McMullen Oil Co. v. Crysen Refining, Inc. (In Re McMullen Oil Co.)

OPINION ON SUMMARY JUDGMENT MOTIONS

I. Introduction

This adversary proceeding arises from fifteen checks that were deposited into a bank account without the indorsement of the payee. The account did not belong to the payee, but to the employee pension plan sponsored by the payee. Five checks were deposited before the payee filed this chapter 11 bankruptcy case, and ten were deposited afterwards.

This summary judgment motion raises two kinds of issues. The first set of issues involves the substantive law of check deposits: is a bank liable for accepting a check with a missing indorsement for deposit into an account other than that of the payee? The court holds that, until the bankruptcy case was filed, the debtor’s president had authority to transfer to a creditor checks that were made payable to the debtor, and to cause their deposit into that creditor’s account. The court finds that this is an effective defense to an action against the bank for conversion. In contrast, the court further finds that the bank is liable for negligence in accepting postpetition checks for deposit into the creditor’s account without the payee’s in-dorsement. However, the bank is not liable for the prepetition deposits, for lack of causation.

The second set of issues arises from the bank’s assertion of four statutes of limitations defenses. As to the postpetition deposits, the court finds that the only applicable statute of limitations is the three-year statute for negligence under California Commercial Code § 3118(g) (West 2000) (Commercial Code). 1 This statute does not bar the claims on any of the postpetition checks because the first amended complaint, which identifies these checks for the first time, relates back to the original complaint.

II. Facts

The McMullen Oil Co. Creditors’ Trust (the Creditors’ Trust) seeks to recover damages from Comerica Bank-California (Comerica) for fifteen checks made payable to debtor McMullen Oil Co. (McMul-len). McMullen used each of these checks to make payments on an unsecured loan that it had previously obtained from the McMullen Oil Co. Pension Plan (the Pension Plan). Each of these checks was deposited into the bank account of the Pension Plan, a separate entity, without the payee’s indorsement. In substance, McMullen transferred each check to the Pension Plan, which then deposited it in its own bank account.

The Pension Plan had a depository account at Long Beach National Bank (LBNB), Comerica’s predecessor, 2 during the times relevant hereto. The name on the account was “McMullen Oil Co. Pension Plan.” McMullen also maintained a general account at LBNB, under the name “McMullen Oil Co.” Upon the filing of the chapter 11 case, the general account was closed pursuant to United States Trustee requirements, which mandate that a debt- or’s bank accounts be replaced with “debt- or in possession” accounts. The Pension Plan account remained open after the filing: its closure was not required, because *566 a pension plan is a separate legal entity, and this pension plan was not in bankruptcy-

Andrew Hopwood was the president of McMullen for approximately 25 years prior to the filing of this bankruptcy case, and continued as president of the debtor in possession at all relevant times. Prior to the filing of the bankruptcy case, Hopwood was authorized to receive, indorse and deposit checks made payable to McMullen, including the prepetition checks at issue in this adversary proceeding. Hopwood was also the trustee of the Pension Plan.

Over a period of some fourteen months, Hopwood caused fifteen checks totaling $77,963, made payable to McMullen, to be deposited into the Pension Plan account. The checks and dates of deposit are listed on Appendix A. Each of these checks was delivered to LBNB for deposit into the Pension Plan account, not into the McMul-len account. Each was stamped with the indorsement of the Pension Plan. None was indorsed by McMullen. Five of these checks totaling $10,868.52 were deposited before the filing of the bankruptcy petition on March 1, 1995. The remaining ten checks totaling $67,094.48 were deposited by the debtor in possession after the bankruptcy filing.

In late 1996 McMullen’s accountant discovered that a $31,493.99 check from Crysen Refining, Inc., made payable to McMul-len, had been deposited into the Pension Plan’s account on November 28, 1995 without McMullen’s indorsement. On November 14, 1997 (a year later), the creditors’ committee filed this adversary proceeding against Comerica, LBNB’s successor, seeking to recover the amount of the Crysen check, the amount of an IRS check in the amount of $4,500, and other McMullen checks that had been deposited without indorsement into the Pension Plan account. On June 15, 1998 the Creditors’ Trust (the successor to the creditors’ committee pursuant to the confirmed chapter 11 plan) filed its first amended complaint to recover the amounts of thirteen additional checks.

