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Sovereign Bank v. United National Bank

359 N.J. Super. 534, 821 A.2d 87 (App. Div. 2003)

UCC; CHECKS—A depository bank that pays on a check made out to joint payees, but endorsed by fewer than all, is strictly liable for losses and assumes the burden of collecting from the person to whom it gave the money. The defrauded co-payee does not necessarily have an obligation to mitigate its damages.

Under the terms of a residential mortgage, the lender was entitled to receive any insurance proceeds and apply those proceeds either to the indebtedness under the Note or to the restoration or repair of the damaged property. Shortly after the mortgage was granted, the mortgaged property suffered extensive flood damage. The insurer issued a check payable jointly to the mortgagee, its lender, and the Secretary of Housing and Urban Development (HUD). Even though the check was not endorsed either by the lender or by the Secretary of HUD, another bank accepted the check and gave the proceeds to the borrower. The borrower diverted the proceeds and the mortgage went into foreclosure. The deficiency approximated the amount of the diverted check. The lender did not commence a deficiency action to reduce its losses but commenced an action against the bank that accepted the check. Under the Uniform Commercial Code, when a check is payable to two persons and the two persons are not alternative payees, “neither payee acting without the consent of the other, is a person entitled to enforce the instrument. ... If [a] Depository Bank takes the check for deposit,” it is liable to the co-payee for conversion if the co-payee did not consent to the transaction. In this case, the depository bank contended that the lender’s failure to bring a deficiency action against its borrower barred its claim.

The Appellate Division “decline[d] to engraft principles of mortgage foreclosure law onto the statutory framework legislatively adopted to impose liability for paying an instrument without all required endorsements. According to the Court, “[t]he policy considerations underlying mortgage foreclosure law do not adhere” to actions for conversion. Under the Uniform Commercial Code, a depository bank is strictly liable for conversion. Here, by accepting a check without the required endorsements, the depository bank did not act in a commercially reasonable manner. Consequently, it assumed the risk and burden of attempting to collect from the person to whom it gave the money (and against whom a default judgment had been entered). The Court rejected the depository bank’s argument that the mortgagee would receive a windfall. It believed that it would probably be fruitless for the lender to chase its borrower, holding that the lender had acted in a commercially reasonably manner by not chasing its borrower and in its handling of the mortgage foreclosure process.

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