Getty Petroleum Corp. v. American Exp. Travel Related Services Co., Inc.

• Decision Date: 12 June 1997
• Citation: 90 N.Y.2d 322,683 N.E.2d 311,660 N.Y.S.2d 689
• Parties: , 683 N.E.2d 311, 32 UCC Rep.Serv.2d 1031 GETTY PETROLEUM CORP., Respondent, v. AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY, INC., Appellant, et al., Defendants.
• Court: New York Court of Appeals Court of Appeals

Page 689

660 N.Y.S.2d 689

90 N.Y.2d 322, 683 N.E.2d 311, 32 UCC

Rep.Serv.2d 1031

GETTY PETROLEUM CORP., Respondent, v. AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY, INC. Appellant, et al., Defendants.

Court of Appeals of New York.

June 12, 1997.

Camhy Karlinxky & Stein, L.L.P., New York City (John F. Triggs, Martin E. Karlinsky and Adam D. Cole, of counsel), for appellant.

Del Gadio & Tomao, Uniondale (Robert G. Del Gadio, Peter J. Tomao and Steven M. Lester, of counsel), for respondent.

OPINION OF THE COURT

KAYE, Chief Judge.

Ordinarily, the drawer of a check is not liable on a forged indorsement. An exception to this principle is found in Uniform Commercial Code § 3-405(1)(b)--the "fictitious payee" rule--which allocates the loss to the drawer if "a person signing as or on behalf of a * * * drawer intends the payee to have no interest in the instrument." In this case of statutory interpretation, we are asked whether the fictitious payee rule, typically applied to protect banks, can also extend to nonbank depositaries when they accept a check over a forged indorsement. We answer that question in the affirmative. We further conclude that the depositary here did not by reason of its own negligence forfeit the benefit of the fictitious payee rule because its conduct did not rise to the level of commercial bad faith, and we therefore dismiss the drawer's complaint.

Facts

Respondent Getty Petroleum Corporation distributes gasoline through dealer-owned stations. Customers who purchase gasoline at a Getty station can pay by cash or credit card. When a customer uses a credit card, Getty processes the transaction, receives payment from the credit card company and then issues computer-generated checks payable to dealers to reimburse them for their credit card sales. Many of the checks, however, are not intended for negotiation and are never delivered to the payees. Instead, Getty uses these checks for bookkeeping purposes, voiding them and then crediting the check amount toward the dealer's future purchases of gasoline.

A supervisor in Getty's credit processing department, Lorna Lewis, was given sole responsibility for voiding the checks. From April 1991 to October 1992, Lewis stole over 130 of the checks, forged the indorsements of the payees by hand or rubber stamp, and then submitted the checks to appellant American Express Travel Related Services Company, Inc. and other credit card companies in payment of her own credit card debt. The credit card companies, in turn, credited Lewis's accounts and forwarded the checks through ordinary banking channels. Chemical Bank, where Getty maintained its checking account, honored each of the checks bearing the forged indorsements.

After uncovering Lewis's theft, Getty commenced an action against the credit card companies which had accepted the checks. As against American Express, Getty sought to recover the face amount of 31 checks, and following a nonjury trial Supreme Court found American Express liable to Getty in the amount of $58,841.60. Supreme Court agreed with American Express that UCC 3-405 is applicable to nonbank transferees and that, because the stolen checks were drawn by Getty with the intent to be voided, and not delivered to the individual dealers, the checks fell within the scope of the statute. Nevertheless, the court concluded that in light of American Express's remittance procedures "calculated to make forged, fraudulent and stolen checks acceptable for processing" and its acceptance of stolen checks on which Lewis's name did not appear, American Express had acted with gross negligence as a matter of law and thus, could not avail itself of the protection of UCC 3-405.

The Appellate Division affirmed, but on different grounds. Contrary to Supreme Court, the Appellate Division held that UCC 3-405 "is widely acknowledged to be a 'bankers provision', and should not protect non-bank depositaries such as American Express" " (227 A.D.2d 444, 445, 642 N.Y.S.2d 910). In addition, the court held that American Express could not avoid liability since it was not a holder in due course and had exhibited "wilful blindness constituting gross negligence" (id., at 446, 642 N.Y.S.2d 910).

We now reverse and dismiss Getty's complaint.

Discussion

The provisions of article 3 of the Uniform Commercial Code relating to check fraud have as their purpose ensuring the ready negotiability of commercial paper and advancing the important policy of assigning loss based upon the relative responsibility of the parties (see, Hartford Acc. & Indem. Co. v. American Express Co., 74 N.Y.2d 153, 165, 544 N.Y.S.2d 573, 542 N.E.2d 1090). Article 3 accomplishes these ends by establishing commercially sound rules designed to place the risk of loss attributable to fraud such as forged indorsements with the party best able to prevent them (Prudential-Bache Securities v. Citibank, 73 N.Y.2d 263, 269, 539 N.Y.S.2d 699, 536 N.E.2d 1118; see generally, McDonnell, Bank Liability for Fraudulent Checks: The Clash of the Utilitarian and Paternalist Creeds Under the Uniform Commercial Code, 73 Geo. L.J. 1399 [1985] ).

