He Who Dealt With the Impostor is in the Best Position -Read

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David A. Szwak

He Who Dealt With the Impostor is in the Best Position -Read

Postby David A. Szwak » Mon Apr 03, 2006 6:53 pm

Chicago Title Ins. Co. v. California Canadian Bank,
1 Cal.App.4th 798, 2 Cal.Rptr.2d 422, 16 UCC Rep.Serv.2d 445, Cal.App. 1 Dist., Dec 11, 1991

Escrow agent in numerous transactions initiated by mortgage broker and client, who were engaged in massive check fraud operation, sued bank through which checks in question passed, claiming that bank was "accountable" for amount of such checks. The Superior Court, San Mateo County, No. 279348, Thomas M. Jenkins, J., entered judgment for escrow agent. Bank appealed. The Court of Appeal, Peterson, J., held that: (1) bank failed to timely return dishonored checks before relevant "midnight deadline," and (2) bank was strictly liable for amount of checks.
Affirmed.

PETERSON, Associate Justice.
The present appeal is a successor to a previous decision by this court (Division Two) in Chicago Title Ins. Co. v. Superior Court (1985) 174 Cal.App.3d 1142, 220 Cal.Rptr. 507. In this appeal, we will affirm decisions of the trial court which held (1) California Canadian Bank (the Bank) failed to timely return certain dishonored checks before the relevant "midnight deadline" provided by section 4302 of the California Uniform Commercial Code and applicable regulations; and (2) this failure of timely return renders the Bank "accountable" or strictly liable for the amount of the checks.
I. FACTS AND PROCEDURAL HISTORY
As the facts have previously been set out in a prior opinion of this court and related opinions of the federal courts, we will summarize the relevant facts here very briefly. (See, generally, Chicago Title Ins. Co. v. Superior Court, supra, 174 Cal.App.3d at pp. 1144-1146, 220 Cal.Rptr. 507; United States v. Benny (N.D.Cal.1983) 559 F.Supp. 264, affd. United States v. Benny (9th Cir.1986) 786 F.2d 1410.)
Chicago Title Insurance Company (the Company) acted as escrow agent in numerous transactions initiated by a mortgage broker, Robert Dean Financial (RDF), and its principal client, George I. Benny. The Bank handled certain checks connected with these transactions, as a result of accounts RDF and Benny held at the Bank.
Unfortunately, RDF and Benny were engaged in a massive check fraud operation. As a result, both the Company as the escrow agent, and the Bank *804 as the financial institution most closely involved, have become entangled in litigation between themselves concerning the large losses generated by the Benny-RDF check fraud scheme. During the period in 1981-1982 when the fraud operated, about $300 million in checks passed through the Bank; Benny and the other defrauders managed to divert roughly $17 million to their own use before their fraud was discovered.
The Company brought this lawsuit alleging, inter alia, that the Bank had caused these losses to improperly fall upon the Company. The Company contended the Bank belatedly returned as dishonored 28 bad checks payable to the Company, after the "midnight deadline" by which time the Bank must take such action or be held "accountable" under the Uniform Commercial Code. (Cal.U.Com.Code, [FN1] § 4302.)


FN1. Unless otherwise indicated, all subsequent statutory references are to the California Uniform Commercial Code.


**424 In Chicago Title Ins. Co. v. Superior Court, supra, a writ proceeding, we resolved certain legal issues which had arisen in the course of pretrial proceedings. Our Supreme Court denied review, and the matter returned to the trial court for further proceedings in light of our rulings.
The trial court, after hearing the relevant evidence at a bench trial, concluded that the Bank had indeed returned the checks late and was, therefore, "accountable" for the loss. The Bank timely appealed from a judgment including interest of approximately $25 million in favor of the Company.
II. DISCUSSION
A. Late Return
[1] We affirm the trial court's conclusion that the Bank returned the checks in issue late, after the midnight deadline. Despite the Bank's ingenious arguments to the contrary, the trial court properly interpreted the relevant statutes, regulations, and rules and concluded in a well-reasoned and thorough opinion that the Bank was in violation of its duty to make timely return of the checks.
The relevant facts regarding the return of the checks in issue are essentially uncontested. The Bank had its main Northern California office in San Francisco, and had a San Mateo County branch which returned the 28 checks *805 in issue, totalling about $17 million. The checks were first deposited by the Company at the Bank of San Francisco. That bank then forwarded them via Crocker Bank to the San Francisco office of the Bank for presentment. The next day, they were sent by the Bank from its San Francisco office to its San Mateo branch. That branch (in which the makers of the 28 checks maintained the accounts on which they were drawn) decided to return the checks as dishonored. The checks left the Bank's San Mateo branch by courier for the Bank's in-house data processing and computer center in San Francisco before the "midnight deadline," but did not arrive at their ultimate destination--14 checks going to the San Francisco clearing house and another 14 going directly to Crocker Bank in San Francisco--until the next day. The Bank claimed this return of the checks from the San Mateo branch was timely, since the checks left that branch for its in-house San Francisco processing and computer center before the midnight deadline; the Company contended, and the trial court ruled, that the checks were returned untimely since they did not actually arrive at the central clearing house in San Francisco or at Crocker Bank before the midnight deadline.
The parties agree that the proper resolution of this issue of timeliness turns upon the interpretation of language contained in the formerly applicable version of certain regulations, issued by the California Bankers Clearing House Association (CBCHA) in order to implement section 4302. [FN2]


FN2. The CBCHA regulations are determinative here by virtue of section 4103, which give such clearing house rules legally binding force.


The most pertinent language of CBCHA regulation 7.04.b.2.(c) provides that checks, "drawn payable at a member bank office or branch located outside of the City and County of San Francisco [such as the Bank's San Mateo branch], shall be mailed or dispatched for return by the payor office or branch not later than midnight of the next business day...."
The trial court determined this regulation contained a latent ambiguity as to whether checks must be merely sent on their way by the midnight deadline, or must be actually returned by arriving at their destination by that time. The trial court resolved this ambiguity by reference to extrinsic evidence offered at trial, and in light of the business purposes of the regulations as a whole. The trial court's conclusion was: "The Court finds that Section 7.04(b)(2)(c) requires a bank which performs bookkeeping at a computer center to return checks to the Clearing House by midnight of the day following receipt...." (Emphasis added.)
The Bank conjures up a variety of quite inventive arguments in an effort to overturn the trial court, principally relying upon a perceived distinction *806 between in-county and out-of-county branches; and arguing **425 that a "return" from its San Mateo County branch to its own data processing and computer center, for subsequent forwarding to the clearing house or a bank on which drawn, was timely under the regulations if the checks were merely so sent by the time of the midnight deadline. Perhaps these arguments might have been more persuasive to the trial court and on appeal if they pertained to the actual facts of the Bank's return policy in this case. Unfortunately, the Bank's internal policy on returns was negligently drafted, so that it directed the Bank's officers to follow a return policy which was certainly untimely as to all checks, including in-county returns.
Put another way, the Bank did not miss its deadline in this case because it put any credence in the distinction it now offers between in-county and out-of-county branches. Rather, the Bank must concede it missed the deadline here not because it relied upon the distinction it now offers, but because its internal procedures did not distinguish at all between in-county and out-of-county checks, and directed a return policy which was legally faulty even as to in-county returns. [FN3]


FN3. The Bank admitted at trial that its returns of in-county checks were routinely late, and that its own Policy and Procedure Manual made no distinction between in-county and out-of-county checks: "An office, regardless of its location, ... must [return the check] the same day." (Emphasis in original.)


The extrinsic evidence offered at trial certainly did not support the Bank's position regarding a supposed dichotomy between in-county and out-of-county returns. The testimony indicated that the usual practice of all the other banks was to return checks by delivering them to a clearing house or the bank on which drawn prior to the "midnight deadline."
The Bank argues, however, that the plain language of the regulation supports its argument, and that the Bank thus accidentally complied with the regulation as it should properly be interpreted. We think the most which can be said of this argument is that, as the trial court recognized, the Bank had through diligent, after-the-fact research uncovered an arguable latent ambiguity in the regulations--since removed by amendment [FN4]--of the sort which sometimes crops up in even the most carefully drafted extensive legal document. However, the testimony at trial and the evidence of trade practice (including the Bank's own internal policy) clearly undermine this argument. *807 We agree with the trial court's rejection of the Bank's argument since it is in accord with our own interpretation of the regulation, in light of the evidence presented at trial. (See Pacific Gas & E. Co. v. G.W. Thomas Drayage etc. Co. (1968) 69 Cal.2d 33, 39-41, 69 Cal.Rptr. 561, 442 P.2d 641.)


