We granted certiorari to review the Court of Appeals’ decision in
Atlanta IBM Employees Federal Credit Union v. Trust Co. Bank,
We will briefly set out the facts: The Credit Union (respondent/drawer) wrote a check for $5,000 on its account with the First National Bank (petitioner/drawee) payable to the order of an employee and a car dealer. The employee deposited the check in his own bank account at the Trust Company (petitioner/collecting bank) without the endorsement of the car dealer. Trust Company credited the employee’s account, and First National debited the account of the Credit Union and returned the cancelled check to the Credit Union in its regular monthly statement. Approximately fourteen months later, the Credit Union discovered that the check in question had only been endorsed by one of the payees.
The Credit Union made demand for repayment on First National, which in turn, made demand upon the Trust Company. When both banks refused to reimburse the Credit Union, it brought suit. After a hearing, the trial court held that the check had been improperly paid by both banks because of the missing endorsement, but that the Credit Union had not notified the bank within a reasonable time and was precluded from bringing suit. The Court of Appeals reversed and held that the warranty provision contained in Code Ann. § 109A-4 — 207 (1) (§ 4-207 (1) of the UCC) and the language of § 4-207(4), providing that the claimant must notify the warrantor of the breach within a reasonable time, had been satisfied by *263 the Credit Union since it notified First National almost immediately after learning of the missing endorsement. The Court of Appeals held that it was "elementary” that all payees must have endorsed the check for it to have been properly payable, and that the Credit Union had no duty to inspect its returned checks for missing endorsements, concluding that since the Credit Union notified the bank as soon as it actually discovered that the car dealer had never endorsed the check, it had satisfied the applicable language of § 4-207.
In discussing the applicability of § 4-406, the Court of Appeals said "a bank customer has a duty [under this section] to discover and report an unauthorized signature or alteration and notify the bank promptly after such a discovery, but a customer is not required to check for missing endorsements. Phoenix Assurance Co. v. Davis, 126 N.J. Super 379 (
At the outset, two aspects of this case should be specially noted: (1) This court agrees with the trial court and with the Court of Appeals that the banks were liable in the first instance for the wrongful payment of the checks under the warranties contained in § 4-207; and (2) the facts in this case are basically undisputed. Therefore, we are dealing only with the interpretation of § 4-406 (4) which provides as follows: "Without regard to care or lack of care of either customer or the bank ... (b) a customer who does not within one year from the time the statement and items are made available to the customer... discover and report any alteration on the back of the item or any unauthorized indorsement is precluded from asserting against the bank such alteration or unauthorized indorsement.”
The Official Comment to UCC § 4-406 explains the policy surrounding its adoption: "The . . . absolute time *264 limit on the discovery of forged indorsements should be ample, because in the great preponderance of cases the customer will learn of the forged indorsements within this time and if in any exceptional case he does not, the balance in favor of a mechanical termination of the liability of the bank outweighs what few residuary risks the customer may still have... The forty existing statutes on the subject as well as Section 4-406 evidence a public policy in favor of imposing on customers the duty of prompt examination of their bank statements and the notification of banks of forgeries and alterations and in favor of reasonable time limitations on the responsibility of banks for payment of forged or altered items.”
The theory behind this section, then, is not unakin to a statute of limitation. No one questions that Trust Company and First National should not have honored this check without the endorsement of a named payee. However, to rule that the statute limiting the bank’s liability to a specified span of time does not apply because the words "unauthorized indorsement” could not include a missing endorsement presents too narrow a construction of the statute so as to circumvent the policy behind it.
There is a split of authority in other jurisdictions on this issue, a fact recognized by all parties involved. See Phoenix Assurance Co. v. Davis,
As a final answer to whether the term "unauthor
*265
ized endorsement” would include a missing endorsement, the definition of an unauthorized endorsement is "one made without actual, implied or apparent authority
and includes a forgery.”
Code Ann. § 109A-1 — 201 (43). (Emphasis supplied.) This definition centers on the existence of authority, as well as requiring that the signature not be an outright forgery. Since a joint payee endorsing the check alone would not have the requisite amount of authority so that a bank paying a check over the sole endorsement of one joint payee would be liable for its wrongful payment
(Ins. Co. of N. A. v. Atlas Supply Co.,
Regarding the Credit Union’s separate claim against First National for breaching its duty as provided in UCC § 4-401, we agree with the trial court that the Credit Union’s failure to promptly discover the bank’s mistake bars it from an otherwise valid claim. See the above discussion.
Judgment reversed.