unlikely to delay payment. It concluded that State Security had not exercised ordinary care, as required by Md.Code, Commercial Law Art. 3-404(d), in paying the imposter, which substantially contributed to the loss. State Security appealed, but the Circuit Court affirmed the District Court's judgment on 8 August 2008, reiterating that State Security's immediate payment to the imposter without proper verification or waiting for the check to clear led to the loss.

Substantial evidence supports the District Court judge's finding that State Security did not exercise ordinary care in processing a check under Md.Code, Commercial Law Art. 3-404(d), leading to significant loss. Consequently, the District Court's decision is upheld as not clearly erroneous. State Security filed a writ of certiorari to review the Circuit Court's judgment, which has been granted (State Sec. v. Am. Gen. 406 Md. 443, 959 A.2d 793 (2008)). 

In both lower courts, State Security claimed to be a holder in due course of a check issued by American General, as defined in Md.Code, Commercial Law Art. 3-302. However, this claim was not resolved in the prior judgments. The definition of a 'holder in due course' includes criteria that the instrument must not show apparent forgery or irregularities, and the holder must have taken the instrument for value, in good faith, and without notice of any defenses or claims against it. Additionally, various conditions regarding notice and the acquisition of rights are outlined. Neither party disputes the applicability of any subsection beyond (a) in this matter.

To qualify as a holder in due course, an item must be classified as a 'negotiable instrument' under Title 3 of the Commercial Law Article, defined as an unconditional promise or order to pay a fixed amount of money that meets specific criteria, including being payable to bearer or order, on demand or at a definite time, and without additional undertakings beyond payment. A check is considered a negotiable instrument if it meets the requirements outlined for checks, even if labeled differently, and it is undisputed that the check issued to the imposter by American General qualifies as such.

However, to be a holder in due course, additional conditions under section 3-302 must be met, including the absence of apparent forgery, taking the instrument for value, in good faith, and without notice of any issues such as overdue payment or unauthorized signatures. State Security claims it satisfies these requirements, but American General contests the good faith aspect, citing 'suspicious circumstances' surrounding the check's negotiation. 

American General presents five arguments to support its claim: (1) State Security lacked special procedures to verify the authenticity of large checks, treating all checks the same; (2) it should have been aware that no competent business would use a check-cashing service for an $18,000 check without a stop payment order being likely; thus, State Security was positioned to detect the fraud due to the unconventional use of check-cashing for such a large amount.

American General, a finance company, had no reason to suspect criminal activity from a customer seeking an $18,000 loan with two years of tax returns indicating self-employment, a high credit score, and a valid Maryland driver's license. In contrast, State Security, a check cashing service, should have recognized suspicious behavior when an individual presented an out-of-state loan check for the same amount and offered to share part of it. Despite this, State Security overlooked these red flags due to a lucrative transaction fee. The individual, identified as Wilder, was not a prior customer, and State Security failed to apply its thumbprint identification system, which could have deterred the impostor. State Security argued it acted in good faith, claiming to have taken reasonable steps to verify the individual's identity by matching signatures and confirming the driver's license. The legal definition of "good faith" under the Maryland Commercial Law Article emphasizes honesty and adherence to reasonable commercial standards, which includes fair dealing rather than just care in execution. The responsibility to prove the good faith of a holder in due course lies with the plaintiff, particularly when contesting claims or defenses related to commercial standards in transactions.

A bank's actions in accepting a $100,000 check to open an account and allowing the depositor to withdraw funds may not violate commercial standards, potentially qualifying the bank as a holder in due course, thus shielding it from claims by the drawer, even if the depositor was a thief. Good faith is assessed not on adherence to general commercial standards, but specifically to those of 'fair dealing.' Deviations stemming from generosity or gullibility do not equate to bad faith. Legal perspectives vary, with some courts conflating negligence with unfairness and suggesting banks have a duty to consider the interests of all parties involved, including those with whom they have no dealings.

