New York Law Review

B.D.G.S., Inc. v. Savings Bank of Utica, 10 N.Y.3d 108 (2008): Bank’s Duty of Care Regarding Restrictive Indorsements

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B.D.G.S., Inc. v. Savings Bank of Utica, 10 N.Y.3d 108 (2008)

Compliance with a restrictive indorsement on a check does not automatically satisfy the requirement of reasonable commercial standards for a bank under UCC § 3-419(3); a bank’s liability for accepting improperly indorsed checks is not limited to remaining proceeds if it fails to act in a commercially reasonable manner.

Summary

B.D.G.S., Inc., sued Savings Bank of Utica (SBU) for accepting checks with allegedly improper restrictive indorsements. The checks, intended for B.D.G.S. as rent payments, were made out to “DBGS, Inc.” and restrictively indorsed “Pay to the order of Beechgrove Warehouse For Deposit” into Beechgrove’s account at SBU. B.D.G.S. argued that SBU failed to act in a commercially reasonable manner. The New York Court of Appeals held that compliance with the restrictive indorsements doesn’t, as a matter of law, establish that SBU acted with reasonable commercial standards under UCC § 3-419(3), and that SBU’s liability was not limited to any remaining proceeds because it failed to satisfy the statutory criteria.

Facts

B.D.G.S. owned a warehouse managed by Balio and Duniec, who formed Beechgrove Warehouse Corporation. Rite-Aid, a tenant of B.D.G.S., made rent payments via checks payable to “DBGS, Inc.” (a typo). Balio and Duniec indorsed sixteen of these checks, along with a large refund check from Niagara Mohawk, “Pay to the order of Beechgrove Warehouse For Deposit” and deposited them into Beechgrove’s SBU account. B.D.G.S. discovered the misdirection of funds and sued SBU, alleging the bank improperly accepted the checks.

Procedural History

B.D.G.S. moved for partial summary judgment on liability, which was denied. SBU’s cross-motion for summary judgment was also denied. A jury found that SBU did not act in accordance with reasonable commercial standards. The trial court denied SBU’s post-trial motions and entered judgment for B.D.G.S. The Appellate Division affirmed. The New York Court of Appeals granted SBU leave to appeal and affirmed the Appellate Division’s decision.

Issue(s)

1. Whether compliance with a restrictive indorsement constitutes acting in accordance with reasonable commercial standards as a matter of law under UCC § 3-419(3)?

2. Whether SBU’s liability under UCC § 3-419(3) is limited to the amount of proceeds remaining in its possession?

Holding

1. No, because there are situations where following the indorsements would not be reasonable; for example, if the bank had good cause to know the indorsements were forged.

2. No, because SBU did not act in conformity with reasonable commercial standards, the defense under UCC § 3-419(3) is unavailable, and the bank’s liability is not limited to the amount of the proceeds remaining in its possession.

Court’s Reasoning

The Court reasoned that UCC § 3-419(3) limits a depositary bank’s liability in an action for money had and received only when the bank complies with restrictive indorsements, acts in good faith, and acts in accordance with reasonable commercial standards. The Court distinguished Spielman v. Manufacturers Hanover Trust Co., noting that Spielman involved a suit by the drawer of a check against the depositary bank, whereas this case involves a suit by the payee. The Court stated that compliance with restrictive indorsements is not necessarily commercially reasonable as a matter of law under all circumstances. The Court relied on expert testimony indicating aspects of the transactions should have raised red flags for SBU, and testimony that SBU did not comply with its own procedures. Because SBU failed to act in accordance with reasonable commercial standards, the protection of limited liability under UCC § 3-419(3) did not apply. The Court stated that when a bank fails to meet the requirements of 3-419(3), the bank’s liability is determined by the common-law action for money had and received as it existed prior to the enactment of the UCC. Quoting Henderson v. Lincoln Rochester Trust Co., the Court stated that a collecting bank has “an obligation to pay the proceeds collected to the true payee owner in the absence of a valid indorsement.”

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