Summary
finding that UCC § 3-419 displaces contrary-pre-Code common-law and equitable principles, including the availability of common-law defenses to drawees
Summary of this case from Weyant v. The Phia Grp.Opinion
Argued November 18, 1997
Decided December 17, 1997
APPEAL from an order of the Appellate Division of the Supreme Court in the Second Judicial Department, entered February 10, 1997, which, with two Justices dissenting, affirmed so much of an order of the Supreme Court (Bruce D. Alpert, J.), entered in Nassau County, as granted a motion by plaintiff for summary judgment as to the third, fourth and fifth causes of action asserted against defendant Manufacturers Hanover Trust, and awarded plaintiff damages against that defendant in the sum of $37,890.60.
Mouradian v Astoria Fed. Sav. Loan, 236 A.D.2d 451, affirmed.
Simmons, Jannace Stagg, L.L.P., Mineola ( Thomas E. Stagg and Debra Lynne Wabnik of counsel), for appellant. Grandinette Serio, P.C., Mineola ( Anthony M. Grandinette of counsel), for respondent.
Sullivan Cromwell, New York City ( H. Rodgin Cohen, Bruce E. Clark, Erik D. Lindauer and Timothy E. Di Domenico of counsel), for New York Clearing House Association and another, amici curiae.
We are asked on this appeal to decide whether a drawee bank, sued for conversion under UCC 3-419 , is entitled to show that the payee received a benefit from the converted checks and therefore should recover less than their face value. We conclude that while a drawee may claim a setoff for funds actually received by the payee, the rule of absolute liability stated in UCC 3-419 (2) precludes further inquiry into whether the payee, who has not recovered the funds, in fact benefitted from the proceeds of the checks.
Plaintiff Pauline Mouradian's estranged husband, Sarkis Mouradian, forged her signature on three checks drawn by Astoria Federal Savings and Loan and made jointly payable to plaintiff and her husband. The checks, totaling $37,890.60, were deposited in accounts at Norstar, N.A. and Citibank, N.A. The ultimate payments on the checks were made by Manufacturers Hanover Trust (MHT). Plaintiff brought this action against Norstar and Citibank, as depository banks, and MHT as drawee bank for conversion. Plaintiff sued Astoria, the drawer, for breach of contract and breach of fiduciary duty as well as for conversion.
Plaintiff moved for summary judgment on the third, fourth and fifth causes of action asserted against MHT on the basis of UCC 3-419 (2), which states:
"In an action against a drawee [for conversion] the measure of the drawee's liability is the face amount of the instrument. In any other action * * * the measure of liability is presumed to be the face amount of the instrument."
The parties' summary judgment submissions reveal that plaintiff was separated from her husband when a house they jointly owned in Garrison, New York, was damaged by fire. An escrow account for the insurance proceeds was established at Astoria, the mortgage holder. Thereafter, Astoria sent the checks at issue, made payable to Pauline and Sarkis Mouradian, without any restrictive indorsements, to plaintiff's husband. Plaintiff's husband admitted during their divorce proceedings that he forged her signature on the checks but claimed that the proceeds were used to make repairs to their fire-damaged house. However, plaintiff was unaware of the extent of the damage or the repairs undertaken and was never billed for work or services performed.
In opposition to plaintiff's summary judgment motion, MHT argued that plaintiff is precluded from recovering because she benefitted from the funds which were used to repair her house and because the forged indorsements resulted from plaintiff's negligence. Relying on the plain language of UCC 3-419 (2), Supreme Court granted plaintiff's motion for summary judgment. In response to MHT's equitable arguments, the court noted that plaintiff had no knowledge of the use to which the funds were applied. Supreme Court also granted the cross motion by defendants depository banks, Citibank and Norstar, to dismiss Astoria's cross claim against them and severed the remaining causes of action.
