On appeal from the Superior Court of New Jersey, Law Division, Essex County.
Before Judges Shebell, Skillman and Wallace.
The opinion of the court was delivered by
On December 21, 1990, plaintiff, David Mandelbaum, filed a three count complaint against P&D Printing Corp. (P&D), P&D's owner, Stanley Phillips, Jr. (Phillips), Pennsylvania National Mutual Insurance Companies (Penn National), Hamilton State Bank (Hamilton), and North Plainfield State Bank, now Rockbank (Rockbank). Plaintiff asserted in count one that P&D and Phillips converted a $41,054.60 draft issued by Penn National and made payable to P&D, plaintiff, and a public adjuster. Count two alleged that Penn National failed to pay a $41,054.60 claim for windstorm loss sustained by plaintiff on November 21, 1989. Count three alleged that Penn National (drawer-drawee), Hamilton Bank ("pay through" collecting bank), and Rockbank (depository bank) deprived plaintiff of the amount of the draft by allowing payment of the draft to P&D without requiring plaintiff's endorsement. Each defendant answered denying liability and asserting cross-claims against the others. Following discovery, all parties moved for summary judgment.
On April 29, 1991, the motion Judge granted plaintiff's motion for summary judgment against P&D and Penn National, and dismissed the claims asserted by plaintiff and Penn National against Hamilton Bank and Rockbank. Subsequently, Penn National was granted judgment against P&D, and Penn National and plaintiff obtained judgments against Phillips. Penn National appeals and plaintiff cross-appeals.
Plaintiff owned a building that was occupied by P&D as a commercial tenant under a lease requiring P&D to maintain insurance on the premises. P&D procured insurance and plaintiff was named as an additional insured. On November 21, 1989, while insured by Penn National, the premises were damaged by a windstorm. Plaintiff submitted a proof of loss and a signed settlement agreement to Penn National on behalf of himself and P&D, purporting to act on his own behalf and as attorney for P&D. Penn National issued a draft for $41,054.60 payable to P&D Printing Corp., David Mandelbaum, and Sarasohn & Company Public Adj. Each payee was listed on a separate line and there were no commas following the names of the payees. The back of the draft stated: "DRAFT MUST BE ENDORSED BY ALL PAYEES." Penn National forwarded the draft to P&D.
Phillips deposited the draft, endorsed only with a stamp stating "P&D Printing Deposit Only," into P&D's account at Rockbank. Rockbank then sent the draft to Hamilton as the draft read "Pay Through Hamilton Bank." Hamilton Bank received the draft and submitted it to Penn National for acceptance. After Penn National accepted the draft, Hamilton Bank debited Penn National's account and transmitted an advice to Rockbank that the draft had cleared. Rockbank then credited the account of P&D. Subsequently, P&D removed all but $100 from its account, and plaintiff never received any settlement proceeds. At oral argument on the motion, Rockbank revealed to the court for the first time that the draft at issue was the second draft from Penn National made payable to P&D and Mandelbaum, and that the first draft (in settlement of another claim) was also deposited with P&D's endorsement alone, forwarded, and approved for payment. Rockbank urges that this prior transaction served as authorization for its acceptance of the present draft in the same manner.
In granting summary judgment to plaintiff against Penn National, the motion Judge held:
By virtue of its having accepted the draft when there were insufficient endorsements, Pennsylvania National Mutual Casualty Insurance Company converted the draft, and therefore, is liable to David Mandelbaum.
We affirm that ruling. N.J.S.A. 12A:3-419(1)(c) provides that "an instrument is converted when ... it is paid on a forged indorsement."*fn1 Payment of a draft or check with a missing endorsement is the equivalent of payment of a forged instrument and constitutes conversion against the non-signing payee. Humberto Decorators, Inc. v. Plaza Nat'l Bank, 180 N.J. Super. 170, 174, 434 A.2d 618 (App. Div. 1981); see Santos v. First Nat'l State Bank, 186 N.J. Super. 52, 72, 451 A.2d 401 (App. Div. 1982); Salsman v. Nat'l Community Bank, 102 N.J. Super. 482, 492, 246 A.2d 162 (Law Div. 1968), aff'd o.b., 105 N.J. Super. 164 (App. Div. 1969). Relying on various theories, a number of courts have held that a drawer-drawee is liable for payment of a draft containing an unauthorized endorsement. See, e.g., Gast v. American Casualty Co., 99 N.J. Super. 538, 542, 240 A.2d 682 (App. Div. 1968); Morris v. Ohio Casualty Ins. Co., 35 Ohio St. 3d 45, 517 N.E.2d 904, 910 (Ohio 1988); The Florida Bar v. Allstate Ins. Co., 391 So. 2d 238, 241 (Fla. Dist. Ct. App. 1980), review denied, 399 So. 2d 1140 (1981); Great American Ins. Cos. v. American State Bank, 385 N.W.2d 460, 464 (N.D. 1986).
Penn National's liability may also, as was alleged in plaintiff's complaint, be grounded on Penn National's failure to satisfy the loss against which it insured plaintiff. See GMAC v. Abington Casualty Ins. Co., 413 Mass. 583, 602 N.E.2d 1085, 1087 (Mass. 1992); Bernardo v. Anello, 61 Ohio App. 3d 453, 573 N.E.2d 126, 129 (Ohio Ct. App. 1988). Penn National's assertion that P&D was the apparent agent of plaintiff is frivolous. Plaintiff submitted a proof of loss for damages that he alone sustained. Although he signed the proof of loss and the settlement agreement on behalf of himself and P&D, listing himself as attorney for P&D, this action cannot be said to have created a reasonable basis for believing that P&D was plaintiff's agent for the purposes of receiving payment. Penn National itself no doubt recognized this as it created the draft so that the endorsement of plaintiff was unequivocally required, and further directed on the back of the instrument: "DRAFT MUST BE ENDORSED BY ALL PAYEES." Payment to P&D alone did not discharge Penn National's contractual obligation to plaintiff.
Penn National asserts that in any event both banks breached their presentment warranties under N.J.S.A. 12A:4-207 by accepting and forwarding the draft for payment without plaintiff's endorsement. See N.J.S.A. 12A:3-116(b).
N.J.S.A. 12A:4-207 provides:
(1) Each customer or collecting bank*fn2 who obtains payment or acceptance of an item and each prior customer and collecting bank warrants to the payor bank or other payor who in good faith pays or accepts the item that
(a) he has a good title to the item or is authorized to obtain payment or acceptance on behalf of ...