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New Jersey Lawyers’ Fund for Client Protection v. PNC Bank, N.A.

A-5869-01T1 (N.J. Super. App. Div. 2003) (Unpublished)

UCC; CHECKS—In the case of a check paid despite a forged payee’s signature, if the proper payee joins the maker and all banks in the chain of collection in a single action, the drawee bank is strictly liable for damages.

An attorney forged a joint payee’s signature on a check and it was accepted by a depository bank. The check was then sent to the drawee bank, who also honored the check and withdrew monies from its customer’s account. When the attorney’s client discovered what had happened he approached the attorney, but was only able to recover part of his funds. He then recovered the balance of the funds from the Client Protection Fund. In connection with that recovery, he assigned to the Fund all of his rights against the attorney “and any other entity liable for the loss.” The Fund sued the attorney, the depository bank, the drawee bank, and the drawer of the check. It then sought summary judgment against both banks. The Court found the drawee bank liable even though the drawee bank maintained that when the Fund sued the depository bank as well as the drawee bank, the Fund “ratified the actions of [the drawee bank] as drawee/payor bank in debiting its customer’s account and transmitting the proceeds to [the depository bank].” In essence, it argued that when the Fund brought suit against the depository bank “for the specific proceeds of the check, the Fund acknowledge[d] that the item was properly paid by the drawee bank.” The Court found the ratification argument to be “unsupported by New Jersey law.” According to the Court, “it is axiomatic that a drawee bank is liable to the payee for conversion if a check is paid on a forged endorsement of the payee.” As to the depository bank, the Court also found liability. Under the 1961 version of the Uniform Commercial Code, a depository bank could assert a defense that it paid “in good faith and in accordance with the reasonable commercial standards applicable” to the banking industry. Under prior case law, a “payee cannot succeed in a direct action against the depository bank alone because the drawee bank is strictly liable to the maker, and the depository bank is strictly liable to the drawee bank on a warranty theory.” On the other hand, prior case law also said: “But if the payee brings an action against all of the banks in the chain of collection and the maker, the reasoning of [the previous sentence] is irrelevant.” Here, the Fund brought an action against all of the banks in the chain of collection as well as the maker. Consequently, the Court was satisfied that the immunity provided in the 1961 Code did not apply and it had no need to reach a decision as to whether a 1995 amendment to the Code eliminating the good faith exception was retroactive.

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