Losses caused by a forged instrument are in the first instance allocated to the drawee bank because, as between that bank and its drawer, the drawee bank is in the better position to detect the forgery before payment (Spielman v. Manufacturers Hanover Trust Co., 60 N.Y.2d 221, 224, 469 N.Y.S.2d 69, 456 N.E.2d 1192; see, Putnam Rolling Ladder Co. v. Manufacturers Hanover Trust Co., 74 N.Y.2d 340, 345, 547 N.Y.S.2d 611, 546 N.E.2d 904; Merrill Lynch, Pierce, Fenner & Smith v. Chemical Bank, 57 N.Y.2d 439, 444-445, 456 N.Y.S.2d 742, 442 N.E.2d 1253). Consistent with this premise, the Code deems a forged indorsement "wholly inoperative" and upon improper payment by the drawee bank over a forged indorsement, the drawee bank must recredit the drawer's account (UCC 1-201[43]; 3-404[1]; 4-401; 2 White and Summers, Uniform Commercial Code § 18-3, at 213-215 [Practitioner's 4th ed.] ).

Article 3, however, shifts the risk of loss to the drawer in situations where the drawer is the party best able to prevent the loss (see, e.g., UCC 3-405, 3-406, 4-406; see also, McDonnell, op. cit., 73 Geo. L.J., at 1407). In particular, UCC 3-405(1)(b)--the fictitious payee rule--provides that "[a]n indorsement by any person in the name of a named payee is effective if * * * a person signing as or on behalf of a maker or drawer intends the payee to have no interest in the instrument." The forged indorsement, in other words, is treated as if it were the actual indorsement of the stated payee, and payment by a transferee in the transactional chain is proper (see, Merrill Lynch, Pierce, Fenner & Smith v. Chemical Bank, 57 N.Y.2d at 444, 456 N.Y.S.2d 742, 442 N.E.2d 1253, supra; Underpinning & Found. Constructors v. Chase Manhattan Bank, 46 N.Y.2d 459, 464, 414 N.Y.S.2d 298, 386 N.E.2d 1319; see also, 2 Crandall, Herbert and Lawrence, Uniform Commercial Code § 17.12.1, at 17:160 [1996] ).

The situation presented here is precisely that contemplated by UCC 3-405(1)(b). Getty drew more than 4,000 checks to the order of payees with no intention that they would be delivered or negotiated. Rather, it was Getty's intention to void the checks and use them to create a paper trail of gasoline credits. Of these, over 130 were misappropriated by Lewis, who then forged the indorsement of the dealers. In short, the drawer (Getty) made checks payable to a payee (a dealer), intending the payee to have no interest in the instruments, thus rendering the forged indorsement by Lewis on the checks "effective" (UCC 3-405[1][b]; see, UCC 3-405, Comments 1, 3; see also, 2 Anderson, Uniform Commercial Code § 3-405:4, at 932 [2d ed.] ).

As the record demonstrates, Getty was in the best position to prevent the losses by its bookkeeping practices, by supervising its employees, by enforcing its rules and by examining records relating to a fraud that had been in progress for a considerable time. Under UCC 3-405(1)(b), the loss brought about by Lewis's misconduct should therefore fall to her employer, not the depositary (see, UCC 3-405, Comment 4; Hartford Acc & Indem. Co. v. American Express Co., 74 N.Y.2d at 165, 544 N.Y.S.2d 573, 542 N.E.2d 1090,supra [the purpose of the UCC is to ensure that check transferees "need not stand as insurers of the honesty of a drawer corporation's employees"] ).

Getty attempts to sidestep responsibility by advancing two arguments: first, that the fictitious payee rule applies only when the transferee of the forged instrument is a bank and second, that American Express's own conduct amounted to gross negligence which strips it of the protection of the rule. We reject both contentions.

Rule Not Limited To Banks

Nothing in UCC 3-405 limits the protection of the fictitious payee rule to banks. Comment 4 to UCC 3-405 indicates that the rule was intended to protect all holders of negotiable instruments: "The principle followed [in UCC 3-405] is that the loss should fall upon the employer as a risk of his business enterprise rather than upon the subsequent holder or drawee." Equally significant is that the Code itself does not distinguish between bank and nonbank holders. The Code defines a "holder" as "a person who is in possession of * * * an instrument * * * indorsed * * * in blank" (UCC 1-201[20] ). Here, American Express was a "holder" because it was the recipient of instruments indorsed in blank by Lewis (UCC 3-202[1] ).

Moreover, the limitation Getty urges upon the Court undermines the objective of the Code to shift the risk of loss to the party best able to prevent loss under circumstances presented by this case--namely, the drawer-employer. As we noted in Prudential-Bache: " 'the employer is normally in a better position to prevent such forgeries by reasonable care in the selection or supervision of his employees, or, if he is not, is at least in a better position to cover the loss by...