Clarkson v. Selected Risks Ins. Co.

• Decision Date: 10 September 1979
• Citation: Clarkson v. Selected Risks Ins. Co., 170 N.J.Super. 373, 406 A.2d 494 (N.J. Super. 1979)
• Parties: , 27 UCC Rep.Serv. 1366 Daniel CLARKSON, Plaintiff, v. SELECTED RISKS INSURANCE COMPANY, Defendant, v. NEWTON TRUST COMPANY, Third-Party Defendant, and CONTINENTAL BANK, Third-Party Defendant and Third-Party Plaintiff, v. Leonard TISHGART, Third-Party Defendant.
• Court: New Jersey Superior Court

Page 373

170 N.J.Super. 373

406 A.2d 494, 27 UCC Rep.Serv. 1366

Daniel CLARKSON, Plaintiff, v. SELECTED RISKS INSURANCE COMPANY, Defendant, v. NEWTON TRUST COMPANY, Third-Party Defendant, and CONTINENTAL BANK, Third-Party Defendant and Third-Party Plaintiff, v. Leonard TISHGART, Third-Party Defendant.

Superior Court of New Jersey, Law Division.

Sept. 10, 1979.

Peter L. Masnik, Haddonfield, for plaintiff (Kalikman & Masnik, Haddonfield, attorneys).

Thomas H. Morgan, Moorestown, for defendant (Capehart & Scatchard, Moorestown, attorneys).

Barry N. Shaw, Collingswood, for third-party defendant and third-party plaintiff Continental Bank.

David L. Johnson, Newton, for third-party defendant, Newton Trust (Morris, Downing & Sherred, Newton, attorneys).

Peter T. Parashes, Edward Sullivan, Cherry Hill, for third-party defendant, Leonard Tishgart (Toll, Pinsky & Sullivan, Cherry Hill, attorneys).

HAINES, J. S. C.

Plaintiff, Daniel Clarkson, a Pennsylvania citizen, retained Roger S. Wolfe, a Pennsylvania attorney, to represent him in a suit for damages arising from a claim of negligence. Wolfe commenced suit in Pennsylvania but was suspended from the practice of law before the proceedings were concluded. After advising Clarkson of his suspension he requested that he nonetheless be allowed to continue with the litigation since he was familiar with the case and expected to be reinstated shortly. Clarkson agreed. Wolfe, without Clarkson's knowledge, then had Leonard Tishgart, another Pennsylvania attorney, substituted for him as counsel of record in the negligence case. Thereafter, the case was settled for $7,988.62 without Clarkson's prior approval and without informing him of the settlement agreement.

Selected Risks Insurance Company, a New Jersey corporation, insured the defendant in Clarkson's suit. Upon receiving a release purportedly executed by Clarkson, it forwarded a check in the amount of the settlement to Tishgart. The check was payable to "Daniel Clarkson and Leonard Tishgart, Esquire, his attorney" and was dated January 19, 1977. Tishgart endorsed the check and turned it over to Wolfe, who endorsed Clarkson's name on the check and deposited it in Wolfe's trust account at Continental Bank in Philadelphia. Continental is a Pennsylvania corporation. The check was drawn on Newton Trust Company, a New Jersey corporation. Continental, as collecting bank, endorsed the check "P.E.G.," I.e., prior endorsements guaranteed, and sent it to Newton for payment. Final settlement was made on or about January 30, 1977 by Newton, and Selected Risks' account was debited accordingly.

Wolfe withdrew all the money from the trust account for his own purposes, forwarding nothing to Clarkson, and shortly thereafter committed suicide. Clarkson learned of Wolfe's death in August 1977, called his office and was referred to Tishgart. After several unsuccessful attempts he finally reached Tishgart in October 1977. Tishgart advised him, for the first time, that the case had been settled and told him there may have been a forgery. On Tishgart's recommendation, Clarkson contacted Arthur Marion, a Pennsylvania attorney appointed to examine Wolfe's affairs. Marion advised Newton Trust of the forgery by letter dated December 21, 1977. Newton immediately advised Selected Risks of the circumstance and notified Continental of the forgery by letter dated February 24, 1978.

On May 31, 1978 Clarkson filed the within suit against Selected Risks. Selected Risks filed third-party complaints against Newton and Continental, plaintiff joined Newton as a defendant to his complaint, Newton crossclaimed against Continental and Continental sued Tishgart. All parties then became involved in various motions for dismissal and summary judgment, motions which, except as indicated, involve no factual disputes and may be disposed of without a trial. R.4:46.

It is clear from the complaint that Clarkson's claims against Selected Risks are based upon the settlement agreement. In its first count the Clarkson complaint alleges that Selected Risks is in breach of the agreement because it never paid him the agreed upon sum. The second count of the complaint, while sounding in tort, nevertheless rests upon the settlement agreement, for it alleges that Selected Risks' payment of the settlement funds to a person other than plaintiff was an act of negligence.

