Lippes v. Atlantic Bank of New York

• Citation: 419 N.Y.S.2d 505,69 A.D.2d 127
• Parties: Mildred LIPPES, as Executrix of the Estate of Abe Lippes, Plaintiff-Appellant, v. ATLANTIC BANK OF NEW YORK and Rainer Murray, Defendants-Respondents, and George Schorr and 211 Canal, Inc., Defendants.
• Decision Date: 10 July 1979
• Court: New York Supreme Court Appellate Division

Page 505

419 N.Y.S.2d 505

69 A.D.2d 127

Mildred LIPPES, as Executrix of the Estate of Abe Lippes Plaintiff-Appellant, v. ATLANTIC BANK OF NEW YORK and Rainer Murray, Defendants-Respondents and George Schorr and 211 Canal, Inc., Defendants.

Supreme Court, Appellate Division, First Department.

July 10, 1979.

Ira A. Turret, New York City, of counsel (Arthur N. Field, New York City, with him on the brief, Field, Domenzo & Turret, P. C., New York City, attys.), for plaintiff-appellant.

Martin I. Shelton, New York City, of counsel (Milton S. Gould and Dean G. Yuzek, New York City, with him on the briefs, Shea, Gould, Climenko & Casey, New York City, attys.), for defendant-respondent Atlantic Bank of New York.

Before KUPFERMAN, J. P., and BIRNS, SULLIVAN, LUPIANO and SILVERMAN, JJ.

KUPFERMAN, Justice.

Abe Lippes, now deceased, ^* had been engaged for many years in the financing business involving the purchase, at discount, of accounts receivable and making collateralized loans.

Defendant, George Schorr, had been engaged for many years in the business of selling jewelry at wholesale, doing business as 211 Canal, Inc., a wholly owned corporation. A relationship between the two was first established in 1973, when Schorr requested and Lippes agreed to discount promissory notes, which Schorr allegedly received as payment from his customers, payable either to himself or his corporation. The first notes discounted as well as all subsequent notes delivered by Schorr were in turn, delivered by Lippes for collection to defendant-respondent Rainer Murray, as Collection Manager of defendant-respondent bank, Atlantic Bank of New York, where Lippes maintained an account for collection for many years. Upon such delivery, Lippes received a receipt therefore and thereafter a formal written acknowledgement, setting forth the name of the makers, the date and place of payment (i. e., the maker's bank), and the amount of the note.

The evidence further reveals that either before or shortly after the purchase of any notes, Lippes verified the alleged makers' satisfactory credit standing and, in general terms, their bank balance, by receiving written advice, in some cases, from the credit personnel of the payee bank, and where a written statement was unavailable, then telephone confirmation was solicited and secured. Such verification was not further pursued by direct personal contact with the makers. The Atlantic Bank's expert witness testified that the custom and practice applicable to the negotiation in New York City of commercial paper would require the purchaser to communicate with the maker to ascertain the validity of a note; however, he agreed that factoring is also done, at the seller's request, without prior or subsequent communication by his purchaser with the maker, but in such instances it is the usual practice for the factor to examine the seller's books to ascertain if the notes arose in the seller's ordinary course of business and were "valid receivables". It appears that Lippes did not examine Schorr's books prior to or immediately after the purchase of any notes.

For over 21/2 years, Lippes continued to factor such notes, purchasing them on regular basis from Schorr, then depositing them for collection with Murray, receiving receipts and subsequent written acknowledgements of such deliveries, and when a note was paid, Lippes would receive an "Advice" from his bank that payment was made and the proceeds thereof (less a small collection fee) credited to Lippes' account. In each instance, there appeared nothing on the face of such "Advice", which would have alerted Lippes in any way that a note was collected in any fashion other than by means of the usual and required collection process. Although some of the early notes purchased by Lippes were genuine and were paid through formal presentment for collection through the Atlantic Bank, the bulk of the notes were admittedly forged by Schorr, without the knowledge of the purported makers.

The fact of the forgeries, during the whole of that 21/2 year period, was effectively kept from Lippes by means of an ingenious but simple scheme devised by Schorr, with the cooperation and assistance of Murray who, apparently, was unaware of the forgeries, and because of the failure of other bank personnel and officials carefully and properly to check and supervise the operations of the bank's collection department and particularly that of its Collection Manager, Murray.

