Jackson Vitrified China Co. v. People's American Nat. Bank of North Miami

• Decision Date: 16 September 1980
• Docket Number: No. 79-1837,79-1837
• Citation: 388 So.2d 1059
• Parties: 30 UCC Rep.Serv. 281 JACKSON VITRIFIED CHINA COMPANY, Appellant, v. PEOPLE'S AMERICAN NATIONAL BANK OF NORTH MIAMI et al., Appellees.
• Court: Florida District Court of Appeals

Page 1059

388 So.2d 1059

30 UCC Rep.Serv. 281

JACKSON VITRIFIED CHINA COMPANY, Appellant, v. PEOPLE'S AMERICAN NATIONAL BANK OF NORTH MIAMI et al., Appellees.

No. 79-1837.

District Court of Appeal of Florida, Third District.

Sept. 16, 1980.

Greenberg, Reiseman & Lamont and L. Richard Mattaway and Howard J. Levine, for appellant.

Leib & Popper, P. A. and Stephen D. Thompson, for appellees.

Before HENDRY, NESBITT and BASKIN, JJ.

HENDRY, Judge.

One Ehrlick stole from appellant approximately $120,000 in checks representing appellant's accounts receivable, and deposited them in an account which he had opened with appellee bank for the purpose of converting them into cash. The account was in appellant's name, but Ehrlick, who had falsely represented himself as the sole proprietor of the business, had sole access to the account. The deposits were effected through Ehrlick's forged endorsement of that name on the reverse side of the checks.

Approximately twenty percent of the total sum deposited had been withdrawn from the account before the fraud was discovered. All of the remaining deposits having been returned to appellant by appellee bank, the sole remaining question concerns the bank's liability, if any, to appellant, for those sums withdrawn by the forger.

The ultimate liability of appellee, which was both depositary and collector, is not at issue. Appellant's clear cause of action was against the drawee banks, under § 673.419(1)(c) (1975), UCC § 3-419(1)(c) (1962), for conversion of funds properly payable to appellant as payee. Alternatively, appellant might have brought actions against its customers, the drawers of the checks, under § 673.804, Fla.Stat. (1975), UCC § 3-804 (1962). In that event, such drawers would have had recourse to their drawee banks for improper payment on the checks, under § 674-401, Fla.Stat. (1975), UCC § 4-401 (1962). At that juncture, the drawee banks would have sued the collecting bank, appellee herein, for breach of warranties of title under §§ 673.417(2), 674.207, Fla.Stats. (1975), UCC §§ 3-417(2), 4-207 (1962). Appellee would have been left to its scant remedy against the forger.

Appellant chose, however, to sue the collecting bank directly. The issue is whether or not such a direct action must yield the same result as that more certainly obtainable in an action either against the drawee banks, or the drawers, appellant's customers. Based upon our analysis of the applicable Code provisions, we must answer in the negative.

Appellant's action below was for conversion, under § 673.419, Fla.Stat. (1975), UCC § 3-419 (1962):

(1) An instrument is converted when: . . .

(C) It is paid on a forged indorsement.

The section is followed by Official Comments, which were submitted by the drafters of the Code to aid in uniform construction, and in coherent integration with other sections. Uniform Laws Annotated, UCC III, LXIII. Appellee's liability for conversion by payment on forged instruments seems clear by reference to subsection (1)(c), above, and doubly so by reference to its Comment:

(P)ayment on a forged indorsement . . . , even though made in good faith (,) . . . is an exercise of dominion and control over the instrument inconsistent with the rights of the owner, and results in liability for conversion.

Comment 3 to UCC § 3-419(1)(c) (1962), § 673.419, Fla.Stat. (1975).

The validity of such an easy conclusion is cast in serious doubt by the terms of subsection (3), through which appellee seeks to exculpate itself:

(3) Subject to the provisions of this code concerning restrictive indorsements a representative, including a depositary or collecting bank, who has in good faith and in accordance with the reasonable commercial standards applicable to the business of such representative dealt with an instrument or its proceeds on behalf of one who was not the true owner is not liable in conversion or otherwise to the true owner beyond the amount of any proceeds remaining in his hands.

A determination of whether appellee collecting bank may properly avail itself of subsection (3) defenses turns on a construction of its terms.

