Hechter v. Chemical Bank, 47 N.Y.2d 428 (1979)

The payee of a negotiable instrument possesses a cause of action in contract against a collecting bank that has collected the instrument over the payee’s forged endorsement, and this action is governed by the six-year statute of limitations applicable to contract actions, even after the adoption of the Uniform Commercial Code.

Summary

Rochelle Hechter sued Chemical Bank, alleging it wrongfully collected checks with her forged endorsement. Her attorney had deposited checks intended for her into his personal account at Chemical Bank after forging her signature. Hechter sued Chemical Bank more than five years after the deposit. The Court of Appeals addressed whether the action was time-barred. It held that because Hechter brought the action in contract, she was entitled to a six-year statute of limitations. The Court reasoned that the UCC did not eliminate the common-law right of a plaintiff to choose a contract remedy over a tort remedy in cases of forged endorsements.

Facts

Rochelle Hechter was the payee on three checks totaling over $135,000 in life insurance proceeds. Her attorney, Emanuel Pavsner, was authorized to deposit the checks into a bank account in her name. Instead, Pavsner forged Hechter’s endorsement on the checks and deposited them into his personal account at Chemical Bank. Chemical Bank collected the checks from the drawee banks. Pavsner then withdrew the funds and misappropriated the portion belonging to Hechter. A prior action against Pavsner resulted in an unsatisfied default judgment.

Procedural History

Hechter sued Chemical Bank for wrongfully collecting the checks over forged endorsements. Chemical Bank moved for summary judgment, arguing the action was time-barred. Special Term denied the motion. The Appellate Division affirmed. The Court of Appeals granted leave to appeal and certified the question of whether the order affirming the denial of summary judgment was properly made.

Issue(s)

Whether Section 3-419(1)(c) of the Uniform Commercial Code abolished the pre-code contract action against a collecting bank for collecting an instrument over a forged endorsement, restricting the payee’s remedy to a suit in conversion with its attendant three-year limitation period?

Holding

No, because nothing in the express language of section 3-419 of the Uniform Commercial Code can be read to sweep aside the historic principle that a litigant may abandon his tort cause of action in favor of one grounded in contract.

Court’s Reasoning

Before the UCC, New York law recognized a payee’s cause of action against a bank collecting an instrument over a forged endorsement, which could be styled in either conversion or contract. The court noted, “That this contract action had as its theoretical basis the well-known common-law action for money had and received”. Choosing the contract action entitled the payee to a six-year statute of limitations. The court stated that the UCC did not eliminate the common-law right to elect a contract remedy over a tort remedy. Section 1-103 of the UCC states that “[u]nless displaced by the particular provisions of this Act, the principles of law and equity * * * shall supplement its provisions”. The court reasoned that only an express code provision limiting a plaintiff’s remedy to a conversion suit would destroy the action ex contractu. Further, subdivision (3) of section 3-419, stating that a bank “is not liable in conversion or otherwise” suggests that all pre-code actions regardless of form were to continue. The court emphasized that a clear and specific legislative intent is required to override the common law, and no such intent to abolish the pre-code contract action was found. Therefore, a cause of action styled in contract, commenced within six years of accrual, is not time-barred.