On appeal from the Superior Court, Law Division, Monmouth County.
Michels, Pressler and Trautwein. The opinion of the court was delivered by Pressler, J.A.D.
The issue raised by this appeal, unaddressed in this State since its adoption of the Uniform Commercial Code, N.J.S.A. 12A:1-101 et seq., is whether the payee of a check whose indorsement has been forged has a cause of action in conversion against the depositary-collecting bank which has paid on the forged indorsement. We hold that N.J.S.A. 12A:3-419(3), relied on by defendant bank, does not immunize it from a conversion action by the payee and hence that the Code does not deprive the payee of the common-law conversion action theretofore available to him. Accordingly, we reverse the summary judgment entered in defendant bank's favor and remand for trial.
The facts giving rise to this action are basically undisputed insofar as they implicate the viability of plaintiff-payee's cause of action in conversion against defendant, the depositary and collecting bank. Plaintiff Steve Knesz was the nonoccupant owner of a cooperative apartment in New York City. He employed a New York attorney, Thomas G. Moringiello, who has since been disbarred, to act as his rental agent. It appears that Moringiello did not regularly transmit rental proceeds to plaintiff since the amount of the rent did not exceed the disbursements required to be made for taxes, mortgage amortization and maintenance expenses. In any event, in March 1979 Moringiello, without plaintiff's knowledge or authority, sold the apartment to Lois Gartlir. She paid the purchase price by way of five checks drawn on three different banks and totaling $32,651. Four of these checks, three drawn on Morgan Guaranty Trust Company of New York and one drawn on Bankers Trust, were payable to the order of Gartlir who, in turn, endorsed them
under the legend "pay to the order of Steve Knesz." The fifth was a bank check of Citibank, N.A., payable to plaintiff's order. Moringiello forged plaintiff's indorsement on all five instruments. He apparently deposited three of the checks payable to Gartlir to his own account in Citibank, N.A., which ultimately repaid plaintiff.
Thus, the controversy involves only two instruments, a check drawn on Morgan Guaranty payable to Gartlir in the amount of $5,000 and the Citibank check payable to plaintiff in the amount of $16,974.24. These two checks were delivered by Moringiello to a New Jersey attorney, James E. Collins, under the following circumstances. Moringiello at the time of this transaction was representing other clients in connection with their sale of a residence in Staten Island. Collins fortuitously represented the same people in connection with their purchase of a residence in Monmouth County, New Jersey. The proceeds of the Staten Island sale were intended to be applied to the New Jersey purchase and, in accordance with this plan, Moringiello sent Collins a check drawn on his "special attorney account" in the amount of $24,000 purportedly representing the sales proceeds. Collins deposited this check into the trust account maintained by his firm, Cerrato, O'Connor, Mehr & Saker (firm) in the Central Jersey Bank and Trust Co. of Freehold (Central Jersey). Moringiello's attorney's check was returned for insufficient funds, and Collins made demand upon Moringiello for the immediate replacement of his bad check. Moringiello obliged by turning over to Collins the two checks on which he had forged Knesz's indorsement, placing his own indorsement immediately below Knesz's forged signature. He added to these another check drawn by him on his attorney's account making up the difference between Knesz's $21,974.24 and the required $24,000. Collins indorsed all three instruments and deposited them in the firm's account in Central Jersey. The collection process proceeded and was completed in due course.
Some nine months later, in January 1980, plaintiff first learned of the unauthorized sale of the apartment. He apparently
chose to ratify the sale and seek recovery of the proceeds. With the gratuitous assistance of yet another bank, he finally obtained the necessary information regarding the five instruments, and in August, 1980 he executed affidavits of forgery as to each. As noted, Citibank paid him the amount of the three checks Moringiello had deposited to his account there. Central Jersey refused to pay, however, on the two checks as to which it was both depositary and collecting bank. Plaintiff consequently brought this action against the bank, which filed a third-party complaint against the firm.
Both plaintiff and the bank moved for summary judgment. Plaintiff took the position that the bank, having paid on a forged instrument, was absolutely liable to him in conversion. The bank cross-moved for summary judgment. Its theories of defense included the claims that the bank was not liable in conversion pursuant to the terms of N.J.S.A. 12A:3-419(3); that plaintiff had been negligent and hence was foreclosed from recovery by N.J.S.A. 12A:3-406, and finally, that in ratifying Moringiello's sale of the apartment, plaintiff also necessarily ratified Moringiello's disposition of the proceeds thereof. It was on the basis of N.J.S.A. 12A:3-419(3) that plaintiff's motion was denied and the bank's motion granted. We agree with plaintiff that the trial judge erred in his construction of this section.