FN4. Effective October 5, 1987, the CBCHA regulations were redrafted to eliminate the language in question. The present regulations, extensively redrafted and revised in 1987 and 1989, now simply provide in regulation 5.0.9 that "Eligible items shall be returned not later than ... the next business day following the date on which the item was settled through the Association."


Further, we agree with the trial court's criticism of the Bank's argument that it could somehow suspend the running of the midnight deadline by sending the checks to its own computer center, thereby getting them out of the bank branch proper before the deadline expired. This argument, as the trial court aptly observed, "is also inconsistent with the California case law."
For instance, in Farmers & Merchants Bank v. Bank of America (1971) 20 Cal.App.3d 939, 942-944, 98 Cal.Rptr. 381, which arose under similar language in the California Financial Code, the Second District rejected the argument that a bank's own computer center, if under a separate roof, was not simply another part of the bank for purposes of return. In Lawrence v. Bank of America (1985) 163 Cal.App.3d 431, 436, 209 Cal.Rptr. 541, Division Three of this district noted that under Farmers and Merchants the physical separation of a computer center from its bank has "no legal significance...." In Lufthansa German Airlines v. Bank of America (9th Cir.1981) 652 F.2d 835, 836, 837, footnote 1, a diversity case arising under California law, the Ninth Circuit recognized the Farmers and Merchants rule; it also affirmed as not "clearly wrong" an ultimate result reached by a district judge, because the prior notice of dishonor in question did **426 not disclose the identity of the customer who had deposited the check or the branch in which it was deposited, and therefore could not be considered sufficient notice to the collecting bank--a consideration clearly not present here, where no questions surrounding the adequacy of a notice of dishonor arise, and it is the checks themselves which were returned untimely. (Cf. also, e.g., American National Bank of Powell v. Foodbasket (Wyo.1972) 497 P.2d 546, 548 (Foodbasket ) and United States Fid. & Guar. v. Federal Reserve Bank (S.D.N.Y.1985) 620 F.Supp. 361, 373, affd. per curiam (2d Cir.1986) 786 F.2d 77 [Both cases excused a late notice of dishonor where the factual circumstances provided a convincing rationale for disregarding the lateness.].)
In Central Bank of Alabama v. Peoples Nat. Bank (Ala.1981) 401 So.2d 14, 18, the Alabama Supreme Court followed Farmers and Merchants in holding that a "Central Computer Center" to which checks were sent was simply another part of the bank: "It makes no difference that *808 it is a separate bank; the computer is still an integral part of it." (Accord, South Sound Nat'l Bank v. First Int. Bank (1983) 65 Or.App. 553, 672 P.2d 1194, 1197 ["We agree with the reasoning of the Alabama court and hold that the First Interstate data processing center is an integral part of its Waverly Branch."].) No case cited by the Bank or disclosed by our own research allows a bank to "return" a check by merely delivering the check to itself for further processing by computer before the midnight deadline expires. [FN5] There are obviously strong considerations of policy militating against the creation of such a loophole in the UCC rules on timeliness.


FN5. The Bank's argument is not at all aided by the belated citation of Fidelity Bank v. Deutsch, Kerrigan & Stiles (La.App.1990) 557 So.2d 991. In Fidelity Bank, the Fourth Circuit Court of Appeal of Louisiana found that a check was timely returned when it was placed in the delivery box of a law firm, which the law firm had placed on the bank's premises and which was emptied by the law firm on a daily basis; by prior practice of the parties, the delivery box was "a proper place for delivery ...." (P. 996, emphasis added.) If anything, the actual facts of that case would seem to support the Company's argument that a check must be delivered to a destination which is not just another part of the Bank; it cannot
merely be sent to the Bank's own computer center by the expiration of the midnight deadline. There is no claim in this case, for instance, that the Bank's computer center contained a similar delivery box established for this type of return use by parties other than the Bank. The Bank suggests its own computer center is an extension and arm of the Bank, for purposes of commencing the running of time toward the midnight deadline for returning checks a branch of the Bank dishonors and returns to another branch or clearing house through that computer center. The Bank conversely suggests the computer center somehow becomes a "separate" bank whose receipt from Bank's own branches of checks it has dishonored, for forwarding to a clearing house or other bank, acts to terminate the running of the time towards the same midnight deadline as to those checks. This confusing and anomalous suggestion is supported neither by law, this record, nor indeed by logical analysis.


In short, the trial court correctly ruled that the Bank missed the applicable midnight deadline.
B. The Bank Is Accountable
[2] Since the Bank did not return the checks in question before the applicable midnight deadline, it is "accountable" or strictly liable for the amount of the checks under section 4302. (Bank of America v. Security Pacific Nat. Bank (1972) 23 Cal.App.3d 638, 642-643, 100 Cal.Rptr. 438.) "Several cases from other jurisdictions have construed identical language contained in the Uniform Commercial Code to provide a basis for a statutory cause of action for the amount of the demand item [i.e., check] involved [citations]. Those courts have construed the word 'accountable' contained in section 4302 to be synonymous with 'liable' and have imposed liability on the payor bank for the amount of the item for a delay in returning the item *809 beyond the bank's midnight deadline....[¶] ... [¶] We agree with the reasoning of the above authorities and hold that section 4302 creates a liability independent of negligence ... for the amount of the item involved. In arriving at this conclusion we are mindful of the importance of securing uniformity in the interpretation of the provisions of the Uniform Commercial Code among the various jurisdictions...." (Ibid.)
**427 In an attempt to avoid this liability for the late return of the checks in issue here, the Bank conjured up a variety of arguments and claims against the Company, asserted by means of purported defenses of "estoppel, waiver, unclean hands, etc." The trial court ruled that in this context--the statutory liability without regard to negligence specified by section 4302-- such defenses "are not valid." The Bank sought to overturn this decision by another writ application, but we denied the application, and the Supreme Court denied review.
The Bank next sought leave to amend to assert a claim for restitution, apparently claiming that the trial court's decision in favor of the Company had caused the Bank harm, and that the Bank was entitled to restitution from the Company for having caused that harm by winning the lawsuit. The trial court rejected this highly inventive argument as well.
The trial court's rulings were correct. (See Los Angeles Nat. Bank v. Bank of Canton (1991) 229 Cal.App.3d 1267, 1278, 280 Cal.Rptr. 831.) "[N]umerous decisions from other jurisdictions have held that a payor bank is strictly liable for its failure to return an item before expiration of the applicable midnight deadline." (Id. at p. 1277, 280 Cal.Rptr. 831, emphasis added.)
"These cases support our conclusion that [the Bank] may be held strictly liable for its failure to return the checks by the applicable deadlines, regardless whether [the Company] demonstrated it suffered actual damage solely as a result of [the Bank's] omission. As [the Bank] suggests, section 1103 provides that general principles of law, which would include the defense that a party's own negligence caused its loss, may apply where not displaced by specific provisions of the Commercial Code. As the above cases indicate, however, the rule of strict liability afforded by section 4302 does displace the defense that [the Company's] own negligence caused its loss. In order to further the statutory objectives of certainty and finality, a bank that fails to return a check by the midnight deadline is deemed to have paid it and thus is held accountable." (Id., 229 Cal.App.3d at p. 1278, 280 Cal.Rptr. 831, emphasis added; accord, Huntmix, Inc. v. Bank of America (1982) 134 Cal.App.3d 347, 358-359, 184 Cal.Rptr. 551.)
*810 We agree with Justice George's discussion in Los Angeles Nat. Bank, supra, and with the similar observations of the New York Court of Appeals in SOS Oil v. Norstar Bank of Long Island (N.Y.App.1990) 76 N.Y.2d 561, 561 N.Y.S.2d 887, 890, 563 N.E.2d 258, 261: "The midnight deadline rule of UCC 4-302 places a heavy burden on payor banks.... The heavy burden imposed by UCC 4-302 serves important commercial purposes: it expedites the collection process by motivating banks to process instruments quickly, and it firms up the provisional credits received by each bank in the collection chain, thereby supplying a key element of certainty in commercial paper transactions [citation]. By requiring that deficiencies in a drawer's account be determined swiftly, the midnight deadline rule is a vital part of the payor bank's role in assuring the integrity of commercial paper [citation]."
"Nor can [the Bank] avoid liability here by resort to the defenses of estoppel, account stated, contributory negligence or illegality of the underlying transaction." (Id., 561 N.Y.S.2d at p. 891, 563 N.E.2d at p. 262, emphasis added.) "[S]uch a defense [of estoppel], if allowable at all under UCC 4-302, would require some factual showing that the bank's failure to meet its midnight deadline was a consequence of justifiable reliance on a representation, action or failure to act on the part of [the Company] [citation]. There is no such showing here." (Id. at p. 892, 563 N.E.2d at p. 263; cf. also Bank Leumi Trust Co. v. Bally's Park Place, Inc. (S.D.N.Y.1981) 528 F.Supp. 349, 351, fn. 4, 352-354 (Bally's ) [In a diversity action governed by New York law, the court excused the late return of a "blank check" which consisted of a non-computer-readable form, partially filled out and presented for payment after the death of the alleged maker, and which the presenting casino knew to be invalid.].) [FN6]


