In May 2011, a New York City court ruled that a signor of a company’s check for payment of goods was personally liable on the check when it was returned for insufficient funds. The ruling in B.B. Jewels Inc. v. Newman Enterprises Inc. and Rozeta Newman is consistent with several other courts, which have entertained this issue.
The facts in the case show that Ms. Newman signed the check on behalf of Newman Enterprises, Inc., when it bought goods from B.B. Jewels Inc., the check’s payee. The $62,800 check was returned to the payee because the account was closed. Eventually, payments were made which reduced the judgment to $52,800. What makes this case so interesting is that the court held Ms. Newman personally liable on the instrument even though she argued that she was signing the check on behalf of the corporation. The error that Ms. Newman committed was not indicating on the check that she was signing it in a representative capacity.
New York law has a quirky provision that renders signors of company checks personally liable in certain circumstances. Worse yet, most people who sign checks on behalf of companies aren’t even aware of this provision. Liability of check signors is found in New York’s Uniform Commercial Code. This law was passed in 1964 along with other key provisions of the Uniform Commercial Code. Unfortunately, while most states – if not all other states – have updated their commercial law, which would have changed the result for Ms. Newman; New York has not. New York still retains the antiquated 1964 statutory language.
A paragraph in section 3-403 of New York’s Uniform Commercial Code provides that “… as otherwise established between the immediate parties, (the signor) of the check is personally obligated if the check names the person represented but does not show that the representative signed in a representative capacity, or if the check does not name the person represented but does show that the representative signed in a representative capacity.”
It is this section of the law that creates liability for someone who signs a company check with insufficient funds. In most instances, a pre-printed check identifies the company name and address (the person represented), but when a person signs the check, they usually do not specify a job title (the representative capacity) and this confusion creates the possibly of personal liability. All is not lost, the law does provide for a narrow exception of personal liability for the signor.
The exception to personal liability of a signor of a company check which later is returned for insufficient funds is created by “… as otherwise established …” language of the statute.
New York courts have held that a signor must prove the existence of a prior agreement, understanding or course of dealing that shows the payee understood the signor was not bound on the check. In most cases, the signor can’t prove the existence of a prior agreement, understanding or course of dealing with the payee and, as a result, the signor incurs personal liability. The courts will not accept the signor’s testimony that they signed in representative capacity and should not be bound on the check since it is considered self-serving.
Another paragraph of section 3-403 provides a method for a signor to indicate that they are signing in a representative capacity and thus avoid personal liability in the event the check is returned for insufficient funds. The statute provides that the signor must show “… the name of the organization preceded or followed by the name and office of the authorized individual is a signature in a representative capacity.” The statute essentially states that if an employee is an authorized signor of company checks, then the company’s name may precede or follow the employee’s name. Second, the employee must indicate their job title. It is sufficient to hand-write all of this information.
In the alternative, since most checks today are pre-printed and specify the company’s name and address, the employee, when signing the check, must also write their job title. Using this method, the signor is compliant with the statutory requirement by indicating the person represented (company’s name on the pre-printed check) and the representative capacity (employee’s signature followed by their job title).
Since signature liability is a complicated legal matter, this article covers most of the major points. If you have concerns about your personal liability, you should consult your attorney.