Okla. Stat. tit. 12A § 3-420
Okla. Stat. tit. 12A, § 3-420
Oklahoma Code Comment
1. This Section specifies that Article 3 is supplemented by the law of conversion. See also UCC § 1-103. Many of the governing principles are provided by the law of conversion rather than Article 3, but Section 3-420 Provides some specific guidance as to the impact of conversion principles in the context of Article 3 transactions. See also sub section 3-118(g) , which provides a statute of limitations, although it does not specify when the limitations period begins to run. Most of this guidance relates to the consequences of taking or paying an instrument on an unauthorized indorsement, which sub section 3-420(a) states is a conversion. (Pre-revision sub sections 3-419(a) and (b) were deleted as inappropriate for all items, and the law of conversion is substituted generally.)
2. In addition to listing two specific instances in which an instrument is converted, this Section makes the law applicable to conversion of ocher personalty apply to an instrument. This is a statement of existing law. See RESTATEMENT (SECOND) OF TORTS §241A comment a. Section 3-420 sets forth an additional circumstance (payment on a forged indorsement), not fitting the common law rule, when the conversion of an instrument may occur. Under the common law conversion (1) is a distinct act of ownership or dominion, (2) wrongfully exercised, (3) over the personal property of another, (4) in denial of or inconsistent with the other's rights. Steenbergen v. First Fed Sav. & Loan of Chickasha, 753 P.2d 1330 (Okla. 1987). The instrument may be converted under the common law if those events occur in relation to it. An act of dominion may be wrongful as to the owner or to a person having some other rights in the property. See Davidson v. First Bank & Trust Co. of Yale, 609 P.2d 1259 (Okla. 1976) (wrongful as to owner); National Livestock Credit Corp. v. Schultz, 425 F.Supp. 966 (W.D. Okla. 1976) (wrongful as to mortgagee).
Once an instrument has been properly deposited in an account at a financial institution, a debtor-creditor relationship is established between the depositor and the institution. No conversion action will lie as to the "wrongful" use of the proceeds represented by the credit in the account because there can be a conversion only of tangible personal property. See Whayne v. Seamans 95 Okla. 168, 217 P. 859 (1923); Shebester v. Triple Crown Insurers, 826 P.2d 603 (Okla. 1992), answer to certified question conformed to 972 F.2d 135 (1Oth Cir. 1992). However, in those cases where a conversion action will lie, the cause of action for conversion under this Section will accrue when the item is taken by the transferee or when a bank pays or obtains payment of the item. See Walker & Walker, Inc. v. Liberty Nat'l Bank & Trust Co., slip op., 64 Okla. B.J. 1496, 1993 W.L 150651 (Okla. May 11, 1993).
3. Regarding damages, even though the face amount of the instrument would be prima facie evidence of the damages suffered, the defendant may prove the actual value of the instrument. See Fourth Nat'l Bank of Tulsa v. Dyer, 350 P.2d 481 (Okla. 1960), Capps v. Vasey Bros., 23 Okla. 554, 101 P. 1043 (1909). But see Fourth Nat'l Bank v. Board of Comm'rs of Craig County, 186 Okla. 102, 95 P.2d 878 (1939).
4. Section 3-420 governs the remedies of the owner of an instrument that has been transferred (other than by negotiation) or paid on a forged indorsement. (If the transfer was by negotiation, other rules apply. See UCC §§ 3-201, 1-201(20), 3-302. 3-305.) Under Article 3, there is no concept of ownership, even though the Official Comments to Section 3-420 speak of the "owner" of the instrument. Apparently, the person who can sue in conversion is "a person entitled to enforce the instrument." See UCC § 3-301. Section 3-420 allows the owner of such an instrument to proceed directly against the person who will ultimately be liable; for example, a depositary bank chat allowed the forger to deposit the check despite the forged indorsement. See UCC §3-420(a), (c), and Official Comment 1. Pre-revision sub section 3-419(3) often was construed to preclude recovery from the depositary bank in these circumstances, unless the depositary bank still had the forger's funds or was Gable on some ocher grounds. See, e.g., West Penn Admin., Inc. v. Union Nat'l Bank of Pittsburgh, 233 Pa. Super. 311, 335 A.2d 725 (1975); Underpinning & Foundation Constr., Inc. v. Chase Manhattan Bank, N.A., 46 N.Y.2d 459, 386 N.E.2d 1319, 414 N.Y.S.2d 298 (1979). Current Section 3-420, as well as Section 3-405 , also will change the allocation of loss that occurred in American National Ins. Co. v. Fidelity Bank, N.A., 691 F.2d 464 (1Oth Cir. 1982).
Under pre-revision Section 3-419 , in many cases, the owner of the check would be required to sue the payor bank that paid the check, the payor bank would then sue the bank that made presentment, and each bank in the collection chain would then sue its transferor for breach of warranty, creating a chain of liability leading ultimately to the party who dealt with the forger (often the depositary bank). Section 3-420 permits the owner of the check to bypass this circuitous chain of liability by directly suing the depositary bank. This reinstates Oklahoma law prior to the enactment of pre-revision Section 3-419 . See Bell-Wayland Co. v. Bank of Sugden, 95 Okla. 67, 218 P. 705 (1923).