Recourse to Florida precedent indicates that the applicability of the subsection (3) defense to facts such as those sub judice has been assumed, without challenge, until now. See FDIC v. Marine National Bank of Jacksonville, 431 F.2d 341 (5th Cir. 1979); Pan American Bank of Orlando v. Yanow, 372 So.2d 1126 (Fla. 4th DCA 1979); Dade County v. Florida Mining and Material Corp., 364 So.2d 31 (Fla.3d DCA 1978); Siegel Trading Co., Inc. v. Coral Ridge National Bank, 328 So.2d 476 (Fla. 4th DCA 1976); Keane v. Pan American Bank, 309 So.2d 579 (Fla.2d DCA 1975); Robert A. Sullivan Construction Co., Inc. v. Wilton Manors National Bank, 290 So.2d 561 (Fla. 4th DCA 1974); Messeroff v. Kantor, 261 So.2d 553 (Fla.3d DCA 1972). See generally Murray, Commercial Law, 31 U.Miami L.Rev. 895, 916- 17 (1977); Murray, Commercial Law, 30 U.Miami L.Rev. 63, 92-93 (1975). Courts of other jurisdictions have, however, closely analyzed its terms.

Judicial application of subsection (3) to suits by a payee against a collecting bank has been strict. Courts generally have held that collecting banks have not qualified for the defense, either because of bad faith or through commercially substandard action. See, e. g., Berkheimers, Inc. v. Citizens Valley Bank, 270 Or. 807, 529 P.2d 903 (1974); Belmar Trucking Corp. v. American Trust Co., 65 Misc.2d 31, 316 N.Y.S.2d 247 (Civ.Ct.1970); Salesman v. National Community Bank of Rutherford, 102 N.J.Super. 482, 246 A.2d 162 (Super.Ct. Law Div.1968), aff'd 105 N.J.Super. 164, 251 A.2d 460 (Super.Ct.App.Div.1969).

Most jurisdictions have at least nominally recognized the impact of subsection (3) to facts such as ours. However, several courts, most notably in California and Pennsylvania, have held that, by its terms, subsection (3) does not apply to suits by payees against depositary/collecting banks for payment of checks bearing forged endorsements.

In Ervin v. Dauphin Trust Co., 84 Dauph. 280, 38 Pa.D. & C.2d 473 (C.P.1965), it was held that payment on a check was not payment of "proceeds", as the term is used in subsection (3). Rather, such payment constitutes an extension of provisional credit to the customer by reduction of the bank's cash-on-hand; only when the check is collected from the drawee bank does the collecting bank hold "proceeds." Thus, according to this argument, since the collecting bank paid out its own cash, and not "proceeds," it must remit to the payee such remaining "proceeds," as required by the terms of subsection (3).

The Ervin court posited an alternative reason for its rejection of subsection (3) applicability: Where the check is cashed, the bank is not acting as a "representative," rather, it has in fact purchased the check. Since the bank is not a representative, subsection (3) does not come into play.

While these basic themes, with varying elaborations, have found judicial acceptance in other jurisdictions, we remain unconvinced.

The former argument, regarding "proceeds", fails on our facts. The record reflects that the payments in question were not made until the process of collection was completed; thus, the transfer was made from actual "proceeds."

In any event, we find no evidence that such a strained construction of the term "proceeds" was intended by the drafters of the Code. To the extent that a distinction is drawn regarding the time of payment vis a vis the time of collection, such a distinction is artificial; to the extent no distinction is made, the provision is rendered nugatory. Such an intent could not have been intended.

The alternative argument of Ervin and Cooper, supra, regarding the term "representative," is more inviting.

" 'Representative' includes an agent, . . . or any other person empowered to act for another." § 671.201(35), Fla.Stat. (1975), UCC § 1-201(35) (1962). And until the process of collection is completed, a collecting bank is indisputably an agent of its customer. § 674.201, Fla.Stat. (1975), § 4-201 (1962). When the collection is finally made, the bank becomes a debtor. Comment 4 to § 674.201, § 4-201. At that point, the bank is no longer a "representative," and the subsection no longer applies.

This construction suffers from the same deficiency as does the argument regarding "proceeds": There is simply no reason to suppose that such an interpretation was intended by the drafters of the Code. By so reading subsection (3), we would limit the availability of the defense to that period of time necessary to effect collection on the checks; once collection were completed, the defense would disappear, because the bank would cease to act as an agent. We cannot conceive of a justification for such a "springing liability," especially where based upon a transmogrification specifically disavowed by Comment 1 to § 674.201, Fla.Stat. (1975), UCC § 4-201 (1962), from which the distinction is drawn. Absent such a justification, or a much clearer expression of intent, we will not endorse that construction.

The one point of universal agreement with regard to subsection (3) is that it is one of the most ambiguous provisions in the Code. Thus, the most believable argument against its application to the facts sub judice does not consist in definitional hair-splitting; rather, it is arguable that subsection (3) was intended to apply to an entirely separate situation, and that it was drawn more broadly than was intended.

The earliest ancestor of subsection (3) appeared in the May 1949 Draft of Article 3:

A representative who in good faith has dealt with an instrument or its proceeds is not liable for conversion even though his principal was not the owner of the instrument.

ALI & National Conference of Commissioners on Uniform State Laws, Uniform Commercial Code § 3-427 (May 1949 Draft). The purpose of the section was avowed to be adoption of

the rule of decisions which have held...