Lost or Stolen Check Enforcement In California
California Uniform Commercial Code Section 3309 allows the payee of a check to enforce it against the drawer when the check has been lost or stolen. Specifically, it states:
"(a) a person not in possession of an instrument is entitled to enforce the instrument if:
(1) the person was in possession of the instrument and entitled to enforce it when loss of possession occurred;
(2) the loss of possession was not the result of a transfer by the person or a lawful seizure;
(3) the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.
(b) a person seeking enforcement of an instrument under subdivision (a) shall prove the terms of the instrument and the person's right to enforce the instrument.
If that proof is made, Section 3308 applies to the case as if the person seeking enforcement had produced the instrument.
The court may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument. Adequate protection may be provided by any reasonable means."
"If a thief steals a check from a payee, the payee might turn to his or her drawer for payment. California Uniform Commercial Code Section 3-309 allows a person who loses an instrument by misplacing it or theft to enforce it in certain circumstances. . . . Thus, a payee who receives a check in payment for services, and then loses the check while walking home, can still enforce the instrument.
Similarly, if the payee was the victim of a mugging on the way home and the thief made off with the payee's wallet containing the check, the payee remains entitled to enforce the instrument.
If, on the other hand, the drawer had entrusted a messenger with delivery of the check to the payee, and the messenger instead chose to flee to Jamaica with the check, the payee would not be able to enforce the instrument because the payee would not have had possession at the time of the loss. (The payee, not having been paid, could still enforce the underlying obligation, however.)." (2 White & Summers, Uniform Commercial Code (4th ed. 1995) 18-2, p. 211.)
Thus, "in the limited cases covered by 3-309 the payee may sue upstream against the drawer on a stolen (or lost) instrument, provided the payee indemnifies the drawer against the possibility of a second claim on the stolen check." (2 White & Summers, supra, 18-1, p. 208.)
Section 3310, subdivision (b)(4) states: "(b) Unless otherwise agreed and except as provided in subdivision (a), if a note or an uncertified check is taken for an obligation, the obligation is suspended to the same extent the obligation would be discharged if an amount of money equal to the amount of the instrument were taken, and the following rules apply: . . . (4) If the person entitled to enforce the instrument taken for an obligation is a person other than the obligee, the obligee may not enforce the obligation to the extent the obligation is suspended.
If the obligee is the person entitled to enforce the instrument but no longer has possession of it because it was lost, stolen, or destroyed, the obligation may not be enforced to the extent of the amount payable on the instrument, and to that extent the obligee's rights against the obligor are limited to enforcement of the instrument."
"Section 3-310, a tidying up provision, states the legal effects on the underlying obligation when one takes a negotiable instrument for that obligation. the section also states the legal effects on the underlying obligation when the obligation on the instrument is discharged.
The 'underlying obligation' is the original obligation between the parties which led to issuance of the negotiable instrument in the first place." (2 White & Summers, Uniform Commercial Code, supra, 16-14, p. 135.)
The Uniform Commercial Code comment to section 3-310 discusses subdivision (b)(4) as follows:
"There was uncertainty concerning the applicability of former Section 3-802 to the case in which the check given for the obligation was stolen from the payee, the payee's signature was forged, and the forger obtained payment. the last sentence of subsection (b)(4) addresses this issue.
If the payor bank pays a holder, the drawer is discharged on the underlying obligation because the check was paid. Subsection (b)(1). If the payor bank pays a person not entitled to enforce the instrument, as in the hypothetical case, the suspension of the underlying obligation continues because the check has not been paid. Section 3-602(a). the payee's cause of action is against the depository bank or payor bank in conversion under Section 3-420 or against the drawer under Section 3-309." (U. Com. Code com., reprinted at 23B West's Ann. Cal. U. Com. Code (2000 supp.) foll. 3310, p. 54, italics added.)
This is precisely the situation here, because the payee who negotiated the check was not entitled to enforce the instrument. the joint payees, acting together, were the persons who could enforce the instrument: "If an instrument is payable to two or more persons not alternatively, it is payable to all of them and may be negotiated, discharged, or enforced only by all of them." ( 3110, subd. (d); see also, 3301.)
The Uniform Commercial Code comment to section 3-310 goes on to state that, in the situation in which the check is unpaid, the debtor is not required to issue a replacement check, the last sentence of subdivision (b)(4) applies, and "The creditor may not enforce the obligation of debtor for which the check was taken. the creditor may assert only rights on the check.
The creditor can proceed under Section 3-309 to enforce the obligation of the debtor, as drawer, to pay the check." (U. Com. Code com., reprinted at 23B West's Ann. Cal. U. Com. Code, supra, foll. 3310, p. 53, italics added.)
It is therefore apparent that the payee may maintain an action against the drawer, leaving the drawer to cross-complain against any or all of the other banks involved in the check-cashing process.