Federal Ins. Co. v. Groveland State Bank

• Decision Date: 17 June 1975
• Citation: 333 N.E.2d 334,37 N.Y.2d 252,372 N.Y.S.2d 18
• Parties: , 333 N.E.2d 334, 17 UCC Rep.Serv. 184 FEDERAL INSURANCE COMPANY, Respondent-Appellant, v. GROVELAND STATE BANK, Appellant-Respondent.
• Court: New York Court of Appeals Court of Appeals

Page 18

372 N.Y.S.2d 18

37 N.Y.2d 252, 333 N.E.2d 334, 17 UCC

Rep.Serv. 184

FEDERAL INSURANCE COMPANY, Respondent-Appellant, v. GROVELAND STATE BANK, Appellant-Respondent.

Court of Appeals of New York.

June 17, 1975.

Douglas Gates and Edward R. Macomber, Rochester, for appellant-respondent.

Michael T. Tomaino and Peter J. Bush, Rochester, for respondent-appellant.

GABRIELLI, Judge.

By assiduously requisitioning checks for issue and adroitly changing entries in the trust department books of the Lincoln First Bank of Rochester, a trust officer, Richard Jaquish, apparently managed to embezzle $333,829.74. Plaintiff, having reimbursed Lincoln under an employees' fidelity bond, seeks to recover this sum, less applicable salvage, from defendant Groveland State Bank, the named payee on the fraudulently issued checks.

The principal issue is whether plaintiff, as the subrogee of a drawer-drawee bank which, over a period of more than three years, failed to uncover the fraudulent issuance of 33 of its own checks by one of its employees, and which consistently paid those checks upon presentment for collection, can successfully maintain an action for money had and received against another bank which, though named as payee, deposited the checks to the personal account of its depositor, the errant employee, without, as charged by plaintiff, making an inquiry as to his rights or interests in the instruments. Present also are issues whether the payee bank breached the warranty of good title upon presentment to the drawee and whether the payee bank took the checks in bad faith and with notice of a defense or claim against them.

The essential facts may be briefly stated. On May 12, 1966 Jaquish opened an account with defendant, informing it that his grandmother had recently died and left him a large trust fund, and that, since he would be selling her properties, the account would become very active. Commencing on May 13, 1966, and continuing until September 2, 1969, Jaquish, who had authority to issue trust department checks in the ordinary course of the business of the bank, caused 33 of Lincoln's checks to be issued and made payable to the order of defendant. These checks were regular in form and varied in amount from $3,000 to $32,500. They were deposited in defendant bank, generally by Jaquish himself, who attached deposit slips directing the funds to his own account. On some occasions, however, he called defendant, or sent a note, requesting that deposit slips be prepared for him. Defendant stamped each check with the customary collecting bank endorsement, i.e., 'Pay to the Order of Any Bank, Banker or Trust Co.; All Prior Endorsements Guaranteed', tentatively credited Jaquish's account, and presented the checks for payment to Lincoln. No inquiry was made of Lincoln regarding the disposition of the proceeds and, likewise, Lincoln paid each check drawn on itself without any inquiry or objection.

In June, 1969 an internal audit conducted by Lincoln revealed that the Trust Department Dividend's Receivable Account was overdrawn by approximately $323,000. At that time, as alleged by plaintiff and Lincoln, the shortage was believed attributable to normal deficiencies resulting from the nonreceipt of dividend checks. Later, and in November, 1969, State and Federal bank examiners uncovered false entries in the receivable account. Jaquish was on vacation during the period of this audit and, when he returned on December 15, 1969, he was directed to report to the office of the Federal examiner in Rochester. He did not report as instructed. Inst he promptly disappeared and his whereabouts are still unknown. The balance of his accou with defendant at the time of his disappearance was $334.91.

