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June 28, 1994



The opinion of the court was delivered by: BERNARD NEWMAN



 BERNARD NEWMAN, Senior Judge:1

 Zambia National Commercial Bank Limited ("Zambia National") brings this action against Fidelity International Bank ("FIB"), alleging negligence, breach of contract and conversion in connection with FIB's payment of two forged and counterfeited checks, and seeking to recover $ 345,649.60, the sum of the two forged checks that were drawn on its account at FIB. The relationship between the parties is governed by the relevant provisions of the New York Uniform Commercial Code (the "U.C.C.").

 This matter arises under the court's diversity jurisdiction, pursuant to 28 U.S.C. § 1332(a). A bench trial was held from April 12 to 14, 1994. The following constitute the court's findings of fact and conclusions of law in accordance with Fed. R. Civ. P. Rule 52(a).


 Zambia National produced the following witnesses: William Holman, the Director of Inspection, Audit and Investigations for Zambia National; Alfred Kumwenda, a former section accountant in the International Banking department at Zambia National; Rose DeGregorio, former manager of the Demand Deposit Accounting area at FIB; and Consuelo Piedrahita and Dietra Jones, the FIB clerks responsible for verifying signatures. Zambia National also offered the deposition testimony of Grace Silumesi, who worked with Kumwenda at Zambia National.

 FIB produced the following witnesses: Richard Bendit, the account officer at Fidelity responsible for the Zambia National account; Carl Schaffenberger, a handwriting expert; Joseph Santiso, an expert in bank operations; and Michael McDevitt, Assistant Vice President of FIB.


 Before pronouncing its findings in this matter, the court observes for the purpose of clarity that under the U.C.C., a person is not liable on an instrument of commercial paper unless he signs it. See U.C.C. § 3-401(1). Moreover, even if the signature appearing on a check is not a forgery, the instrument upon which it appears may not be "properly payable", U.C.C. § 4-401, if the signature is made outside the scope of the authority of a person purporting to sign for a customer. See Thomas M. Quinn, UNIFORM COMMERCIAL CODE COMMENTARY AND LAW DIGEST, § 3-404[A] at 3-157 (1987 & 1991 Supp.). The term "forgery", therefore, does not capture every variety of "unauthorized signature". It is the term "unauthorized signature", and not "forgery" which is used by the drafters of the U.C.C. to describe the condition pursuant to which a customer may deny the validity of a signature and demand a recredit to his account. For convenience, however, the court here uses the words "forgery" and "unauthorized signature" interchangeably.

 Zambia National's Check Writing Procedure:

 Zambia National is an African bank with its principal place of business in Lusaka, Zambia. FIB is a New York bank maintaining its principal place of business in New York City. First Fidelity Bank, N.A., New Jersey ("FFB") is a national bank maintaining its principal place of business in Newark, New Jersey. FIB and FFB, along with Fidelity Bank of Philadelphia, are wholly owned subsidiaries of First Fidelity Bancorporation.

 During 1988, George Thomas, Richard Bendit and other representatives of FIB visited Zambia National in Lusaka to discuss the possibility of Zambia National's opening an account at FIB in the United States. Zambia National maintained foreign bank accounts in order to pay certain expenses of Zambian citizens overseas, including import/export transactions and small bills requiring payment in hard currency. In November 1988, Zambia National opened Account Number 18028 at FIB in New York.

 Payments were made from Zambia National's account by either of two means. Large sums, i.e., amounts over $ 10,000 or $ 20,000, were paid either by letter of credit or by "tested telex", a form of wire transfer authorizing FIB to pay money from a customer's account. *fn2" Where such sums were involved, telex payment was preferable from the point of view of the payee because it permitted speedy payment and the opportunity to earn interest at an earlier time than would be possible if the payment were made by check. According to Holman, large sums were paid almost exclusively by telex, with the particular exception of one customer, the Zambia State Insurance Company, which always paid its reinsurance premiums by check. Relatively small amounts, typically not exceeding $ 10,000 to $ 20,000, were paid by check.

 Since Zambia had strict foreign exchange controls, most payments from Zambia National's foreign accounts were preceded by extensive paperwork. First, the bank required the customer to furnish invoices and other documentation from or concerning the payee. Zambia National also required a certification from the Zambian high commissioner in the country where the foreign currency payment was required. Then, the bank would forward the invoice and related documentation to the Zambian central bank, with an application for permission to pay out funds from the foreign account.

