Plaintiffs, payee and special indorsee of a check, sue defendant collecting bank for applying the proceeds of the check to the account of an attorney, Harold Breslow, who improperly indorsed the check. The parties have waived trial by jury and have submitted to the court the issue of defendant's liability based upon various stipulations, depositions, affidavits and admissions. Defendant has sued third-party defendants Harold Breslow, who has defaulted, and The Fidelity and Casualty Company of New York, for indemnification on a bond. The third-party action is not presently before the court.
In May 1965 plaintiff Elizabeth A. Odgers (now Elizabeth A. Salsman) retained an attorney, Harold Breslow, to handle matters arising out of the death of her husband, Arthur J. Odgers. Breslow was recommended to Mrs. Odgers by her personal physician, Dr. S. It is stipulated that Breslow enjoyed a good reputation in the community at that time. Arthur J. Odgers had been an officer and stockholder in a company in which he had a one-third interest. He participated in the company's profit-sharing plan and had designated his wife as sole beneficiary. In payment of benefits under the plan, Mrs. Odgers received a cashier's check of the First National City Bank made out to her order in the amount of $159,770.02. The check is dated
August 13, 1965. Breslow then informed Mrs. Odgers that the check was not hers but belonged to the estate and that the proceeds must be held in a separate account for payment of taxes and other purposes. Mrs. Odgers was told by Breslow that the check "must be put in the estate account of Arthur Odgers." Breslow testified that at no time did he indicate or inform Mrs. Odgers that the money was to go or would go into his attorney's trust account.
Breslow wrote on the back of the cashier's check "Pay to the order of Estate of Arthur J. Odgers." He requested Mrs. Odgers to indorse the check in this fashion, and she did so. Under this special indorsement, when he was no longer in the presence of Mrs. Odgers, Breslow wrote, "Estate of Arthur J. Odgers -- for deposit Harold Breslow, Trustee." Under this purported indorsement Breslow's secretary then wrote, "For deposit Harold Breslow Trustee." Mrs. Odgers had no knowledge of the subsequent indorsements. The check was then sent by mail to defendant National Community Bank of Rutherford for collection, and the proceeds were collected and deposited in Breslow's' general trustee account. Defendant bank did not inquire into the authority of Breslow to indorse the checks for the estate. There was no estate account in defendant's bank, although Mrs. Odgers had qualified as administratrix of the estate on July 9, 1965.
From August 1965 until March 1966 Mrs. Odgers inquired of Breslow on many occasions as to the status of the profit-sharing funds. She was anxious to have the funds invested so that she could use the income for current expenses. Breslow put her off with a variety of delaying tactics and misrepresentations. Ultimately he told her the funds were invested in Treasury notes. As time passed Mrs. Odgers became more suspicious and began to investigate the disposition of the funds. In March 1966 she called defendant bank to get information concerning the alleged Treasury notes. The bank advised her that there was no record of an account for the estate of Arthur J. Odgers. Mrs. Odgers then contacted another attorney and he assisted her in further
investigation. She obtained a copy of the original check from the First National Bank in New York City. She took the check to several lawyers for their advice. An appointment was then made with Breslow for March 30. On that date, at his office, Breslow confessed to Mrs. Odgers and her present husband, Salsman, that he had appropriated the funds to his own use, but that he had some money left in his account. They immediately took Breslow to defendant bank where he paid over to Mrs. Odgers funds which were still in his account. Later that day Mrs. Odgers and Salsman went to Salsman's attorney who called defendant concerning the matter. Attached to exhibit DN-1 is a copy of a letter dated April 1, 1966 sent by an attorney on behalf of Mrs. Odgers to defendant demanding reimbursement of the funds received on collection of the check. Mrs. Odgers was also advised to file a criminal complaint against Breslow, and she did so promptly. Breslow has since pleaded guilty to the charge of embezzlement and misappropriation of funds (N.J.S. 2 A:102-5) and is presently serving a prison sentence. He also resigned from the New Jersey Bar. In April 1966 Mrs. Odgers started an action against Breslow and on June 3, 1966 obtained a judgment in her favor. Some monies were recovered by execution on that judgment. The balance not yet recovered is $117,437.43.