The Appellate Division affirmed, with two Justices dissenting. The majority acknowledged that MHT would not be precluded from claiming a setoff if plaintiff had received all or part of the proceeds from the converted checks. However, the majority noted that plaintiff never received any of the proceeds nor did she have control over or input into how the funds were used. The dissenters were of the view that the statute should be construed to permit a setoff to the extent that the plaintiff realized a benefit from the proceeds. They argued that such a broad interpretation would be consistent with the equitable provisions espoused in UCC 1-103 and 1-106 and with UCC 3-420 (2 ULA 127 [Master ed 1991]). MHT appeals pursuant to CPLR 5601 (a) and we now affirm.
Pursuant to UCC 3-419 (1) (c), an instrument is converted when it is paid on a forged indorsement. The UCC distinguishes between a drawee converter and a nondrawee converter. While the measure of liability of a nondrawee is presumed to be the face amount of the check, "the measure of the drawee's liability is the face amount of the instrument" (UCC 3-419 [emphasis added]). Thus, the clear language of UCC 3-419 (2) prescribes the measure of damages against a drawee to be absolute — that is, the face amount of the check in question.
Official Comment 4 to this section indicates that the section is new and leaves no doubt that "[i]n the case of the drawee * * * the presumption [of liability for the face value of the instrument] is replaced by a rule of absolute liability" (UCC 3-419 , Official Comment 4, McKinney's Cons Laws of NY, Book 62 1/2, at 314 [1991]). This provision also represents a departure from pre-Code case law insofar as it imposes an absolute liability on the drawee ( compare, Hillsley v State Bank, 24 A.D.2d 28, 30, affd 18 N.Y.2d 952 [recovery on a forged instrument may be defeated by proof that the rightful owner has suffered no damage], with Williamson v Citibank, 157 Misc.2d 578; and Lawyers' Fund for Client Protection v Manufacturers Hanover Trust Co., 153 Misc.2d 360 [both holding that UCC 3-419 (2) imposes absolute liability on drawees]; see also, New York Annotations to UCC 3-419 , McKinney's Cons Laws of NY, Book 62 1/2, at 315).
Initially, we agree that the rule of absolute liability will not preclude a setoff where the payee has received all or part of the proceeds of a converted instrument. Pursuant to UCC 1-106 (1), the remedies in the act are to be liberally administered "to the end that the aggrieved party may be put in as good a position as if the other party had fully performed". Where the payee receives all or part of the proceeds from either the forger or the wrongfully paying bank, a setoff for sums previously received will obviously put the payee in as good a position as if her signature had not been forged. Thus, UCC 1-106 is consistent with the general principle that recovery will be denied where the proceeds of an improperly paid check actually reach the person intended to receive them ( see, Tonelli v Chase Manhattan Bank, 41 N.Y.2d 667, 670-671).
Actual receipt of the proceeds from the forger may preclude denial of the indorsement's authenticity and assertion of forgery ( see, UCC 3-404 [1] [a forged indorsement is "wholly inoperative as that of the person whose name is signed unless he ratifies it or is precluded from denying it"]; see also, Bank of W. v Wes-Con Dev. Co., 15 Wn. App. 238, 548 P.2d 563, 567).
Lund v Chemical Bank ( 797 F. Supp. 259) is illustrative of this principle. In Lund, a drawee bank was held liable for conversion under section 3-419 but was permitted to claim a setoff where it was established that one of the copayees had been fully reimbursed by the wrongdoer ( id., at 272). Contrary to MHT's assertion, however, Lund is distinguishable from the present case. Here, it is uncontroverted that plaintiff neither received the funds nor had control over or input into the use to which the funds were applied. Notably, the checks contained no restrictive indorsements and were therefore plaintiff's to use as she saw fit and not as dictated by the forger ( see, Tonelli v Chase Manhattan Bank, supra, 41 N.Y.2d, at 671). Accordingly, UCC 1-106 is of no avail to MHT.
The out-of-State cases relied upon by MHT are similarly distinguishable. In those cases the payees recovered all or part of the funds ( see, e.g., Southern Cal. Permanente Med. Group v Bozinovski, 148 Cal.App.3d 503, 196 Cal.Rptr. 150; Twellman v Lindell Trust Co., 534 S.W.2d 83 [Mo Ct App]; Starkey Constr. v Elcon, Inc., 248 Ark. 958, 457 S.W.2d 509; Maynard Inv. Co. v McCann, 77 Wn.2d 616, 465 P.2d 657; Lurz v Panek, 172 Ill. App.3d 915, 527 N.E.2d 663).