When a principal institutes suit to enforce an unauthorized agreement made by his agent, the principal affirms or ratifies the transaction. See Restatement, Agency 2d, §§ 82, 83 and 97(a) (1958). Neither Wolfe nor Tishgart was expressly authorized to settle Clarkson's claim, and the mere employment of Wolfe is an insufficient predicate for a finding that he had apparent authority to settle. 7 C.J.S. Attorney and Client § 105 (1937). Consequently, by filing the complaint Clarkson ratified the settlement agreement. More importantly, for present purposes, he also ratified the authority of his agent to accept payment from Selected Risks. As the Supreme Court pointed out in Thermo Contracting Corp. v. Bank of N.J., 69 N.J. 352, 362, 354 A.2d 291, 296 (1973): "A principal must either ratify the entire transaction or repudiate it entirely, and cannot pick and choose only what is advantageous to him."

Under this reasoning it must be concluded that Clarkson ratified the settlement and the payment.

Although there is a split of authority as to the consequences of this ratification, see Annotation, "Discharge of Debtor Who Makes Payment by Delivering Check to Creditor to Latter's Agent, Where Agent Forges Creditor's Signature and Absconds with Proceeds," 49 A.L.R.3d 843 (1973), New Jersey in Gross v. Grimaldi, 64 N.J.Super. 457, 464, 166 A.2d 592 (App.Div.1960), certif. den. 34 N.J. 469, 169 A.2d 744 (1961), acknowledged its agreement with the position set forth in Restatement, Agency 2d, § 178(2) (1958), which states:

If an agent who is authorized to receive a check payable to the principal as conditional payment forges the principal's endorsement to such a check, the maker is relieved of liability to the principal if the drawee bank pays the check and charges the amount to the maker.

Comment (c) to this section goes on to explain:

Thus, if the drawee bank cashes the check after a forgery and embezzlement by the agent and charges the amount to the debtor, the latter is relieved of his debt. The creditor then would be subrogated to the right of the debtor against the bank. If, in the meantime, the bank becomes insolvent, it is the creditor and not the debtor who loses.

These principles were applied to a nearly identical factual situation by the Supreme Court of California in Navrides v. Zurich Ins. Co., 5 Cal.3d 698, 97 Cal.Rptr. 309, 488 P.2d 637 (1971). After suffering injury on the premises of another, plaintiff hired an attorney, who instituted suit on her behalf. A settlement negotiated between the attorney and defendant's insurance carrier was rejected by plaintiff without the carrier's knowledge. Upon receipt of a release allegedly signed by plaintiff, the insurance company gave the attorney a draft payable to the client and her attorney. The attorney forged his client's signature and cashed the draft. A year later plaintiff became aware of the settlement and attempted to recover the money from the attorney. When these efforts proved unsuccessful a suit was instituted against the insurance company.

The Supreme Court of California held that by bringing the suit plaintiff had ratified the settlement agreement. Echoing Thermo Contracting Corp. v. Bank of N.J., supra, the court stated that "a principal is not allowed to ratify the unauthorized acts of an agent to the extent that they are beneficial, and disavow them to the extent that they are damaging. If a principal ratifies part of a transaction, he is deemed to ratify the whole of it." 97 Cal.Rptr. at 311, 488 P.2d at 641. Since "the principal has the power to approve the transaction only as it, in fact, occurred," Id., ratification of the settlement necessarily entailed ratification of the method of payment.

The plaintiff there argued that the controversy was governed exclusively by law peculiar to negotiable instruments. In particular plaintiff placed reliance upon two provisions of the California negotiable instruments law. Initially, under what is the equivalent of N.J.S.A. 12A:3-116(b), it was pointed out that an instrument payable to the order of two persons jointly can only be negotiated by joint action. Secondly, plaintiff cited the principle encapsulated in N.J.S.A. 12A:3-404 that an "unauthorized signature is wholly inoperative as that of the person whose name is signed * * * ." Reading these sections together, plaintiff argued that the underlying obligation cannot be held discharged when payment is made by check to an agent who forges his principal's signature and absconds with the proceeds. To the contrary, defendant argued that the rule enunciated in the Restatement, Agency 2d, § 178(2), Supra, was controlling. The court agreed with defendant and held that "the rules of negotiable instruments should not be considered paramount in the present context." 97 Cal.Rptr. at 316, 488 P.2d at 644. Accord, Hutzler v. Hertz Corp., 39 N.Y.2d 209, 383 N.Y.S.2d 266, 347 N.E.2d 627 (1976).

The Uniform Commercial Code as enacted in New Jersey is to be interpreted by taking into consideration concepts developed in other areas of the law. For example, N.J.S.A. 12A:1-103 provides that "(u)nless displaced by the particular provisions of this Act, the principles of law and equity, including * * * the law relative to * * * principal and agent, * * * shall supplement is provisions." N.J.S.A. 12A:3-404, the particular provision of the act applicable here, qualifies its general principle concerning the effect of an unauthorized signature with the phrase, "unless he (the principal) ratifies it or is precluded from denying it." In these circumstances the rule...