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Sovereign Bank v. United National Bank

March 18, 2003

SOVEREIGN BANK, PLAINTIFF-RESPONDENT,
v.
UNITED NATIONAL BANK (N/K/A UNITED TRUST BANK), DEFENDANT/THIRD-PARTY PLAINTIFF-APPELLANT, V. ELDER VERGARA AND LUZ M. VERGARA, THIRD-PARTY DEFENDANTS.



On appeal from Superior Court of New Jersey, Law Division, Somerset County, SOM-L-2049-00.

Before Judges King, Wefing and Lisa.

The opinion of the court was delivered by: Wefing, J.A.D.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued February 5, 2003

Plaintiff, Sovereign Bank ("Sovereign"), sued United National Bank ("United"), a depositary bank, for conversion under N.J.S.A. 12A:3-420. On cross-motions for summary judgment, the trial court ruled for plaintiff and entered judgment in its favor for $65,150. United has appealed. We affirm.

The dispute arises in the following context. In September 1999, Luz and Elder Vergara granted a purchase money mortgage to Sovereign on residential property located at 12 Fisher Avenue in Bound Brook, New Jersey, to secure a loan of $135,992. The mortgage was insured through the United States Department of Housing and Urban Development ("HUD"), and it required the Vergaras to maintain fire, flood and other hazard insurance on the property. The mortgage stated in pertinent part

In the event of loss, . . . [a]ll or any part of the insurance proceeds may be applied by Lender (i.e., Sovereign), at its option, either (a) to the reduction of the indebtedness under the Note and this Security Instrument, . . . or (b) to the restoration or repair of the damaged Property . . . . Any excess insurance proceeds over an amount required to pay all outstanding indebtedness under the Note and this Security shall be paid to the entity legally entitled thereto.

Several days after closing on this transaction, Hurricane Floyd struck the State of New Jersey and the property suffered extensive flood damage. On November 24, 1999, the Federal Emergency Management Agency ("FEMA"), in connection with the National Flood Insurance Program, issued a check for $52,065.34, payable jointly to the Vergaras, Sovereign and the Secretary of HUD. The Vergaras received the check and on December 11, 1999, they presented it to United. Despite the fact that the check had not been endorsed by either Sovereign or the Secretary of HUD, United accepted the check and credited the proceeds to the Vergaras. The Vergaras diverted the proceeds and have made no payments on the mortgage held by Sovereign.

Sovereign commenced a foreclosure action and obtained a final judgment of foreclosure against the Vergaras in August 2000 in the amount of $145,295.15. According to Sovereign, HUD refused to accept the property in its flood-damaged state and, therefore, Sovereign had to purchase the property at a foreclosure sale and then place it on the open market to protect its interests. The highest offer Sovereign had received for the property was $140,000, but the amount due on the mortgage, with interest and fees, exceeded $180,000. Sovereign asserted it would net no more than $128,905 from a gross sales price of $140,000.

Sovereign did not commence a deficiency action against the Vergaras to reduce its losses. Rather, in December 2000, it commenced this action against United, contending that United had converted the insurance proceeds when it accepted the FEMA check for payment without the endorsement of the joint payees. In August 2001, Sovereign filed an offer of judgment against United for $50,000.

I.

Subsection (a) of N.J.S.A. 12A:3-420 provides in part:

The law applicable to conversion of personal property applies to instruments. An instrument is also converted if it is taken by transfer, other than a negotiation, a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument a person not entitled to enforce the instrument or receive payment.

The Uniform Commercial Code Comment gives the following description of the scope of this section, saying that it covers cases in which an instrument is payable to two persons and the two persons are not alternative payees, e.g., a check payable to John and Jane Doe . . . . [N]either payee acting without the consent of the other, is a person entitled to enforce the instrument. If John indorses the check and Jane does not, the endorsement is not effective to allow negotiation of the check. If Depositary Bank takes the check for deposit to John's account, Depositary Bank is liable to Jane for conversion of the ...


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