Belmar Trucking Corp. v. American Trust Co.

Decision Date31 July 1970
Citation316 N.Y.S.2d 247,65 Misc.2d 31
Parties, 8 UCC Rep.Serv. 73 BELMAR TRUCKING CORPORATION, Plaintiff, v. The AMERICAN TRUST COMPANY, Defendant. AMERICAN BANK & TRUST COMPANY (sued herein as The American Trust Company), Third-Party Plaintiff, v. Frank JAYSON, Third-party Defendant.
CourtNew York City Court

David Abramowitz, New York City, for plaintiff.

Guzik Boukstein, New York City, for defendant; Joseph H. Einstein and Artin E. Randall, New York city, of counsel.

Arthur Neukrug, New York City, for third-party defendant.

EDWARD GOODELL, Judge.

The primary issue in this case is whether a collecting bank is liable to the corporate payee of a check for its face amount under the following circumstances:

The plaintiff is engaged in the trucking business. One of its trailers was stolen in January 1966. A claim for the loss was made on its behalf to the insurer, the Holyoke Mutual Fire Insurance Company, by the plaintiff's insurance broker, Frank Jayson, the third party defendant in this action.

The plaintiff's claim was settled for $1,750. On August 9, 1966, the insurance company issued its check for that amount, drawn on a Massachusetts bank, and payable to the order of the plaintiff and to the order of Universal C.I.T.

The check was not delivered to the plaintiff. Instead it was delivered to the third party defendant, Frank Jayson, the plaintiff's broker. Jayson appears to have secured the endorsement of the check to the order of the plaintiff by Universal C.I.T., one of the payees. Here it should be noted that Universal C.I.T. asserts no interest in or claim to the proceeds of the check and is not involved in this action.

After the endorsement of Universal C.I.T. was secured the third party defendant wrote on the back of the check, beneath the endorsement of Universal C.I.T., the endorsement of the plaintiff in blank. The form in which he wrote this endorsement was the corporate title followed by the name of the plaintiff's president and his title as follows:

'Belmar Trucking Corp.

Joseph Siciliano--Pres.'

Prior to these events the third party defendant had established a checking account with the defendant American Trust Company in the name of 'Curtis Creations', a trade name in which Jayson conducted business.

After he had endorsed the plaintiff's name on the check he wrote beneath it the further endorsement 'For deposit--Curtis Creations' and, as so endorsed, deposited the check in his account with the defendant bank. The bank accepted the deposit for collection and subsequently credited the face amount of the check, $1,750 to the third party defendant's account with it.

The plaintiff's testimony is that the endorsement of its name was made by the third party defendant without its knowledge or consent and that it only learned of the delivery of the check to the third party defendant and of his endorsement of its name more than two years after the event. This knowledge came about as the result of its own inquiry following unsuccessful efforts to get information from the third party defendant as to the disposition of its claim against the insurance company.

The plaintiff then instituted this action to recover $1,750 from the bank and the bank joined Jayson as a third party defendant.

Frank Jayson was not present at the trial and did not testify. No explanation was offered for his absence.

Jayson was examined before trial and portions of his testimony were read into the record by the defendant. The essential purport of this testimony was that Jayson had written the name of the plaintiff's president on the check at his direction. Such testimony is not the equivalent of testimony given at the trial where it would be subjected to the searching test of cross-examination.

As stated in Dowling v. Hastings, 211 N.Y. 199, 203, 105 N.E. 194, 195 'Where one party to an action, knowing the truth of a matter in controversy, and having the evidence in his possession omits to speak, every inference warranted by the evidence offered will be indulged in against him.' (See also Isquith v. Isquith, 229 App.Div. 555, 242 N.Y.S. 383 and Meyer v. Mayo, 196 App.Div. 78, 187 N.Y.S. 346).

It may be noted at this point in passing that even if Jayson's testimony that he signed the name of the plaintiff's president at his direction were to be accepted by the court as true, the defendant would still be obligated, for reasons hereafter stated, to make inquiry as to whether the plaintiff's president was authorized to participate in the transfer to a third person of a check payable to the plaintiff corporation.

On the basis of the record in this case I find that the endorsement by the third party defendant of the check in the name of the plaintiff was made without its knowledge or consent and that it was unauthorized. In view of the record here I find that this was a forged endorsement.

The question then is whether the defendant bank is liable to the plaintiff by reason of its acceptance of the check for deposit and its subsequent credit of the proceeds of collection to the third party defendant's account.

Section 3--419 of the Uniform Commercial Code, entitled 'Conversion of Instrument; Innocent Representation' provides, in part, in subdivision (1) that 'An instrument is converted when '(c)' it is paid on a forged indorsement.' As stated in the Annotations to this section in McKinney's Consolidated Laws of New York (Book 62 1/2, Part 2, p. 372) 'Subsection 1(c) adopts the result in such cases as Henderson v. Lincoln Rochester Trust Co., 303 N.Y. 27, 100 N.E.2d 117 (1951), under which payment on a forged instrument constitute conversion of the instrument.'

In the Henderson case, supra, the Court of Appeals stated its conclusion in this way:

'To put it in other words, a collecting bank is merely an agent for the purpose of collecting from the drawee bank the proceeds of the check delivered to it. When it takes the check for collection, it assents to the agency and becomes bound by the terms of the instrument received. Those terms include an obligation to pay the proceeds collected to the true payee owner in the absence of a valid endorsement. The moment the collecting bank receives the proceeds it holds money belonging to the owner of the check and becomes a debtor of such owner and of no one else in the absence of a valid endorsement.'

Standing by itself, therefore, the provisions of subdivision (1)(c) of U.C.C. 3--419 would require a determination of liability on the part of the bank.

However, subdivision (3) of U.C.C. 3--419, which is new, is an exculpatory proviso, relieving a depository or collecting bank from liability in the event that it acts 'in good faith and in accordance with the reasonable commercial standards applicable to the business' of the bank. It reads as follows:

'Subject to the provisions of this Act concerning restrictive endorsements a representative, including a depository 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.'

There is no evidence here that the bank did not act in good faith. The question is whether it acted in this instance in accordance with reasonable commercial standards applicable to its business.

Generally speaking, the proceeds of a check payable to a corporate payee constitute, of course, a corporate asset which may not be diverted to a non-corporate purpose. In the normal course of business such checks are deposited for collection in corporate bank accounts and the proceeds of their collection are available for the purpose of meeting corporate obligations.

The court takes judicial notice of the fact that it is not normal business practice for a corporate payee of checks to endorse them in blank and deliver them to third persons in the absence of an appropriate reason and pursuant to appropriate corporate authorization. Customarily, such reason and authorization are stated in the form of a corporate resolution. When duly certified and submitted to a collecting bank together with the check to which it relates the certified resolution serves as a reasonable warrant for the acceptance of the check for deposit.

While there is no testimony in this record as to banking practice in this respect, I am of the opinion that judicial notice can be taken of the fact that reasonable standards of banking practice require a collecting bank to make inquiry as to the reason and authority for the deposit to a third person's account of a check endorsed by a corporate payee before accepting the check for deposit.

This view of the standard of reasonable commercial practice as applied to banks is confirmed by the cases and other...

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