New York Law Review

Tag: UCC 3-419

  • B.D.G.S., Inc. v. Savings Bank of Utica, 10 N.Y.3d 108 (2008): Bank’s Duty of Care Regarding Restrictive Indorsements

    B.D.G.S., Inc. v. Savings Bank of Utica, 10 N.Y.3d 108 (2008)

    Compliance with a restrictive indorsement on a check does not automatically satisfy the requirement of reasonable commercial standards for a bank under UCC § 3-419(3); a bank’s liability for accepting improperly indorsed checks is not limited to remaining proceeds if it fails to act in a commercially reasonable manner.

    Summary

    B.D.G.S., Inc., sued Savings Bank of Utica (SBU) for accepting checks with allegedly improper restrictive indorsements. The checks, intended for B.D.G.S. as rent payments, were made out to “DBGS, Inc.” and restrictively indorsed “Pay to the order of Beechgrove Warehouse For Deposit” into Beechgrove’s account at SBU. B.D.G.S. argued that SBU failed to act in a commercially reasonable manner. The New York Court of Appeals held that compliance with the restrictive indorsements doesn’t, as a matter of law, establish that SBU acted with reasonable commercial standards under UCC § 3-419(3), and that SBU’s liability was not limited to any remaining proceeds because it failed to satisfy the statutory criteria.

    Facts

    B.D.G.S. owned a warehouse managed by Balio and Duniec, who formed Beechgrove Warehouse Corporation. Rite-Aid, a tenant of B.D.G.S., made rent payments via checks payable to “DBGS, Inc.” (a typo). Balio and Duniec indorsed sixteen of these checks, along with a large refund check from Niagara Mohawk, “Pay to the order of Beechgrove Warehouse For Deposit” and deposited them into Beechgrove’s SBU account. B.D.G.S. discovered the misdirection of funds and sued SBU, alleging the bank improperly accepted the checks.

    Procedural History

    B.D.G.S. moved for partial summary judgment on liability, which was denied. SBU’s cross-motion for summary judgment was also denied. A jury found that SBU did not act in accordance with reasonable commercial standards. The trial court denied SBU’s post-trial motions and entered judgment for B.D.G.S. The Appellate Division affirmed. The New York Court of Appeals granted SBU leave to appeal and affirmed the Appellate Division’s decision.

    Issue(s)

    1. Whether compliance with a restrictive indorsement constitutes acting in accordance with reasonable commercial standards as a matter of law under UCC § 3-419(3)?

    2. Whether SBU’s liability under UCC § 3-419(3) is limited to the amount of proceeds remaining in its possession?

    Holding

    1. No, because there are situations where following the indorsements would not be reasonable; for example, if the bank had good cause to know the indorsements were forged.

    2. No, because SBU did not act in conformity with reasonable commercial standards, the defense under UCC § 3-419(3) is unavailable, and the bank’s liability is not limited to the amount of the proceeds remaining in its possession.

    Court’s Reasoning

    The Court reasoned that UCC § 3-419(3) limits a depositary bank’s liability in an action for money had and received only when the bank complies with restrictive indorsements, acts in good faith, and acts in accordance with reasonable commercial standards. The Court distinguished Spielman v. Manufacturers Hanover Trust Co., noting that Spielman involved a suit by the drawer of a check against the depositary bank, whereas this case involves a suit by the payee. The Court stated that compliance with restrictive indorsements is not necessarily commercially reasonable as a matter of law under all circumstances. The Court relied on expert testimony indicating aspects of the transactions should have raised red flags for SBU, and testimony that SBU did not comply with its own procedures. Because SBU failed to act in accordance with reasonable commercial standards, the protection of limited liability under UCC § 3-419(3) did not apply. The Court stated that when a bank fails to meet the requirements of 3-419(3), the bank’s liability is determined by the common-law action for money had and received as it existed prior to the enactment of the UCC. Quoting Henderson v. Lincoln Rochester Trust Co., the Court stated that a collecting bank has “an obligation to pay the proceeds collected to the true payee owner in the absence of a valid indorsement.”

  • 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.