SW Legal studies in Business

UCC Liability Rules Control Damages for Funds Embezzled from Accounts
Description Appeals court held that when funds have been embezzled and a bank received the funds improperly without genuine endorsement, the bank is liable under UCC for the actual amount of funds lost, plus interest. Common law theories of damages do not apply since the UCC controls.
Topic Negotiable Instruments/Commercial Paper
Key Words Checks; Conversion; Liability
C A S E   S U M M A R Y
Facts Ensenat was 88 years old when her niece, Flores came to live with her. Flores was later convicted of having embezzled substantial funds from Ensenat's accounts. Flores withdrew $157,386 from two investment accounts by forging Ensenat's signature, and deposited the checks in her account at Hancock Bank. Ensenat sued the bank for breach of contract and negligence.. The bank was held liable for compensatory damages, consequential damages and bad faith damages. The trial court ordered Hancock Bank to repay $180,000. Hancock appealed.

Reversed. The UCC controls the transactions here, 3-420 especially. This is not a matter of common law liability, even if the result may be much the same. The checks were negotiable instruments subject to the rules of the UCC. The embezzlement was conversion under the UCC such that the bank was liable for the funds. The bank's liability under the UCC is limited to the amount payable on the checks, plus interest on that amount, and punitive damages if they are justified by the evidence. The bank receives credit for any of the funds that could be recovered. The fact that the victim was elderly and should perhaps have had a financial guardian watching over her accounts is irrelevant. Case remanded for proceedings consistent with this opinion.

Citation Hancock Bank v. Ensenat, So.2d (2001 WL 1610059, Ct. Aoo., Miss., 2001)

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