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Nutt v. Chemical Bank

New Jersey Superior Court, Appellate Division

Decided: February 24, 1989.


On appeal from the Superior Court of New Jersey, Law Division, Morris County.

Dreier and Havey. The opinion of the court was delivered by Dreier, J.A.D.


[231 NJSuper Page 59] The First Morris Bank (First Morris) appeals from a judgment entered in favor of plaintiff, Ronald R. Nutt, Sr., in the amount of $30,425.95.

[231 NJSuper Page 60]

In a previous action, Nutt brought suit against The Equitable Life Assurance Society (Equitable). His attorney in that action was Henry S. Gordon. As a result of that litigation, on April 26, 1984 Equitable drew a check for $21,639.00 on its account with The Chemical Bank (Chemical), payable to "Ronald R. Nutt and Henry S. Gordon, Esq." Gordon endorsed the check "Ronald R. Nutt by Henry S. Gordon agent and attorney in fact," and deposited it in his trust account with defendant First Morris, which through a collecting bank, First Fidelity Bank (First Fidelity), obtained payment from Chemical, the drawee.

The plaintiff complains that that money was rightfully his and he never received any of it. Nutt filed a complaint against Chemical stating that he was subrogated to the rights of Equitable and alleging that Chemical had breached its contract with Equitable by paying the check to First Morris "over an 'unauthorized signature,'" a violation of N.J.S.A. 12A:3-401. On March 4, 1985 Nutt amended that complaint to include the presenting bank (First Fidelity) and the depositary bank (First Morris) as defendants. Plaintiff's claims were based upon both conversion and breach of contract.

Chemical and First Fidelity each filed an answer and cross-claim for indemnification and contribution against First Morris, and First Morris filed a third-party complaint, and a claim for contribution, against Gordon. Thereafter, First Morris agreed to indemnify Chemical and First Fidelity, and the cross-claims were dropped.

Nutt made five unsuccessful motions for summary judgment; however, the sixth motion, the judgment which is here under review, was granted. The issues to be decided on this appeal are whether this summary judgment was properly granted on the liability issue, and, if so, whether summary judgment properly was entered on the damages question.


The standard by which an appellate court reviews a grant of summary judgment is the same as that by which the trial court

[231 NJSuper Page 61]

assesses the request: if, after reviewing the record, "there is no genuine issue as to any material fact," summary judgment will be granted or affirmed. R. 4:46-2. Even though the pleadings may raise some minor issue of fact, if there are no "material issues," then summary judgment can be granted. Judson v. Peoples Bank & Trust Co. of Westfield, 17 N.J. 67, 75 (1954).

The amended complaint in this case alleges that First Morris is liable to the plaintiff for breaching its duties of presentment under N.J.S.A. 12A:4-207 and for conversion under N.J.S.A. 12A:3-419. Under N.J.S.A. 12A:4-207, a collecting bank must warrant that it has good title, and has no knowledge that the signature on the instrument is unauthorized. According to case law, a depositary bank presenting a check with a forged indorsement to a drawee bank may ultimately be held liable for a breach of the implied warranty that it had "good title." Clients' Sec. Fund v. Allstate Ins., 219 N.J. Super. 325, 329-330 (App.Div.1987). In addition, First Morris is specifically liable to all down-stream banks in the collection process by its guaranty of all prior indorsements. In short, N.J.S.A. 12A:4-207 places the burden of loss from forged indorsements on the bank which first accepts such forgeries. Clients' Sec. Fund, at 331; Perkins State Bank v. Connolly, 632 F.2d 1306, 1319-1320 (5th Cir.1980).

Most of the material facts in this case were stipulated. The check from Equitable was made out to "Ronald R. Nutt and Henry S. Gordon, Esq." (emphasis added); Ronald Nutt never signed the check; and Henry Gordon, in his own words, "secretly signed [Nutt's] name and took that money."*fn1

[231 NJSuper Page 62]

N.J.S.A. 12A:3-404(1) states that an unauthorized signature is wholly inoperative unless ratified or unless the person whose name is signed is precluded from denying it. The signature, however, operates as the signature of the unauthorized signer against any party who in good faith pays the instrument. Therefore, Gordon's indorsement, although in the name of Nutt, operated as the valid indorsement of Gordon himself, who was one of the two named payees on the instrument.