III. Analysis

The question on this summary judgment motion is whether Comerica (as LBNB’s successor) shares in the responsibility for the diversion of these funds from McMul-len to the Pension Plan because LBNB accepted the checks for deposit with missing indorsements. There is no evidence that LBNB was a knowing participant in Hopwood’s wrongdoing. Thus the question is what liability a depositary bank has for accepting a check for deposit into a third party account (not belonging to the payee), based solely on the fact that the check lacks an indorsement by the payee.

A few basic concepts are useful to facilitate the discussion. A check 3 typically involves three parties, (1) the “drawer” who writes the check, (2) the “payee”, to whose order the check is made out, and (3) the “drawee” or “payor bank”, the bank which has the drawer’s checking account from which the check is to be paid. In form, a check is an order to the drawee bank to pay the face amount of the check to the payee. After receiving the check, the payee typically indorses 4 it on the back in the payee’s own name, and then deposits it in the payee’s account in a *567 different bank, the “depositary bank”. The depositary bank credits the check to the payee’s account, and sends the check through the check clearing system to the payor bank for ultimate payment from the drawer’s account. Any bank through which the check passes in the clearing process is an “intermediary bank”. Any bank handling the check for collection, including the depositary bank but excluding the payor bank, is referred'to as a “collecting bank.” See generally Roy Supply, Inc. v. Wells Fargo Bank, 39 Cal.App.4th 1051, 46 Cal.Rptr.2d 309, 313-15 (1995).

When a payee receives a check, the payee becomes its holder. 5 The payee may negotiate 6 the check by indorsing it and transferring it to another person, who then becomes its holder. In the normal course of events, a check is negotiated to a depositary bank, which then submits the check for collection through the check clearing system. If the check is indorsed in blank, it then becomes payable to bearer, and can be negotiated thereafter simply by delivery (just like cash). 7 ,

A holder who takes a-check (that is regular on its face) for value, in good faith, and without notice of certain defects or defenses, becomes a holder in due course. 8 The right of a holder in due course to enforce a check is not subject to most defenses, even if the defenses might have been good against the payee. 9 Thus a holder in due course may obtain better rights in a check that its predecessor. Banks always want to be holders in due course with respect to checks that are deposited with them.

The payee may transfer a check, where the transfer is not a negotiation. A check is transferred 10 when it is delivered for the purpose of giving the recipient'' the right to enforce it. If the check is transferred without negotiation, the transferee does not become a holder, let alone a holder in due course, and usually has no better rights than its transferor.

A. Substantive Claims Against the Bank

The Creditors’ Trúst alleges three substantive grounds for recovery against Comerica: (1) conversion, (2) negligence, and (3) payment of checks with fraudulent indorsements. 11

I. Conversion

The Creditors’ Trust (as McMullen’s successor) contends that McMullen was the owner of the checks, and that LBNB *568 converted the checks by accepting them for deposit into the Pension Plan account without McMullen’s indorsement. 12 When the checks were subsequently collected, the bank then obtained payment for the Pension Plan, which was not entitled to receive payment. In consequence, the Trust contends that LBNB converted the funds.

Comerica argues that it has no liability for accepting checks indorsed for deposit to someone other than the payee, if such deposits were made by an authorized agent acting within the scope of the agent’s duties. Comerica further contends that Hopwood, as president of McMullen, had the authority to direct the deposit of the checks into the Pension Plan account (i.e., to transfer the funds to the Pension Plan), and that in fact he did so.

If a check is transferred with a missing indorsement, the transferee is nonetheless intended to have the right to enforce the check. See Commercial Code § 3203(a). The transferee then receives the same rights as the transferor. 13 Because the payee of a check is not a holder in due course, no subsequent transferee (including a bank) can become a holder (let alone a holder in due course), unless the missing indorsement is supplied. See Knight Pub. Co. v. Chase Manhattan Bank, 125 N.C.App. 1, 479 S.E.2d 478, 482 (1997); James J. White & Robert S. Summers, Uniform Commerctal Code § 13-9 at 562 (3d ed.1988) (“In the case of order instruments, only the payee or one who signs on his behalf can make the first effective indorsement and negotiate the instrument.”). Nonetheless, as a nonholder in possession of the check, the transferee is a “person entitled to enforce the instrument,” if the transferor had such an enforcement right. See Commercial Code § 3301 (UCC § 3-301).

