Gast v. American Cas. Co. of Reading, Pa.

• Decision Date: 13 March 1968
• Docket Number: No. A--3,A--3
• Citation: 99 N.J.Super. 538,240 A.2d 682
• Parties: , 5 UCC Rep.Serv. 155 The Reverend Stuart F. GAST and Elizabeth T. Gast, Plaintiffs-Appellants, v. AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, a body corporate, Defendant-Respondent.
• Court: New Jersey Superior Court — Appellate Division

Page 538

99 N.J.Super. 538

240 A.2d 682, 5 UCC Rep.Serv. 155

The Reverend Stuart F. GAST and Elizabeth T. Gast Plaintiffs-Appellants, v. AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, a body corporate, Defendant-Respondent.

No. A--3.

Superior Court of New Jersey Appellate Division.

Argued Feb. 19, 1968.

Decided March 13, 1968.

Richard T. O'Connor, Freehold, for appellants (Dittmar, Dittmar, Goldberg, Cerrato & McGovern, Freehold, attorneys).

Gerald M. Zashin, Newark, for respondent (Zashin & King, Newark, attorneys).

Before Judges GOLDMANN, LEWIS and CARTON.

The opinion of the court was delivered by

CARTON, J.A.D.

Plaintiffs Gast appeal from a judgment in favor of defendant insurance company based upon a jury verdict of no cause for action. They attribute the result to erroneous instructions the trial judge gave the jury.

Plaintiffs brought the action to recover a fire loss of $3435.92 under an insurance policy issued by defendant, covering premises which plaintiffs had contracted to sell to Mark and Gertrude Hanna. The policy, which had been procured by the Hannas pursuant to their obligation under the contract, insured them 'as purchasers under the contract as their interest may appear,' and, under its standard mortgagee clause, provided that 'loss, if any, on building items shall be payable to Stuart and Elizabeth Gast.'

On January 7, 1965 a fire damaged the property and the amount of the loss was agreed upon at $3435.92 through Sidney Rosenbaum and Co., a public fire adjuster. On March 31 defendant issued a draft in that amount, drawn upon itself, and stating on its face 'payable thru Berks County Trust Co., Reading, Pa. upon acceptance by American Casualty Companies.'

The draft was payable to the Hannas, the Gasts and Sidney Rosenbaum and Co. According to the date stamped on the back of the instrument, it was presented to the bank on April 29, 1965. The proceeds of the draft were paid to persons other than plaintiffs, who never received any of the proceeds or any payment on the loss from defendant. The Hannas, defaulting on the contract, absconded, leaving the property in its damaged condition. Presumably they were responsible for the forging of plaintiffs' signatures as indorsers.

Defendant denied that it had any liability by reason of the forgery of the indorsements on the draft and, in addition, alleged that plaintiffs had contributed to the forgery by their negligence and were thus precluded from recovery. At the conclusion of the testimony in the course of which the facts recited above were established without substantial dispute, the trial judge instructed the jury that plaintiffs had an insurable interest under the policy and charged the applicable law as follows '* * * A drawee is liable for payment to a person whose name had been forged unless the person was subsequently negligent in contributing to the forgery. Therefore, the factual problem, members of the jury, in this problem reduces itself to one of alleged negligence on the part of the defendant, in their manner of payment and too, the alleged contributory negligence on the part of the plaintiffs under the facts of this case, and these factual issues, of course, will be for your determination. * * *' (Emphasis supplied)

We conclude that the charge as given was erroneous, both on the issue of defendant's liability as drawer-drawee to plaintiffs on the forged indorsements and on the issue of plaintiffs' contributory negligence.

The underscored language is a misconception of the law regarding the elements of defendant's liability. The draft was drawn upon defendant and was executed by defendant. As both drawer and drawee defendant had the responsibility to make payment to the named payees on the instrument. That the draft was 'payable thru Berks County Trust Co., Reading, Pa.' upon acceptance does not alter that responsibility. See N.J.S. 12A:3--120, N.J.S.A.

The nature of defendant's obligation is set forth in the statute. It is not grounded upon negligence.

N.J.S. 12A:3--419, N.J.S.A. provides in pertinent part:

'(1) An instrument is converted when

(c) It is paid on a forged indorsement.

(2) In an action against a drawee under subsection (1) the measure of the drawee's liability is the face amount of the instrument. In any other action under subsection (1) the measure of liability is presumed to be the face amount of the instrument.'

The statute created an absolute right to recover in favor of plaintiffs (absent negligence on their part as discussed below) upon proof that the draft was paid on the forged indorsements. Plaintiffs' indorsements were concededly forged. It follows that defendant, having paid the draft, was rendered liable for the conversion in the face amount.

Comment 3 to N.J.S. 12A:3--419, N.J.S.A., by the draftsmen of the Uniform Commercial Code, makes it clear that the above analysis is correct. That comment states:

'Subsection (1)(c) is new. It adopts the prevailing view of decisions holding that payment on a forged indorsement is not an acceptance, but that Even though made in good faith it is an exercise of dominion and control over the instrument inconsistent with the rights of the owner, And results in liability for conversion.' (Emphasis added)

There being no dispute as to the basic facts, plaintiffs' right to recovery (apart from defendant's defense that plaintiffs had contributed to the forgery) was fully established. It was therefore error to instruct the jury that plaintiffs were required to show that defendant was negligent.

The element of negligence enters into this case by virtue of N.J.S. 12A:3--406, N.J.S.A., which provides, in pertinent part:

'Any person who by his negligence substantially contributes to * * * the making of an unauthorized signature is precluded from asserting the * * * lack of authority against * * * a drawee or other payor who pays the instrument in good faith and in accordance with the reasonable commercial standards of the drawee's or payor's business.'

An 'unauthorized signature' includes a forgery. N.J.S. 12A:1--201(43). Taking N.J.S. 12A:3--406, N.J.S.A. in conjunction with N.J.S. 12A:3--419(1)(c), N.J.S.A., it appears that, although plaintiffs had established conversion of the draft by defendant, the latter had available to it the defense that plaintiffs were guilty of negligence which substantially contributed to the forgery.

This was the defense that defendant attempted to establish. As noted, the trial judge had charged:

'A drawee is liable for payment to a person whose name had been forged unless the person was Subsequently negligent in contributing to the forgery.' (Emphasis added)

He refused to give the following instruction:

'A drawee is liable for payment to a person whose name has been forged unless that person was Substantially negligent in contributing to the forgery.' (Emphasis added)

Neither the instruction as given nor the plaintiffs' requested instruction accords with the statutory language or its meaning. The substitution in the charge actually given of the word 'subsequently' for the statutory language 'substantially' materially altered the meaning of the statute. It made the defense of plaintiffs' negligence a bar to a recovery only when such negligence occurred after the payment on the forged indorsements. We do not so read N.J.S. 12A:3--406, N.J.S.A. We note that...