FN6. While the Bank cites numerous cases from other jurisdictions decided under other sections of the UCC, and in different factual situations, none of them abrogated the rule of section 4302 in these circumstances. Indeed, one of the Bank's cited cases indicates precisely the opposite: "Courts have universally held that payor banks are strictly liable for violation of 4-302 deadlines." (Morgan Guar. Trust Co. v. American Sav. and Loan (9th Cir.1986) 804 F.2d 1487, 1499.) The Bank has not cited nor have we found a case which held the strict liability of section 4302 was subject to the defenses the Bank sought to assert. Both Los Angeles Nat. Bank, supra, and SOS Oil, supra, indicated such defenses are not viable here. In our prior published opinion in this
case, we also indicated that " 'Beyond the duty relating to return of the [negotiable] instruments, the ... bank [herein] had no duty arising out of a relationship to the holder of the checks which could [ripen] into tort liability.' " (Chicago Title Ins. Co. v. Superior Court, supra, 174 Cal.App.3d at p. 1159, 220 Cal.Rptr. 507, quoting Pa. Nat. Turf Club v. Bank of West Jersey (1978) 158 N.J.Super. 196, 385 A.2d 932, 936.) We decline to create such a relationship or such tort liability here as well.


**428 In this case, however, the Bank failed to make the midnight deadline because its own operating manual was erroneous, incorrectly stating the applicable deadline. The Company can hardly be accused of misdrafting the Bank's internal policy for the return of checks.
*811 Moreover, the Bank is not aided by its reference to a 1990 proposed amendment to the Uniform Laws Commissioners' version of UCC section 4-302, and the official comment thereto--which amendment, as of this writing, has apparently been adopted in certain other states but not in California. (See 2B West's U.Laws Ann. (1991) U. Com. Code, § 4-302 and off. com., pp. 54-55.) The proposed amended version would attempt to codify the results reached in Foodbasket and Bally's. Those cases held a perpetrator of a check kite could not escape the consequences of his fraud by relying upon a bank's technical failure to meet a midnight deadline, where (1) the perpetrator knew the bank would have to reject the invalid check in question--since the maker told the bank it was drawn on insufficient funds (as in Foodbasket ), or the check was knowingly drawn on the no longer accessible account of a deceased person (as in Bally's); and (2) the perpetrator took additional action which would have retarded or defeated a bank's normal check processing procedures--such as requesting a loan to cover the deficiency in Foodbasket, or submitting a non-computer-readable check in Bally's.
The Bank's reliance on such exceptional cases fails here for a number of reasons. First, California has not adopted the proposed uniform amendment which endorses these results; plainly the amendment was not in force in the relevant period. Further, it is not clear how the amended language, or application of the holdings of the cited cases, could have aided the Bank; the Bank is not suing the actual perpetrators of the check kite, Benny and RDF; and in this instance, the Bank's prior practice had been to honor RDF checks which it knew to be drawn on insufficient funds. Finally, the Bank conceded at argument that nothing the Company did caused the Bank to miss its midnight deadline, by retarding or sabotaging the Bank's internal check-return procedures or otherwise. Thus, the Bank could not on the record before us squeeze through this narrow loophole, even if it were otherwise available. The case is, therefore, governed by the general rule of accountability provided by section 4302.
It is important to bear in mind in this context that the UCC is designed to banish from the law governing timely return of dishonored checks such fact-based theories of liability and defense as negligence, fault, estoppel, intentional tort, or illegality of the underlying transaction in the overriding public interest of promulgating the integrity, certainty, and finality of commercial transactions. Consequently, the UCC establishes a more mechanical system, characterized by certainty and finality, and based only upon facts unlikely to be disputed in litigation--such as the date stamped on a check upon its receipt, the date it *812 was returned as dishonored, or the fact of whether the check was not readable by computer or was presented posthumously for payment. As the Second District observed in similar circumstances almost 10 years ago, " 'The plain fact is that in the modern world of check collection a clear cut, mechanical rule of check acceptance is necessary....' " (Huntmix, Inc. v. Bank of America, supra, 134 Cal.App.3d at p. 359, 184 Cal.Rptr. 551, quoting Bank Leumi Trust Co. v. Bank of Mid-Jersey (D.N.J.1980) 499 F.Supp. 1022, 1026; **429 accord, Los Angeles Nat. Bank v. Bank of Canton, supra, 229 Cal.App.3d at p. 1278, 280 Cal.Rptr. 831 ["In order to further the statutory objectives of certainty and finality, a bank that fails to return a check by the midnight deadline is deemed to have paid it and thus is held accountable."]; see also Bank of America v. Security Pacific Nat. Bank, supra, 23 Cal.App.3d at p. 643, 100 Cal.Rptr. 438 ["We agree with the reasoning of the above authorities and hold that section 4302 creates a liability independent of negligence [citation] or conversion [citation] for the amount of the [check] involved. In arriving at this conclusion we are mindful of the importance of securing uniformity in the interpretation of the provisions of the Uniform Commercial Code among the various jurisdictions [citation]."].)
We are loath to disturb such a carefully circumscribed, determinate, and reticulated system by our own amendments in the guise of interpretation-- especially where, as here, the present system apparently results from a deliberate choice of the drafters which has previously been uniformly enforced and endorsed by the courts. We are also concerned that allowing the Bank to escape the consequences of its delay by indulging its claim of fault or fraud on the part of the Company, which claim is factually unrelated to the actual mechanics of the check return procedure--i.e., a fraud which did not cause the Bank to miss its deadline, would begin to cause the system of reciprocal obligations underlying commercial transactions to unravel in a mass of time consuming litigation, such as we have glimpsed in these protracted proceedings.
The Bank and its sister institutions are well-placed to effect change to this statutory system by advocating legislation or by private agreement. We may not ourselves lightly tamper here with the existing law, even if the result of the application of section 4302 might seem harsh in some contexts.
Finally, the Bank contends at length that it is unfair to require the Bank to bear the loss here [FN7] because it is being required to make good a large loss caused in whole or in part by the fraud of others. However, the Bank *813 itself was in the best position to determine whether the defrauders' accounts with the Bank contained sufficient funds to cover the checks. The Bank, before seeking to dishonor the 28 checks involved in the case at bench, knew for months that RDF checks were apparently not backed by sufficient funds, yet did nothing at the time to stop the defrauders. Unfortunately, when the Bank did act, it was too late.


FN7. The Bank points to the malfeasance of lower level operatives at the Company, who it contends connived at or intentionally ignored the fraudulent scheme. The Company makes similar insinuations regarding the Bank and its toleration of the scheme for months after it became apparent that something was very much amiss in the RDF financial transactions which employed the Bank's resources. As the legal issue here is the strict liability imposed by section 4302, these attempts to fix blame for the fraud of others are in any event beside the point.


The trial court correctly rejected the Bank's defenses and cross-claim, since the Bank was strictly liable under section 4302.

III. DISPOSITION
The judgment is affirmed.

KLINE, P.J., and BENSON, J., concur.
Cal.App. 1 Dist.,1991.
Chicago Title Ins. Co. v. California Canadian Bank
1 Cal.App.4th 798, 2 Cal.Rptr.2d 422, 16 UCC Rep.Serv.2d 445

David A. Szwak

Postby David A. Szwak » Mon Apr 03, 2006 6:58 pm

Hibernia Nat. Bank v. Commerce Bank,
368 N.J.Super. 144, 845 A.2d 664, 53 UCC Rep.Serv.2d 79, N.J.Super.A.D., Apr 02, 2004

Background: Drawee bank sued depository bank alleging depository bank breached its presentment warranties alleging depository bank breached its presentment warranties by paying check that was fraudulently endorsed. The Superior Court, Law Division, Camden County, granted summary judgment for drawee bank. Depository bank appealed.

Holding: The Superior Court, Appellate Division, Alley, J.A.D., held that depository bank failed to establish fictitious payee defense.
Affirmed.

Before Judges ALLEY, PARKER, and COLEMAN.

