Siegel v. New England Merchants Nat. Bank

• Citation: 33 U.C.C.Rep. Serv. 1601,386 Mass. 672,437 N.E.2d 218
• Parties: , 31 A.L.R.4th 320, 33 UCC Rep.Serv. 1601 Rosalyn SIEGEL, executrix, 1 v. NEW ENGLAND MERCHANTS NATIONAL BANK.
• Decision Date: 01 July 1982
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 218

437 N.E.2d 218

386 Mass. 672, 31 A.L.R.4th 320, 33

UCC Rep.Serv. 1601

Rosalyn SIEGEL, executrix, ¹ v. NEW ENGLAND MERCHANTS NATIONAL BANK.

Supreme Judicial Court of Massachusetts,

Suffolk.

Argued March 4, 1982.

Decided July 1, 1982.

Donald N. Sweeney, Boston (Frank L. McElroy, Marblehead, with him), for defendant.

Mark A. Michelson, Boston, for plaintiff.

Before HENNESSEY, C. J., and ABRAMS, NOLAN and O'CONNOR, JJ. HENNESSEY, Chief Justice.

We are called upon to define the respective rights of a bank and its depositor when the bank has paid a post-dated check before maturity and deducted the amount of the check from the depositor's account. Applying the Uniform Commercial Code, G.L. c. 106, we conclude that the bank must recredit the depositor's account, but may then assert against the depositor any rights acquired by prior holders on either the instrument or the transaction from which it arose. In the course of this opinion, we shall describe the parties' responsibilities of proof with respect to the bank's subrogation claim. We remand for a further hearing on the question of subrogation.

The plaintiff's decedent, David Siegel, maintained a checking account with the defendant, New England Merchants National Bank. On September 14, 1973, Siegel drew and delivered a $20,000 check to Peter Peters, post-dated November 14, 1973. Peters immediately deposited the check in his own bank, which forwarded it for collection. The defendant bank overlooked the date on the check, and, on September 17, paid the item and charged it against Siegel's account. Siegel discovered the error in late September when another of his checks was returned for insufficient funds. He informed the bank that the check to Peters was post-dated November 14, and asked the bank to stop payment of the check. ² Later, he requested that the bank return the $20,000 to him.

When the bank refused to restore the $20,000, Siegel brought this action for wrongful debit of his account. The bank denied liability, raised defenses of waiver, estoppel, and ratification, and filed counterclaims asserting rights on the instrument and rights of subrogation. Two banks in the collecting chain became parties, one permitted to intervene as a party defendant and the other impleaded by the bank. The bank also impleaded Peters, the payee, who filed a suggestion of bankruptcy. The case was later dismissed as against the two collecting banks.

After a trial, jury-waived, the judge found that the check was post-dated by agreement between Peters and Siegel, without fraudulent purpose, and that Siegel had acted with reasonable speed to inform the bank of the error. He also found that Peters had paid no money to Siegel since receiving the check. The judge ruled that (1) the check was a negotiable instrument; (2) the check was not payable until November 14; (3) the bank was negligent in paying it before that date; (4) the bank had no right to debit Siegel's account; (5) Siegel had not waived his rights or ratified the bank's action and was not estopped from demanding the $20,000; and (6) the wrongful debit caused Siegel a loss of $20,000. He also rejected the bank's counterclaims as having no merit. He then entered judgments for Siegel against the bank in the amount of $20,000, for Siegel on the bank's counterclaims, and for the bank against Peters for $20,000. ³ The bank appealed, and we transferred the case to this court on our own motion. We vacate the judgment and remand the case for further consideration of the bank's subrogation claims. 1. Wrongful Debit and Subrogation.

The parties agree that the bank should not have paid the check when Peters presented it on September 14, and had no right at that time to charge it against Siegel's account. G.L. c. 106, §§ 3-114, 4-401(1). See Smith v. Gentilotti, 371 Mass. 839, 840, 359 N.E.2d 953 (1977). Their differences center instead on whether the bank's wrongful action caused Siegel any loss, so as to entitle him to damages. Siegel contends, and the judge ruled, that his loss must be $20,000 because that amount was debited from his account. The bank contends that there was no loss, because Siegel drew the check with the intention that it eventually be paid, and the bank could rightfully have charged it against his account on November 14. We believe that the drafters of the code anticipated disputes such as this, and provided a logical system for their resolution.

We begin with G.L. c. 106, § 4-401(1), which governs bookkeeping between depositor and bank. A bank may charge any "properly payable" item against its depositor's account. ⁴ Implicitly, the bank may not charge items, such as post-dated checks, that are not properly payable. If the charge is unauthorized, it follows that the depositor has a valid claim to the amount of the charge by virtue of the account itself. Cf. Stone & Webster Eng'r Corp. v. First Nat'l Bank & Trust Co., 345 Mass. 1, 5, 184 N.E.2d 358 (1962) (relationship of bank and depositor as debtor and creditor).