LBNB did not become a holder of the checks at issue, because each was missing the indorsement of the payee. When a bank receives a check with a missing indorsement, it does not receive the check by negotiation, and it is not entitled to the rights of a holder in due course. See, e.g., Hartford Fire Ins. Co. v. Maryland Nat’l Bank, 341 Md. 408, 671 A.2d 22, 26-27 (1996); Kelly v. Central Bank & Trust Co., 794 P.2d 1037, 1042 (Colo.Ct.App.1989); Barber v. United States Nat’l Bank, 90 Or.App. 68, 750 P.2d 1183, 1186 (1988). 14 Thus LBNB received no better rights in the checks than the rights of its transferor, the Pension Plan.

a. Law Applicable to Conversion of Checks

California law governs the state law conversion claims. Raleigh v. Illinois Dep’t of Revenue, — U.S.-,-, 120 S.Ct. 1951, 1955, 147 L.Ed.2d 13 (2000) (“Creditors’ entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor’s obligation, subject to any qualifying or contrary provisions of the Bankruptcy Code.”). 15

*569 Commercial Code § 3420(a) (UCC § 3420(a)) provides in relevant part:

The law applicable to conversion of personal property applies to instruments. An instrument is also converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment.

Under this statute, a check is converted by a bank if (a) the bank receives the check without negotiation from a person not entitled to enforce the check, or (b) the bank obtains payment on the check for a person not entitled to receive payment. The Creditors’ Trust contends that LBNB is liable under both of these provisions.

A bank may be liable for conversion when it permits the deposit of a check into a third party’s account without the indorsement of the payee. Kelly, 794 P.2d at 1042; Geldert v. American Nat'l Bank, 506 N.W.2d 22, 25-28 (Minn.1993) (dictum that 1990 amendments to UCC Article 3 permits payee to sue depositary bank for conversion for paying a check with a missing indorsement); Stratton v. Equitable Bank, 104 B.R. 713, 722 (D.Md.1989), aff'd, 912 F.2d 464 (4th Cir.1990) (applying UCC § 3419(l)(c), the predecessor to § 3420(a)).

Entirely apart from receiving the checks here at issue without negotiation, LBNB can be hable for conversion if it obtained payment on the checks for a person not entitled to enforce them or to receive payment. It is clear in this case that LBNB obtained payment on the checks on behalf of the Pension Plan.

This raises the issue of whether the Pension Plan was entitled to enforce the instruments or to receive payment On them.’ Conversion arises under § 3405 only, when the depositor is neither the payee 16 nor another person entitled to enforce the instrument, or to receive payment thereon.

b, Pension Plan’s Entitlement Enforce or to Receive Payment on the Checks

Comerica contends that it is not hable for conversion, because the Pension Plan was entitled to enforce the instruments here at issue, and to receive payment thereon. Comerica contends that McMul-len transferred the checks to the Pension Plan, which made the deposits. Because of the transfers, Comerica claims, it is not liable for conversion.

According to Hopwood’s deposition testimony, he caused the delivery of the checks here at issue to the Pension Plan. Transfer is governed by the intent of the transferor. Thus the Pension Plan obtained from McMullen the right to enforce each of the checks here at issue.

A depositary bank may rebut a claim for conversion based on a missing indorsement by showing that the payee whose indorsement is missing in fact transferred the instrument to the indorsing party. In Spear v. Wells Fargo Bank (In re Bartoni-Corsi Produce, Inc.), 130 F.3d 857 (9th Cir.1997), the bankruptcy trustee for the payee was denied recovery against the depositary bank for conversion, where checks payable to Bartoni-Corsi were deposited into the account of Your Produce Co. The checks fell into three categories: (1) checks indorsed by both Bartoni-Corsi and Your Produce Co.; (2) checks indorsed by Your Produce Co. and also by one of Bartoni-Corsi’s authorized signatories (but not by Bartoni-Corsi itself), and (3) checks indorsed only by Your *570 Produce Co. Bartoni-Corsi subsequently filed a bankruptcy case. Some of the deposits were made before the bankruptcy filing, and some afterwards.

