State v. Barclays Bank of New York, N.A.

• Decision Date: 18 October 1990
• Citation: 76 N.Y.2d 533,563 N.E.2d 11,561 N.Y.S.2d 697
• Parties: , 563 N.E.2d 11, 59 USLW 2271, 12 UCC Rep.Serv.2d 1120 STATE of New York, Appellant, v. BARCLAYS BANK OF NEW YORK, N.A., Respondent.
• Court: New York Court of Appeals Court of Appeals

Page 697

561 N.Y.S.2d 697

76 N.Y.2d 533, 563 N.E.2d 11, 59 USLW 2271,

12 UCC Rep.Serv.2d 1120

STATE of New York, Appellant, v. BARCLAYS BANK OF NEW YORK, N.A., Respondent.

Court of Appeals of New York.

Oct. 18, 1990.

[76 N.Y.2d 534] Robert Abrams, Atty. Gen. (Denise A. Hartman, O. Peter Sherwood and Peter H. Schiff, of counsel), for appellant.

[76 N.Y.2d 535] David M. Satnick and John Nocera, for respondent.

OPINION OF THE COURT

HANCOCK, Judge.

In the absence of actual or constructive possession of a check, does the named payee have a right of action against the depositary bank which has paid out the proceeds over a forged indorsement? This is the question presented in plaintiff's appeal from a dismissal of its action to recover the amounts of several checks drawn by taxpayers to the order of various State taxing authorities. The checks were never delivered to plaintiff; the taxpayers' dishonest accountant misappropriated them, and deposited them in his own account at Banker's Trust Company of Hudson Valley, N.A. ¹ For reasons stated hereafter, we hold that plaintiff has no right of action and accordingly affirm the order granting summary judgment to defendant.

I

The case stems from the activities of Richard Caliendo, an accountant. Caliendo prepared tax returns for various clients. To satisfy their tax liability, the clients issued checks payable to various State taxing entities, and gave them to Caliendo. Between 1977 and 1979, he forged indorsements on these checks, deposited them in his own account with defendant, and subsequently withdrew the proceeds. In November 1980--shortly after the scheme was uncovered--Caliendo died when the plane he was piloting crashed. The State never received the checks. In 1983, after learning of these events, the State commenced this action seeking to recover the aggregate face amount of the checks.

Supreme Court denied defendant's motion to dismiss the complaint and its subsequent motion for summary judgment, concluding that the payee's possession of the checks was not essential to its action against the depositary bank. On appeal, the Appellate Division reversed and dismissed the complaint. It held that requiring "delivery, either actual or constructive, [as] an indispensable prerequisite for" a conversion action under UCC 3-419(1)(c) is consistent with the view of most authorities and supported by practical considerations (State of New York v. Barclays Bank, 151 A.D.2d 19, 21-24, 546 N.Y.S.2d 479). We agree. ²

II

It has long been held that a check has no valid inception until delivery (see, Irving Trust Co. v. Leff, 253 N.Y. 359, 363, 171 N.E. 569; Cowing v. Altman, 71 N.Y. 435, 441). Further, a payee must have actual or constructive possession of a negotiable instrument in order to attain the status of a holder (see, UCC 1-201[20] and to have an interest in it. These are established principles of negotiable instruments law (see, Papex Intl. Brokers v. Chase Manhattan Bank, 821 F.2d 883, 885 [1st Cir 1987]; UCC 3-410, Official Comment 5 pertaining to subd. [1] [ordinarily the obligation on an instrument is not effective until delivery]; Bailey, Brady on Bank Checks § 5.1, at 5-2 [6th ed. 1988]; see also, Uniform Negotiable Instruments Law § 16).

Permitting a payee who has never had possession to maintain an action against the depositary bank would be inconsistent with these principles. It would have the effect of enforcing rights that do not exist. For this reason, most courts and commentators have concluded that either actual or constructive delivery to the payee is a necessary prerequisite to a conversion action under section 3-419(1)(c) (see, Papex Intl. Brokers v. Chase Manhattan Bank, supra; Lincoln Natl. Bank & Trust Co. v Bank of Commerce, 764 F.2d 392 [5th Cir.]; Winn v. First Bank, 581 S.W.2d 21 [Ky.App.1978]; Caviness v. Andes & Roberts Bros. Constr. Co., 508 S.W.2d 253 [Mo.App.1974]; 1 White & Summers, Uniform Commercial Code § 15-5, at 757 [Practitioner's-3d ed. 1988] ["court(s) should not recognize a conversion cause of action for one who, though a payee on a check, has never received actual or constructive possession of that check"]; Bailey, Brady on Bank Checks, op. cit., § 27.8, at 27-23 [payee who has not received delivery of check cannot sue depositary bank for converting it because "only a person with rights in the instrument may claim conversion"].

Significant practical considerations support this conclusion. Where a payee has never possessed the check, it is more likely that the forged indorsement resulted from the drawer's negligence, an issue which could not be readily contested in an action between the payee and the depositary bank (see, Papex Intl. Brokers v. Chase Manhattan Bank, supra, at 886; Lincoln Natl. Bank & Trust Co. v. Bank of Commerce, supra, at 398). Moreover, as noted by the Appellate Division, the payee is not left without a remedy, inasmuch as it can sue on the underlying obligation (see, UCC 3-802[1][b]; Papex Intl. Brokers v. Chase Manhattan Bank, supra, at 885).