 Once approval was obtained from the central bank, Zambia National would prepare a draft. Zambia National maintained a stock of blank checks in the vault of the Lusaka main branch. Checks were withdrawn one at a time, in sequential number order, each time a foreign exchange transaction was approved for payment. The date of withdrawal, and the person to whom the check was issued, was noted in a register. See Plaintiff's Exhibit 2. During the period 1985 through 1991, Zambia National issued checks within the range of check numbers 251101 through 302300. The numbers of the two checks at issue were outside that amount, suggesting that the forger counterfeited the checks while working from old, canceled checks.

 Zambia National arranged to have its blank drafts printed locally by a Zambian firm called Associated Printers, and Zambia National engaged that same company to prepare the authorized signatures lists for use by the correspondent banks. At the time the account at FIB was opened, FIB recommended that Zambia National use checks supplied by FIB's printers in order to facilitate account reconciliation. Such checks would be precoded with a microcoding line, which allows a computer system to print the check number on the customer's statement, in addition to the notation of "check" and the dollar amount paid. However, Zambia National was unwilling to incur additional expenses because it had already purchased its drafts from Associated Printers. *fn3"

  Checks required two authorized signatures. Once retrieved from the vault, a blank draft was completed by a typist, reviewed against the information appearing in the application for payment, and signed by the section accountant. The draft, thus prepared and authorized, was then forwarded to a second person, who would reverify the same details and sign the check. Checks thus approved were then forwarded to the customer. Check Verification at FIB:

 Before charging customer accounts, FIB followed a procedure which called for verifying the authenticity of signatures appearing on checks presented for payment. To this end, FIB maintained in its files at 520 Madison Avenue, in New York City, an Authorized Signature List (the "signature list"). The list was provided by Zambia National for use by FIB's personnel. The department at FIB responsible for signature verification was the Demand Deposit Accounting ("DDA") area, of which Rose DeGregorio was the manager. At all times relevant to the instant case, the signature list on file with the DDA area contained specimen signatures of Alfred Kumwenda and Grace Silumesi, who were employees in the International Banking Department at Zambia National, and were responsible for issuing checks against the bank's overseas accounts. The two checks at issue in this action bore the forged signatures of Alfred Kumwenda and Grace Silumesi.

 At the time when the forged, counterfeited checks were paid, the DDA area had on file a signature list from Zambia National dated December 1986. On several occasions prior to the payment of the two checks at issue, FIB attempted to obtain an updated signature list from Zambia National. First, on November 17, 1989, DeGregorio dispatched a telex to Zambia National in connection with an unauthorized signature on one of Zambia National's checks in the amount of $ 204,611.70. See Defendant's Exhibit I. FIB requested that Zambia National forward an updated list of authorized signatures, concluding its message with the phrase, "matter most urgent." Thereafter, on December 13, 1989 and again on January 10, 1990, FIB sent similar telex messages in connection with other signatures the validity of which FIB could not confirm. See Defendant's Exhibit J, K. Finally, by letter dated March 19, 1990, FIB itemized a list of checks that it was returning to Zambia National because the signatures could not be confirmed. See Defendant's Exhibit L. Once again, FIB sought an updated signatures list. None of the aforementioned checks were forged and they were paid in due course.

 Indeed, it was not until August 1, 1990--more than eight months after the first request--that Zambia National provided an updated list of signatures. See Plaintiff's Exhibit 1. By this time, Zambia National had been alerted that someone was forging the signatures of the employees who were authorized to sign checks; accordingly, when supplying exemplars for the August 1, 1990 list, Kumwenda changed the way in which he signed his name. This precaution was, of course, too late to prevent the two forged signatures at issue here from passing examination by FIB.

 From 1989 through 1990, Dietra Jones and Consuela Piedrahita were the FIB employees in the DDA area primarily responsible for comparing the signatures of customers on checks drawn against FIB's customers' accounts with the signatures appearing on the customers' authorized signature lists. However, in January 1990 Piedrahita was temporarily reassigned to other duties due to pregnancy complications. The following month, Piedrahita took maternity leave and did not report back to the DDA area until May 1990.

 During an ordinary business day, DDA received checks drawn by its depositors, including Zambia National, from the clearinghouse in the afternoon. Upon receiving the check, FIB posted the check to the customer's account and entered a provisional debit on the account. The checks were sorted and prepared for signature verification, which took place the following morning.

 According to FIB's operating procedures governing signature verification, the DDA clerk was required to compare the signatures appearing on checks with the exemplars in the customer's authorized signature list in cases where (1) the check was payable to a corporation or bank in an amount equal to or exceeding $ 3,000 and was issued by a foreign customer; (2) the check was payable to an individual in an amount equal to or exceeding $ 500 and was issued by a foreign customer; or (3) the check was issued by a domestic customer irrespective of the amount. If the clerk determined that the signatures appearing on the check compared favorably to the exemplar in the signature list, she would place an unsigned verification stamp on the check. The stamp recited: "We certify that the above signature compares favorably to that in our files." If the clerk determined that a given signature was questionable, she would bring the check to the attention of Rose DeGregorio before placing the stamp on the check.