In Bartoni-Corsi the Ninth Circuit found that all of the indorsements were adequate. After the deposit of several of the checks, Bartoni-Corsi had sold all of its assets to Your Produce Co. In consequence, pursuant to California corporation law, Your Produce Co. became the owner of the checks deposited after the sale, and properly indorsed them. See id. at 861. The court further found that Bartoni-Cor-si had authorized in advance the pre-sale deposit of checks into the Your Produce account. See id. at 862. Thus, all of the checks were properly transferred to Your Produce before the Bartoni-Corsi bankruptcy, and the bank was not liable for conversion.

Similarly, in Stratton v. Equitable Bank, 104 B.R. 713 (D.Md.1989), aff'd, 912 F.2d 464 (4th Cir.1990), the bankruptcy trustee brought an action against the depositary bank for accepting checks made payable to the debtor, but deposited in the bank account of a related entity. In Stratton, as in this case, the deposited checks were indorsed by the depositor, but not by the payee. The court found that the bank was entitled to show that the payee’s agent had actual or apparent authority to deposit the checks on behalf of the payee without the payee’s indorsement. Id. at 724. The court found (1) that the payee of the checks gave actual authority for the deposit of the checks into the third party account, and (2) that the finances of the two entities were commingled to such an extent that tracing was not possible. Id. at 728. In consequence, the court found that the payee had in fact authorized the deposits into the account of the related entity, and the bank could not be held liable for conversion for accepting these deposits with the missing indorse-ments. 17

Comerica contends that it qualifies for the exception articulated in Bartoni-Corsi and Stratton. Comerica has the burden of proving that it qualifies for this exception. The court finds that Hopwood’s deposition testimony, presented in connection with these summary judgment motions, shows that he, acting on behalf of McMullen, in fact authorized the transfer of'the checks at issue for deposit into the Pension Plan accounts.

Thus the Pension Plan obtained from McMullen the right to enforce each of the checks here at issue. In consequence, the bank received all of the checks here at issue from a person entitled to enforce the checks, and the bank cannot be held liable for conversion under § 3420(a).

The missing indorsements are not sufficient to make LBNB liable for conversion of the checks. A bank’s failure to follow reasonable commercial standards by accepting checks without the indorsement of the named payee does not make the bank liable to the payee for conversion, if the checks were deposited by an entity that was authorized by the payee to enforce the checks. See Commercial Code § 3420(a); Bartoni-Corsi, 130 F.3d at 862. Furthermore, a bank normally is not responsible to police its fiduciary accounts to assure that the fiduciary does not breach its fiduciary duties. See, e.g., Chazen v. Centennial Bank, 61 Cal.App.4th 532, 71 Cal.Rptr.2d 462, 464-66 (1998) (withdrawal of funds from trust account); Desert Bermuda Properties v. Union Bank, 265 Cal.App.2d 146, 71 Cal.Rptr. 93, 96 (1968) (same). Thus Comerica is entitled to sum *571 mary judgment on the claim for conversion.

2. Negligence

In addition to its claim for conversion, the Creditors’ Trust also contends that LBNB was negligent in accepting the checks for deposit into the Pension Plan account with missing indorsements. California recognizes the following elements of a tort claim for negligence: (1) a legal duty to use due care; (2) a breach of the legal duty; and (3) a resulting injury for which the breach is the proximate or legal cause. 18 See, e.g., Artiglio v. Corning, 18 Cal.4th 604, 614, 76 Cal.Rptr.2d 479, 957 P.2d 1313 (1998); 6 B.E. Witkin, Summaey of California Law § 1732 (9th ed.1988).

a. Duty of Care

Absent a duty of care toward an interest of another worthy of legal protection, there can be no negligence cause of action. Erlich v. Menezes, 21 Cal.4th 543, 552, 87 Cal.Rptr.2d 886, 981 P.2d 978 (1999); Software Design & Application, Ltd. v. Hoefer & Arnett, Inc., 49 Cal.App.4th 472, 56 Cal.Rptr.2d 756, 760 (1996). The Creditors’ Trust asserts that the depositary bank LBNB owed a duty of care to McMullen, as the payee of the checks at issue, that the depositary bank breached when it accepted the checks for deposit with missing indorsements.

i. Related Case Law

Under California law, a bank does not owe a duty of care to a noncustomer, absent extraordinary and specific facts. Software Design, 56 Cal.Rptr.2d at 760.

