Article 3 — Negotiable Instruments · Section 3-406
This section addresses the effect of a negligent endorsement on the rights of parties to a negotiable instrument.
Source: U.C.C. § 3-406
A person whose signature appears on an instrument is not liable on the instrument if the signature was made by an agent without authority, or if the endorsement is forged, unless the person is precluded from asserting nonliability due to his or her negligence.
UCC § 3-406 establishes that if a person is negligent in failing to secure their signature or other conditions regarding a negotiable instrument, they can still be held liable for that instrument even if their authorization was lacking or there was a forgery. This section limits liability in cases of unauthorized signatures, depending on the conduct of the parties involved.
Failure to exercise the care that a reasonably prudent person would exercise in similar circumstances.
A signature or statement added to a negotiable instrument to transfer rights or titles.
Example 1
A bank receives a check with a forged endorsement. If the account holder did not take necessary precautions, like regularly monitoring their account, they may be liable for the loss.
Example 2
An individual leaves their signed checks in an unsecure location, and someone forges their signature. If the individual acts negligently by not safeguarding their checks, they may be held responsible for the payments made on those checks.