As the bank points out, the depositor's realization of this claim may produce unjust enrichment. Even when an item is not properly payable, due to prematurity or a stop payment order, the bank's payment may discharge a legal obligation of the depositor, or create a right in the depositor's favor against the payee. See G.L. c. 106, §§ 3-601(1)(a), 3-603(1), 3-802(1)(b); J. White & R. Summers, Uniform Commercial Code 542 (2d ed. 1980). If the depositor were permitted to retain such benefits, and recover the amount of the check as well, he would profit at the bank's expense. Therefore, § 4-407 provides that upon payment, the bank is "subrogated" to any rights prior holders may have had against the drawer-depositor, on either the check or the initial underlying transaction, and to any rights the drawer may have against the payee or other holders. G.L. c. 106, 4-407. ⁵ See Southeast First Nat'l Bank v. Atlantic Telec, Inc., 389 So.2d 1032, 1033 (Fla.Dist.Ct.App.1980); Mitchell v. Republic Bank & Trust Co., 35 N.C.App. 101, 103-104, 239 S.E.2d 867 (1978); Peck v. Franklin Nat'l Bank, 4 U.C.C.Rep.Serv. 861, 862 (N.Y.App.Term 1967); J. White & R. Summers, supra at 559-561. See also Universal C. I. T. Credit Corp. v. Guaranty Bank & Trust Co., 161 F.Supp. 790, 794 (D.Mass.1958) (pre-code case).

Thus, the code fixes the rights of the bank and the depositor by a two part adjustment. The depositor has a claim against the bank for the amount improperly debited from its account, and the bank has a claim against the depositor based on subrogation to the rights of the payee and other holders. The bank may assert its subrogation rights defensively when its depositor brings an action for wrongful debit. See Universal C. I. T. Credit Corp. v. Guaranty Bank & Trust Co., supra at 794-795.

Here, the bank asserted a subrogation claim based on the rights of Peters, the payee. ⁶ Neither party, however, introduced evidence concerning Peters's rights against Siegel. ⁷ A question then arises as to what matters each party was obligated to prove in order to prevail.

Section 4-403(3) of the code provides that when the problem is one of improper payment over a stop order, the "burden of establishing the fact and amount of loss ... is on the customer." G.L. c. 106, § 4-403(3). Here, of course, the bank's liability is for premature payment rather than for payment over a stop order. Nevertheless, these two forms of improper payment have in common the problem of unjust enrichment, and we believe that § 4-403(3) is a source of useful analogy.

The rule of § 4-403(3), that a depositor must prove his loss, may at first seem at odds with our earlier conclusion that § 4-401(1) provides the depositor with a claim against the bank in the amount of the check, leaving the bank with recourse through subrogation under § 4-407. See Mitchell v. Republic Bank & Trust Co., 35 N.C.App. 101, 104, 239 S.E.2d 867 (1978); Thomas v. Marine Midland Tinkers Nat'l Bank, 86 Misc.2d 284, 288-289, 381 N.Y.S.2d 797 (N.Y.Sup.Ct.1976); J. White & R. Summers, supra at 684-691. We believe, however, that § 4-403(3) was intended to operate within the process of credit and subrogation established by §§ 4-401(1) and 4-407. See G.L. c. 106, § 4-403, comment 8. When a bank pays an item improperly, the depositor loses his ability to exercise any right he had to withhold payment of the check. His "loss," in other words, is equivalent to his rights and defenses against the parties to whose rights the bank is subrogated--the other party to the initial transaction and other holders of the instrument. Section 4-403(3) simply protects the bank against the need to prove events familiar to the depositor, and far removed from the bank, before it can realize its subrogation rights. The depositor, who participated in the initial transaction, knows whether the payee was entitled to eventual payment and whether any defenses arose. Therefore, § 4-403(3) requires that he, rather than the bank, prove these matters. Cf. Knowles v. Gilchrist Co., 362 Mass. 642, 651-652, 289 N.E.2d 879 (1972) (when goods are damaged in the hands of a bailee, bailee, who is best informed, must establish due care).

This view of the three relevant sections of the code suggests a fair allocation of the burden of proof. The bank, which has departed from authorized bookkeeping must acknowledge a credit to the depositor's account. It must then assert its subrogation rights, and in doing so must identify the status of the parties in whose place it claims. If the bank's subrogation claims are based on the check, this would entail proof that the third party subrogor was a holder, or perhaps a holder in due course. This responsibility falls reasonably upon the bank, because it has received the check from the most recent holder and is in at least as good a position as the depositor to trace its history.

The depositor must then prove any facts that might demonstrate a loss. He must...