The court has found one reported case, from Rhode Island, which held that a depositary bank owes no duty of care to the payee of a check whose indorsement was forged, where the payee was not a customer of the bank. See Volpe v. Fleet National Bank, 710 A.2d 661, 664 (R.I.1998). However, in this respect a forged indorsement is different from a missing indorsement. A depositary bank typically has no way of knowing that an indorsement of a stranger to the bank is forged. In consequence, the bank cannot be charged with negligence for failure to discover the forgery. For a missing indorsement, on the other hand, the situation is different: by inspecting the indorsements alone a bank can see that an indorsement is missing.

There are several California reported opinions on related issues. In Campbell v. Bank of America, 190 Cal.App.3d 1420, 235 Cal.Rptr. 906, 911 (1987), the court found that the drawer of a check made a prima facie case of negligence against the payor bank (the drawee), where there was a missing indorsement. Although the bank was also the depositary bank, the court specified that the bank’s exposure on the claim arose from its status as payor bank. However, the court found that the bank adequately rebutted the prima facie case of negligence by showing that the payee had authorized the indorsement by the subsequent indorser. Id. at 911. Thus the drawer was not entitled to recover.

In Joffe v. United California Bank, 141 Cal.App.3d 541, 190 Cal.Rptr. 443 (1983), the court arrived at a result similar to that in Campbell. Joffe was a pleading case, which was on appeal from a demurrer sustained without leave to amend. The Joffes had obtained a $25,000 check drawn by their savings and loan association against their savings account, which was *572 payable to “Continental Financial Systems-Wells Fargo Escrow Trust Account.” 19 After the Joffes delivered the check, it was deposited without the payee’s indorsement. The Joffes were defrauded by actions of Continental Financial Systems.

The court in Joffe found that the depositary bank was negligent in accepting the check for deposit with a missing indorsement. The court crafted a narrow rule, applicable only where a bank accepts for deposit a check for a substantial amount, payable to an escrow, trust, or similar entity at another bank, with a missing indorsement and inadequate indicia on the face of the check regarding the subsequent indorser’s authority to negotiate the instrument. In these circumstances, the court held, the risk to the drawer is sufficiently foreseeable to impose a duty on the depositary bank not to ignore the danger signals, including the missing indorsement of the payee, inherent in the attempted negotiation by the third party. Id. at 451-52.

Both Campbell and Joffe involved a duty of care owing by the depositary bank to the drawee of a check. Unlike those cases, McMullen was the payee, not the drawee, of the checks at issue in this case. To determine whether a bank accepting for deposit a check with a missing indorsement owes a similar duty to the payee, we must return to basic principles.

ii. Duty of Care for Banks

The standard of care for banks dealing with checks is set forth in Commercial Code § 3103(a)(7) (UCC § 3-104(a)(7)), which provides in relevant part:

“Ordinary care” in the case of a person engaged in business means observance of reasonable commercial standards, prevailing in the area in which the person is located, with respect to the business in which the person is engaged.

Under California case law, the chief element in determining whether a defendant owes a duty or an obligation to a plaintiff is the foreseeability of the risk. See, e..g, Burgess v. Superior Court, 2 Cal.4th 1064, 1072, 9 Cal.Rptr.2d 615, 831 P.2d 1197 (1992). In this case, the question is whether LBNB could reasonably foresee that the payee of the checks would suffer a loss if LBNB accepted the checks for deposit with missing indorsements.

The court finds that it is reasonably foreseeable that the acceptance for deposit of a check with a missing indorsement will cause harm to the payee. Cf. Joffe, 141 Cal.App.3d 541, 190 Cal.Rptr. 443 (1983) (holding that it was sufficiently foreseeable that the drawer of a check (that was otherwise regular but had some unusual features) would be harmed by a depositary bank’s acceptance of the check with a missing indorsement, and permitting the drawer to sue the bank for negligence). The reasonable commercial standards for banks include the inspection of checks to see that they appear to be properly indorsed.