Schorr's scheme was to arrange with Murray, of course, unbeknownst to Lippes, that whenever Lippes would deliver a Schorr note or notes to Murray for collection, Murray agreed to alert Schorr of such fact, and Schorr would then deliver cash to Murray to cover the face amount of the note(s). Such scheme circumvented the usual collection process, and no note, except for one hereinafter mentioned, was ever presented to a maker's bank for collection. Of course, had such presentment been effected initially and the uncollectable, forged note returned to Lippes in the regular course, Schorr's criminal scheme could have been aborted early.

It should be noted that such practice engaged in by Murray was a clear violation of Sect. 3-504(4) of the Uniform Commercial Code, which mandates that ". . . a note made payable at a bank in the United States Must be presented at such bank". (Emphasis added). Further, Murray's collaboration in this regard was also in direct violation of general banking practices and of rules adopted by his bank, which were apparently predicated upon this U.C.C. Section, as testified to by a Vice President of Atlantic Bank directly responsible for the operations of his bank's collection department and its staff, including its manager, Murray.

As Murray received a cash payment from Schorr, his practice was to complete and initial an intrabank credit slip known as a "290 ticket", which indicated that a cash payment had been received and was to be finally credited to Lippes' account. Murray would then deliver such slip and the cash to a teller in another bank department. Over the 21/2 year period, many such slips were so delivered and accepted without question by any bank personnel or officials. Neither the tellers, nor the Atlantic Bank Vice President in charge of the Collection Department, nor the bank's internal audit department, ever questioned the large number of such "290 tickets" and cash payments credited to Lippes' account, the acceptance of which was known and should have been known to be in violation of bank rules and the law.

During Murray's occasional absences from the bank, his assistant, following his instructions, accepted cash from Schorr to satisfy the Lippes notes, completed the "290" tickets and delivered them with the cash to the tellers in the same manner practiced by Murray. Neither Murray nor his assistant ever notified Lippes of this unauthorized and unusual cash redemption procedure. As testified, when one note slipped through accidentally and was presented for payment at a maker's bank, it was returned unsatisfied with notation "signature irregular". Murray's assistant notified Murray, not Lippes, of the default, and Murray communicated with Schorr, not Lippes, who then satisfied this note with the usual cash payment.

From the outset, Lippes apparently was led to believe that his notes were being paid through the formal and required collection procedure, and apparently was thus encouraged to continue his business relationship with Schorr. In all, about 1000 notes were discounted, most apparent forgeries. However, in September, 1975, Schorr's scheme collapsed for reasons unclear in the record. ¹ At that time, Lippes was left holding 603 forged notes with an aggregate face value of $389,200.00, which the jury found cost Lippes $261,000.00 in discounted payment. ²

Schorr, through his attorneys, and later personally, made and executed a full sworn confession to Lippes of his criminal scheme. Lippes commenced action against his bank, Atlantic Bank, its Credit Manager, Murray, Schorr and his wholly owned corporation, seeking, among other relief, compensatory damages of $389,000.00, the face amount of the remaining notes, with allegations couched in fraud, misrepresentation, negligence and violation of the U.C.C. Schorr and his corporation defaulted and did not answer the complaint, resulting in a directed verdict against those defendants for the full amount of the loss; the other two defended.

The proof established the negligence of both Atlantic Bank and its collection manager, Murray, in processing the notes in an unorthodox and impermissible manner, and in contravention of the dictates of U.C.C. Sect. 3-504(4) and bank rules, which statutory requirements and rules were known to and should have been known to at least all bank supervisory officials and department heads, including Murray. However, the jury exonerated Murray from blame, while holding Atlantic Bank partially liable for the loss to the extent of 5% Thereof or $13,050.00, and, in effect, finding Lippes comparatively negligent to the extent of the remaining 95% Of the loss.

The plaintiff agreed to and prosecuted his claim at trial against the bank and Murray essentially on the theory of negligence. However, defendants, without conceding their own negligence, elicited proof indicating Lippes' contributory negligence in failing properly to protect his investments, by, among other things, not verifying the genuineness of the notes directly with the makers thereof. The defendants maintain that had Lippes done so from the outset, Schorr's criminal scheme would have revealed itself, the relationship between them would have ended, and the damage avoided. Further, Schorr testified that he bribed Murray to engage in the scheme with him, while Murray firmly denied it, contending that he innocently collaborated under the misguided belief that Schorr and Lippes were associated as partners, as Schorr had allegedly told...