To inquire further whether plaintiff in fact received a benefit from the converted funds, and therefore suffered a loss lower than the face amount of the checks, is contrary to the express provisions of UCC 3-419 (2). While the Code allows the consideration of common-law and equitable principles, it does so "[u]nless displaced by the particular provisions of this Act" (UCC 1-103 ). UCC 3-419 (2) clearly distinguishes the measure of liability of drawee converters from that of nondrawee converters, leaving the availability of common-law defenses open only to nondrawee converters. Hence, the particular provision of UCC 3-419 (2) displaces contrary pre-Code common-law and equitable principles ( see, McKinney's New York Annotations to UCC 3-419 , op. cit., comparing the new provision with prior law as stated in Hillsley v State Bank, supra, 24 A.D.2d 28, affd 18 N.Y.2d 952; see also, True v Fleet Bank-N.H., 138 N.H. 679, 645 A.2d 671).
Hillsley is not inconsistent with the Code insofar as it recognizes the general principle that recovery on a forged instrument may be defeated by proof that payment was made to the person entitled to the check ( 24 A.D.2d, at 30).
That the availability of common-law defenses is denied to drawees under UCC 3-419 (2) is reinforced both by Official Comment 4 to that section, discussed above, and by the revision of article 3 in 1990 which replaced UCC 3-419 with 3-420. The new provision — UCC 3-420 (2) — eliminates the distinction between drawee converters and nondrawee converters and prescribes a rule of presumptive liability in all cases ( see, UCC 3-420 [2], Official Comment 2, 2 ULA 129 [Master ed 1991]). However, New York has not adopted UCC 3-420 and, therefore, the rule of absolute liability enunciated in UCC 3-419 (2) remains the law in New York.
In urging this Court to weigh the proof submitted by the banks to determine whether plaintiff received a benefit from the converted checks MHT is, in effect, asking the Court to ignore the clear provision of UCC 3-419 (2) and to apply UCC 3-420 (2) to the facts of this case. This we cannot do. Had the Legislature intended to replace the rule of absolute liability, it would have adopted UCC 3-420. In the circumstances, we must conclude that the retention of UCC 3-419 (2) is a choice made by the Legislature given the joint policy considerations of certainty and loss allocation underlying article 3 of the UCC ( see generally, Getty Petroleum Corp. v American Express Travel Related Servs. Co., 90 N.Y.2d 322). In any event, a drawee bank is not without recourse as it may bring an action against a depository bank where a check is paid over a forged indorsement ( see, UCC 3-417 [transfer warranties]).
MHT next argues that plaintiff should be precluded from recovering because the forged indorsements resulted from her negligence. MHT relies on UCC 3-406 which provides that:
"Any person who by his negligence substantially contributes to * * * the making of an unauthorized signature is precluded from asserting * * * the lack of authority against a * * * drawee * * * who pays the instrument in good faith and in accordance with the reasonable commercial standards of the drawee's * * * business" (emphasis added).
To prevail under this provision, 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. Here, MHT made no showing, in opposing summary judgment, that it acted in a commercially reasonable manner, nor is there any evidence that plaintiff's conduct substantially contributed to the forged indorsements.
In sum, we conclude that, absent a showing that a payee has actually received part or all of the proceeds of a converted check, a drawee is strictly liable under UCC 3-419 (2) for the face amount of the check.
Perhaps because it has always contended that plaintiff benefitted from the full amount converted, MHT did not raise below the issue, addressed by amici curiae, of plaintiff's status as a copayee. The question whether a copayee may recover the full face value of a converted check is therefore unpreserved for our review.
Accordingly, the order of the Appellate Division should be affirmed, with costs.
Chief Judge KAYE and Judges TITONE, BELLACOSA, SMITH, LEVINE and WESLEY concur.
Order affirmed, with costs.