There are two qualifications in sub section 3-420(a) . An action in conversion may not be brought by (1) the issuer or acceptor of the instrument, or (2) a payee or indorsee who did not receive delivery of the instrument (directly or indirectly). This resolves a split of authority under prior law in both circumstances, rejecting cases to the contrary such as Sun 'N Sand Inc. v. United California Bank, 21 Cal. 3d 671, 582 P.2d 920, 148 Cal. Rptr. 329 (1978) (drawer can sue), and the first opinion in Lund v. Chemical Bank, 665 F.Supp. 218 (S.D.N.Y. 1987) (on reh'g, 675 F.Supp. 815 (S.D.N.Y. 1987), rev'd in part, 870 F.2d 840 (2d Cir. 1989)), based on the fact that until delivery, the payee/indorsee has no interest in the check and is not entitled to enforce it. See UCC § 3-420, Official Comment 1, and §§ 3-309 and 3-310(b)(4). The payee/indorsee is deemed to take delivery when the instrument comes into the payee's possession, is placed in the mailbox, or is delivered to an agent. Id. If the payee/indorsee never received delivery of the instrument, then the payee is limited to recourse against the drawee/indorser on the underlying obligation.
An action in conversion is necessary because the owner of an item paid on a forged indorsement has no contractual privity with the party or bank that took or paid the instrument; hence, there is no remedy under contract law. However, some courts under prior law allowed an action for money had and received. Sub section 3-118(g) specifies the statute of limitations, and that should remove the attraction of this alternative. Sub section 3-420(b) limits the liability for conversion of an instrument to the amount payable on the instrument or the plaintiff's interest in the instrument, whichever is less, but including interest. See Official Comment 2. This should preclude an award of punitive damages, and also a full recovery by a joint payee, from whom the other joint payee then must recover.
5. Under pre-revision sub section 3-419(3) , a depositary bank lost its protection against liability to the owner of the check if it failed to follow reasonable commercial standards. Because Section 3-420 eliminates any such protection for depositary banks, the exception for such banks relating to reasonable commercial standards has likewise been deleted. However, a party, other than a depositary bank, who deals with the instrument in good faith retains this protection and is not liable in conversion except to the extent the party retains funds from the instrument.
6. By permitting the owner of an item paid on a forged indorsement to bring a direct suit against the party who dealt with the forger (typically a depositary bank), Section 3-420 permits the owner to sue a single depositary bank over a variety of forged indorsements on multiple checks drawn on different payor banks. Under pre-revision Section 3-419 , if a forger intercepted a number of checks drawn on different banks and forged the indorsements as a means to deposit them in the forger's account (typically the case, if the scheme was perpetrated over a period of time by an employee of the payee of the checks), then the payee/owner would have to sue numerous payor banks separately, perhaps in different geographic locations, leading ultimately to multiple suits against the depositary bank. This Section permits a more economical, direct action against the depositary bank as to all such items. Cases under pre-revision Section 3-419 that allowed this result by stretching the meaning of the Code are thus rejected as a means of statutory interpretation but affirmed in result. See, e.g., Cooper v. Union Bank, 9 Cal. 3d 371, 507 P.2d 609, 107 Cal. Rptr. 1 (1973). See also Section 3-405 , which will reduce the number of these suits.
7. Cases involving forged indorsements are also subject to the UCC provisions that may preclude an aggrieved party from asserting a forgery or alteration when that party's failure to exercise ordinary care substantially contributes to the forger's ability to perpetrate the scheme. Sec. e.g., UCC §§ 3-403 (ratification), 3-404 (impostors and fictitious payees), 3-405 (forged indowments by employees), 3-406 (negligence), 4-406 (duty to examine bank statements); American Nat'l Ins. Co. v. Fidelity Bank N.A., 691 P.2d 464 (1Oth Cir. 1982) (depositary bank not Gable for forged indorsements by insurance agent because insurance company was negligent in supervising its agent). In some instances, under Article 3, a corresponding failure of the party who took the instrument from the forger (e.g., the depositary bank) to exercise ordinary care may trigger a loss allocation rule based on comparative negligence. See, e.g., UCC 55 3-404, 3-405, 3-406 and 4-406.
8. This Section does not determine whether an indorsement is forged, and thus would not affect cases like O'Petro Energy Corp. v. Canadian State Bank, 837 P. 2d 1391 (1992) (failure of bank to honor restrictive indorsement did not constitute conversion under pre-revision Section 3-419 ) . Section 4-205 indicates that a missing indorsement is not a forged indorsement and the payor bank can treat an item as properly payable despite a missing indorsement. See F. MILLER & A. HARRELL, THE LAW OF MODERN PAYMENT SYSTEMS AND NOTES ¶ 8.04[3][g][4] (2d ed. 1992). Sub section 3-103(a)(7) indicates that a payor bank may refrain from examining indorsements without violating its duty of ordinary care or prejudicing its rights to a preclusion under UCC §§ 3-405, 3-405, 3-406 and 4-406.