Henderson v. Lincoln Rochester Trust Co., 303 N.Y. 27, 100 N.E.2d 117, on which plaintiff relies, does not support its argument in this respect. There, in concluding that the payee could maintain an action either in contract or conversion, the court did not reach the issue of nondelivery of the check. Other cases cited by plaintiff are readily distinguished. They involve situations where the plaintiff, unlike the State here, had received constructive possession of the check through delivery to the payee's agent, to a copayee, or to a coindorsee (see, e.g., Lund's, Inc. v. Chemical Bank, 870 F.2d 840 [2d Cir.] [delivery to coindorsees]; ³ United States v. Bankers Trust Co., 17 UCC Rep.Serv. 136 [E.D.N.Y.1975] [delivery to copayee]; Burks Drywall v. Washington Bank & Trust Co., 110 Ill.App.3d 569, 66 Ill.Dec. 222, 442 N.E.2d 648 [1982] [delivery to copayee or agent]; Thornton & Co. v. Gwinnett Bank & Trust Co., 151 Ga.App. 641, 260 S.E.2d 765 [1979] [delivery to agent].

Plaintiff maintains, however, citing language in Burks Drywall, 66 Ill.Dec. at 226, 442 N.E.2d, supra, at 652 and Thornton, 260 S.E.2d, supra, at 767, that, based solely on its status as named payee and intended beneficiary of the checks, it has a sufficient interest to bring a conversion action under UCC 3-419(1)(c) or a common-law action for money had and received. We believe such a rule would be contrary to the underlying theory of the UCC and, to the extent that the cases cited by plaintiff suggest it, we decline to follow them. Plaintiff's contention that depositary banks could frequently avoid liability for paying over forged indorsements--if payees could not bring suit against them in the absence of delivery--is unfounded. The depositary bank could still be liable to the drawee bank (UCC 3-417[1][a]; 4-207[1][a] and to the drawer, in certain circumstances where the forged indorsement was effective (see Underpinning & Found. Constructors v. Chase Manhattan Bank, 46 N.Y.2d 459, 464-466, 414 N.Y.S.2d 298, 386 N.E.2d 1319).

Nor are we persuaded by plaintiff's suggestion that permitting a suit under UCC 3-419(1)(c) by a payee not-in-possession would promote judicial economy and avoid circuity of action. On the contrary, relegating such a payee to a suit against the drawer on the underlying obligation would give full effect to the UCC's loss allocation scheme by furthering the aim of placing ultimate responsibility on the party at fault through an orderly process in which each defendant in the transactional chain may interpose the defenses available to it (see, Hartford Acc. & Indem. Co. v. American Express Co., 74 N.Y.2d 153, 165, 544 N.Y.S.2d 573, 542 N.E.2d 1090; Prudential-Bache Sec. v. Citibank, 73 N.Y.2d 263, 269, 539 N.Y.S.2d 699, 536 N.E.2d 1118; 1 White & Summers, op. cit., §§ 15-1--15-5, 16-7; see also, SOS Oil Corp. v. Norstar Bank, 76 N.Y.2d 561, 571-572, 561 N.Y.S.2d 887, 563 N.E.2d 258 [decided today]. And requiring a payee-not-in-possession to sue the drawer on the underlying claim would actually avoid circuity of action in some instances--for example, where the drawer's suit against the drawee bank is barred by valid defenses (see, UCC 3-406, 4-406) or where the drawer has an effective defense against the payee's claim. This concern has particular pertinence here where--as the Appellate Division observed (151 A.D.2d, at 20, 546 N.Y.S.2d 479)--it is contended that some of the checks were for inflated or nonexistent tax liabilities for which the drawers-taxpayers would have valid defenses against the State. In such cases, permitting a payee-not-in-possession to sue the depositary bank at the other end of the transactional chain would only produce unnecessary litigation. Accordingly, we agree with the Appellate Division that the rule requiring actual or constructive possession by a payee as a prerequisite for a suit against the depositary bank is preferable (see, Papex Intl. Brokers v. Chase Manhattan Bank, supra; Lincoln Natl. Bank & Trust Co. v. Bank of Commerce, supra ) and we adopt it.

III

Plaintiff contends, nevertheless, that even if possession is a prerequisite to a cause of action by a named payee against a depositary bank, it should prevail because the drawers' delivery of the checks to Caliendo constituted constructive delivery to the State. It is a general rule that putting a check in the hands of the drawer's own agent for purpose of delivery to the payee does not constitute delivery to the payee (see, Papex Intl. Brokers v. Chase Manhattan Bank, 821 F.2d, at 886, supra; Lincoln Natl. Bank & Trust Co. v. Bank of Commerce, 764 F.2d at 398 supra; Daggett v. Simonds, 173 Mass. 340, 53 N.E. 907 [1898]; this is so because the drawer has control of the agent and the check is revocable and ineffective until the agent delivers it (see, Caviness v. Andes & Roberts Bros. Constr. Co., 508 S.W.2d 253, 256, supra [Mo.App.1974]; 11 Am.Jur.2d, Bills & Notes, § 278)....