1. Determine who is the drawee, the drawer, and the third party in the court’s discussion.

2. What public policy issues is the court balancing?

3. What would happen if nonbank third parties were held liable for negligence with regard to conduct such as that of Young in this case?

Carol Young was employed as Brian P. Burns’s secretary at a salary that never exceeded $75,000. Between 1995 and 2000, Young opened several credit card accounts with Neiman Marcus. In the three-year period prior to 2006, Young spent approximately $1 million at Neiman Marcus, and “the balance on [one] credit card, as of January 10, 2006, was in excess of $242,000.” Young was offered entrée into Neiman Marcus’s exclusive INCIRCLE® rewards program—a loyalty incentive program. Young had a personal shopper who knew of her annual salary of less than $75,000. However, the personal shopper repeatedly contacted and encouraged Young to make excessive purchases with her various Neiman Marcus cards.

Young would personally deliver on a regular basis fraudulent and forged checks drawn on Burns’s Union Bank of California checking account to pay down her various [Neiman Marcus] credit card bills at the Customer Service Center in Neiman’s San Francisco store. Young used three different methods for presenting Burns’s checks: (a) stealing checks and forging Burns’s signature; (b) stealing checks with no signature whatsoever; and (c) stealing checks with Burns’s signature—checks that Burns presumed were for payments toward his own Neiman Marcus credit card account, but which were diverted to Young’s credit card accounts.

Because Young managed all of Burns’s accounts, the reconciliations she made had fake ledger entries for payment to third parties to cover her payments to Neiman Marcus. Burns did not detect Young’s activities for three years because he did not see the bank statements, only Young did. A serendipitous examination of the ledger and canceled checks resulted in the discovery. Burns recovered what he could from his bank, an amount limited by UCC Article 4. Burns filed suit against Neiman Marcus, seeking to recover the funds paid on the checks and claiming that Neiman Marcus was subject to the defenses of forgery and unauthorized payments. The trial court granted Neiman Marcus’s motion for demurrer and Burns appealed.

JUDICIAL OPINION

JENKINS, Judge … Section 3407 allows a person who pays a fraudulently altered or forged instrument or takes such an instrument for value, in good faith and without notice of the alteration or forgery, to enforce the instrument according to the instrument’s original terms. “If negligence of a obligor on the instrument substantially contributes to the alteration or the forgery, then section 3406 gives the holder … the alternative right to treat the altered or forged instrument as though it had been issued in the altered form.” Thus, section 3406, together with 3407, outline the rights to enforce and collect on altered or forged checks while precluding the obligor, whose negligence contributed to the alteration or ……….