The complaint sets forth three causes of action: (1) for money had and received, (2) for breach of warranty of good title, and (3) to recover funds received by defendant in bad faith and with notice of a claim or defense to the checks. In its answer, defendant admitted receiving the checks from Jaquish and forwarding them for collection, but otherwise denied the allegations in the complaint. ¹

On cross motions for summary judgment, Special Term granted defendant's motion for judgment on the third cause of action and otherwise denied the motions on the ground that triable issues of fact remained as to the first two causes of action. On cross appeals, the Appellate Division modified by reversing the order of Special Term insofar as it denied the motion on the first cause of action and granted summary judgment to plaintiff, and otherwise affirmed. Relying on Arrow Bldrs. Supply Corp. v. Royal Nat. Bank of N.Y., 21 N.Y.2d 428, 431, 288 N.Y.S.2d 609, 611, 235 N.E.2d 756, 757; Shipman v. Bank of State of N.Y., 126 N.Y. 318, 326--327, 27 N.E. 371, 372--373; Sims v. United States Trust Co., 103 N.Y. 472, 475--476, 9 N.E. 605, 606; and Matteawan Mfg. Co. v. Chemical Bank & Trust Co., 244 App.Div. 404, 412--413, 279 N.Y.S. 495, 504--505, mod. 272 N.Y. 411, 3 N.E.2d 845, the Appellate Division held that defendant's failure to inquire of Lincoln as to the disposition of the proceeds of the checks entitled plaintiff to recover in an action for money had and received. It was further held that even if 'Lincoln violated some duty of supervision of its employees, checks and funds owed to Groveland * * * the loss * * * was occasioned by the superceding act of Groveland in paying out Lincoln's funds' (44 A.D.2d 182, 189, 354 N.Y.S.2d 220, 227).

Defendant appeals here as a matter of right from the order of the Appellate Division, and plaintiff appeals pursuant to leave granted by the Appellate Division which certified the following question to this court: 'Was the order of the Court at Special Term, to the extent that it denied plaintiff's motion for summary judgment on the second and third causes of action and to the extent that it dismissed the third cause of action, properly affirmed by the Appellate Division, Fourth Department?'

Directing our attention first to the rationale of the decision below, we think the Appellate Division correctly decided that defendant violated a duty owed to Lincoln by disbursing its money without making any inquiry of the depositor as to his actual or apparent authority to act for Lincoln. However, we cannot agree that the negligence of defendant intervened so as to nonetheless permit plaintiff full recovery against it.

In an action for money had and received, the plaintiff 'must show that it is against good conscience for the defendant to keep the money' (Schank v. Schuchman, 212 N.Y. 352, 358, 106 N.E. 127, 128). Though it may be termed an action at law, it is, of course, founded upon equitable principles aimed at achieving justice, unimpeded by legal niceties (Chapman v. Forbes, 123 N.Y. 532, 536, 26 N.E. 3, 4; Myers v. Hurley Motor Co., 273 U.S. 18, 24, 47 S.Ct. 277, 71 L.Ed. 515; United States v. Jefferson Elec. Co., 291 U.S. 386, 402--403, 54 S.Ct. 443, 78 L.Ed. 859; County of Oneida v. First Citizens Bank & Trust Co. of Utica, 264 App.Div. 212, 35 N.Y.S.2d 782). In County of Oneida, supra, p. 214, 35 N.Y.S.2d p. 784, it was said: 'It is the most favorable way in which a defendant can be sued. In such an action the defendant 'may defend himself by everything which shows the plaintiff Ex aequo et bono is not entitled to the whole of his demand or any part of it ". Thus it has been held that a depositor's negligence in examining his monthly bank statement will bar a recovery for money had and received (Arrow Bldrs. Supply Corp. v. Royal Nat. Bank of N.Y., 21 N.Y.2d 428, 288 N.Y.S.2d 609, 235 N.E.2d 756, Supra; Potts & Co. v. Lafayette Nat. Bank, 269 N.Y. 181, 199 N.E. 50).

Applying these principles to the instant case, we hold that there are triable issues as to whether plaintiff's recovery should be barred in whole or in part. After processing and making payment on the instruments presented for collection by defendant, Lincoln, of course, retained possession of the canceled checks. If its trust department were a private depositor, it would have received a monthly statement containing the canceled checks and, as with any depositor, Lincoln was under a duty to examine the items and to uncover any irregularities in its account (see, e.g., Arrow Bldrs. Supply Corp. v. Royal Nat. Bank of N.Y., 21 N.Y.2d 428, 432, 288 N.Y.S.2d 609, 612, 235 N.E.2d 756, 758, Supra; cf. Uniform Commercial Code, Consol.Laws, c. 38, § 4--406). Minimally, Lincoln is chargeable with exercising the same degree of care and control of its accounts that an individual depositor would have been expected to exercise. ² Indeed, plaintiff does not deny it had such a duty, rather, it asserts, in conclusory fashion and certainly without foundation, that such activities would not have revealed Jaquish's peculations. However, the record is devoid of any...