ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Tuesday, March 19, 1996 TAG: 9603190089
SECTION: VIRGINIA PAGE: A-1 EDITION: METRO
SOURCE: LAURENCE HAMMACK STAFF WRITER
NOTE: Above
In a decision that could affect banking procedures statewide, a Roanoke judge has ruled that First Union National Bank of Virginia is responsible for money that a check-forging bookkeeper embezzled from a museum that had an account with the bank.
Circuit Judge Robert P. Doherty ordered First Union to pay about $32,000 of the amount embezzled from a checking account the Harrison Museum of African American Culture had with the bank.
In a case of first impression - meaning the issue has not been addressed by an appellate court - Doherty was asked to decide who, in addition to convicted embezzler Norma Underwood, was liable for the stolen money.
United States Fidelity and Guaranty Co., a bonding company that has already reimbursed the museum, sought to recover its losses by arguing that First Union should have detected the scheme in the course of cashing 36 checks that Underwood forged in 1992 and 1993.
First Union contended that the ultimate responsibility rested with the museum, which should have discovered the embezzlement in its routine checking of monthly bank statements.
As it turned out, the forgeries came to light only when checks began to bounce after Underwood had emptied the museum's account. She was sentenced to six months in jail in 1993 after she admitted forging more than $40,000 in checks to herself, explaining that she felt the museum did not adequately compensate her for her long hours of service.
After hearing a day of testimony, Doherty ruled that the bank's "lack of ordinary care" in paying the unauthorized checks made it responsible for the bulk of the money - a decision that could force First Union and other banks to change the way they review checks before cashing them.
"This is an important case beyond the numbers involved," said Bradley McGraw, a Roanoke lawyer who represented USF&G. "The court said, in effect, that the bank cannot shirk its own responsibility to have a plan in place to thwart forgeries."
"This is a case of tremendous importance to the banking industry," Kevin Oddo, a Roanoke lawyer who represented First Union, wrote in court papers before Doherty made a ruling. Oddo and David Scanzoni, a spokesman for First Union, declined to comment in detail on Doherty's ruling Monday.
Scanzoni said only that the bank is considering its legal options of appeal as well as any policy changes that might be made as a result of the decision.
At the time of the forgeries, First Union had a threshold at which it reviewed checks and compared them to a signature card for possible forgeries. The threshold was $5,000 in 1992; it was changed to $10,000 in 1993. Underwood, whose criminal activity spanned both years, always wrote checks to herself for amounts of less than $5,000 and thus was not subject to the bank's scrutiny.
Most forgeries involve checks of more than $5,000, First Union maintained in defending a threshold level that is also utilized by other Virginia banks.
The bank's policy was grounded on "practical and economic considerations," Oddo wrote. Because it processes more than 1 million items a day - including more than 360,000 checks drawn on First Union accounts - the bank maintained it would not be feasible to visually inspect each check.
But USF&G countered that the bank should not have automatically cashed the checks, noting that in one case a check with no signature was processed without a problem being detected.
The complex case was complicated even further by a change in the law that took effect halfway through Underwood's embezzlement scheme. Doherty ruled that for the checks forged before 1993, First Union was liable for the full amount of $24,950.
But under a "comparative negligence" standard that became effective in 1993, the judge found that both the bank and the bonding company were equally negligent for the rest of the checks and ordered them to split the remaining cost of $15,700.
Underwood, meanwhile, has also been ordered to make restitution. But court officials are not optimistic that she will be able to come close to repaying all the money.
LENGTH: Medium: 77 linesby CNB