Description

Attorney Eliot Disner tendered a check for $100,100 to Sidney and Lynne Cohen. In drawing the check, Disner was serving as an intermediary for his clients, Irvin and Dorothea Kipnes, who owed the money to the Cohens as part of a settlement agreement. The Kipneses had given Disner checks totaling $100,100, which he had deposited into his professional corporation's client trust account. After confirming with the Kipneses' bank that their account held sufficient funds, Disner wrote and delivered a trust account check for $100,100 to the Cohens' attorney, with this note: “Please find $100,100 in settlement (partial) of Cohen v. Kipnes, et al[.] Per our agreement, delivery to you constitutes timely delivery to your clients.” Also typed on the check was a notation identifying the underlying lawsuit. Without Disner's knowledge, the Kipneses stopped payment on their checks, leaving insufficient funds in the trust account to cover the check to the Cohens.

 The trust account check therefore was not paid due to insufficient funds; the Kipneses declared bankruptcy; and the Cohens served Disner and his professional corporation (jointly, Disner) with demand for payment. The Cohens sought the amount written on the check plus a $500 statutory penalty. The trial court entered summary judgment for Disner, reasoning he is not liable on the check because he was a mere conduit or agent for transferring money from the Kipneses to the Cohens. The Cohens appeal from the judgment. Decision Judgment affirmed. Opinion The drawer of a check that is rejected for insufficient funds is not liable for payment if there is no enforceable obligation to pay. However, the Cohens contend that California Civil Code Section 1719 rejects the “representative capacity” defense and imposes strict liability against the drawer of a check drawn on an account lacking sufficient funds. If Section 1719 imposed strict liability, it would conflict with the preexisting law of negotiable instruments. However, as worded, Section 1719 may readily be harmonized with the Uniform Commercial Code (UCC) to impose liability only when there is an enforceable obligation to pay the check. By acknowledging that there must be an enforceable obligation to pay, Section 1719 echoes the UCC, which precludes recovery where the payee has no “right to enforce the obligation of a party to pay an instrument.” If the drawer has no enforceable obligation to pay a dishonored check, there is no amount “owing upon that check” under the plain language of Section 1719. Had the legislature intended Section 1719 to be a strict liability statute, it would have imposed liability for “the amount written upon that check” rather than “the amount owing upon that check.” 

Under the “representative capacity” defense, a representative, signing the representative's name, is only liable on the instrument to a holder in due course without notice of his representative capacity if the form of the signature does not show unambiguously that the signature is made in a representative capacity and the represented party is not identified on the instrument. However, when the holder has notice of the drawer's representative status, it is not required that the representative indicate his representative capacity in the signature even if the check is payable from the account of the representative. Disner is not liable on the check because he has no enforceable obligation to pay and it was drawn by him in a representative capacity. Interpretation When a holder has notice that the drawer's signature is in the capacity of an agent, the drawer is not personally liable on the instrument. Criticial Thinking Question When should an agent be liable on an instrument that she signs? Ethics Question 1 What does the fictitious payee rule provide? Does a fictitious payee act ethically What is the public policy ybderlying the fictitious payee rule? Ethics Question 2 What dose the impostor rule provide? Who is liable under the impostor rule? Does an impostor act ethically? What is the public policy underlying the impostor rule