The opinion of the court was delivered by

ALLEY, J.A.D.
On November 8, 2000, Otto Candies, LLC (Otto), drew a check on its account at Hibernia National Bank (Hibernia) for $116,419.12, payable to "ENSCO Marine-Offshore-B" (ENSCO-B), a Texas entity. The check was drawn as intended payment due to ENSCO-B for several invoices.
On November 9, 2000, Marcus L. Vaughn opened an account in the name of "Marcus Vaughn d/b/a ENSCO Marine and Offshore Company, Inc." (ENSCO-Marine) at Commerce Bank's Rahway branch (Commerce). As was required for the opening of such an account, Vaughn presented Commerce with copies of his New Jersey driver's license and ATM card, as well as a Certificate of Trade Name for "Marcus Vaughn d/b/a ENSCO Marine and Offshore Company, Inc.," issued by the Clerk of Union County on *146 November 8, 2000. The payee named on the check, ENSCO-B, is separate from and unrelated to ENSCO-Marine, the trade name utilized by Vaughn.
On November 20, 2000, Vaughn endorsed the check by writing "Marcus L. Vaughn" on the back and deposited it in his Commerce account at that bank's Woodbridge branch. The record does not reflect how Vaughn came into possession of the check, but there is no evidence that this occurred through negligence on the part of either Otto or ENSCO-B. On November 21, 2000, the check was presented to drawee bank Hibernia and was subsequently paid by Hibernia.
On or about February 7, 2001, ENSCO-B verified to Hibernia that it had not received the check. Hibernia then recredited Otto's account in the amount of the missing funds and sought recoupment from Commerce. After Commerce denied Hibernia's request, Hibernia filed its complaint against defendants Commerce and Vaughn on February 19, 2002. On May 9, 2003, Judge John A. Fratto granted summary judgment in favor of Hibernia as to both liability and damages. In essence the judge rejected Commerce's contention that the "impostor" exception provided under N.J.S.A. 12A:3-404 [FN1] entitled it to summary judgment as a matter of law and ruled, as Hibernia asserted, that Commerce breached its presentment warranties under N.J.S.A. 12A:4-208 and that the impostor exception is inapplicable. We affirm.


FN1. Under the previous version of UCC Article 3 as enacted in New
Jersey, impostor cases were governed by N.J.S.A. 12A:3-405(1)(a), fictitious payee cases were governed by N.J.S.A. 12A:3-405(1)(b), and fraudulent indorsements by employees were covered under N.J.S.A. 12A:3- 405(1)(c). In 1995, the Legislature enacted the current versions of N.J.S.A. 12A:3-404 and 12A:3-405. Section 12A:3-404 now governs impostor and fictitious payee cases, and section 12A:3-405 pertains solely to the scope of an employer's liability for the conduct of its employees.


The Uniform Commercial Code (UCC) as in effect in New Jersey provides that a depository bank that has presented a draft **666 for payment to a drawee bank warrants that it was entitled to *147 payment on behalf of the person authorized to enforce the draft. N.J.S.A. 12A:4-208(a)(1); N.J.S.A. 12A:3-417(a)(1). See e.g., Kuhn v. Tumminelli, 366 N.J.Super. 431, 446, 841 A.2d 496 (App.Div.2004) (noting that the drawee-payor banks correctly relied on depository bank's warranty that it was entitled to enforce the draft under N.J.S.A. 12A:4-208(a)(1)). Subsection (a)(1) of the presentment warranties "in effect is a warranty that there are no unauthorized or missing endorsements." N.J.S.A. 12A:3-417 cmt. 2. Section 12A:4-208 provides in pertinent part:
a. If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, the person obtaining payment or acceptance, at the time of presentment, and a previous transferor of the draft, at the time of transfer, warrant to the drawee that pays or accepts the draft in good faith that:
(1) the warrantor is, or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft;
(2) the draft has not been altered; and
(3) the warrantor has no knowledge that the signature of the purported drawer of the draft is unauthorized.
....
c. If a drawee asserts a claim for breach of warranty under subsection a. of this section based on an unauthorized indorsement of the draft or an alteration of the draft, the warrantor may defend by proving that the indorsement is effective under 12A:3-404....
Commerce, however, seeks to invoke the "impostor and/or fictitious payees" defense, N.J.S.A. 12A:3-404, which provides in relevant part:
a. If an impostor, by use of the mails or otherwise, induces the issuer of an instrument to issue the instrument to the impostor, or to a person acting in concert with the impostor, by impersonating the payee of the instrument or a person authorized to act for the payee, an indorsement of the instrument by any person in the name of the payee is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.
The trial court correctly observed that the central issue was whether section 12A:3-404 was available to Commerce as a defense for breach of its presentment warranty under section 12A:4-208. It began its analysis by recognizing the UCC rule that a drawee bank can shift its loss on a forged check upstream to the depository bank, citing *148 Guardian Life Ins. Co. of Am. v. Weisman, 30 F.Supp.2d 720, 723 (D.N.J.1998), rev'd on other grounds, 223 F.3d 229 (3d Cir.2000). In reviewing whether any of the defenses in section 12A:3-404 were available to Commerce, Judge Fratto stated:
In analyzing the transaction at issue we know first that the payee on the check ENSCO Marine Company-B is not a fictitious payee. They're an active company maintaining offices in Dallas, Texas and the check was made out by Otto to a properly named payee and indeed it indicated on its face ENSCO Marine Company B, Dallas, Texas. In that regard Paragraph (b) of 12A:3-404 is not applicable. And while Paragraph (a) may appear to apply as used in that paragraph Marcus Vaughn I find was not an impostor. Vaughn did not induce Otto to issue the check to Vaughn or to ENSCO Marine and Offshore Co. The **667 payee on the instrument was ENSCO Marine Offshore-B. He did not hold himself out as being ENSCO ... Marine Company-B nor did he hold himself out as acting for ENSCO Marine Company-B. He did not impersonate ... ENSCO Marine Company-B nor did he endorse the instrument in the name of ENSCO Marine Company-B.
Instead, he endorsed the instrument in his own name and deposited it into his own account. The endorsement Marcus Vaughn on the back of the check is not the name of ENSCO Marine Company-B.
The judge also rejected the argument by Commerce that its position was supported by the example in case # 4 in the Official Comment to section 12A:3-404, observing:
That case I think is distinguishable. In that case a thief gained access to the computer and caused a check to be written to a non-existing company, Supplier Co. He then endorsed the check in the name of Supplier Co. and deposited it into an account in the depository bank in the name of Supplier Co. In effect, although he did it by gaining access to the computer it's the same as if he hoodwinked or induced the maker to issue the check to his company Supplier Co.
In the instant case the check in question was not made to a non-existent company but was made to a proper operating identity--entity rather. Further, the check was not endorsed in the name of the proper entity but was endorsed in the name of Marcus Vaughn.
As stated in the cited cases for policy reasons the review of endorsement should take place at the depository bank which is most likely to have the information available to verify such endorsements, and is in the best position to prevent fraudulent endorsements. A cursory examination of the check I think would have disclosed that it was made to a different entity and Mr. Vaughn's company which was purportedly registered in New Jersey and was payable to a company in Dallas, and it was written before Vaughn opened the account. All things which may be explainable but which may be or should be red flags to the depository ... bank.
I specifically find that Vaughn did not induce Otto to issue the check to him or to his company. I find that Vaughn did not impersonate ENSCO Marine Company-B *149 and that the impostor fictitious payee ... statute defense to the warranties does not apply.
We have carefully considered, in light of the record and the applicable law, each of the contentions on appeal, and because we are satisfied that the decisional rationale set forth by Judge Fratto in support of the order appealed from is essentially correct, we affirm substantially for those reasons. We add the following, however.
The trial court correctly determined that section 12A:3-404 did not provide Commerce a defense to the presentment warranties provided to Hibernia. Commerce cannot avail itself of the defense provided under subsection (a) because it has provided no evidence that Vaughn "induce[d] the issuer ... to issue the instrument" to him or anyone acting in concert with him, as required for this defense. N.J.S.A. 12A:3-404(a). Inducement should be shown before inquiry is made into whether any impersonation has taken place. See, e.g., Clients' Sec. Fund of Bar of New Jersey v. Allstate Ins. Co., 219 N.J.Super. 325, 331-32, 530 A.2d 357 (App.Div.1987) (holding that impostor defense requires not only impersonation, but also that the drawer or maker was induced into issuing the instrument to the impostor by the impersonation).
**668 We agree that the record plainly fails to establish that Vaughn induced Otto into issuing him the check. The record indicates, rather, that ENSCO-B is a going concern with which Otto regularly engages in business transactions. Otto issued the check to ENSCO-B as payment for monies due under several invoices. According to the certification of Otto's agent, the check was sent by Otto with several others via regular mail in accordance with general business practices. The record fails to provide any evidence that makes the defense in section 12A:3-404(a) available to Commerce.
Commerce also errs in asserting that the court mistakenly relied on N.J.S.A. 12A:3-405, instead of section 12A:3-404 which superseded it and that subsection (c) of the current "impostor *150 and/or fictitious payee" rule provides it a defense to section 12A:4-208.
This contention has no merit for a number of reasons. First, the trial judge in fact relied on section 12A:3-404 in reaching his decision. In its analysis, the court refers to both paragraphs (a) and (b) of section 12A:3- 404 as being inapplicable. The court also referred to subsection (c) when it stated that, "it also seems to me that under Section (c) of 12A:3-404 that the endorsement by Marcus Vaughn is not made in a name substantially similar to that of the payee ENSCO Marine Offshore-B." Moreover, Commerce's argument that it should prevail under subsection (c) is equally lacking in merit. That provision reads:
Under subsection a. or b. of this section, an indorsement is made in the name of a payee if it is made in a name substantially similar to that of the payee or the instrument, whether or not indorsed, is deposited in a depositary bank to an account in a name substantially similar to that of the payee.
[N.J.S.A. 12A:3-404(c).]
Subsection (c) is part of the revisions made to sections 12A:3-404 and 12A:3-405, and makes reference to the types of "indorsements" necessary for coverage under those sections. James J. White & Robert S. Summers, Uniform Commercial Code § 16-4 at 84 (3d ed.1993). Contrary to Commerce's contention, it does not appear that this revision was intended to address payee titles, but rather to address holdings that barred banks from asserting defenses under the former version of UCC § 3-405 on account of inexact or inadequate indorsements. See N.J.S.A. 12A:3-404 cmt.1 (stating that revised subsection (c) "requires only that the indorsement be made in a name 'substantially similar' to that of payee"). Compare Twellman v. Lindell Trust Co. v. Continental Bank & Trust Co., 534 S.W.2d 83, 92-93 (Mo.Ct.App.1976) (finding that the forged indorsement was not identical to the payee as required by UCC 3-405, and, therefore that section did not apply), and Travco Corp. v. Citizens Fed. S. & L. Ass'n, 42 Mich.App. 291, 201 N.W.2d 675, 676 (1972) (holding that inexact indorsements precluded application of former UCC 3-405), with *151 Kraftsman Container Corp. v. United Counties Trust Co., 169 N.J.Super. 488, 497, 404 A.2d 1288 (Law Div.1979) (construing former UCC 3-405 to require indorsements be "substantially identical" to named payee). Subsection (c) modifies paragraphs (a) and (b) and will not provide a defense unless one of the two aforementioned defenses applies. See, e.g., King v. White, 265 Kan. 627, 962 P.2d 475, 481 (1998) (recognizing that the "fictitious payee" rule was broadened to include indorsements which are "substantially similar").
In short, Judge Fratto properly rejected Commerce's asserted impostor defense as lacking any basis in the record and recognized that this dispute falls within the **669 general rule that, as we recently reiterated it in Kuhn, "the depository bank is in the best position of any other bank to guard against forged or unauthorized endorsements." 366 N.J.Super. at 446, 841 A.2d 496.
Affirmed.
N.J.Super.A.D.,2004.
Hibernia Nat. Bank v. Commerce Bank
368 N.J.Super. 144, 845 A.2d 664, 53 UCC Rep.Serv.2d 79

