Girard Bank v. Mount Holly State Bank

• Decision Date: 31 July 1979
• Docket Number: Civ. A. No. 78-539.
• Citation: 474 F. Supp. 1225
• Parties: GIRARD BANK, Plaintiff, v. MOUNT HOLLY STATE BANK, Defendant, v. Darlene PAYUNG and Penn Mutual Life Insurance Company, Third-Party Defendants.
• Court: U.S. District Court — District of New Jersey

474 F. Supp. 1225

GIRARD BANK, Plaintiff, v. MOUNT HOLLY STATE BANK, Defendant, v. Darlene PAYUNG and Penn Mutual Life Insurance Company, Third-Party Defendants.

Civ. A. No. 78-539.

United States District Court, D. New Jersey.

July 27, 1979.

As Amended July 31, 1979.

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Archer, Greiner & Read by John B. Kearney, Haddonfield, N. J., for plaintiff Girard Bank.

Bleakley, Stockwell & Zink by Salvatore A. Alessi, Camden, N. J., for defendant and third-party plaintiff Mount Holly State Bank.

Capehart & Scatchard, P. A. by William F. Keating, Moorestown, N. J., for third-party defendant Penn Mutual Life Insurance Co. Avena, Hendren & Friedman, P. A. by James R. Hendren, Camden, N. J., for third-party defendant Darlene Payung.

OPINION

BROTMAN, District Judge.

This case presents intriguing questions concerning commercial paper transactions and Articles 3 and 4 of the Uniform Commercial Code. In particular, the court must determine to what extent the negligence of the drawer of a check affects the liability of a depository bank for a forged indorsement under the U.C.C. and common law. The drawee bank has sued the depository bank on its presentment warranty and now seeks summary judgment, while the depository bank defends by asserting the drawer's negligence. The depository bank has also sued the drawer directly in a third-party claim, on which the drawer now seeks summary judgment. The court is asked to hold that certain types of negligence by the drawer, no matter how serious, will not preclude liability of a depository bank or other party taking a check bearing a forged indorsement.

I. Factual and Procedural Background

Certain facts are not disputed by the litigants. On August 4, 1977, third-party defendant Penn Mutual Life Insurance Company issued its check numbered 377406, dated August 4, for $28,269.54 to a Morris Lefkowitz of New York City, as a return of a policy premium. The check was drawn on Penn Mutual's account at plaintiff Girard Bank in Philadelphia. The check, prepared and signed in Philadelphia, was to be sent by mail to Penn Mutual's agency in New York for distribution to Mr. Lefkowitz.

On August 5, third-party defendant Darlene Payung deposited the check in her account at Mount Holly State Bank of Mount Holly, New Jersey, the defendant and third-party plaintiff. The check bore a forgery of Mr. Lefkowitz's signature as an indorsement; the origin of the forgery is disputed. Ms. Payung also added her signature as an indorsement when she deposited the check. Mount Holly transferred the check through normal banking channels to Central Penn National Bank of Philadelphia, which then presented it for payment to the drawee and payor, Girard. Mount Holly, the depository and a collecting bank, recovered the full amount of the check from Central Penn.

The facts surrounding the discovery of the forgery are disputed but much of the evidence submitted for these summary judgment motions is uncontroverted. According to a Penn Mutual official, its New York agency first alerted the Philadelphia office that the check had not been received by a telephone call on August 19; the agency had become aware about August 11 that the check might be missing. Deposition of Ronald M. Sherlock at 74-75. Mr. Sherlock further states that both Girard and Mount Holly were notified that the check was missing on the 19th. Id. at 74-75, 86.

John Hall, executive vice president of Mount Holly, has indicated in his deposition that Mr. Sherlock indeed notified Mount Holly on the morning of the 19th, enabling the bank to freeze the remaining $5600 in Ms. Payung's account. Deposition of Hall at 8-9. Most of the proceeds had already been withdrawn by Ms. Payung. Id. at 13-14.

Mr. Sherlock of Penn Mutual also discussed the check with a Girard Bank officer on August 25, the same day that Mr. Lefkowitz signed an affidavit swearing that the indorsement was forged. Deposition of Sherlock at 86; Plaintiff's Exhibit B. That telephone conversation was confirmed by letter dated August 26 from Penn Mutual to Girard. Affidavit of Robert Torzone ¶ 3 and Accompanying Exhibit A.

It is not certain how the check was stolen and forged. Mount Holly maintains that several checks had been stolen by Penn Mutual employees prior to August 4, and that the company knew of the problem and unreasonably failed to take proper security measures. The defendant further contends that it can prove at trial that the Lefkowitz check, which was deposited at Mount Holly the day after it was drawn, was stolen by a Penn Mutual employee.

