State of New York v. Barclays Bank of New York, N.A., 76 N.Y.2d 533 (1990)
A payee who has never received actual or constructive possession of a check generally cannot maintain an action against the depositary bank for paying out the proceeds over a forged endorsement.
Summary
The State of New York sued Barclays Bank to recover the amounts of checks drawn by taxpayers to state taxing authorities. An accountant, Caliendo, preparing tax returns for clients, received checks payable to the State, forged endorsements, and deposited them into his own account at Barclays. The State never received the checks and sought to recover from the bank. The court held that because the State never had actual or constructive possession of the checks, it could not sue the depositary bank for conversion. This decision emphasizes the importance of delivery in establishing a payee’s rights in a negotiable instrument and promotes an orderly loss allocation scheme under the UCC.
Facts
Richard Caliendo, an accountant, prepared tax returns for clients who issued checks payable to various New York State taxing entities to satisfy their tax liabilities. Caliendo, instead of forwarding the checks, forged endorsements and deposited them into his account with Barclays Bank between 1977 and 1979. The State of New York never received these checks. Caliendo died in 1980, and the State discovered the scheme in 1983, subsequently commencing an action against Barclays to recover the face amount of the checks.
Procedural History
The Supreme Court initially denied Barclays’ motion to dismiss and for summary judgment, holding that the payee’s possession was not essential for an action against the depositary bank. The Appellate Division reversed, dismissing the complaint, reasoning that delivery, either actual or constructive, is a prerequisite for a conversion action under UCC 3-419(1)(c). The New York Court of Appeals granted leave to appeal.
Issue(s)
Whether a named payee, in the absence of actual or constructive possession of a check, has a right of action against the depositary bank that paid out the proceeds over a forged endorsement?
Holding
No, because a payee must have actual or constructive possession of a negotiable instrument to attain holder status and have an interest in it, and because practical considerations favor requiring possession to maintain a conversion action.
Court’s Reasoning
The Court of Appeals affirmed the Appellate Division’s decision, holding that a check has no valid inception until delivery. The court stated, “It has long been held that a check has no valid inception until delivery.” Furthermore, a payee must have actual or constructive possession to be considered a holder under UCC 1-201(20) and thus have an interest in the instrument. Allowing a payee without possession to sue the depositary bank would be inconsistent with these established principles. The court reasoned that practical considerations support requiring possession, as it is more likely the forgery resulted from the drawer’s negligence, an issue difficult to contest between the payee and the depositary bank. The court emphasized that the payee is not without recourse, as it can sue on the underlying obligation under UCC 3-802(1)(b). The court also rejected the State’s argument that delivery to the accountant constituted constructive delivery to the State, noting that the accountant was the drawer’s agent, and the check remained revocable until delivered. The court noted concerns about judicial economy, indicating that “relegating such a payee to a suit against the drawer on the underlying obligation would give full effect to the UCC’s loss allocation scheme by furthering the aim of placing ultimate responsibility on the party at fault”. Finally, the court declined to allow recovery under unjust enrichment or quasi-contract theories, stating that the State, never having possessed the checks, suffered no loss.