 According to Jones, the task of comparing signatures was the most time consuming part of her work day. Jones testified, however, that after a few months on the job, she became more proficient and usually spent approximately 30 to 45 minutes per day verifying checks before turning them over to DeGregorio for approval, although the job could take longer, depending upon the number of signatures she was required to verify. On an average day in 1990, the DDA area was responsible for verifying the signatures appearing on at least 100 checks. The evidence also established, however, that during the period in question there was a higher volume of checks than usual and the task of signature verification could consume the entire morning. See Record at 246, 257, 265.

 Zambia National placed in issue the question of Jones' job performance. Plaintiff consequently produced FIB's periodic job evaluation form for the period of June 1990 through June 1991, which characterized her job performance as generally standard, while noting some areas that required improvement. See Plaintiff's Exhibit 12. However, FIB produced the job evaluation for the period covering the payment of the two checks at issue, which period ranged from June 1989 through June 1990. See Defendant's Exhibit F. This latter evaluation described Jones' performance as "high standard" and praised the accuracy of her work. Based on the testimony and the evidence, the court is not persuaded that the evidence of Jones' performance during a later period, while relevant, detracts greatly from the weight of FIB's evidence on this point. The court accordingly concludes that, whatever may have happened to Jones' job performance in the review period following the date when the two checks passed through DDA, Jones was carrying out her assigned duties with at least normal care and efficiency during the period in question.

 DeGregorio was responsible for reviewing all checks before signing her name on the approval stamp. In cases where the clerk questioned a signature, DeGregorio independently checked the signature against the corresponding exemplar in the authorized signature list. The procedure thus described comports with the requirements of FIB's operations manual governing check verification. See Defendant's Exhibit H. In fact, DeGregorio exceeded the requirements contained in the procedures manual to the extent that she personally referred to the signature list, not only when the clerk questioned a signature, but also when DeGregorio did not find a given signature to be familiar. Record at 197, lines 2 through 13.

 Zambia National originally arranged to receive account statements from FIB on a weekly basis, delivered by airmail. Defendant's Exhibit M. According to Holman, it took two to three weeks for mail to arrive in Lusaka. In March 1989 the account instructions were changed. From that time forward, FIB sent to Zambia National a daily summary of account activity by telex, i.e., on the date that the account was debited. Defendant's Exhibit N. In conformance with Zambia National's request, as of June 1989 the daily telex was routed to a specific location within Zambia National's International Banking Department. FIB transmitted all telexes to its customers from London. If a telex did not go through, an FIB officer in London was responsible for contacting FIB in New York. FIB continued to send account statements and the corresponding canceled checks to Zambia National via airmail, although these statements were now transmitted on a daily basis. Thus, at all times relevant to this action, Zambia National had at its disposal the means to track account activity on a daily basis.

 The Forged Checks and the "March" Checks:

 On January 16, 1990, FIB made provisional debits to accounts for checks presented for payment. Among them was the first of the two forged and counterfeited checks which form the basis of the instant action. This first counterfeited check bore the number 167690, dated December 28, 1989, and was payable to United Derby Mills Property in the amount of $ 147,694 ("the first check"). The signatures appearing on the check were compared by FIB with the signature list and found to compare favorably with the specimen signatures of Kumwenda and Silumesi. The check was thus approved for payment on January 17, 1990 and Zambia National's account was charged $ 147,694.00. Thereafter, FIB mailed the daily statement for January 16, 1990, including the $ 147,694 draft, to Zambia National. The statement and enclosed checks were received by Zambia National on February 9, 1990.

 The January 16 statement recited payment of fourteen checks designated by the symbol "CK". The checks were payable in amounts ranging from $ 56 to $ 19,000, with the exception of the $ 147,694 check bearing unauthorized signatures. See Plaintiff's Exhibit 3.

 On February 28, 1990, FIB sent a telex message to Zambia National, questioning whether two checks presented for payment were in fact authorized. Zambia National requested that FIB forward photocopies of the front and back of each of the two checks. See Defendant's Exhibit A (the "March checks"). The March checks were denominated in the amounts of $ 6,000 and $ 46,000, and each check bore what purported to be the signature of Alfred Kumwenda. Although Holman could not recall with certainty whether Zambia National ever determined the March checks to be forgeries, it should be recalled that Kumwenda's signature was known to have been forged prior to August 1990, and as discussed supra, said forgery occasioned an update of Zambia National's signature list. Further, the investigation into the March checks was conducted over a period of at least two months. Holman further testified that Zambia National subsequently changed its operating procedures with regard to the account at FFB. Specifically, in response to the March checks, and similarly with regard to one other check that had come to Zambia National's attention, Zambia National undertook in the middle of 1990 to monitor all transactions in the account. FFB was not even responsible for verifying signatures on the checks. See Record at 63-69.

