Lund v. Chemical Bank

• Decision Date: 06 July 1987
• Docket Number: No. 84 Civ. 1621 (RWS).,84 Civ. 1621 (RWS).
• Citation: 665 F. Supp. 218
• Parties: Russell T. LUND, Jr., Lund's Inc., and Wardwell M. Montgomery, Plaintiffs, v. CHEMICAL BANK, Defendant. CHEMICAL BANK, Defendant and Third-Party Plaintiff, v. LAIDLAW ADAMS & PECK, INC., Third-Party Defendant.
• Court: U.S. District Court — Southern District of New York

665 F. Supp. 218

Russell T. LUND, Jr., Lund's Inc., and Wardwell M. Montgomery, Plaintiffs, v. CHEMICAL BANK, Defendant.

CHEMICAL BANK, Defendant and Third-Party Plaintiff, v. LAIDLAW ADAMS & PECK, INC., Third-Party Defendant.

No. 84 Civ. 1621 (RWS).

United States District Court, S.D. New York.

June 15, 1987.

As Amended July 6, 1987.

Parker Chapin Flattau & Klimpl, New York City, for plaintiffs; Stephen G. Rinehart, of counsel.

Kenneth J. Kelly, Asst. Gen. Counsel, New York City, for defendant; Thomas W. Cullen, Senior Counsel.

Wilson, Elser, Moskowitz, Edelman & Dicker, New York City, for Third-Party Defendant; Jonathan C. Thau, Lawrence G. Nusbaum, III, of counsel.

SWEET, District Judge.

In this action to recover the face amount of three checks which plaintiffs claim were paid over forged endorsements, third-party defendant Laidlaw Adams & Peck, Inc. ("Laidlaw") has moved for summary judgment. Plaintiffs Russell T. Lund, Jr. ("Lund"), Lund's, Inc. ("Lund's, Inc.") and Wardwell M. Montgomery ("Montgomery") have cross-moved for summary judgment, as has defendant and third-party plaintiff Chemical Bank ("Chemical").

For the following reasons, the motions for summary judgment are granted in part and denied in part, Chemical's motion is denied, and the plaintiffs' motion is granted in part and denied in part. Summary judgment is granted in favor of Chemical on the Rubin/Lund check and in favor of plaintiffs on the Lund's, Inc. and Montgomery/Karki checks.

The Facts

The following facts are undisputed.

At all times relevant to this action, Lund was an officer, director and shareholder of Flight Transportation Corporation ("FTC"), a Minnesota corporation engaged in the business of providing aircraft charter and general aviation services. FTC ceased doing business on or about June 18, 1982, when it was placed into receivership on the application of the Securities and Exchange Commission. Montgomery was also a director, shareholder and (until 1979) an officer of FTC. Lund's, Inc. is a privately held Minnesota corporation engaged in the retail food business. Lund is a shareholder and officer of Lund's, Inc.

William Rubin ("Rubin") joined FTC in 1978 as a consultant, then became chairman of FTC in 1978 and president in 1979. Rubin ran the day-to-day operations of FTC and coordinated its periodic offerings of stock to the public. In addition, Rubin purchased several aircraft with Lund, including a Learjet 25D and a Learjet 28.

To facilitate their purchases, Lund and Rubin opened joint bank accounts entitled "Rubin and Lund Jet Account," through which Lund and Rubin each possessed the independent right to write checks. Lund never wrote checks against the accounts, nor did he ever inspect the bank statements prior to June 18, 1982, nor question Rubin regarding the balances, the amount of the checks Rubin was writing, the purpose of the checks, or the dollar amounts. Although Lund contributed substantial funds toward the purchase of the aircraft and co-signed with Rubin loan agreements, Rubin selected the aircraft for purchase, negotiated the leases, received the lease payments, and made loan and maintenance payments. The jointly-owned aircraft earned for both Rubin and Lund investment tax credit.

Janet Karki ("Karki") was, at all relevant times, FTC's corporate secretary. In addition, she co-owned, with Montgomery, a Cessna P210 aircraft.

In 1980, FTC, looking to obtain additional capital, retained Laidlaw, a New York underwriter, to act as co-manager of a public offering. Prior to this offering, Lund, Montgomery and Rubin proposed various transactions with FTC by which FTC was to purchase aircraft owned by one or more of the plaintiffs and Rubin or Karki. The parties planned that the public offering and the aircraft sales would close simultaneously, and details of the proposed transactions were disclosed in the prospectus. On March 9, 1981, the public offering closed. Rubin and Karki were present at the closing, but neither Lund, Montgomery nor a representative of Lund's, Inc. attended.

