Opinion
99 Civ. 11161 (RO).
December 6, 2000.
Ronald A. Nimkoff, Esq., Harvey B. Silikovitz, Esq., Shechter Nimkoff, LLP, New York, New York, for Plaintiff.
Steven M. Frederick. Esq., Wofsey, Rosen, Kewskin Kuriansky, LLP, Stamford, Connecticut, for Defendants.
OPINION AND ORDER
In January 1997, plaintiff Linda Whalen received a check from MetLife Insurance Company for $133,508.71. The check was payable only to Whalen and was drawn on an account that MetLife maintained at Chase Manhattan Bank in New York. Robert Iannucci, plaintiffs former investment advisor, stole this check, in addition to other checks not at issue here, and deposited them into an account maintained by his wife at First County Bank in Connecticut. The check, when deposited, bore no endorsement. Not withstanding this, First County credited Iannucci's wife's account and presented the check to Chase. Chase then transferred that sum to First County and debited MetLife's account.
In November 1998, Whelan commenced an action against MetLife and Iannucci (but not Chase), among others, in the Southern District of New York. Among the causes of action were claims for conversion of five checks, one of which is the cheek at issue here. In December 1998, she also filed an action against First County in Connecticut. asserting claims of conversion under the Uniform Commercial Code, common law conversion, negligence, and unjust enrichment with respect to three checks, again, one of which is the same check at issue here. Chase, as observed, was not a defendant in either of these actions. The New York action was settled in July 1999. The Connecticut action settled in September 1999, and First County and plaintiff exchanged releases.
On November 9, 1999, plaintiff commenced this action against Chase, claiming conversion under the U.C.C., common law conversion, and negligence with respect to the January 1997 check. Chase served a third-party complaint on First County on December 15, 1999, alleging that if plaintiffs allegations are true, First County breached its warranties to Chase under N.Y. U.C.C. Law § 3-419 (McKinney 1991). Chase now moves for summary judgment against plaintiff. Summary judgment is appropriate only when there is no genuine issue of material fact remaining for trial, and the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(e); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). Here. the parties do not dispute the facts, and Chase claims that, as a matter of New York law. Whalen's suit against First County constitutes a ratification of Chase's alleged misconduct. entitling it to a judgment ordering a dismissal.
Although the complaint contains allegations relating to three checks, the parties have stipulated to dismissal of all claims relating to two of them as time-barred.
The U.C.C. addresses conversion in § 3-419. This section states:
(1) An instrument is converted when (a) a drawee to whom it is delivered for acceptance refuses to return it on demand: or (b) any person to whom it is delivered for payment refuses on demand either to pay or return it; or (c) it is paid on a forged indorsement.
(2) In an action against a drawee under subsection (1) the measure of drawee's liability is the face amount of the instrument. In any other action under subsection (1) the measure of liability is presumed to be the face amount of the instrument.
(3) Subject to the provisions of this Act concerning restrictive indorsements, including a depositary or collecting bank, who has in good faith and in accordance with the reasonable commercial standards applicable to the business of such representative dealt with an instrument or its proceeds on behalf of one who was not the true owner is not liable in conversion or otherwise to the true owner beyond the amount of any proceeds remaining in his hands.
N.Y. U.C.C. § 3-419. Under this section. a depositary or collecting bank (such as First County here) is not liable to the true owner (Whalen) for conversion of a check if it has dealt with the check in good faith and if it retains no proceeds therefrom. See § 3-419, cmt. 5; see also Moore v. Richmond Hill Sav. Bank, 502 N.Y.S.2d 202, 205 (App.Div. 2 d Dep't 1986); 2 State of New York, Report of the Law Revision Commission: Study of the Uniform Commercial Code at 1079-80 (1955). This literal reading of the statute effectively eliminates a direct suit by Whalen, (the true owner) against First County (the depositary bank) if it handled the check in good faith; and the U.C.C. requires Whalen to proceed first against Chase (the payor bank) in conversion. Chase could then recover from First County for breach of warranty of good title. However, some courts regard the involvement of the payor bank as superfluous, and permit a true owner to sue a depositary bank directly, even when it has complied with § 3-419(3). See, e.g., 4 William D. Hawkland Lary Lawrence, Uniform Commercial Code Series § 3-419:05 (1999) (collecting cases at n. 23); Cooper v. Union Bank, 507 P.2d 609 (Cal. 1973); Ervin v. Dauphin Deposit Trust Co., 38 Pa. D. C. 2d 473 (C.P. Dauphin County 1965). These courts employ the theory of ratification to side-step the Code's requirement that a true owner sue the payor bank before proceeding directly against the depositary bank (which has presumably dealt with the check in good faith). See Cooper, 507 P.2d at 613-14.
