On certification to the Superior Court, Appellate Division, whose opinion is reported at 188 N.J. Super. 391 (1982).
For reversal -- Chief Justice Wilentz and Justices Clifford, Pollock, Handler and Garibaldi. For affirmance -- None. The opinion of the Court was delivered by Handler, J.
Plaintiff, Steve Knesz, a Pennsylvania resident, owned a cooperative apartment in New York City. He engaged Thomas G. Moringiello, a since-disbarred New York attorney, to act as his agent for the purpose of collecting rent from the occupant of the apartment and making disbursements for expenses, including taxes, mortgage amortization, and maintenance costs associated with the apartment. Apparently, Moringiello did not regularly transmit rental proceeds to Knesz because the rents did not exceed these expenses.
On or about March 16, 1979, without plaintiff's knowledge or consent, Moringiello sold the apartment to one Lois Gartlir for $32,651.00. Ms. Gartlir remitted the purchase price to Moringiello by five checks. One was a cashier's check in the amount of $16,974.24, dated March 14, 1979, drawn by Citibank, N.A., at the request of Lois Gartlir, payable to Steve Knesz. Three checks, each dated March 13, 1979, were drawn by Hofheimer, Gartlir, Gottlieb & Gross on Morgan Guaranty Trust Company of New York, payable to Lois Gartlir in the amount of $10,000.00, $5,000.00, and $500.00 respectively. The fifth check was drawn on Banker's Trust in the amount of $177.30, payable to Lois Gartlir. Gartlir specially indorsed the three Morgan Guaranty checks and the Banker's Trust check, all under the legend "pay [or "payable"] to the order of Steve Knesz." Moringiello forged plaintiff's indorsement on all five instruments. The forger's own signature and the notation "For deposit only," appeared to have been placed under plaintiff's forged indorsement on the back of three of the checks, the $10,000.00 and $500.00 Morgan Guaranty checks and the $177.30 Banker's Trust check totaling $10,677.30. These three checks were collected in due course and credited to Moringiello's
account. The two remaining instruments -- the $16,974.24 Citibank check and the $5,000.00 Morgan Guaranty check -- are the subject of this litigation.
During this time, Moringiello had been representing other clients, Salvatore and Susan Dagate, in connection with the sale of their residence in Staten Island. James E. Collins, Esq., of the New Jersey law firm of Cerrato, O'Connor, Mehr & Saker, also represented the Dagates in connection with their purchase of a new home in Jackson Township, New Jersey. The Dagates wanted the proceeds of the Staten Island sale applied to the purchase price of the Jackson Township home. On March 5, 1979, the Dagates gave Collins a $24,000.00 check, payable to Collins, drawn by Moringiello on his special attorney's account with Central State Bank of New York. The Dagates advised Collins that the check represented the proceeds of the sale of their Staten Island property. After confirming this with Moringiello, Collins indorsed the $24,000.00 check and deposited it into his law firm's trust account with defendant, Central Jersey Bank and Trust Company of Freehold ("Central Jersey").
Moringiello's check bounced. Collins telephoned Moringiello, who apologized for the oversight and promised to deliver immediately replacement checks covering the Dagates' $24,000.00 deposit. On March 14, 1979, Moringiello delivered to Collins three checks totalling $24,000.00: the $16,974.24 Citibank check, the $5,000.00 Morgan Guaranty check, and a personal check from Moringiello's Citibank account in the sum of $2,025.76. Moringiello placed the notation "Pay to the order of James E. Collins" below Knesz's forged signature on the $16,974.24 check.
Collins promptly indorsed and deposited the checks into his firm's trust account with Central Jersey on March 15, 1979. Central Jersey forwarded the checks for payment pursuant to the bank's regular collection process and all three checks were paid in due course by the appropriate payor banks. Subsequently, the Cerrato law firm issued checks against the proceeds
of the $24,000.00 on deposit with Central Jersey. Eventually, the entire $24,000.00 was depleted by these disbursements.
Over nine months later, in January 1980, plaintiff first discovered that Moringiello had sold his apartment. Knesz chose to ratify the sale and recover the proceeds. He obtained copies of the five checks bearing his forged indorsement, executed the requisite affidavits of forgery for each, and had them forwarded to the appropriate banks for collection. These items and photocopies of the $16,947.24 Citibank check and the $5,000.00 Morgan Guaranty check were mailed to Central Jersey on August 28 and September 5, 1980. Citibank subsequently paid Knesz $10,677.30, the full amount of the three checks that Moringiello had illicitly deposited there. Central Jersey, however, refused payment on the remaining $16,974.24 and $5,000.00 checks.