 Zambia National did not, however, take steps in March to prevent further forgeries of Kumwenda's signature, or otherwise monitor account activity by referring to the daily telex. Nor did it choose at that time to submit a new signature list.

 On April 2, 1990, FIB debited Zambia National's account in the amount of $ 197,955.60, representing the second of the two counterfeited and forged checks in this action ("the second check"), numbered 167704 and dated March 7, 1990, likewise payable to United Derby Mills Limited. On April 3, 1990, FIB verified the signatures against the specimens on file, and paid the check. Thereupon, FIB mailed the April 2, 1990 statement, including the $ 197,955.60 check, to Zambia National.

 As with the January 16 statement, the check for $ 197,955.60 was, conspicuously, very large in relation to the other checks paid on that date, which were payable in the range of $ 250 to $ 4,757. See Plaintiff's Exhibit 4.

 The court finds that the forged signatures compare favorably with the genuine signatures of Kumwenda and Silumesi, and that under its operating procedures FIB was reasonable in making that determination. Although the signatures appearing on each of the counterfeit checks are forgeries, a comparison of the forged signatures with the exemplars provided in Zambia National's authorized signature list reveals that the forgeries closely resemble the authentic signatures. It is noteworthy that defendant's handwriting expert, Schaffenberger, indicated that he required several hours to confirm that the signatures were forgeries. Additionally, he characterized the signatures as "facsimiles," which he explained to mean that they "are the same [as genuine signatures] in general appearance". Record at 343-344. *fn4" Likewise, while the checks are counterfeits, their deviation from the design of genuine checks can only be discerned after very careful comparison to the real article.

 As to both checks, the court finds that FIB transmitted the daily account information for January 16 and April 2, respectively, to Zambia National by telex in accord with its usual business practice. Although FIB had sent the relevant account information on the dates in question, the telex was not found, and Zambia National suggests that it was never sent. The court finds that the telex was sent and received. Either the International Banking Department: did not check the telex upon arrival; lost track of the telex; or, it failed to take steps to verify that the amounts recited in the telex statement were in fact authorized to be paid.

 Review of Account Statements and Canceled Checks:

 According to Holman, Zambia National recorded the receipt of all items of mail, including bank statements, in a central register. Bank statements were then forwarded to International Banking, where they were reviewed on arrival by the Director, one Tim Daka.

 International Banking had its own routine practice regarding the daily receipt and disposition of mail. Upon receiving bank statements, Daka's secretary opened the statements and placed them on Daka's desk. Daka routinely looked through the statements and examined the contents. Thereupon, Daka forwarded the statement to the Reconciliation Department, which recorded its receipt of the statements on a second register maintained by International Banking. Although Daka was neither deposed nor offered as a live witness to testify concerning his examination of the statements containing the two forged checks, the court infers from Holman's testimony that on the two days in question, Daka's conduct was in conformity with his routine practice, and that Daka did in fact examine those statements and the enclosed checks. Fed. R. Evid. 406.

 It must be recalled here that the sums paid over the two forged signatures far exceeded the amounts normally paid by check. Significantly, neither Kumwenda nor Silumesi ever signed any checks in excess of $ 10,000. Indeed, checks ordinarily were not paid much in excess of that amount; they were virtually always paid by wire transfer or by letter of credit. Daka did not make inquiries upon reviewing those checks when he first saw them in his office in Lusaka, or communicate to FIB that the checks had been paid over unauthorized signatures. Rather, he passed them on to the Reconciliation Department. According to Holman, the Reconciliation Department was routinely four to five months behind on its reconciliation of Zambia National's accounts. As it happened, neither of the two checks at issue were discovered to be forged during the reconciliation stage.

 Zambia National Discovers the Forged Checks: In early October 1990, Zambia National notified FFB of the existence of four checks bearing unauthorized signatures, all dated during the month of September and drawn against Zambia National's account at FFB ("the September forgeries"). Those checks were as follows: Check no. 5450 $ 389,000.17 Sept. 3, 1990 Check no. 5451 $ 365,000.28 Sept. 5, 1990 Check no. 5452 $ 422,000.71 Sept. 7, 1990 Check no. 5453 $ 482,500.26 Sept. 11, 1990


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