New York Law Review

Tag: Forged Endorsement

  • Mouradian v. Astoria Fed. Sav. & Loan, 91 N.Y.2d 124 (1997): Drawee Bank’s Liability for Conversion

    Mouradian v. Astoria Fed. Sav. & Loan, 91 N.Y.2d 124 (1997)

    Under UCC 3-419(2), a drawee bank is strictly liable for the face amount of a check converted due to a forged endorsement, unless the payee actually received some or all of the proceeds.

    Summary

    Pauline Mouradian sued Manufacturers Hanover Trust (MHT), a drawee bank, for conversion after her estranged husband forged her signature on checks jointly payable to them. The checks, totaling $37,890.60, were used to repair a fire-damaged house they jointly owned. MHT argued that Pauline benefited from these repairs and should not recover the full face value of the checks. The New York Court of Appeals held that MHT was strictly liable for the face amount of the checks under UCC 3-419(2) because Pauline never actually received the funds. The court clarified that a setoff is only allowed if the payee directly receives the proceeds.

    Facts

    Pauline and Sarkis Mouradian were separated when their jointly owned house was damaged by fire.
    Astoria Federal Savings and Loan, the mortgage holder, issued checks jointly payable to Pauline and Sarkis for insurance proceeds.
    Astoria sent the checks to Sarkis without any restrictive endorsements.
    Sarkis forged Pauline’s signature on the checks and deposited them into his accounts.
    Sarkis claimed the funds were used to repair the fire-damaged house, but Pauline was unaware of the extent of the damage or the repairs.

    Procedural History

    Pauline sued MHT, the drawee bank, for conversion under UCC 3-419(2).
    Supreme Court granted summary judgment to Pauline, finding MHT strictly liable.
    The Appellate Division affirmed.
    MHT appealed to the New York Court of Appeals.

    Issue(s)

    Whether a drawee bank, sued for conversion under UCC 3-419, is entitled to reduce its liability by arguing that the payee indirectly benefitted from the converted checks, even if the payee did not directly receive the funds.

    Holding

    No, because UCC 3-419(2) imposes strict liability on a drawee bank for the face amount of a converted check unless the payee actually received some or all of the proceeds.

    Court’s Reasoning

    The court emphasized the clear language of UCC 3-419(2), which states that “the measure of the drawee’s liability is the face amount of the instrument.”
    The court distinguished between drawee and non-drawee converters, noting that only non-drawee converters have a presumed liability that can be rebutted.
    The court cited Official Comment 4 to UCC 3-419, which indicates that the presumption of liability is replaced by a rule of absolute liability for drawees.
    The court acknowledged that UCC 1-106(1) allows for remedies to put the aggrieved party in as good a position as if the other party had fully performed. However, this principle only applies when the payee receives all or part of the proceeds from the forger or the wrongfully paying bank.
    Because Pauline never received the funds or had control over their use, UCC 1-106 was not applicable.
    The court rejected MHT’s argument that Pauline’s negligence contributed to the forgery because MHT did not demonstrate that it acted in a commercially reasonable manner or that Pauline’s conduct substantially contributed to the forged endorsements. The court stated that to prevail under UCC 3-406, a drawee must show that it acted in good faith in accordance with reasonable commercial standards and that the plaintiff’s negligence substantially contributed to the forgery.
    The court noted that UCC 3-420, which eliminates the distinction between drawee and non-drawee converters and prescribes a rule of presumptive liability in all cases, has not been adopted in New York. Thus, the rule of absolute liability in UCC 3-419(2) remains the law.
    The court concluded that the Legislature’s retention of UCC 3-419(2) reflects a policy choice balancing certainty and loss allocation.
    The court pointed out that a drawee bank is not without recourse, as it can bring an action against a depository bank where a check is paid over a forged endorsement under UCC 3-417 (transfer warranties).

  • State of New York v. Barclays Bank of New York, N.A., 76 N.Y.2d 533 (1990): Delivery Requirement for Payee’s Claim Against Depositary Bank

    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.

  • Hechter v. Chemical Bank, 47 N.Y.2d 428 (1979): Statute of Limitations for Collecting Bank’s Liability on Forged Endorsement

    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.

