31 N.Y.2d 223 (1972)
When one of two innocent parties must suffer due to the actions of a third party, the loss falls on the party who enabled the third party to cause the loss.
Summary
Bunge Corp. sued Manufacturers Hanover Trust Co. to recover the value of cashier’s checks that were diverted by a Bunge employee. Manufacturers issued the checks to Allied Crude Vegetable Oil Refining Corp. at the request of North Bergen Bank. An employee of Allied, situated in Bunge’s office, returned the checks to Manufacturers without Bunge’s endorsement, and North Bergen’s account was recredited. However, Bunge’s head cashier had switched these checks with ordinary checks, which were later returned for insufficient funds after Allied’s bankruptcy. The court held that Bunge was estopped from recovering because its employee’s actions enabled the loss, applying the principle that the party whose misplaced confidence enabled the wrongdoing must bear the loss.
Facts
Manufacturers Hanover Trust Co. issued cashier’s checks totaling $3,040,386.60 at the request of its correspondent bank, First National Bank of North Bergen, for Allied’s use in a bidding process.
Manufacturers delivered the checks, payable to Bunge, to an Allied employee who had a desk at Bunge’s office.
The Allied employee returned the checks unused and without Bunge’s endorsement to Manufacturers, which then recredited North Bergen’s account.
Bunge’s head cashier, Caterina, switched the official checks with ordinary checks also payable to Bunge, delaying the deposit of the ordinary checks.
When the ordinary checks were deposited, they were returned for insufficient funds due to Allied’s bankruptcy, resulting in a loss to Bunge.
Procedural History
Bunge sued Manufacturers for conversion in the Supreme Court, New York County, and was initially awarded $4,484,151.81.
The Appellate Division, First Department, modified the judgment and dismissed the complaint.
Bunge appealed to the New York Court of Appeals.
Issue(s)
Whether Bunge should be equitably estopped from maintaining an action against Manufacturers, given that Bunge’s employee was the primary actor in diverting the checks.
Holding
Yes, because Bunge’s employee, Caterina, facilitated the diversion of the checks, enabling the loss; thus, Bunge is equitably estopped from recovering from Manufacturers.
Court’s Reasoning
The court applied the doctrine of equitable estoppel, stating, “where one of two innocent persons must suffer by the acts of a third, he who has enabled such third person to occasion the loss, must sustain it”. The court emphasized that cashier’s checks are freely returnable to the issuing bank when in the hands of the remitter (Allied).
The court distinguished this case from situations involving theft, highlighting that Caterina merely diverted the checks. It noted that Bunge, by entrusting the checks to Caterina, enabled the diversion to occur. No forgery or unauthorized endorsement was necessary.
The court cited National Safe Deposit Co. v. Hibbs, stating that “the principles which underlie equitable estoppel place the loss upon him whose misplaced confidence has made the wrong possible.”
The court rejected Bunge’s argument that Caterina could not transfer title to the unendorsed checks, reiterating that official checks are freely returnable when held by the remitter.
The court also addressed Bunge’s contention that Manufacturers assumed a risk by accepting the checks back, clarifying that banks are generally permitted to accept official checks from the remitter, absent notice of improper delivery. Manufacturers was specifically instructed the checks may be returned unnegotiated if Allied’s bid was not accepted or the checks were drawn in the incorrect amount.