N.J.S.A. 12A:3-419(1)(c) states with unmistakable clarity that "an instrument is converted when . . . it is paid on a forged indorsement." N.J.S.A. 12A:3-419(3), which poses the constructional problem here, provides in full as follows:
Subject to the provisions of this Act concerning restrictive indorsements a representative, including a depositary or collecting bank, who has in good faith and in accordance with the reasonable commercial standards applicable to the business of such representative dealt with an instrument or its proceeds on behalf of one who was not the true owner is not liable in conversion or otherwise to the true owner beyond the amount of any proceeds remaining in his hands.
Thus, the question is whether a depositary or collecting bank, when it engages in the customary business of accepting checks for cash payment or ordinary collection, is entitled to the statutory immunity from conversion liability afforded by § 3-419(3).
We note preliminarily that this is a question which has generated substantial controversy among those courts and commentators who have addressed it and who apparently are unanimous in their conclusion that there is neither commercial nor practical nor rational justification for construing it as applicable to depositary and collecting banks engaging in normal check collection business. Consequently, the section has either been ignored altogether, applied reluctantly, or held inapplicable on a variety of theories. For the reasons hereafter stated we agree with those courts which have concluded that the section does not apply in this situation but we reach that conclusion on grounds somewhat different from those heretofore articulated.
Our beginning point is pre-Code common law, which virtually universally recognized the right of the payee whose indorsement was forged to recover on theories of conversion, contract or money had and received directly against the depositary-collecting bank which paid on the forged indorsement. See the leading case of Buckley v. Second National Bank of Jersey City, 35 N.J.L. 400 (Sup.Ct.1872). See, also, American Saw Co. v. First National Bank, 58 N.J.L. 438 (Sup.Ct.1896), rev'd o.g. 60 N.J.L. 417 (E. & A.1897); Passaic-Bergen Lumber Co. v. U.S. Trust Co., 110 N.J.L. 315 (E. & A.1933). And see the post-Code decision in Salsman v. National Community Bank of Rutherford, 102 N.J. Super. 482, 489 (Law Div.1968), aff'd o.b. 105 N.J. Super. 164 (App.Div.1969), in which the court, relying on a plethora of cited out-of-state case authority, pointed out that it "has been the established law throughout the country and continues to be the rule in states which have adopted the Uniform Commercial Code" that 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 on a forged or unauthorized indorsement of a check." See, also, Thermo Contracting Corp. v. Bank of N.J., 69 N.J. 352, 359 (1976), a post-Code decision of the Supreme Court which assumed that collecting and paying banks are prima facie liable to
a payee whose indorsement is forged or unauthorized. See, also, cases collected in 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. 2d 670 (1965).
The common law right of action by the payee against the depositary-collecting bank rests, of course, upon sound and established principles dependent upon the legal fact that neither the forger of the indorsement nor those taking through him have title to the instrument and hence that the payee or last genuine indorser remains its owner. The check owner's right of direct action against the depositary-collecting bank is also recognized as resting upon sound considerations of public policy as well. First, the loss is appropriately placed upon the depositary bank since it has dealt most immediately with the forged instrument and consequently has the best as well as the last opportunity to have avoided the loss. Second, since the depositary bank is the most immediately connected with the transaction involving the forged instrument, it is, in most situations, in the best position to raise the traditional defenses of negligence, estoppel and ratification. Finally, it is the depositary bank upon which, as a consequence of the normal operation of the collection system, the loss will in any event be ultimately placed since, as a consequence of their respective indorsement warranties, each bank in the collection chain, from drawee to depositary, has a right to look to its own transferor for recovery.*fn1 See, e.g., Cooper v. Union Bank, 9 Cal. 3d 371, 107 Cal.Rptr. 1, 507 P. 2d 609, 616-617 (Sup.Ct.1973); Sherriff-Goslin Co. v. Cawood, 91 Mich.App. 204, 283 N.W. 2d 691, 693-694 (Ct.App.1979); Denn v. First State Bank of Spring Lake Park, 316 N.W. 2d 532, 537 (Minn.Sup.Ct.1982); Mississippi B. & T. Co. v. County Sup. &
Diesel Serv., Inc., 253 So. 2d 828, 831 (Miss.Sup.Ct.1971); Jackson Vitrified China v. People's American, 388 So. 2d 1059, 1062-1063 (Fla.D.Ct.App.1980). And see, generally, White & Summers, ...