1. What is different about this situation and the fictitious payee exception?

2. Evaluate this statement, “UCC Article 3 does not provide protection for checks written to bad fund managers.” Is it true or false? Explain.

3. How would you have advised the investors to make their payments to Charlie in order to avoid this embezzlement?

Won Charlie Yi solicited money from investors in the Korean–American community (plaintiffs) by representing that he would invest their money in brokerage accounts at Carlin Equities Corporation, a nationally recognized brokerdealer based in New York. Yi, however, did not invest the money he received from plaintiffs at all. Instead, Yi registered the name “Carlin Co.” as a fictitious name under which he did business. He opened a bank account at Wells Fargo in the name of “Won Charlie Yi dba Carlin Co.” Between January and September of 2003, Yi received eight checks, totaling $6.3 million, payable to “Carlin Co.,”

“Carlin Corp.,” or “Carlin Corporation.” Yi deposited the checks into his Wells Fargo account and absconded with plaintiffs’ money. He was later apprehended by federal authorities and convicted of a variety of criminal fraud charges. The defrauded investors filed suit against Wells Fargo to recover their losses for the bank’s lack of ordinary care in being certain that the checks deposited were deposited with the intended payee. A jury found in favor of Wells Fargo and the investors appealed.

JUDICIAL OPINION

MOSK, Judge …The evidence at trial was undisputed that (1) plaintiffs issued checks payable to “Carlin Co.,” “Carlin Corp.” and “Carlin Corporation”; (2) plaintiffs intended those designations to refer to Carlin Equities Corporation; and (3) Carlin Equities Corporation was the intended payee of the checks.

The identity of the payee is not determined by the name written on the check. Rather, the payee is determined by the intent of the person who signs the check as, or on behalf of, the drawer—that is, the signer. This rule is of particular importance when it is unclear from the face of the check to whom the check is payable. For example, if a check is made payable to “John Smith” and two or more people share that name, the intent of the signer will determine which John Smith is the payee. Similarly, if the signer intended that John Smith would be the payee but misidentified John Smith as “John Jones” on the check, the payee is nevertheless John Smith, not some other person named John Jones. The intended payee may negotiate a check by indorsing it and depositing it in his or her bank account. Some provisions of Articles 3 and 4 serve to allocate losses due to the payment of unauthorized or fraudulent checks. In general, those provisions place the burden of loss on the party best able to prevent or to insure against the loss. That section allocates to the drawer losses in certain circumstances in which it is presumed the drawer failed to exercise due care to avoid the loss.

Relevant here is section 3-404, subdivision (b)(i). In effect, subdivision (b)(i) shields a bank from liability for negotiating an unauthorized or fraudulent check by deeming an indorsement to be effective if (1) the signer of the check did not intend that the named payee would have an interest in the check—that is, the named payee was not the intended payee; and (2) the check was either indorsed in a name substantially similar to that of the named payee, or deposited to an account in a name substantially similar to that of the named payee. “In applying section 3–404(b), the key issue is whether the person signing as or on behalf of the drawer … intended that the [named] payee have no interest in the [check]….[T]he section applies where the … drawer issues an instrument intending that the named payee have no interest in the instrument. Because the drawer … knows ………………….