In Any Kind Checks Cashed, Inc. v. Talcott, the court examined whether the check cashing store was a holder in due course for a $10,000 check fraudulently obtained from an elderly man, John G. Talcott, Jr. Talcott was misled by a purported financial advisor, D.J. Rivera, into issuing the check for travel expenses. After placing a stop payment on the check following a subsequent conversation with Rivera, Guarino, a cohort of Rivera, attempted to cash the check at Any Kind. The store supervisor, Nancy Michael, conducted a basic verification of Guarino’s identity and the check's legitimacy based on her experience and the accompanying Federal Express envelope. Unable to contact Talcott for confirmation and believing the transaction was legitimate, Michael cashed the check after deducting a fee.

On January 15, 2000, Rivera contacted Talcott regarding a $5,700 check, which Talcott sent that same day, unaware that he had previously stopped payment on a $10,000 check. On January 17, Guarino presented the $5,700 check at Any Kind, where teller Joanne Kochakian followed company policy requiring supervisor approval for checks over $2,000. Kochakian consulted Michael, a supervisor, who advised her to wait for Talcott's confirmation before cashing the check. After obtaining verbal approval from Talcott, the check was cashed. On January 19, after Rivera informed Talcott about Guarino being a thief, Talcott stopped payment on the $5,700 check. The trial court determined that Guarino and Rivera had defrauded Talcott into issuing both checks. Any Kind filed a two-count complaint against Guarino and Talcott, asserting it was a holder in due course for both checks. The trial court ruled in favor of Any Kind for the $5,700 check but favored Talcott for the $10,000 check, citing that Any Kind should have been alerted to potential issues due to the circumstances surrounding the cashing of the larger check. The Florida appellate court upheld this decision, noting that Any Kind did not act in good faith regarding the $10,000 check, as it was atypical for check cashing businesses, which typically handle smaller checks. The court emphasized that the size of the check warranted caution and that Guarino, as a customer, did not fit the usual profile for check cashing outlets. The ruling highlighted the need for careful consideration in cashing large checks, especially when the risk of payment stoppage exists.

'Fair dealing' does not provide protection for dishonest actions. American General argues that the circumstances surrounding the negotiation of an $18,000 check for a 3-5% fee should have alerted State Security to obtain confirmation regarding the check's validity. State Security counters that its scrutiny levels were consistent regardless of check amounts, claiming that this practice does not negate its ability to assert 'good faith.' It highlights a distinction between its case and the Talcott case, where the court found the check cashing store was a holder in due course for a $5,700 check but not for a $10,000 check due to lack of verification. State Security claims that it took adequate steps to ascertain the validity of the $18,000 check and stresses that it is not obligated to verify American General's intentions behind issuing the check. The testimony from American General's Branch Manager indicated that a call to verify the check would have confirmed its validity. Furthermore, State Security argues that Talcott supports its position, asserting that had they contacted American General, they would have confirmed the check's validity. The excerpt also references skepticism from legal scholars regarding the treatment of check cashing businesses in good faith determinations. A cited case, Buckeye Check Cashing, Inc. v. Camp, illustrates that a check cashing company may be deemed to have failed in good faith if it does not act reasonably in verifying the check, particularly when presented with suspicious circumstances, such as a future date on the check.

The excerpt addresses the legal complexities surrounding the cashing of postdated checks and the standards of good faith required of check cashing services. It highlights that while it may be commercially unreasonable to accept a postdated check without customer clarification in some scenarios, this is less applicable for ATM transactions. The case of *Any Kind Checks Cashed, Inc. v. Talcott* is referenced, where a court found that a check cashing service failed to act in good faith by not verifying a substantial check presented by a financial broker, given that the broker was atypical clientele for such services. The court emphasized the need for caution with large checks to prevent potential fraud, suggesting that check cashing facilities are held to higher standards than banks regarding good faith. The text questions the courts' skepticism towards check cashing facilities and calls for evidence of their association with fraudulent activities before imposing stricter standards. Under Md.Code, Com. Law Art. 3-308(b), the burden of proof lies with the plaintiff to demonstrate good faith in the context of holder in due course rights. Ultimately, it is concluded that State Security is entitled to enforce the check, having proven it acted in good faith, amidst a broader discussion of disputes over good faith among banking institutions concerning check acceptance.

State Security cashed a check issued by American General to an imposter, relying on the same documentation and identification that American General used to issue the loan. Unlike in the Talcott case, where a personal check was involved, the check presented was from a financial institution, making it more likely to be valid. State Security verified the authenticity of the check by comparing it to previous checks from American General and by examining the imposter's driver's license and loan documents. 