On December 17, 1980, Knesz filed a two-count complaint against Central Jersey to recover $21,974.24 for the two unpaid checks. Defendant, Central Jersey, filed an answer and a third-party complaint on April 15, 1981 against Cerrato, O'Connor, Mehr & Saker, asserting that the law firm, as depositor, had warranted the instruments and was therefore liable to the bank. The firm denied its liability, raising the defenses of contributory negligence and intervening causation.
On cross-motions for summary judgment, the trial court ruled that the bank was not liable under the Uniform Commercial Code (UCC or Code), N.J.S.A. 12A:3-419(3), which furnishes a broad immunity to certain banks in their handling of forged checks. The Appellate Division reversed the summary judgment order and remanded the case to the trial court for further proceedings. 188 N.J. Super. 391, 410 (1982). We granted defendant's petition for certification, 93 N.J. 293 (1983), to consider the interpretation and application of the terms of N.J.S.A. 12A:3-419(3) of the UCC.
N.J.S.A. 12A:3-419(3) by its general terms purports to provide that a depositary or collecting bank that acts in a representative capacity in the negotiation of a forged check, doing so in good faith and in conformity to applicable commercial standards, is not liable to the instrument's true owner except to the extent of any proceeds still remaining with it.*fn1 Specifically, subsection (3) of N.J.S.A. 12A:3-419 states that these banks may be insulated from liability to the payee or true owner of a forged check when the following circumstances converge: (1) the bank was acting as a "representative;" (2) it honored the forged check in good faith and in accordance with the applicable reasonable commercial standards; and (3) it retained no "proceeds" of the check.
This section of the UCC purports sharply to restrict the causes of action available to the true owner or payee of a check whose indorsement has been forged. Under N.J.S.A. 12A:3-419(1)(c), the owner-payee may bring an action against a drawee or payor bank that transmits final payment on the forged indorsement, the payor bank being defined as "a bank by which an item is payable as drawn or accepted," N.J.S.A. 12A:4-105(b). However, the UCC by the application of the terms of § 3-419(3) does not extend this liability to a "depositary" or "collecting" bank that in the chain of collection has handled the check with the forged indorsement, a depositary bank being "the first bank to which an item is transferred for collection"
(N.J.S.A. 12A:4-105(a)), and a collecting bank being "any bank handling the item for collection except the payor bank" (N.J.S.A. 12A:4-105(d)).
In concluding that defendant, Central Jersey, was liable to the plaintiff and not entitled to the immunity accorded by § 3-419(3), the Appellate Division did not base its determination on any asserted failure on the part of the bank to adhere to the standards of good faith and commercial reasonableness applicable to such transactions. N.J.S.A. 12A:3-419(3). Conduct falling short of the standards of good faith and commercial reasonableness includes such matters as the failure to make inquiries about facial irregularities on a check or into the indorsing agent's authority. See, e.g., Salsman v. National Community Bank of Rutherford, 102 N.J. Super. 482 (Law Div.1968), aff'd o.b., 105 N.J. Super. 164 (App.Div.1969) (bank was negligent in failure to pay in accordance with terms of restrictive indorsement and to inquire into agent's authority); accord Slavin v. Passaic Nat'l Bank & Trust Co., 114 N.J.L. 341 (E. & A.1935) (common law imposed duty on depositary bank to inquire into agent's authority to endorse check payable to designated payee-principal corporation). See generally Comment, "Forged Indorsements, Depositary Banks, and the Defense of Section 3-419(3) of the Uniform Commercial Code," 18 Houston L.Rev. 173, 185-88 (1980).
Here, the trial court expressly found, and the Appellate Division concurred, that Central Jersey acted in a reasonable manner in accepting the instrument with a forged indorsement, having not dealt with the forger, but with its regular customer, James E. Collins, Esq., an attorney whose law firm maintained an account with the bank. There is no question that Collins had authority to indorse a check payable to the law firm and to deposit this into the firm's special account. Both checks were endorsed by Collins and also were stamped with the law firm's restrictive indorsement. Further, affixed to the Citibank check was the restrictive indorsement "Pay to the order of James E. Collins," indicating a proper chain of title from Knesz-to-Collins-to-Cerrato,
O'Connor, Mehr & Saker, Esqs. The only arguable irregularity in the instrument was the absence of a similar restrictive indorsement to Collins on the Morgan Guaranty check, but no one contends that such a restrictive indorsement was required or ...