David A. Szwak

Postby David A. Szwak » Mon Apr 03, 2006 7:02 pm

243 F.Supp.2d 763


United States District Court,
N.D. Illinois,
Eastern Division.
NATIONAL ACCIDENT INSURANCE UNDERWRITERS, INC., a Delaware corporation,
Plaintiff,
v.
CITIBANK, F.S.B., Defendant.
No. 02 C 3390.
Aug. 12, 2002.

Payee brought action against drawee bank for statutory conversion of negotiable instrument. On bank's motion to dismiss, the District Court, Bobrick, United States Magistrate Judge, held that: (1) fictitious payee rule did not apply, and (2) fact issues remained as to whether bank exercised ordinary care in cashing checks.
Motion denied.

*764 MEMORANDUM ORDER

BOBRICK, United States Magistrate Judge.
Before the court is the motion of defendant Citibank, F.S.B. to dismiss the complaint of plaintiff National Accident Insurance Underwriters, Inc.
One of plaintiff's employees, Robert Carter, intercepted certain insurance premium checks that plaintiff's customers had made payable to plaintiff. He was not involved in any facet of plaintiff's business that gave him authority to endorse or negotiate the checks. He altered those checks by adding a "slash" (/) and additional payees, such as "Sherman" or "Sherman Imports, Inc." These alterations were made either in a different typewritten font or different handwriting than that used on the original checks. Carter maintained a checking account ("Sherman account") in the name of the altered payees with defendant. He endorsed and deposited the checks in the Sherman account; defendant accepted the checks and credited the account. The face value of the checks totaled more than $10 million. Defendant then presented the checks for payment to the various drawee banks. Plaintiff has filed a one-count complaint against defendant under 810 ILCS 5/3-420 [FN1] for statutory conversion. Defendant seeks dismissal of this suit.


FN1. Section 5/3-420 provides:


(a) The law applicable to conversion of personal property applies to instruments. An instrument is also converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment. An action for conversion of an instrument may not be brought by (i) the issuer or acceptor of the instrument or (ii) a payee or indorsee who did not receive delivery of the instrument either directly or through delivery to an agent or a co-payee.


(b) In an action under subsection (a), the measure of liability is presumed to be the amount payable on the instrument, but recovery may not exceed the amount of the plaintiff's interest in the instrument.


(c) A representative, other than a depositary bank, that has in good faith dealt with an instrument or its proceeds on behalf of one who was not the person entitled to enforce the instrument is not liable in conversion to
that person beyond the amount of any proceeds that it has not paid out.