This standard is in accord with the basic policy grounds for imposing a duty of care. The imposition of such a duty depends on the balancing of a number of policy considerations, including the foreseeability of the harm to the plaintiff and the extent of the burden to the defendant and consequences to the community of imposing such a duty. See, e.g., Sun ‘n Sand, Inc. v. United California Bank, 21 Cal.3d 671, 148 Cal.Rptr. 329, 346, 582 P.2d 920 (1978) (plurality opinion).

Where a bank’s burden in shouldering a duty is minimal to avoid reasonably foreseeable losses, such a duty is proper. Id. This is especially true where the bank is the party best in position to avoid the loss.

*573 Thus LBNB had a duty to McMullen to exercise ordinary care in inspecting the checks here at issue that were presented for deposit in the Pension Plan account, and to reject any checks that lacked McMullen’s indorsement as payee.

b. Breach

If a bank accepts a check for deposit that is not indorsed by the payee, the bank breaches its duty of ordinary care, as set forth in Commercial Code § 3103(a)(7). LBNB failed to exercise ordinary care by accepting the checks for deposit into the Pension Plan Account without proper indorsement. This constituted a breach of its duty to McMullen to exercise ordinary care in examining checks made payable to the order of McMullen to assure that they were properly indorsed before accepting them for deposit. Had it exercised ordinary care, LBNB would have discovered that the checks were missing the indorsement of the payee, McMullen.

A bank has the burden of proving that it used ordinary care in honoring forged checks or checks with missing indorsements. See Story Road Flea Market, Inc. v. Wells Fargo Bank, 42 Cal.App.4th 1733, 50 Cal.Rptr.2d 524, 528 (1996). In Story Road the bank established that it had processed the forged checks there at issue in accordance with its own check processing procedures, and that these procedures were in accord with reasonable commercial standards and with general banking practice in the community. Id. Comerica has provided no evidence in support of such a defense in this case.

c. Causation

The Creditors’ Trust contends that LBNB’s breach of its duty to McMullen to exercise ordinary care in inspecting the fifteen checks to assure that .they were properly indorsed caused. McMullen to suffer a loss. If LBNB had refused to deposit the checks in the Pension Plan account without proper indorsement, the Trust contends that the funds would not have been improperly deposited into that account and dispersed beyond the reach of the Trust in this case.

For the prepetition checks, if the bank had refused the deposits on the grounds of the missing indorsements, the court infers from the evidence presented that Hopwood would have provided the missing indorsements. McMullen had a right to decide how to pay its creditors before the bankruptcy fifing, and to choose to repay the Pension Fund rather than to pay other creditors. The only limitation on this right was the possible exposure of a recipient of such a payment to a preferential transfer claim under Bankruptcy Code § 547 in case of a subsequent bankruptcy fifing. Thus the court cannot find that the bank’s acceptance of these checks with missing indorsements caused a loss to McMullen (that can now be pursued by the Creditors’ Trust).

As to the postpetition deposits, on the other hand, McMullen lacked the authority altogether to transfer the funds to the Pension Plan for the purpose of repaying the prepetition debt. Once a chapter 11 bankruptcy case is filed, prepetition unsecured creditors must await the confirmation of a chapter 11 plan before they can be repaid. In making these payments, McMullen breached the fiduciary duty that it owed to creditors as a debtor in possession. 20

A bank, however, is normally protected from any liability for such wrongdoing by a depositor. This protection arises from the holder in due course doctrine, codified in UCC § 3302 (Commercial Code § 3302). However, the bank in this case made a major mistake. It failed to qualify as a *574 holder in due course for the checks at issue, because it accepted them with missing indorsements. In consequence, the bank received no better right to the checks, or to the proceeds thereof, than the Pension Plan had. The Pension Plan, in turn, had no right whatever in these checks, because their transfer to the Pension Plan violated bankruptcy law.

d. Damages

The damages to the Creditors’ Trust on its negligence claim against Comerica are $67,094.48, the sum of the ten postpetition checks improperly deposited into the Pension Plan account.