Defendant bank contends that it is not liable under any provision of the Uniform Commercial Code; that Mrs. Odgers was negligent, that she ratified the acts of Breslow, and that N.J.S. 3 A:41-7 exonerates the bank for any misapplication of funds by Breslow. The bank contends that Breslow had the power to negotiate the check as agent or fiduciary under N.J.S. 12 A:3-117, that the bank became a holder in due course of the check, and that N.J.S. 12 A:3-406 bars recovery because of the alleged negligence of Mrs. Odgers in substantially contributing to the making of an unauthorized endorsement. The bank also relies on N.J.S. 12 A:3-404 to claim that Mrs. Odgers ratified the unauthorized signature of Breslow. It apparently contends
that Mrs. Odgers ratified the application that Breslow pretended to make of the monies, but in its brief concedes that she did not ratify his embezzlement (i.e., personal use) of the funds.
In the absence of defenses such as negligence, estoppel or ratification, the payee of a check is entitled to recover against a bank making collection from the drawee based upon a forged or unauthorized indorsement of a check. Gast v. American Casualty Co. of Reading, Pa., 99 N.J. Super. 538 (App. Div. 1968); Teas v. Third National Bank and Trust Co., 125 N.J. Eq. 224 (E. & A. 1939); Passaic-Bergen Lumber Co. v. United States Trust Co., 110 N.J.L. 315 (E. & A. 1933); Buckley v. The Second National Bank of Jersey City, 35 N.J.L. 400 (Sup. Ct. 1872). This has been the established law throughout the country and continues to be the rule in states which have adopted the Uniform Commercial Code. Gresham State Bank v. O. & K. Construction Co., 231 Ore. 106, 370 P. 2 d 726, 372 P. 2 d 187, 100 A.L.R. 2 d 654 (Sup. Ct. 1962); Harry H. White Lumber Co., Inc. v. Crocker-Citizens National Bank, 253 A.C.A. 423, 61 Cal. Rptr. 381 (D. Ct. App. 1967); Ervin v. Dauphin Deposit Trust Co., 84 Dauph. 280, 38 Pa. Dist. & Co. 2 d 473 (C.P. 1965); Mackey-Woodward, Inc. v. Citizens State Bank of Cheney, 197 Kan. 536, 419 P. 2 d 847 (Sup. Ct. 1966); Aetna Casualty & Surety Company v. Lindell Trust Co., 348 S.W. 2 d 558 (Mo. App. 1961); Saf-T-Boom Corporation v. Union National Bank of Little Rock, 236 Ark. 518, 367 S.W. 2 d 116 (Sup. Ct. 1963); E. Moch Co. v. Security Bank, 176 App. Div. 842, 163 N.Y.S. 277 (App. Div. 1917), affirmed 225 N.Y. 723, 122 N.E. 879 (Ct. App. 1919); Annotation, "Right of check owner to recover against one cashing it on forged or unauthorized indorsement and procuring payment by drawee," 100 A.L.R. 2 d 670 (1965). See also Stone & Webster Engineering Corp. v. The First National Bank & Trust Company of Greenfield, 345 Mass. 1, 184 N.E. 2 d 358, 99 A.L.R. 2 d 628 (Sup. Jud. Ct. 1962). [102 NJSuper Page 490] The check in question was indorsed by the payee, Mrs. Odgers, to the order of the estate of Arthur J. Odgers. There was no valid indorsement thereafter by the estate of Arthur J. Odgers. N.J.S. 12 A:3-110(1)(e) provides that an instrument may be payable to the order of "an estate, trust or fund, in which case it is payable to the order of the representative of such estate, trust or fund * * *." The check was not indorsed by the administratrix of the estate, the only person who had authority in law to indorse the check. Breslow was not a trustee of the estate, and the purported indorsement for the estate by "Harold Breslow, Trustee" was unauthorized and ineffective. Breslow testified that he never told plaintiff that he would act as her agent. His purported indorsement was not authorized as the agent for the administratrix nor as a representative of the estate. See N.J.S. 12 A:1-201 (35) and N.J.S. 12 A:3-403. In Teas v. Third National Bank and Trust Co., supra, 125 N.J. Eq., at p. 227, similar indorsements were made. The checks in that case were payable to the order of Rutherford Teas, ancillary executor, and to the order of the estate of Elizabeth M. Teas. The checks were indorsed by the attorney for the estate in the name of the payee followed by "Joseph H. Carr, atty." The attorney, ...