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Metuchen Savings Bank v. Pierini

377 N.J. Super. 154, 871 A.2d 759 (App. Div. 2005)

CHECKS; CONVERSION; UCC — A bank may recover from a payee who converts and misappropriates a check and deposits it without a co-payee’s signature.

A contractor built work stations for medical professionals. It entered into a construction contract with a hospital. It then entered into an agreement with a subcontractor to install some equipment. After some of the work was completed, the contractor requested a progress payment from the hospital. The hospital wrote a check that was jointly payable to the contractor and the subcontractor for the work that had been performed. The check was supposed be sent to the subcontractor, but was inadvertently sent to the contractor. The contractor’s office manager was instructed by the contractor’s president to deposit the check into the contractor’s bank account, despite the fact that the check had not been endorsed by the subcontractor. The bank accepted the check and deposited into the contractor’s account. The contractor then filed for bankruptcy and was to pay the subcontractor for the work performed. The subcontractor notified the bank that it was the intended payee on the check and demanded payment. The bank paid the subcontractor the full check amount and then filed an action against the contractor and its president to recover the funds. The lower court ruled that the president was liable for the entire amount paid from the bank to the subcontractor because he failed to take any action to ensure that the check proceeds were paid to the subcontractor. The president appealed the lower court’s ruling. On appeal, the president asserted that he should not have been held personally liable for the bank’s conversion check. He further asserted that even if he was liable, the lower court should have reduced the judgment based on the bank’s comparative negligence.

The Appellate Division affirmed the lower court’s ruling. It found that, under the Uniform Commercial Code (UCC), the bank committed conversion by depositing the check in the contractor’s account with the missing endorsement from the subcontractor. It held that the bank’s liability was to the subcontractor only and not to the contractor who was the depositing wrongdoer, and therefore the contractor could not assert comparative negligence against the bank to reduce the judgment. It further held that the UCC does not preclude a bank from recovering from a payee who converts and misappropriates a check and deposits it without the other payee’s signature. Accordingly, it concluded that the bank could recover the total check proceeds from the contractor.

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