Under N.J.S.A. 12A:4-401(1) Chemical Bank was precluded from charging Equitable's account with the amount of the instrument, since Equitable's order was to pay only if the indorsement of both Nutt and Gordon were present. At the present posture of the case, Nutt has been subrogated to Equitable's claims against Chemical and First Morris which, in turn, must under its statutory obligations and its guarantee of prior indorsements, indemnify Chemical Bank. Therefore, although the claim before us is principally that of Nutt against First Morris, the rights of the parties stem from the relation of Equitable and Chemical, i.e., drawer and drawee.*fn2

In addition, since an instrument is converted when it is paid on a forged indorsement, Nutt in his own right as a payee properly has asserted a conversion claim under N.J.S.A. 12A:3-419(1)(c). N.J.S.A. 12A:3-419 provides in part:

(1) An instrument is converted when

(a) a drawee to whom it is delivered for acceptance refuses to return it on demand; or

[231 NJSuper Page 63]

(b) any person to whom it is delivered for payment refuses on demand to pay or to return it; or

(c) it is paid on a forged indorsement.

(2) In an action against a drawee under subsection (1) the measure of the drawee's liability is the face amount of the instrument. In any other action under subsection (1) the measure of liability is presumed to be the face amount of the instrument.

As there is no question that the indorsement was forged, summary judgment on the issue of liability was properly entered in favor of Nutt and against First Morris.*fn3


The harder question in this case concerns the issue of damages. We find the trial judge erred in entering summary judgment on the damages question. The statute is deceiving. N.J.S.A. 12A:3-419(2), quoted earlier, states that "in an action against a drawee [for conversion on a forged indorsement] the measure of the drawee's liability is the face amount of the instrument." The statute continues, stating that if the action is brought against any other party liability is merely "presumed to be the face amount of the instrument."

[231 NJSuper Page 64]

As will be explained, however, the statutory absolute liability envisioned against a drawee, here Chemical (indemnified by First Morris), is inapplicable. Gordon's indorsement of Nutt's name was unauthorized, and an unauthorized signature is a "forged indorsement." Salsman v. Nat'l Community Bank of Rutherford, 102 N.J. Super. 482, 489 n. 1 (Law Div.1968), aff'd o.b. 105 N.J. Super. 164 (App.Div.1969). Under a literal reading of the statute, the claim against the drawee would be one on a forged indorsement thus apparently subjecting Chemical (and therefore First Morris) to absolute liability. We need not decide here, however, whether the statute actually mandates such absolute liability.*fn4

In Humberto Decorators, Inc. v. Plaza Nat'l Bank, 180 N.J. Super. 170 (App.Div.1981), this court recognized that N.J.S.A. 12A:3-419(1)(c) requires that an instrument paid on a forged indorsement be considered converted. Id. at 174. But in Humberto Decorators, in considering the amount of damages to be paid, we reviewed the record to see whether there was merit in defendant's claim that the plaintiff had received partial payment from the party that had incorrectly received payment

[231 NJSuper Page 65]

of the check without the plaintiff payee's indorsement. We stated:

Defendant also contends that the judge erred in determining that plaintiff was entitled to $28,205.09 because there was no evidence of a debt in that sum and because plaintiff had received partial payment from [the recipient of the funds]. The record adequately supports the finding of the trial judge that the face amount of the check represented [the recipient's] actual indebtedness to plaintiff. We will not disturb a finding adequately supported by credible evidence in the record. [ Id. at 175]. (citations omitted).

This discussion is at least some authority that the drawee is not automatically liable for the face amount of the check, irrespective of the amount lost by the payee.

The factual damage question in our case is even stronger than that in Humberto Decorators. Since this case involves joint payees, only one of whose name was forged, the rule of absolute liability cannot prevail where the defendant bank's alleged damage issue involves disputed claims between the two payees concerning how the proceeds were to have been divided. Whether defendant's obligation is absolute or only presumptive, it is liable to both Nutt and Gordon for the face amount of the check. To the extent that the bank has overpaid Gordon, it may recoup these funds and has asserted this right by way of third-party complaint. To the extent that it has underpaid Nutt, it must now remedy this wrong. First Morris can be liable to Nutt for as much as the face amount of the check if, as alleged by Nutt, Gordon was to have received nothing from the proceeds, and an alleged $6,500 payment by Gordon to Nutt was indeed a separate repayment of a loan. But, if in fact, Gordon were to have received his legal fee from the proceeds, then Nutt would be entitled to the settlement amount, less the fee. If the parties' agreement was that Nutt was to have received nothing but $6,500, and the balance was to have been retained by Gordon in payment for legal services and in settlement of other claims of Gordon against Nutt, then there may be no payment at all. These are all allegations between Gordon and Nutt raised by their depositions, and creating factual issues

[231 NJSuper Page 66]

inappropriate for resolution on a motion for summary judgment.

We therefore determine that insofar as the damage question is concerned in this joint-payee matter, where the forger was one of the payees, the rule of absolute liability as opposed to presumptive liability (if it has any general vitality at all), is inapplicable. We reverse the decision of the trial judge on the issue of damages and remand the matter to the Law Division for trial on that issue alone.


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