California Uniform Commercial Code Section 1103 - Interpretation

California Uniform Commercial Code section 1103 declares that the California Uniform Commercial Code is supplemented by "the principles of law and equity," but only if such principles are not "displaced by the particular provisions" of the code. In Sun 'n Sand, the court rejected the argument that a common law negligence cause of action based on the narrow duty of inquiry that it recognized was displaced by any provision of the California Uniform Commercial Code. The court reasoned that there is no specific provision intended to apply to this factual situation. Although the California Uniform Commercial Code has been amended numerous times since Sun 'n Sand was decided, no amendment has been directed at limiting the scope of a payee's duty when presented with a third party check. In Sun 'N Sand, Inc. v. United California Bank (1978) 21 Cal.3d 671, the court upheld the employer's cause of action against the bank on a theory of negligence, imposing upon the bank a "narrowly circumscribed" duty "activated only when checks, not insignificant in amount, are drawn payable to the order of a bank and are presented to the payee bank by a third party seeking to negotiate the checks for his own benefit." (Id. at p. 695.) In Sun 'n Sand, supra, 21 Cal.3d at pages 692, 694-695, the court recognized a limited "duty of inquiry" in a similar factual circumstance. In that case, an employee obtained authorized signatures on checks for small sums made payable to United California Bank (UCB) drawn on her employer's bank account. The employee then altered the checks by increasing the sums payable. Upon presentation of the altered checks, UCB permitted the proceeds of the checks to be deposited into the employee's personal account maintained at UCB. When the fraud was discovered, the employer sued UCB for common law negligence. The employer asserted that UCB had breached its duty of care in permitting checks made payable to the bank to be deposited in the personal account of a party who was neither the drawer nor the drawee of the checks. (Id. at p. 692.)