The Creditors’ Trust claims that it is entitled to additional damages totaling at least $1.25 million. The Creditors’ Trust claims that, during its bankruptcy case, McMullen was forced to pay an interest rate of 30% to 50% in order to obtain credit to purchase inventory. Had McMullen received the proceeds of the deposited checks, the Trust contends, McMullen would not have had to pay such exorbitant rates for trade financing and would have been adequately capitalized. In addition, as a result of McMullen’s inadequate capitalization, its primary supplier of fuel cut off its trade credit, which forced McMullen to sell its operating assets at “fire sale” prices. Consequently, the. Creditors’ Trust claims, the bankruptcy estate was damaged by at least $1.25 million.

However, the Creditors’ Trust has not show that any of these further damages were proximately caused by LBNB’s negligence. The court finds that Hopwood’s transfer of the funds to the Pension Plan, at a time that McMullen sorely needed the funds for other purposes, was the proximate cause of McMullen’s damages, insofar as such damages exceed the face amount of the checks in question.

The Creditors’ Trust points to Commercial Code § 4108(e), which would permit the Trust to prove any other damages that it suffered as a proximate cause of LBNB’s negligence, if the Trust shows that LBNB acted in bad faith. However, § 4103 is inapplicable, because it applies only to a bank’s “handling of an item,” which is governed by Division 4 of the Commercial Code (UCC Article 4). The acceptance of checks for deposit is regulated by Division 3 (UCC Article 3), and thus does not come under the category “handling of an item.”

3. Payment of Checks with Fraudulent Indorsements

The Creditors’ Trust also charges that LBNB paid the cheeks at issue over fraudulent indorsements. Where an employee fraudulently indorses a check, the rights of the parties are governed by Commercial Code § 3405. 21

However, § 3405 is not relevant to this case. As the Official Comment 22 states, *575 this section covers only two categories of fraudulent indorsements: (a) an indorsement made in the name of the employer to an instrument payable to the employer, and (b) an indorsement made in the name of the payee of an instrument issued by the employer. See U.C.C. § 3405 cmt. 1 (1999).

In this case no employee forged an in-dorsement purporting to be that of McMullen. On all of the checks the McMullen indorsement was missing, not forged. None had the Pension Plan as the payee.

In many respects the rights of a payee against a depositary bank for accepting the deposit of a check with a missing indorsement are the same as those of a payee whose check was deposited with a fraudulent indorsement. However, this is not the kind of “fraudulent indorsement” covered by § 3405. Thus the Creditors’ Trust cannot prevail on this claim.

4. Similarity of Name on the Two Accounts

Comerica also defends on the grounds that the names on the two accounts were sufficiently similar that Commercial Code § 3405(c) relieves it of any liability for accepting the deposits in the wrong account. Comerica argues that this defense applies to all of the causes of action.

The 1990 revision of Article 3 of the Uniform Commercial Code, adopted in 1992 by California in Commercial Code § 3405(c), provides:

Under subdivision (b), an indorsement is made in the name of the person to whom an instrument is payable if ... the instrument, whether or not indorsed, is deposited in a depositary bank to an account in a name substantially similar to the name of that person.

Subdivision (b) provides in relevant part:

For the purpose of determining the rights and liabilities of a person who, in good faith, pays an instrument or takes it for value or for collection ... a fraudulent indorsement ... is effective as the indorsement of the person to whom the instrument is payable if it is made in the name of that person.

The purpose of these provisions is to protect a depositary bank that accepts in good faith the deposit of a check in the account of a business where there is a minor variation between the name shown as the payee on the check and the name in the indorsement. See, e.g., Knight Pub. Co. v. Chase Manhattan Bank, 125 N.C.App. 1, 479 S.E.2d 478, 483 (1997) (“UCC § 3405 does not require an exact match between the payee’s name and the indorsement.”). For example, these provisions protect a bank in accepting a deposit in an account in the name of “ABC, Inc.”, even if the payee is “ABC Corp.”, “ABC Co.” or “ABC Co., Inc.” Comerica claims that “McMullen Oil Co.” and “McMullen Oil Co. Pension Plan” qualify as “substantially similar” names under these statutory provisions.

Comerica relies