A motion to dismiss does not challenge the merits of a lawsuit, but only tests whether the allegations of a complaint state a claim upon which relief may be granted. Johnson v. Rivera, 272 F.3d 519, 520-21 (7th Cir.2001). We must not only accept as true all of the well-pleaded factual allegations in the plaintiff's complaint but also draw all reasonable inferences in the plaintiff's favor. First Ins. Funding Corp. v. Federal Ins. Co., 284 F.3d 799, 804 (7th Cir.2002). On the other hand, we need not accept as true "conclusory statements of law or unsupported conclusions of fact." Id.
[1] Under Illinois law, the elements of a cause of action for conversion under UCC § 3-420 are: (1) plaintiff's ownership of, interest in, or possession of the check; (2) the forged or unauthorized endorsement on the check; and (3) defendant bank's unauthorized cashing of the check. Continental Cas. Co., Inc. v. American National Bank and Trust Co. of Chicago, 329 Ill.App.3d 686, 263 Ill.Dec. 592, 601, 768 N.E.2d 352, 361 (1st Dist.2002); Great Lakes Higher Educ. Corp. v. Austin Bank of Chicago, 837 F.Supp. 892, 897 (N.D.Ill.1993) (referring to predecessor provision). Here, plaintiff has clearly alleged each of these elements. Indeed, defendant does not dispute this, but questions whether Carter was unauthorized to endorse the check, and whether it was unauthorized to *765 cash the checks. (Motion to Dismiss, at 3). To support its motion to dismiss, it relies on another provision of the UCC: 810 ILCS 5/3-404(b).
Defendant argues that, under section 3-404(b), Carter was a person entitled to enforce the checks, and thus, receive payment on them. The section provides:
(b) If (i) a person whose intent determines to whom an instrument is payable (Section 3-110(a) or (b)) does not intend the person identified as payee to have any interest in the instrument, or (ii) the person identified as payee of an instrument is a fictitious person, the following rules apply until the instrument is negotiated by special indorsement:
(1) Any person in possession of the instrument is its holder.
(2) An indorsement by any person in the name of the payee stated in the instrument is effective as the indorsement of the payee in favor of a person who in good faith, pays the instrument or takes it for value or for collection.
810 ILCS 5/3-404(b). Defendant argues that the comments to the UCC make it clear that this section applies to forged check cases. (Motion to Dismiss, at 3). Defendant goes on to explain that it is the intent of the issuers of the stolen checks that is determinative and that they did not intend "Sherman" or "Sherman, Inc." to have an interest in the checks. Even though Carter may have stolen the checks and wrongfully added payees, defendant, argues, he was nevertheless the "holder of the check entitled to negotiate it." (Motion to Dismiss, at 3-4, citing 810 ILCS 5/3-404, Comment 2, Case # 5). Because Carter was a person entitle to enforce the instrument, as defendant would have it, UCC § 3-420 does not apply and the complaint, based solely on that section, must be dismissed. (Motion to Dismiss, at 4). For several reasons, however, defendant's arguments for dismissal are unconvincing.
[2] First, under the notice pleading regime of the Federal Rules of Civil Procedure, plaintiffs are not required to plead legal theories or cite appropriate statutes. Slaney v. The Intern. Amateur Athletic Federation, 244 F.3d 580, 600 (7th Cir.2001). The court does not ask whether a complaint points to the appropriate statute, but whether relief is possible under any set of facts that could be established consistent with the allegations. Id. Accordingly, here, defendant's argument as to appropriate statutory authority is unavailing.
[3] Second, even if it were appropriate at this early stage of litigation to examine such things, defendant's arguments on the application of 810 ILCS 5/3-404(b) to this matter are, at this point at least, poorly supported. The section upon which defendant relies is known as the "fictitious payee" rule. The statutory fictitious payee rule covers situations where a bank honors a check bearing the forged indorsement of a fictional payee. Meng v. Maywood Proviso State Bank, 301 Ill.App.3d 128, 133, 234 Ill.Dec. 92, 702 N.E.2d 258, 262 (1st Dist.1998). By deeming the forged indorsement to be effective, the rule relieves a bank from liability and places the loss on the drawer of the checks, who is thought to be in the best position to avoid the loss. 301 Ill.App.3d 128, 134, 234 Ill.Dec. 92, 702 N.E.2d 258, 263. The Uniform Commercial Code Comment to section 3-404 specifically explains this rationale:
If a check payable to an impostor, fictitious payee, or payee not intended to have an interest in the check is paid, the effect of subsections (a) and (b) is to place that loss on the drawer of the check rather than on the drawee or the Depositary Bank that took the check for collection.... [F]raud is almost always involved in cases governed by subsection (b). The drawer is in the best position *766 to avoid the fraud and thus should take the loss.
810 ILCS 5/3-404 (Comment (emphasis added )). Thus, it is clear that the section upon which defendant relies applies to situations involving drawees and their employees or agents. Indeed, that was specifically what the rule was originally designed to address. In re Ostrom-Martin, Inc., 155 B.R. 997, 1001 (Bkrtcy.C.D.Ill.1993); Govoni & Sons Construction Co., Inc. v. Mechanics Bank, 51 Mass.App.Ct. 35, 42, 742 N.E.2d 1094, 1101 (2001). Because the earlier version of the rule did not apply when "checks were bona fide when written but later intercepted by a faithless employee," Ostrom-Martin, 155 B.R. at 1001, it was expanded to its present version to cover "instances where an employee with signing authority signs a check intending that the named payee receive it but later changes his mind and steals the check, indorsing it in the name of the payee." Id. Needless to say, there is nothing in the rule, its history, or cases analyzing it, to suggest the rule applies to situations-such as the one here-between payees and drawee banks. All of the example cited in the comments to the UCC involve fraud or forgery occurring in the drawing or issuance of checks; courts have even held that if the intent to commit forgery arise after the check is issued, section 3-404 does not apply. In re Ostrom-Martin, Inc., 202 B.R. 267, 276 (Bkrtcy.C.D.Ill.1996)( § 3-406 of the UCC comes into play where intent formed after check is written). Simply put, defendants offer nothing to convince the court that the normal application of the rule should be extended to cover the instant case. Indeed, courts are generally reluctant to expand on the rule's coverage:
[The] provision is intended to protect banks that cash instruments with such forged indorsements and is based on the assumption that as between the bank and the drawer, the latter is in a better position to prevent the loss. We have held that section 3405 should be interpreted broadly enough to carry out its purpose. But, we [have] recognized that because this provision "is a banker's exception which dramatically departs from the general UCC rule and narrows the liability of a bank, courts should be cautious in expanding the section's scope beyond its explicit rationale." Commentators have also characterized [the] section ... as a banker's provision that should be strictly construed so as not to give more protection than is stated.
Universal Premium Acceptance Corp. v. York Bank & Trust Co., 69 F.3d 695, 701 (3rd Cir.1995). Accordingly, we are not, at this time, ready to accept the interpretation that the fictitious payee rule requires dismissal of plaintiff's complaint in this case.
[4] Finally, and as an aside, we note that defendant's invocation of section 3-404 is less than complete. Notably, it ignores subsection (d) of that provision, which provides:
(d) With respect to an instrument to which subsection (a) or (b) applies, if a person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from payment of the instrument, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.
810 ILCS 5/3-404(d). The allegations in plaintiff's complaint, specifically those regarding the appearance of the checks after Carter altered them, certainly-at least at the pleading stage-call into question the defendant's exercise of ordinary care in *767 cashing the checks. Thus, even if we were convinced by defendant's submissions that the fictitious payee rule applied to this case, we would still be unable to dismiss plaintiff's complaint.

CONCLUSION
For the foregoing reasons, the defendant's motion to dismiss the plaintiff's complaint is hereby DENIED.
N.D.Ill.,2002.
National Accident Ins. Underwriters, Inc. v. Citibank, F.S.B.
243 F.Supp.2d 763

David A. Szwak

Postby David A. Szwak » Mon Apr 03, 2006 7:06 pm

301 Ill.App.3d 128, 702 N.E.2d 258, 234 Ill.Dec. 92, 36 UCC Rep.Serv.2d 1106

Appellate Court of Illinois,
First District, Fifth Division.
Hans MENG and Klaus A. Wieske, Plaintiffs-Appellants,
v.
MAYWOOD PROVISO STATE BANK, and First Security Trust and Savings Bank,
Defendants-Appellees (Greater Illinois Title Insurance Company, Defendant).
Hans MENG and Klaus A. Wieske, Plaintiffs-Appellants,
v.
ALBANY BANK AND TRUST COMPANY, N.A., a/k/a Albank, Defendant-Appellee.
Nos. 1-97-3288, 1-97-3289.
Oct. 16, 1998.

Copurchasers of three cashier's checks payable to two payees, one of whom turned out to be fictitious, sued the issuing bank for breach of contract and the three honoring banks for negligence after the actual payee forged the fictional payee's indorsement and absconded with the funds. The Circuit Court, Cook County, Kenneth L. Gillis, J., granted summary judgment to the issuing bank and dismissed the claims against the honoring banks, and the copurchasers appealed. The Appellate Court, Greiman, J., held that: (1) the forged indorsements invoked the fictitious payee rule, absolving the issuing bank from liability; (2) the designation of two payees on a cashier's check is ambiguous as a matter of law where the checks give no directions about whether payment is to be made alternatively or jointly; and (3) the honoring banks did not fail to exercise ordinary care.
Affirmed.

Justice GREIMAN delivered the opinion of the court:
Plaintiffs Hans Meng and Klaus A. Wieske purchased three cashier's checks from defendant Albany Bank & Trust Company, N.A., a/k/a Albank (Albank), which subsequently were honored by three separate institutions (defendants Maywood Proviso State Bank, First Security Trust & Savings Bank, and Greater Illinois Title Insurance Company [FN1]). Plaintiffs made two of the cashier's checks payable to *130 John Parolin and David Kelly, who is a fictional person. The third cashier's check was payable to one of the plaintiffs, who specially indorsed it to Parolin and the fictitious Kelly. Parolin indorsed each cashier's check with his name and the name of Kelly, cashed the checks and absconded with the funds.


FN1. Greater Illinois Title Insurance Company did not appear or
participate in the proceedings in the trial court and have not filed any documents in the appellate court.


Plaintiffs first filed a complaint against Albank, asserting a breach of contract claim. Upon the trial court's granting summary judgment in favor of the bank, plaintiffs filed a complaint against the three institutions that separately honored the cashier's checks, which was dismissed by the trial court for failure to state a cause of action.
This consolidated appeal raises three issues: (1) whether the fictitious payee rule codified in section 3-404(b)(ii) of the Uniform Commercial Code (Code) (810 ILCS 5/3-404(b)(ii) (West 1994)) precludes plaintiffs' breach of contract claim against the bank (Albank) that issued the cashier's checks; (2) whether a cashier's check that names two payees, absent any instructions as to whether they are joint payees or alternate payees, constitutes an ambiguous instrument, which is deemed to be payable in the alternative under section 3- 110(d) of the Code (810 ILCS 5/3-110(d) (West 1994)); and (3) whether plaintiffs' negligence claim against the institutions that honored the cashier's checks is precluded under section 3-404(d) of the Code (810 ILCS 5/3-404(d) (West 1994)). We answer each issue in the affirmative and, thus, affirm both orders from the trial court.
In 1995, plaintiffs wanted to purchase a building located at 712 West Diversey in Chicago, Illinois. The building was in foreclosure and a federal government agency (United States Department of Housing and Urban Development (HUD)) held the mortgage. To accomplish the purchase, plaintiffs retained John F. Parolin, an attorney who has since been disbarred. Parolin advised plaintiffs that, before HUD would consider plaintiffs as a potential purchaser, plaintiffs were required to establish a fund in the amount of the purchase price by obtaining cashier's checks. Parolin further advised plaintiffs that the cashier's checks must be made payable to himself and David L. Kelly, an alleged HUD employee who was authorized to make the sale. In fact, David L. Kelly does not, and never did, exist. David L. Kelly is a fictional person.
Plaintiffs purchased the following three cashier's checks from Albank, totaling $712,500: (1) $350,000; payable to Klaus Wieske; dated March 1, 1995; check no. 404885; (2) $125,000; payable to David L. Kelly and John Parolin; dated May 24, 1995; check no. 407067; and *131 (3) $237,500; payable to David L. Kelly and John F. Parolin; dated June 26, 1995; check no. 410255. Plaintiffs delivered each check to Parolin.
The first check was specially indorsed by Klaus Wieske in the following manner:

**261



Image 1 (2.25" X 2.5") Available for Offline Print


***95 All three cashier's checks were cashed by Parolin at defendants Maywood Proviso State Bank (check No. 1), First Security Trust & Savings Bank (check No. 2), and Greater Illinois Title Insurance Company (check No. 3), respectively. When cashed, each check bore the signatures of both Parolin and Kelly, the fictional person. Upon presentment, Albank made payment on the three checks.

Appeal No. 1-97-3289 (Albank)
On May 24, 1996, plaintiffs filed a complaint against Albank, alleging that Albank breached a contract with plaintiffs by making payment on the cashier's checks without the endorsement of David L. Kelly. Plaintiffs alleged that the cashier's checks were issued by Albank with the agreement that the checks had to be endorsed by both Parolin and Kelly, as payees, before Albank would make payment on the checks. Plaintiffs further alleged that Kelly never endorsed the checks and that Parolin forged the endorsement of Kelly. Thus, plaintiffs contended that "the payment of the checks without the endorsement of David L. Kelly was a breach of the contract between the Plaintiffs and" Albank.
On December 9, 1996, Albank filed a motion for summary judgment, asserting that it had paid the cashier's checks in the ordinary course of business, in good faith and without knowledge that Kelly was a fictitious payee. To its motion, Albank attached an affidavit from the personnel assistant at HUD in the Chicago regional office, who attested that no one by the name of David Kelly or David L. Kelly was employed by HUD in the entire United States during the time period 1994 through 1996. Albank contended, and the trial court agreed, that the fictitious payee rule completely absolves a bank from any liability for payment over a forged indorsement.
*132 On February 5, 1997, the trial court entered summary judgment in favor of Albank, finding that Albank was only the nominal drawer of the subject cashier's checks, that plaintiffs were the drawers of the checks, and that Albank properly paid the disputed items pursuant to the Code (810 ILCS 5/3- 404(b)(ii) (West 1994)). On August 4, 1997, the trial court denied plaintiff's motion to reconsider the summary judgment for Albank.

