Phoenix Assurance Company (plaintiff) brings this action against First National State Bank (National), Fidelity Union Trust Company (Fidelity) and certain others who were payees on its drafts numbered 055438 for $2,800 (first draft), and 113737 for $700 (second draft). The present parties to the action are plaintiff and the two banks. A default judgment has been entered against the payee who received the proceeds and all other payees were dismissed by consent at pretrial.
The facts, which have been stipulated, show that the payee entitled to the proceeds never endorsed the drafts. The case involves a missing, and not a forged, endorsement and a claim by the drawees against the collecting banks, drawees having issued new drafts to the payee whose endorsement was missing. No New Jersey decision has been found on the question for decision. Cf. Gast v. American Cas. Co. of Reading, Pa., 99 N.J. Super. 538 (App. Div. 1968) (payees who did not receive proceeds of draft because of forged endorsements had cause of action in conversion against drawer-drawee who paid draft on forged endorsement.) The basic practical problem is one familiar to the law. The wrong person obtained the funds and is no longer available. The novel question for decision is what is the effect of N.J.S.A. 12A:3-120 making a bank through which a draft is payable a collecting bank. See Murray, "Drafts Payable Through Banks," 77 Comercial L.J. 389 (1972) (analysis of problems created in the use of drafts, as distinguished from checks, due to the absence of a drawee bank and the designation of the banks through which drafts are payable as collecting banks.)
Plaintiff issued the drafts in settlement of two claims under an insurance policy insuring the mortgagor-owners (husband and wife) of, and the mortgagee of, real property in Newark, New Jersey, against vandalism and fire losses.
The first draft was issued on December 28, 1968, "payable through Fidelity Union Trust Company, Newark, N.J." upon acceptance by Plaintiff and payable to the owners of the
property, an attorney who represented owners, a public claims adjuster and the mortgagee. The first draft was sent to the owners. This draft was endorsed by all payees, except the mortgagee. The husband-owner deposited it in his account with National on January 9, 1969 and provisional credit was given. National endorsed the draft, "Pay any bank, banker or trust company P.E.G.,"*fn1 and transferred and delivered said draft on that date to Fidelity. Fidelity provisionally credited National's account with Fidelity for the draft on that date.
Plaintiff and Fidelity had no defined legal relationship except that created or imposed by N.J.S.A. 12A:3-120.
In accordance with the arrangements between Fidelity and plaintiff, Fidelity presented the first draft to plaintiff on January 10, 1969 for acceptance and authorization of payment. Plaintiff reviewed the draft and authorized and directed Fidelity to pay from a checking account plaintiff had with Fidelity. Fidelity did so and final settlement was issued on January 14, 1969 to National.
On February 27, 1969 plaintiff issued the second draft, "payable through Fidelity Union Trust Company, Newark, N.J." upon acceptance by plaintiff to the order of the owners and mortgagee. The owners endorsed the second draft. The mortgagee did not. On April 2, 1969 the husband-owner-payee deposited it in his account with National. National gave provisional credit. National endorsed the draft, "Pay any bank, banker or trust company, P.E.G.," and transferred and delivered said draft to Fidelity on the same day.
Pursuant to Fidelity's arrangement with plaintiff, Fidelity endorsed the second draft and presented it to plaintiff for acceptance and authorization of payment on or about April 3, 1969. Plaintiff reviewed, accepted and authorized payment of the second draft against plaintiff's checking account at Fidelity. Fidelity debited plaintiff's account and
issued final settlement to National on April 7, 1969. Owner obtained proceeds of both drafts.
On May 2, 1969 the mortgagee notified plaintiff that it was foreclosing the mortgage and had not been paid on the two claims. The mortgagee made formal demand for payment upon plaintiff. Plaintiff made demand upon those who endorsed the drafts, other than the banks, for repayment after the mortgagee's demand upon it. Repayment was not obtained. On June 26, 1969 plaintiff issued third and fourth drafts for $2,800 and $700, respectively, to the mortgagee alone. These were paid through Fidelity on July 30, 1969.
Plaintiff made no demand on the banks prior to June 30, 1969. During the two months preceding June 30, 1969 the owner had a modest balance in the account at National, but not a balance sufficient to pay the full amount of the two drafts. The account was closed June 30, 1969. This action was commenced on July 16, 1969. The complaint was the first notice to the banks.
The remaining parties agreed to a stipulation of facts and all moved for summary judgment. The stipulation ends with the following:
Plaintiff has alleged negligence of defendant banks and breach of warranty of good title under N.J.S.A. 12A:4-207 as the bases of their respective liability to it. If the court finds defendants liable on one of the two grounds, it is unnecessary to consider the other.
Defendant Fidelity has asserted that the action is barred because plaintiff gave no timely notice as required by N.J.S.A. 12A:4-406 or 4-207(4), and that Fidelity acted in accordance with plaintiff's instructions, N.J.S.A. 12A:4-203. Fidelity has ...