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Cheque crossing – bearer cheque stolen and payee’s name altered – unusually large deposit – not crossed not transferable or account payee only – bank not liable
Mrs L issued a cheque for $20,000. She crossed the cheque with two parallel lines, but did not cross out the words “or bearer” or write anything between the lines. She posted her cheque to the intended recipient – an investment company. Unfortunately the letter containing the cheque, along with a number of other letters, was stolen from the Post Office.
The thief wrote another customer’s name over the top of the original payee’s and deposited it into that customer’s account. Mrs L’s bank paid the cheque. When Mrs L discovered that her cheque had been paid to someone other than the intended recipient, she complained to the police and the bank. The bank did not consider that it had any responsibility to Mrs L for the stolen funds. The bank said that it had accepted the cheque in good faith, and that there had been nothing to alert it to the fact that it was stolen. Mrs L then referred her complaint to me.
Mrs L submitted that the bank had been negligent in accepting the cheque into the account of someone other than the intended recipient. She considered that the alteration to the cheque was obvious, and should have been noticed by the bank. She also contended that the bank should have noticed that the cheque was an unusually large amount to be deposited into the account of the customer in question, who was believed by Mrs L to have a very low income. She also claimed that comments by bank staff revealed their awareness of the fraudulent nature of some of this customer’s activities.
My analysis of this complaint was governed by the Bills of Exchange Act 1908 and the Cheques Act 1960. As the words “or bearer” had not been crossed out, the cheque was what is known as a bearer cheque. This allows a bank to legally deposit the cheque into an account in the name of either the payee or the bearer of the cheque. Under these circumstances, the cheque did not need to be endorsed before it could be legally transferred to another recipient. The crossing meant only that the cheque could not be cashed, but did not prevent it from being paid into the account of someone other than the original payee.
In law, a cheque that has been “materially altered” is invalid. Mrs L contended that the cheque in question had been materially altered. However, although she had crossed the cheque, she had not crossed out the words “or bearer”, and had failed to write either “not transferable” or “payee account only” between the parallel lines. Only then would she have been legally entitled to claim reimbursement of the substantial amount that she had lost. The case of Smith v Lloyds TSB Bank plc [2001] 1 All ER 424 (CA) established that, if the name of a payee is changed on a cheque clearly marked “A/C payee only”, this constitutes a material alteration, and is accordingly invalid. As Mrs L’s cheque bore only parallel lines without any such wording, the subsequent change was not a material alteration, and cannot be legally contested. The absence of the words “Not transferable” or “payee account only” on a cheque means that the name of an intended recipient may be changed without any independent confirmation or authorisation by a third party, including the bank in question.
Mrs L also submitted that the bank should have registered that the person banking the cheque was not the intended recipient, and should have noted as unusual the deposit of a large amount of money into the account of a customer with a low income. However, I was not persuaded that this, on its own, would be enough to cause the bank to suspect that the customer was not the true owner of the funds. Further, the bank staff may not have known the account holder’s income source when the transaction was processed.
Mrs L said in her submissions to me that a bank staff member had told her that the bank had concerns about fraudulent activity in this customer’s account. If this were true, the bank might indeed have had a duty to make further enquiries about the cheque. The bank denied this claim, and indicated that the customer in question had been confused with another customer with a similar name. There was ultimately no convincing evidence that, when the cheque was presented, the bank knew or could have known that this customer, or someone associated with her, was engaging in fraudulent activities.
In the circumstances of this case I was satisfied that the bank had quite properly accepted the cheque at face value as a simple deposit into an account. Both the bank and Mrs L accepted my view.