"Ratification" is defined as. [c]onfirmation and acceptance of a previous act, thereby making the act valid from the moment it was done." Black's Law Dictionary, Seventh Edition (West 1999).
According to the ratification doctrine, when a payor bank transfers funds pursuant to a check presented with an improper endorsement, those funds are not transferred as pursuant to the check, but rather as the payor bank's general funds because the instrument is not properly payable and the payor's funds become part of the depositary bank's general funds upon receipt. See id. Any funds thereafter paid out by the depositary bank are part of that bank's general funds, and not occasioned by the check. Therefore, if the true owner sues the depositary bank for conversion, that suit implicitly assumes that the depositary bank has the proceeds of the instrument. See id. The true owner is deemed to have ratified the act of the depositary bank in collecting the check; and if it has collected the check not for the true owner but some thief, the loss is its own.See id. The true owner's ratification retroactively validates the payor bank's remission of proceeds and provides a defense to an action for conversion. Accordingly, Chase argues that Whalen's initial Connecticut action against depositary bank First County ratified its receipt of the monies the check called for and, therefore, Chase no longer has those monies and thereby has a complete defense to being sued for them.
The issue for me to resolve is whether to apply the doctrine of ratification. Counsel has not cited, and independent research has not unearthed, any controlling authority. The New York Court of Appeals accepted the ratification doctrine prior to New York's enactment of§ 3-419(3) in Henderson v. Lincoln Rochester Trust, Co., 30 N.Y. 27, 32-33 (1951). The Henderson court did not specifically resolve whether ratification was a binding principle for New York courts. In fact.Henderson itself and subsequent decisions have expressed no opinion on this issue. See Hecter v. New York Life Insurance Co., 46 N.Y.2d 34, 38 n. 3 (1978). The Henderson decision stands only for the proposition that a plaintiff may elect to bring an action against a collecting bank sounding in contract and avail himself of the six year statute of limitations as opposed to the three year limitations period for conversion actions. Indeed, subsequent New York decisions confirm the more limited scope of this holding as going to the statute of limitations issue and not the doctrine of ratification. See, e.g., Hechter v. New York Life Insurance Co., 46 N.Y.2d at 37-38 (citing Henderson and discussing plaintiffs right to elect a contract rather than tort remedy to shroud claim in longer limitations period); Lawyer's Fund for Client Protection of the State of New York v. Gateway State Bank, 709 N.Y.S.2d 243, 245-246 (2000) (reaffirming holding in Hechter, supra, but without discussion of ratification issue). In the post-U.C.C. period, the doctrine of ratification has been applied by the Ninth Circuit, see Resh v. Connecticut National Bank, 89 F.3d 598, 600 (9th Cir. 1996), and in a diversity action in Illinois district court see P.M.F. Services, Inc. v. Grady, 698 F. Supp. 141, 144 (N.D.Ill. 1988). Both federal cases involved application of state contract law.
I find the ratification doctrine persuasive and, having considered the current state of New York caselaw on the issue, believe the doctrine is applicable here. The distinction between actions in contract versus actions in tort is relevant only to the issue of whether Whalen's claims are time-barred. This view leaves intact a plaintiff's ability to elect a contract rather than a tort remedy and avail himself of a longer limitations period. Such is the current state of New York law. Although litigants are free to make choices as to how to frame the action procedurally and thereby avoid most problems of time-bar, a plaintiff still gets only one bite at the apple for substantive commercial paper claims. The considerations at bar are judicial economy and fundamental fairness. It is in the interests of efficiency that all aspects of the disputed transaction are resolved in one proceeding in a court of appropriate jurisdiction. This contributes to the goal of avoiding cumulative litigation that is too costly, taking up already scarce judicial time and resources. Ratification is also a fundamentally fair concept in that plaintiff is forced to proceed against either the collecting bank or the drawee. Such a required election provides that a plaintiff can only recover what he is equitably entitled to recover and that no defendant will be required to pay more than the loss resulting from the misconduct.
Given the foregoing, I reject Whalen's contention that ratification is not applicable because her claims include conversion, negligence, etc., but not breach of contract.
Moreover, I see no reason why Whalen could not have proceeded against Chase and First County in a single action in Connecticut or New York. Assuming Whalen proved all the elements of her claim in such an action, one court would have the opportunity to sort, efficiently and fairly, through the relevant U.C.C. claims and defenses and apportion liability accordingly between Chase and First County.
Whalen's initial Connecticut suit against First County, the depositary bank, in December 1998 asserted claims of conversion under the U.C.C., common law conversion, negligence, and unjust enrichment with respect to three checks, one of which is the check at issue here. Whalen elected to proceed against First County (the collecting bank) and thereby ratified the collection of the check and acknowledged that her monies were in First County's accounts and no longer with Chase. Accordingly, Chase's motion for summary judgment is granted.
So ordered.