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.