New York Law Review

Tag: Chemical Bank

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.”

February 22, 2000
Production Workers Union v. Chemical Bank, 66 N.Y.2d 223 (1985): Sufficiency of Account Number for Indorsement

Production Workers Union Local 148 Welfare Fund v. Chemical Bank, 66 N.Y.2d 223 (1985)

An indorsement on a check is valid even if it identifies the transferee by bank account number rather than by name, provided the account is identifiable as belonging to a specific person, and the depositary bank follows the instructions on the check.

Summary

Production Workers Union Local 148 Welfare Fund sued Chemical Bank after the bank allowed the Fund’s attorney to deposit a check, intended for a third-party law firm, into his own account. The check was indorsed with both the payee’s name and a special account number. The attorney subsequently absconded with the funds. The New York Court of Appeals held that the bank was not liable because the indorsement, including the account number, was sufficient to identify the transferee, and the bank followed the instructions by depositing the check into the specified account. The court distinguished this case from prior rulings where banks failed to follow explicit restrictive indorsements.

Facts

Plaintiffs, as trustees of Production Workers Union Local 148 Welfare Fund, issued a check payable to Pitney, Hardin & Kipp, a law firm representing an opposing party in litigation against the Fund. The check was intended as settlement payment and was delivered to the Fund’s attorney, Robert T. Weisswasser. Weisswasser forged the payee’s indorsement and deposited the check into his own “special account” at Chemical Bank. Weisswasser then withdrew the funds and disappeared. The back of the check was marked: “Pay to Special Account #012-043478 &/ Pitney, Hardin & Kipp For Deposit Only Special Account 012-043478.”

Procedural History

The Fund sued both Manufacturers Hanover Trust Company (the drawee bank) and Chemical Bank (the depositary bank). The claim against Manufacturers Hanover was dismissed. Special Term granted summary judgment in favor of the Fund against Chemical Bank. The Appellate Division affirmed. Chemical Bank appealed to the New York Court of Appeals.

Issue(s)

Whether an indorsement on a check is valid when it identifies the transferee by bank account number rather than by name.

Holding

No, because identifying the transferee by bank account number is sufficient, provided the account is identifiable as belonging to a specific person, and the depositary bank follows the instructions on the check.

Court’s Reasoning

The court reasoned that an indorsement transfers an instrument to another party. A special indorsement specifies the person to whom the instrument is to be paid and requires further indorsement by that party. A restrictive indorsement requires the taker to apply the proceeds consistently with the indorser’s directions. Both types of indorsements can appear on the same instrument. The critical question is whether the indorsement was effective even though the customer was identified by account number rather than name. The court held that there is no requirement that a person be identified by name; identification by bank account number is sufficient when the account is identifiable as belonging to a specific person. There is also no specific requirement for the form of the signature. The court cited UCC § 3-401(2), noting that a person may use any name or mark as a means of identification. The court distinguished this case from Underpinning & Foundation Constructors v. Chase Manhattan Bank, where the depositary bank failed to deposit funds into the account named in the restrictive indorsement. Here, Chemical Bank followed the indorser’s directions by depositing the proceeds into the specified account. The court emphasized that “there are many instances in which a family member or a business may indorse for deposit funds to the credit of another and a depositary is not on notice of chicanery because of it nor is it liable if it faithfully follows such a direction.”

November 3, 1983
Hydrocarbon Processing Corp. v. Chemical Bank New York Trust Co., 16 N.Y.2d 147 (1965): Bank’s Duty of Care in International Draft Collection

Hydrocarbon Processing Corp. v. Chemical Bank New York Trust Co., 16 N.Y.2d 147 (1965)

A collecting bank owes its principal ordinary care in discharging its duty, but is not necessarily precluded from collecting its own debt by lawful means, so long as it acts in good faith and with due diligence.

Summary

Hydrocarbon Processing Corp. sued Chemical Bank for failing to remit funds from a draft collection in Cuba. Chemical Bank offset funds it held for a Cuban bank (Banco) against a debt owed to it by a nationalized Cuban entity (Electric). The court held that Chemical Bank was not liable to Hydrocarbon because it acted with ordinary care and in good faith. The bank’s actions regarding unrelated funds did not constitute a breach of duty to Hydrocarbon, and the plaintiff could not selectively benefit from the Cuban nationalization while preventing the bank from doing the same.

Facts

Hydrocarbon, a creditor-vendor, deposited a sight draft with Chemical Bank for collection from its debtor-vendee in Cuba. Funds reached Banco, a Cuban bank, but were not transmitted due to lack of an export permit and subsequent nationalization of Banco. Banco’s assets and liabilities were merged into Nacional by the Cuban government. Electric, also nationalized, owed Chemical Bank $750,000. Chemical Bank received instructions from Whitney National Bank to credit Banco’s account in London. Chemical Bank then charged Banco’s London account, credited Nacional, and offset the amount against Electric’s debt.

Procedural History

Hydrocarbon sued Chemical Bank, arguing the bank improperly offset the funds. The Appellate Division agreed with Hydrocarbon. Chemical Bank appealed to the New York Court of Appeals.

Issue(s)

Whether Chemical Bank, as a collecting bank, breached a duty to Hydrocarbon by offsetting funds held for a Cuban bank against a debt owed to it by a related, nationalized Cuban entity, when the funds collected on Hydrocarbon’s draft were blocked due to Cuban regulations.

Holding

No, because Chemical Bank acted with ordinary care and in good faith, and its actions regarding the unrelated funds did not constitute a breach of duty owed to Hydrocarbon as a collecting agent.

Court’s Reasoning

The court emphasized that the Cuban nationalization’s effect and the propriety of the bank’s offset were not the central issues. The key question was whether Chemical Bank, as a collecting agent, breached a duty to Hydrocarbon. The court cited Uniform Commercial Code § 4-202, stating a collecting bank owes its principal “ordinary care.” The bank fulfilled its duties under this section. The court reasoned that holding the bank liable would effectively make it a guarantor of the draft, which is not the intent of the law. Citing Thack v. First Nat. Bank & Trust Co., the court noted that a collecting bank is not precluded from collecting its own debt by lawful means, so long as it acts in good faith. The court found no evidence of collusion or bad faith. The fund in dispute came into the bank’s possession in good faith through an unrelated transaction. The court reasoned, “If, then, the defendant could properly apply the money to its own debt, at least as opposed to the plaintiff, there would be no purpose in requiring the bank to notify the plaintiff of the fund’s existence, and no liability would flow from the failure to do so.” The court rejected the argument that the bank was obligated to notify Hydrocarbon of the existence of the Banco credit. The court reversed the Appellate Division’s order and entered judgment for Chemical Bank.

July 9, 1965