New York Law Review

Tag: Check Fraud

  • Guardian Life Ins. Co. of America v. Chemical Bank, 94 N.Y.2d 420 (2000): Fictitious Payee Rule and Agency in Check Fraud

    Guardian Life Ins. Co. of America v. Chemical Bank, 94 N.Y.2d 420 (2000)

    Under UCC 3-405(1)(c), the fictitious payee rule applies when an agent of the drawer supplies the name of the payee intending the latter to have no interest in the instrument, shifting the loss from a forged endorsement to the drawer.

    Summary

    Guardian Life sued Chemical Bank to recover funds from checks fraudulently obtained by an insurance broker, Rutberg, who forged policyholders’ endorsements. Rutberg, acting for Baer Insurance Agency, requested checks from Guardian for policy loans/dividends, which he then intercepted and cashed after forging the endorsements. The court addressed whether the general rule placing the risk of loss on the drawee bank for forged endorsements applied, or whether the fictitious payee exception shifted the risk to Guardian. The Court of Appeals held that Rutberg acted as Guardian’s agent for the purpose of UCC 3-405(1)(c), thus the fictitious payee rule applied, and Guardian bore the loss because it was in a better position to prevent the fraud.

    Facts

    Jerome Rutberg, an insurance broker for Baer Insurance Agency, defrauded Guardian Life for ten years by requesting checks for policy loans/dividend withdrawals in the names of Guardian policyholders without their consent. Guardian issued the checks and sent them directly to Rutberg, who forged the payees’ endorsements and cashed them. Baer Agency was a “general agent” of Guardian. Guardian did not verify the requests or notify the policyholders before issuing the checks to Rutberg.

    Procedural History

    Guardian sued Chemical Bank to recover the value of fraudulent checks cashed between June 5, 1986, and July 9, 1989. The Supreme Court granted Chemical Bank’s motion for summary judgment, holding Rutberg was Guardian’s agent. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether, under UCC 3-405(1)(c), Rutberg acted as an agent of Guardian when he supplied the names of payees (policyholders) to Guardian, intending that the payees have no interest in the checks, thus triggering the fictitious payee rule and shifting the loss from the forged endorsements to Guardian.

    Holding

    Yes, because Rutberg was entrusted by Guardian with the responsibility of processing requests for policy loans and dividend withdrawals, making him Guardian’s agent for the purpose of UCC 3-405(1)(c); therefore, the fictitious payee rule applies, and Guardian bears the loss.

    Court’s Reasoning

    The court reasoned that UCC 3-405(1)(c) assigns the risk of loss to the drawer when an agent supplies the payee name intending the payee to have no interest, reflecting a policy of placing the risk on the party best able to prevent the loss. While Rutberg was not a formal employee of Guardian, agency principles apply. Agency can be established by conduct and does not require a formal agreement. Pennsylvania law, where Rutberg cashed the checks, holds that an insurance broker can act as an insurer’s agent when authorized to perform specific tasks. The court emphasized that Rutberg, with Guardian’s consent, performed all steps to process policy loan requests except the check issuance. The court noted that Guardian could have prevented the fraud through better verification and supervision. The court stated, “Since the undisputed facts establish that Rutberg was ‘an agent * * * of the * * * drawer [who] supplied [it] with the name of the payee intending the latter to have no such interest’ when he effected these insurance policy loan and dividend withdrawal transactions, his indorsements were effective under UCC 3-405 (1) (c) despite their having been forged.”

  • Bunge Corp. v. Manufacturers Hanover Trust Co., 31 N.Y.2d 223 (1972): Equitable Estoppel and Employee Misconduct

    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.