American General's argument that State Security acted in bad faith is weakened by the fact that State Security used similar verification methods to those employed by American General. Holding State Security to a higher standard than American General simply because the latter was deceived would be unjust. 

The unusualness of the imposter using a check cashing business instead of a traditional bank does not negate State Security's good faith. Concerns raised by American General about State Security's procedures for validating large checks and Wilder's lack of prior customer status are deemed speculative and irrelevant, as State Security took appropriate verification steps. Furthermore, the assertion that requiring a thumbprint would have deterred the imposter is speculative, especially since State Security’s thumbprint machine may not have been operational and lacked a connection to a centralized database for verification.

American General's claim regarding an imposter's potential deterrence from committing identity theft by being asked for a thumbprint lacks supporting evidence and is therefore not accepted. The timing of the imposter presenting the check at State Security, coinciding with his receipt of the check from American General on a Friday afternoon, does not imply premeditation related to the weekend. State Security has demonstrated good faith, as required under Md. Code, Com. Law Art. 3-308(b), by adhering to reasonable commercial standards and taking efforts to verify the identity of the check presenter, who at the time appeared to be Ronald E. Wilder. Consequently, State Security is deemed a holder in due course of the check cashed by the imposter. 

Regarding the applicability of Md. Code, Com. Law Art. 3-404, the District Court found that State Security failed to exercise ordinary care in processing the check, which significantly contributed to the loss. The Circuit Court upheld this finding, confirming substantial evidence supported the District Court's judgment. Under Maryland Rule 8-131(c), appellate review of the District Court's factual findings is limited to determining whether they are clearly erroneous, with courts required to respect the trial court's credibility assessments. This standard of review has been consistently applied in Maryland case law, as illustrated in precedents such as Ryan v. Thurston and $3,417.46 U.S. Money v. Kinnamon.

The appellate court evaluates trial evidence favorably towards the prevailing party, and if substantial evidence supports the trial court's findings, those findings are not considered clearly erroneous and will not be overturned. The trial court is responsible for assessing witness credibility and the weight of evidence, and the appellate court will not replace the trial court's factual determinations unless clearly erroneous. Legal errors in the application of law to facts are reviewed under a non-deferential standard. For mixed questions of fact and law, the appellate court affirms the trial court's decision unless it finds clear error in both findings and legal application. Pure legal conclusions are reviewed de novo. 

In this case, the District Court improperly concluded that State Security failed to meet the ordinary care standard, which substantially contributed to the loss. It correctly identified the imposter rule under Commercial Law Art. 3-404(a), which applies when an impostor induces the issuance of an instrument by impersonating the payee. The term "imposter" is defined as someone who poses as another to gain benefits from a negotiable instrument. The imposter in this case presented a forged driver's license with the name of Ronald E. Wilder to conduct transactions, thus inducing American General to issue a check to him. The imposter then endorsed the check in Wilder's name at State Security, which accepted the instrument in good faith. The appellate court's decision to reverse the lower judgments hinges on the interpretation of subsection (d) of 3-404.

If an individual or entity fails to exercise ordinary care when paying or collecting an instrument, and this negligence contributes to a loss, the party suffering the loss can recover damages from the negligent party. "Ordinary care" for businesses involves adhering to reasonable commercial standards relevant to their operations. For banks processing instruments automatically, they are not required to examine instruments unless doing so breaches their internal procedures, which must align with general banking practices.

Official Comment 3 clarifies that disputes typically occur between the drawer of a check and the drawee bank that pays it. A drawer cannot reclaim funds from their account based on a forged indorsement if the drawee acted in good faith in processing the payment. Scenarios without forgery mean the drawer bears the loss unless the banks acted in bad faith. In cases of forgery, the Depositary Bank retains the proceeds if it was unaware of the forgery, and the drawee bank cannot seek recovery from the Depositary Bank due to the good faith and value exchanged.

Loss allocation is specified: if a forged check is paid and no relevant exceptions apply, the drawee bank incurs the loss. In instances where a corporation has consented to the bank debiting its account despite unauthorized check usage, the corporation absorbs the loss. If a check is paid to an impostor or fictitious payee, the loss is assigned to the drawer. The rationale is that the drawer is positioned best to prevent fraud, which is frequently involved in these cases. However, if the party accepting the check could have identified the fraud with ordinary care, they may bear some responsibility for the loss.