Girard has sued Mount Holly to recover on the latter's presentment warranty which it alleges was breached by the forged check. Jurisdiction is based on diversity of citizenship, 28 U.S.C. § 1332(a). Mount Holly has filed third-party complaints against Ms. Payung and Penn Mutual, while the two third-party defendants have cross-claimed against each other. Girard now seeks summary judgment against Penn Mutual for the full amount of the check, and Penn Mutual has asked for summary judgment dismissing Mount Holly's third-party claim against it. The claims by and against Ms. Payung are not at issue here.

II. Drawee's § 4-207 Claim

A. Choice of Law

Neither party disputes that New Jersey law applies to Girard's claim against Mount Holly. This court must follow the choice of law rule of New Jersey in determining what state's substantive law should apply. Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Section 4-102(2) of the Uniform Commercial Code, as codified in New Jersey, N.J.Stat. 12A:4-102(2), states in pertinent part:

(2) The liability of a bank for action or non-action with respect to any item handled by it for purposes of presentment, payment or collection is governed by the law of the place where the bank is located.

The term "liability" in the statute is most logically construed to mean the legal liability of the collecting bank, Mount Holly, on its presentment warranty, rather than the actual loss to the drawee bank, Girard, if its warranty claim is unsuccessful. This construction is supported by Official Comment 2 c.¹ Accordingly, the law of New Jersey, where Mount Holly is located, will apply to Girard's claim.

B. Presentment Warranty

Girard seeks recovery for Penn Mutual's breach of its presentment warranty under N.J.Stat. 12A:4-207(1)(a). (Further citation to the Code will omit the codification title N.J.Stat. 12A, and titles in other states where an enactment of the Code is construed.) That statute provides in pertinent part:

4-207. Warranties of Customer and Collecting Bank on Transfer or Presentment of Items; Time for Claims.

(1) Each customer or collecting bank who obtains payment or acceptance of an item and each prior customer and collecting bank warrants to the payor bank or other payor who in good faith pays or accepts the item that

(a) he has a good title to the item or is authorized to obtain payment or acceptance on behalf of one who has a good title; . . .

The forged indorsement prevented Mount Holly, the depository and collecting bank, from obtaining good title to the check, and Mount Holly therefore breached its warranty. See § 3-417, Comment 3; § 4-207, Comment 1; J. White & R. Summers, Uniform Commercial Code 510 & n. 37 (1972).² The overriding scheme of the Code is to place liability on the person who takes from the forger, which is often the depository bank. The rationale is that this party is normally in the best position to detect the forgery and prevent the fraud. See, e. g., Perini Corp. v. First National Bank of Habersham County, 553 F.2d 398, 405 (5th Cir. 1977). This has long been the policy of negotiable instruments law. See, e. g., Standard Accident Insurance Co. v. Pellecchia, 15 N.J. 162, 189, 104 A.2d 288, 302-03 (1954).

This policy is reflected throughout Articles 3 and 4 of the Code. Various sections indicate that a check bearing a forged indorsement is not "properly payable" within the terms of § 4-401(1). See Perini, 553 F.2d at 403 & n. 7. That section indicates that, absent cognizable negligence on the part of the drawer, the drawee bank may not charge the drawer for a check that is not "properly payable." However, the drawee which has paid the check may seek recovery against prior banks in the collection chain for breach of presentment warranty under § 4-207. The depository bank may also sue the prior transferring party under a similar warranty provided in § 3-417. In the instant case, Mount Holly, if found liable to Girard, may be able to shift the loss back to the prior transferor, Ms. Payung. However, it is often the case that a depository bank will be unable to recover from a prior party and will ultimately bear the loss.

While the Code essentially presumes that the depository bank (or prior party) was negligent in accepting the check and should be held liable, that bank can sometimes shift the loss to the drawer or drawee if those parties were negligent. Mount Holly does not deny the applicability of § 4-207 here, but raises various negligence defenses under several Code provisions.

C. § 4-207(4) Defense

Mount Holly first contends that it is relieved of liability on its warranty by subsection (4) of § 4-207, which states:

(4) Unless a claim for breach of warranty under this section is made within a reasonable time after the person claiming learns of the breach, the person liable is discharged to the extent of any loss caused by the delay in making claim.

Mount Holly argues that there is a genuine issue of material fact precluding summary judgment as to whether Girard asserted its claim within a reasonable time.

While reasonableness has been held to present a fact question, Phoenix Assurance Co. v. Davis, 126 N.J.Super. 379, 391, 314 A.2d 615, 622 (Law Div. 1974), the court finds there is nothing in the record to show that Mount Holly suffered a loss as the result of any...