  • Hutzler v. Hertz Corp., 39 N.Y.2d 209 (1976): Liability Discharge When Attorney Forges Endorsement

    Hutzler v. Hertz Corp., 39 N.Y.2d 209 (1976)

    A tortfeasor’s liability is discharged when a settlement check, jointly payable to the plaintiff and their attorney, is paid by the drawee bank, even if the attorney forges the plaintiff’s endorsement and misappropriates the funds, placing the onus on the plaintiff who chose the dishonest agent.

    Summary

    Christina Hutzler, as administratrix of her husband’s estate, settled a wrongful death claim against Hertz Corporation. Hertz issued a settlement check payable to Hutzler and her attorney, Daniel Yudow. Yudow forged Hutzler’s endorsement, deposited the check into his account, and absconded with the funds. Hutzler sued Hertz, seeking repayment. The court held that Hertz’s liability was discharged upon the bank’s payment of the check, despite the forgery. The court reasoned that Hutzler, by selecting the dishonest attorney, bore the risk of his unauthorized actions. The loss falls on the creditor, not the debtor.

    Facts

    Christina Hutzler was appointed administratrix of her deceased husband’s estate.
    Hutzler retained attorney Daniel Yudow to pursue a wrongful death claim against Hertz.
    Yudow settled the claim with Hertz for $11,500, and Hutzler executed a general release.
    Hertz issued two checks: one to the State Insurance Fund and another for $10,929 payable to “Christina Hutzler Individually And As Administratrix of the Estate of Michael E. Hutzler and Daniel D. Yudow as Attorney.”

    Yudow forged Hutzler’s signature on the $10,929 check, endorsed it with his own signature, deposited it into his account, and later closed the account, misappropriating the funds.
    Hutzler was unable to locate Yudow until June 1973, and then discovered he had closed his practice.

    Procedural History

    Hutzler sued Hertz and Manufacturers Hanover Trust Company (the drawee bank) to recover the settlement amount.
    Special Term granted summary judgment to Hutzler against Hertz, but granted summary judgment to the bank. Hutzler did not appeal the judgment in favor of the bank.
    The Appellate Division modified the judgment, reducing Hutzler’s recovery by the amount of Yudow’s attorney’s lien.
    Hertz appealed, and Hutzler cross-appealed.

    Issue(s)

    Whether a tortfeasor is discharged from liability when a settlement check, jointly payable to the plaintiff and their attorney, is negotiated by the attorney on the plaintiff’s forged endorsement, and the proceeds are appropriated?

    Holding

    Yes, because the tortfeasor’s obligation is discharged upon payment of the settlement draft by the drawee bank, the forgery notwithstanding, and the claimant may not thereafter recover against the tortfeasor.

    Court’s Reasoning

    The court distinguished between agency principles and negotiable instruments law. While an attorney generally has authority to receive payment on behalf of a client, the issue arises when payment is made via check payable to both the client and attorney.
    The court relied on the established rule that a debtor’s liability is discharged when a check payable to the creditor is wrongfully endorsed by the creditor’s agent and paid by the drawee bank.
    The court reasoned that the drawer’s only obligation is to ensure funds are in the bank. It is the creditor who chose the dishonest agent and should bear the risk of the agent’s unauthorized acts. As the court noted quoting Sage v. Burton, 84 Hun 267, 270, “It is the creditor, after all, who selected a dishonest person to represent him, and he, not the drawer, should bear the risk of his unauthorized acts, having placed him in a position to perpetrate the wrong.”

    The court cited the Restatement (Second) of Agency § 178(2), which states that if an agent authorized to receive a check payable to the principal forges the principal’s endorsement, the maker is relieved of liability if the drawee bank pays the check and charges the amount to the maker. The court expressly approved of that restatement provision as correctly stating New York Law.
    Referring to UCC § 3-404(1), which states that an unauthorized signature is wholly inoperative, the court stated that the plaintiff is “precluded from denying” the unauthorized signature because of their unwise selection of the agent.
    The court noted that the plaintiff might have had a cause of action for conversion against the drawee bank, but that claim was not preserved on appeal.
    The court emphasized that its decision was not unduly harsh, as the creditor could pursue an action against the bank or the agent.