If a person fails to exercise ordinary care and this failure contributes to a loss, it is reasonable for that person to bear a portion of the loss. Subsection (d) allows a party suffering loss from a check payment to recover damages from the negligent party, typically the depositary bank, in cases where the drawer of the check is the one suffering the loss. The determination of loss allocation is to be made by the trier of fact. Ordinary care is defined in Section 3-103(a)(7), and specific conduct of the depositary bank that may lead to recovery under subsection (d) is elaborated in Comment 4 to Section 3-405.

In several cases cited (Case 1, Case 2, and Case 3), there was no forgery of the drawer's signature, but cases involving checks payable to fictitious payees often involve forgery. In such scenarios, the drawee bank typically bears the loss, as illustrated in Case 5. In Case 4, the drawer assumes the risk of forgery due to an agreement with the drawee bank. The legal doctrine preventing a drawee bank from recovering payments on forged checks is codified in Sections 3-418 and 3-417(a)(3), based on the premise that the depositary bank cannot detect forgery since the drawer is not their customer.

However, when the depositary bank could have detected the fraud, such as in checks made out to fictitious payees, subsection (d) applies, allowing the drawer or the drawee bank to sue the depositary bank for failure to exercise ordinary care. The rationale behind the "impostor rule" holds that the person who had direct dealings with the forger is best positioned to prevent the fraud, thereby shifting the loss to them. This principle is supported by case law and emphasizes that the closest contact with the forger should dictate responsibility for the resulting loss.

The section places the loss on the drawer when an impersonator fraudulently induces the drawer to issue a check, as the drawer is best positioned to prevent forgery through reasonable care in verifying the identity of the payee. This aligns with the impostor rule's policy of assigning the loss to the party who dealt with the impostor rather than to a subsequent holder without the same opportunity for detection. In some cases, a drawer may mitigate losses by recovering damages from parties who failed to exercise ordinary care, contributing to the loss.

The District Court erroneously ruled in favor of American General by misinterpreting the statutory definition of "ordinary care," which requires adherence to reasonable commercial standards relevant to the location and business involved. Testimony from State Security's compliance officer, Deutsch, highlighted that State Security followed proper procedures in the check cashing industry, and American General did not contest his credibility. The only evidence presented by American General was insufficient to prove that State Security lacked "ordinary care." The court incorrectly assumed that State Security could have prevented the loss by delaying payment until the check cleared, neglecting to consider that the decision not to withhold payment was based on operational fees.

The trial court's conclusion did not align with the standard of "ordinary care." Charging a fee for services, such as cashing a check, does not inherently indicate a lack of ordinary care in business conduct. The trial court appeared to focus on "good faith" rather than the required analysis of ordinary care, as highlighted by Judge Easterbrook in State Bank of the Lakes v. Kansas Bankers Surety Co., which distinguishes "good faith" from "due care." The trial court wrongly assumed that State Security exploited the situation by charging a fee. However, previous claims that State Security acted in bad faith were dismissed. According to Official Comment 3 of UCC Article 3-404, losses due to fraud involving checks payable to impostors should fall on the drawer, who is better positioned to prevent fraud. American General had adequate means to protect itself, including contacting personal references provided by the impostor. The attempt to place the loss on State Security based solely on its failure to request a thumbprint from the impostor was rejected, especially since State Security had verified the driver’s license and loan documents deemed satisfactory by American General. Consequently, the judgment of the Circuit Court for Baltimore County was reversed, directing the case back to the District Court to enter judgment in favor of the appellant, with costs to be borne by the appellee.

The fee charged by State Security to the imposter for cashing the check is not disclosed. Deutsch testified about the system's existence on June 22, 2007, but could not confirm its proper functioning. Section 3-404 of the Commercial Law Article stipulates that if an impostor induces the issuance of an instrument by impersonating the rightful payee, any endorsement made in the payee's name is effective for a good faith payee or a value-taker. If the payee is fictitious or not intended to have an interest in the instrument, the holder in possession of the instrument retains its rights, and endorsements made in a name similar to the payee's are valid. Should a person fail to exercise ordinary care which contributes to a loss from the instrument's payment, they may be held liable to the extent of their negligence. Additionally, Md.Code, Courts and Judicial Proceedings Art. 12-305 allows the Court of Appeals to require certiorari for review of circuit court decisions to ensure uniformity or address special circumstances. Art. 12-307 grants the Court of Appeals jurisdiction to review cases from the Court of Special Appeals and circuit courts, as well as exclusive jurisdiction over specific legal questions and death penalty cases. The successful petition raised two questions for review: the standard of care required under Commercial Law Article 3-404(d) for a good faith taker of a check issued to an imposter, and whether the lower courts erred in requiring State Security to wait for the check to clear before providing proceeds to the imposter.