Appeal No. 1-97-3288 (Maywood Bank)
On February 26, 1997, plaintiffs filed a complaint against the three defendant institutions that cashed the three cashier's checks, alleging that defendant institutions failed to exercise ordinary care in paying or taking the instrument under section 3-404(d) of the Code (810 ILCS 5/3-404(d) (West 1994)). Both Maywood and First Security filed section 2-615 motions to dismiss (735 ILCS 5/2-615 (West 1996)), for failure to state causes of action based on the Code.
On August 6, 1997, the trial court dismissed plaintiffs' complaint with prejudice as to all three named defendants. Regarding the dismissal motions filed by Maywood and First Security, the trial court specifically found that plaintiffs' complaint failed to state a claim for breach of warranty under the Code (810 ILCS 5/3-416, 3-417, 4-207, 4-208 (West 1994)) and, even if ordinary care was **262 ***96 not exercised, the failure could not have, as a matter law, "substantially contribute[d] to loss resulting from payment of the instrument" under section 3-404(d) of the Code (810 ILCS 5/3-404(d) (West 1994)). In addition, the trial court found that the endorsement of Parolin alone sufficed to make the check negotiable because the cashier's check was alternatively payable to Parolin or Kelly under section 3- 110(d) of Code (810 ILCS 5/3-110(d) (West 1994)).
[1] [2] [3] The first issue on appeal is whether the fictitious payee provision in the Code bars plaintiffs' breach of contract claim against the bank (Albank) that issued and subsequently paid the cashier's checks upon presentment. We apply a de novo standard of review to summary judgment rulings. Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill.2d 90, 102, 180 Ill.Dec. 691, 607 N.E.2d 1204 (1992). Moreover, where no factual issues are raised on appeal, the sole question on review is whether the trial court's entry of summary judgment is proper as a matter of law. McNamee v. State of Illinois, 173 Ill.2d 433, 438, 220 Ill.Dec. 147, 672 N.E.2d 1159 (1996).
Plaintiffs assert that the issuer of a cashier's check (i.e., Albank) is obligated under an implied contract to pay the payees (Parolin and Kelly) named by the remitter (plaintiffs) on the checks or to return the checks to the remitter. Plaintiffs argue that the Code does not effectively deal with the rights and obligations of the remitter of a cashier's check in relation to the issuer.
[4] *133 We agree with plaintiffs that an enforceable contract arises when a cashier's check is purchased and the contract calls for the issuing bank to pay the instrument according to its terms. Lassen v. First Bank Eden Prairie, 514 N.W.2d 831, 836 (Minn.Ct.App.1994) (and cases cited therein). The implied contract is the issuing bank's promise to pay the cashier's check to the named payee only. Lewis v. Telephone Employees Credit Union, 87 F.3d 1537, 1546 (9th Cir.1996). The Code, in fact, authorizes the use of contract or equity claims where the Code does not cover a particular topic or transaction. Section 1-103 expressly provides that "[u]nless displaced by the particular provisions of this Act, the principles of law and equity * * * shall supplement its provisions." 810 ILCS 5/1-103 (West 1994).
Under the facts of the present case, however, we disagree with plaintiffs' contention that the Code does not deal with the relationship between the issuing bank and the remitter of a cashier's check. The dispositive fact in the present case is that the cashier's checks bore the forged signature of a fictitious payee, David Kelly. The Code specifically addresses the situation involving such a payee.
Section 3-404 of the Code is entitled "Impostors-Fictitious payees." Section 3-404(b)(ii), in relevant part, is as follows:
"(b) If * * * (ii) the person identified as payee of an instrument is a fictitious person, the following rules apply until the instrument is negotiated by special indorsement:
(1) Any person in possession of the instrument is its holder.
(2) An indorsement by any person in the name of the payee stated in the instrument is effective as the indorsement of the payee in favor of a person who in good faith, pays the instrument or takes it for value or for collection." 810 ILCS 5/3-404(b) (West 1994).
This particular provision is the Illinois codification of the fictitious payee rule. It became effective in 1992, when it was revised and renumbered from section 3-405. 810 ILCS Ann. 5/3-404, Uniform Commercial Code Comment, at 209 (Smith-Hurd 1993).
As specifically stated in section 3-404(b)(ii) of the Code, where a named payee is a fictitious person, then the "indorsement by any person in the name of the payee * * * is effective as the indorsement of the payee." 810 ILCS 5/3-404(b)(ii) (West 1994). A forged indorsement of a fictional payee is an exception to the general rule that places liability on a bank that pays over a forged endorsement. See In re Ostrom-Martin, Inc., 188 B.R. 245, 250 (Bankr.C.D.Ill.1995).
The statutory fictitious payee rule relieves a bank from liability for honoring a check bearing the forged indorsement of a fictional **263 ***97 payee by deeming the forged indorsement to be effective. 810 ILCS 5/3-404 (West 1994). The drawer of the checks in such a scenario suffers *134 the loss because the drawer is in the best position to avoid the loss. The Uniform Commercial Code Comment to section 3-404 specifically explains this rationale:
"If a check payable to an impostor, fictitious payee * * * is paid, the effect of subsections (a) and (b) is to place that loss on the drawer of the check rather than on the drawee or the Depositary Bank that took the check for collection. * * *[F]raud is almost always involved in cases governed by subsection (b). The drawer is in the best position to avoid the fraud and thus should take the loss." (810 ILCS Ann. 5/3-404, Uniform Commercial Code Comment, at 211 (Smith-Hurd 1993)).
Plaintiffs direct attention to the Lassen case, which is factually distinguishable from the instant case because Lassen did not involve a fictitious payee. The issuing bank in Lassen breached its contract with the purchasers of the cashier's checks because it did not pay the cashier's checks in accordance with its terms, which provided that the checks were payable to two joint copayees. The issuing bank erroneously honored the checks on the endorsement of only one copayee. Lassen, 514 N.W.2d at 836. In contrast, the issuing bank in the present case (Albank) fulfilled its contract with plaintiffs because the cashier's checks were made payable to two copayees and, indeed, contained the endorsements of the two named copayees (Parolin and Kelly). In all other respects, the Lassen decision accords with our findings.
A case more on point is Lewis, which involved cashier's checks and fictitious payees. Lewis, 87 F.3d 1537. In Lewis, two elderly women were separately swindled out of hundreds of thousands of dollars by fraud artists who persuaded the victims to write numerous checks for the alleged purpose of investment in valuable coins and gems. The victims prepared numerous checks in the form of personal, teller's and cashier's checks. The victims sued various banks that had sold, collected or paid the checks. Lewis, 87 F.3d at 1542.
For the banks that had issued the cashier's check to fictitious payees, the Lewis court applied the fictitious payee rule, which was then codified under section 3--405, the former imposter provision, and held that the complaint could not state a claim upon which relief could be granted. Lewis, 87 F.3d at 1545. The court found that banks that sell cashier's checks are both the drawer and drawee of the checks. Lewis, 87 F.3d at 1546; accord Lassen, 514 N.W.2d at 836. The purchasers of the cashier's checks are the drawers. Lewis, 87 F.3d at 1548. Under the language and policy of the impostor provision, the forged signatures of the payees are considered effective and "the drawer bears the loss from the check because the drawer was the party most *135 directly duped by the imposter and the party in the best position to avoid the loss." Lewis, 87 F.3d at 1550.
We find the Lewis decision persuasive and in accord with the language and policy of section 3-404(b)(ii) of the Code in Illinois. A forged indorsement of a fictional payee invokes the fictitious payee rule and places the loss on the drawer of a cashier's check, not the issuing bank. Thus, we find that summary judgment in favor of Albank was proper.
We further observe that to the extent plaintiffs rely on the 1931 case of United States Cold Storage Co. v. Central Manufacturing District Bank, 343 Ill. 503, 175 N.E. 825 (1931), such reliance is misplaced. As noted in two subsequent decisions, the holding in Cold Storage Co. was rejected by the legislature when it amended the then-existing negotiable instrument law in 1931. See People v. Dauphin, 53 Ill.App.2d 433, 203 N.E.2d 166 (1964); Houghton Mifflin Co. v. Continental Illinois National Bank & Trust Co., 293 Ill.App. 423, 12 N.E.2d 714 (1938).
[5] Second, plaintiffs assert that there was no ambiguity to invoke the alternative payee method of payment in the cashier's check that was made payable to Klaus Wieske who, in turn, specially indorsed the back of the check as follows:
**264 ***98 "EARNEST MONEY FOR 712 DIVERSEY
Pay to the order of:
John F. Parolin
David L. Kelly
Klaus A. Wieske [signature]
David L. Kelly [signature]
John F. Parolin [signature]."
Plaintiffs argue that the form of this indorsement is not ambiguous but rather requires that the cashier's check be paid jointly, not in the alternative, under section 3-110 of the Code (810 ILCS 5/3-110(d) (West 1994)). We disagree.
Section 3-110(d) of the Code governs how to identify the person to whom an instrument is payable and provides for multiple payees as follows:
"(d) If an instrument is payable to 2 or more persons alternatively, it is payable to any of them and may be negotiated, discharged, or enforced by any or all of them in possession of the instrument. If an instrument is payable to 2 or more persons not alternatively, it is payable to all of them and may be negotiated, discharged, or enforced only by all of them. If an instrument payable to 2 of more persons is ambiguous as to whether it is payable to the persons alternatively, the instrument is payable to the persons alternatively." (Emphasis added.) 810 ILCS 5/3-110(d) (West 1994).
*136 This multiple payee provision became effective in 1992 and replaced former section 3-116 of the Code. 810 ILCS Ann. 5/3-110, Uniform Commercial Code Comment, at 53 (Smith-Hurd 1993). Under former section 3-116 of the Code, an instrument was presumed to be payable jointly where the instrument did not designate payment in the alternative. 810 ILCS 5/3-116 (West 1992). Contrary to the former provision, the current section shifts the presumption to pay on an instrument in the alternative rather than jointly.
[6] We find, as a matter of law, that the designation of two payees on a cashier's check is ambiguous where no directives are stated on the checks to determine the manner of payment. In the present case, the cashier's check at issue names two payees but does not include any directions regarding whether the check is payable to the named persons alternatively or jointly. The subject cashier's check does not contain any language or markings to instruct the method of payment, such as the word "and" or the word "or." Accordingly, section 3-110 provides that the check is payable to the persons alternatively. Therefore, in the present case, one named payee was sufficient to negotiate the cashier's check at Maywood Proviso State Bank.
We further note that the special indorsement of Klaus Wieske does not change the validity or result of the negotiation of the subject cashier's check. The Code expressly accommodates special indorsements and applies the principles stated in section 3-110 to special indorsements. 810 ILCS 5/3-205 (West 1994).
[7] Third, we consider whether plaintiffs stated a negligence claim against the institutions that paid the cashier's checks, relying on section 3-404(d) of the Code (810 ILCS 5/3-404(d) (West 1994)).
[8] [9] [10] [11] [12] Where, as here, the trial court dismisses a complaint under section 2-615, this court applies a de novo standard of review. Brown Leasing, Inc. v. Stone, 284 Ill.App.3d 1035, 1044, 220 Ill.Dec. 518, 673 N.E.2d 430 (1996). The question presented by a section 2- 615 motion to dismiss for failure to state a cause of action is whether sufficient facts are contained in the pleadings which, if established, would entitle the plaintiff to relief. Wright v. City of Danville, 174 Ill.2d 391, 398, 221 Ill.Dec. 203, 675 N.E.2d 110 (1996). A section 2-615 motion to dismiss "tests the legal sufficiency of a pleading and a court must accept all well-pleaded facts as true." Doe v. Calumet City, 161 Ill.2d 374, 381, 204 Ill.Dec. 274, 641 N.E.2d 498 (1994). Where "it clearly appears that no set of facts can be proved" that would entitle the plaintiffs to recover, the trial court's dismissal order will be affirmed. People ex rel. Daley v. Datacom Systems Corp., 146 Ill.2d 1, 11, 165 Ill.Dec. 655, 585 N.E.2d 51 (1991).
**265 ***99 Section 3-404(d) of the Code provides as follows:
"(d) With respect to an instrument to which subsection (a) or (b) [fictitious payee rule] applies, if a person paying the instrument or *137 taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from payment of the instrument, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss." 810 ILCS 5/3- 404(d) (West 1994).
[13] Under the language of section 3-404(d) and the facts of the present case, we find that plaintiffs did not and, indeed, cannot demonstrate in their complaint any failure to exercise ordinary care on the part of the three institutions that accepted the cashier's checks. Plaintiffs, at oral arguments, suggested that banks should have a duty to question customers about the payees in transactions involving cashier's checks, but conceded that, even if such inquiries had been made in the present case, the outcome would not be affected. We believe that such a duty is not required under the Code and that imposing such a duty contravenes the very purpose of a cashier's check, which is meant to operate as cash. Furthermore, such a duty would infringe on the rights of a customer to access his or her own funds for the purpose of distributing them to his or her own designated payees.
The unfortunate facts of this case indisputably include a scam initiated by an attorney against his clients, a fictitious payee, forged check transactions, and the loss of hundreds of thousands of dollars. Although the fact that plaintiffs were duped by a scam is regrettable, their attempt to place blame on the institutions that actually followed and honored their orders is not supportable either under the Code or in common sense. In fact, the opening comments addressing the revised article 3 of the Code specifically state what benefits were expected to obtain from the 1992 revisions. One such stated benefit is the expectation that the new sections 3-404, the fictitious payee provision, through 3-406 "should significantly reduce litigation." Another expected benefit directly addressed cashier's checks and the importance of honoring them as cash equivalents: "Section 3-411 and related provisions considerably improve the acceptability of bank obligations like cashier's checks as cash equivalents by providing disincentives to wrongful dishonor, such as possible recovery of consequential damages." 810 ILCS Ann. 5/3-101 et seq., Uniform Commercial Code Comment, at 7-8 (Smith-Hurd 1993).
For all of the foregoing reasons, we affirm both orders by the trial court.
Affirmed.

HOURIHANE, P.J., and HARTMAN, J., concur.
Ill.App. 1 Dist.,1998.
Meng v. Maywood Proviso State Bank
301 Ill.App.3d 128, 702 N.E.2d 258, 234 Ill.Dec. 92, 36 UCC Rep.Serv.2d 1106


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