The three checks at issue here were drawn by Laidlaw on Chemical Bank and are dated March 9, 1981. All three checks were made payable to the order of FTC. The check numbers and face amounts are as follows:

                       Check                Amount
                       56863              $716,946.00
                       56853               400,000.00
                       56854                46,034.00
                

The checks represented part of the proceeds of the March, 1981 public offering. The three checks issued by Laidlaw were properly endorsed by FTC by its secretary, Karki, who then endorsed the checks as follows:

                Check                   Indorsees
                56863         Russell T. Lund and
                               William Rubin
                56853         Lund's Inc
                56854         Wardwell M. Montgomery and
                               Janet Karki
                

The checks were endorsed to these individuals pursuant to the aircraft transactions discussed above. Specifically, the $716,946 check represented payment for two aircraft jointly owned by Lund and Rubin: a Learjet 25D and a Learjet 28. The $400,000 check represented payment for a Mitsubishi aircraft owned by Lund's, Inc. The $46,034 check represented payment for the Cessna P210 aircraft jointly owned by Montgomery and Karki. Although Lund, Lund's, Inc. and Montgomery had previously agreed to sell the aircraft to FTC or an affiliated company, they were unaware of the dates or details of the transactions and did not know that checks representing the proceeds of the sales had changed hands at the March 9 closing. Rubin never advised plaintiffs that the transactions had taken place at the closing, and never told them about the disposition of the cash proceeds.

Karki, as co-owner, endorsed the Karki/Montgomery check. Then Rubin took the three checks in question and endorsed each as "attorney in fact" for the plaintiffs. In order to facilitate the scam, Rubin presented three documents dated March 7, 1981 purporting to be "power of attorney" forms signed by Lund, Lund's, Inc. and Montgomery giving Rubin the authority to endorse and negotiate the checks. All parties to this action apparently agree that none of the plaintiffs signed the forms and that the signatures thereon are therefore false. Rubin endorsed each of the checks and negotiated them back to Laidlaw for his private purchase of FTC securities. Laidlaw then deposited the checks at its bank, Chemical. Plaintiffs never received the stock or the cash proceeds of the transfers and have lost their ownership interests in the aircraft.

In June, 1982, the Securities and Exchange Commission (the "SEC") commenced an action against FTC, asserting that FTC and certain of its officers and directors, including Rubin, had engaged in a massive fraud on the investing public. As a result of the investigation, FTC was declared bankrupt, placed into receivership, and its assets were eventually distributed to creditors of and investors in FTC. Rubin and Karki were sent to prison for their part in that fraud.

Prior Proceedings

After FTC filed for bankruptcy, investors and creditors of FTC commenced a number of lawsuits against FTC, Rubin, its officers and directors, auditors, attorneys, and underwriters who had been involved in the various public offerings of FTC securities. These actions were consolidated into a multidistrict action before the Honorable Charles Weiner. In Lund v. Flight Transportation Corp., 669 F.Supp. 284 (D.Minn. 1985), a case involving Rubin's forgery of Lund's endorsement on a check other than the three checks involved in this case, Judge Weiner concluded after a bench trial that Rubin and Lund were partners with respect to the ownership of six aircraft, including the Learjets at issue here.

On or about March 7, 1984, prior to the conclusion of Lund's suit before Judge Weiner, plaintiffs commenced this action by serving a summons and complaint upon Chemical alleging that Chemical accepted the three checks in question over the plaintiffs' unauthorized endorsements.

Chemical commenced a third-party action against Laidlaw seeking indemnity for breach of warranty of endorsement. By endorsing the checks, Chemical alleges, Laidlaw warranted that all signatures on the checks were authorized and is, therefore, liable for Chemical's loss.

Laidlaw and Chemical have moved for summary judgment dismissing plaintiffs' complaint, and plaintiffs have cross-moved for summary judgment against Chemical, and Chemical has moved for summary judgment with respect to the Rubin/Lund's, Inc. check only. Oral argument was heard on March 13, 1987 and all submissions were received by March 23.

Summary Judgment

In order to grant summary judgment, this court must conclude that no genuine issue of material fact exists. See Fed.R. Civ.P. 56(c). In other words, the inquiry is whether "there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). The standard is the same as that for a directed verdict:

whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.

Id., 106 S.Ct. at 2512. Summary judgment permits a court to "streamline the process for terminating frivolous claims and to concentrate its resources on meritorious litigation."

Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 12 (2d Cir.1986).

Conversion Under U.C.C. § 3-419

Plaintiffs base their claims against Chemical on U.C.C. § 3-419 of the Uniform Commercial Code (U.C.C.), which provides in relevant part:

(1) An instrument is converted when

. . . . .

(c) it is paid on a forged indorsement.

Chemical's liability to plaintiffs is therefore contingent upon a finding that Chemical paid the checks over unauthorized or forged endorsements. Since it is undisputed that Chemical paid the checks, the...