Florida's definition of "good faith" for determining a holder in due course is aligned with Maryland's, as specified in FLA. STAT. ANN. 673.1031(1)(d), adopted in 1992 and effective from January 1, 1993. Maryland Code, Commercial Law Art. 3-308 establishes that the authenticity of signatures on an instrument is presumed unless specifically denied in pleadings. If the validity is challenged, the burden lies with the claimant to prove validity, except in cases where the signer is deceased or incompetent. A plaintiff must prove entitlement to enforce the instrument unless the defendant presents a defense or claim, which could limit the plaintiff's right to payment unless they qualify as a holder in due course. Testimony revealed that American General required various documents from an imposter for a loan application, while State Security required fewer documents to cash a check associated with the loan. State Security did not request the imposter's tax returns or conduct a credit check, and American General did not specify how these omissions would impact the case outcome.

State Security's examination of loan documents to confirm the check's legitimacy significantly diminished the likelihood that the check was improperly issued. Although State Security did not verify with American General, the Branch Manager, Thurman Toland, indicated he would have confirmed the check's validity if contacted. American General did not contest the reasonableness of State Security's reliance on the loan documents. Among five arguments presented by American General regarding State Security's lack of good faith, only one related directly to good faith, suggesting that no reasonable business would cash an $18,000 check at a check-cashing service without expecting a stop payment order. The other arguments pertained to the "ordinary care" requirement under Commercial Law Article 3-404(d). American General cited the case of Messing v. Bank of America, arguing that requiring a thumbprint would deter the imposter; however, it was deemed insufficient evidence that the imposter would have been deterred at that stage, given his extensive preparations for the fraud. Lastly, the rights of a holder in due course are protected under Commercial Law Article 3-306, allowing them to take an instrument free of claims against it.

An impostor who uses deception to induce the issuance of an instrument, whether through impersonation of the payee or an authorized person, allows for a valid indorsement in the name of the payee, which is effective for any good-faith payer or holder. If a person does not intend for the named payee to have an interest in the instrument, or if the named payee is fictitious, specific rules apply: possession of the instrument grants holder status, and any indorsement by someone in the payee's name is effective for good-faith transactions. An indorsement meets the requirements if it resembles the payee's name or is deposited into an account with a similar name. 

If a person fails to exercise ordinary care regarding the instrument, contributing to a loss, they may be liable to the extent of their negligence. The situation involves State Security, which suffered an initial loss, suing American General, which invoked the comparative negligence defense under the relevant statute. Although the typical scenario would involve American General seeking damages from State Security after a payment, the inverse situation still achieves the intended allocation of loss based on negligence. Recent legal revisions have established a comparative negligence standard for claims related to negligence in cashing checks. American General noted that previous cases were judged under an earlier version of the impostor rule that did not account for ordinary care exceptions.

The addition of the ordinary care exception to the imposter rule maintains the persuasive value of existing authorities, as emphasized in Official Comment 3 to §3-404, which states that the party best able to prevent loss—typically the drawer—bears the default risk in imposter cases. During oral arguments, American General's counsel admitted that no evidence was presented to challenge State Security's business practices. They referenced a similar case, Talcott, where the Florida appellate court faced a lack of evidence regarding industry standards in check cashing. The Talcott court relied on academic studies about the role of check cashing in the financial sector, but American General's reliance on this case is unhelpful as no evidence was provided regarding State Security's commercial reasonableness. Even if Any Kind's procedures for checks over $2,000 were deemed industry best practices, the court concluded that the procedures applied to the $10,000 check did not adequately ensure fair dealing among all parties involved in the transaction, citing the limitations of Talcott's focus on the good faith requirement.