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Triffin v. American International Group, Inc.

372 N.J. Super. 517, 859 A.2d 751 (App. Div. 2004)

CHECKS; HOLDER IN DUE COURSE—Whether or not a holder in due course, an assignee whose assignor took a check from someone who cashed it with a fraudulent endorsement can only recover from the unauthorized endorser unless the check’s writer substantially contributed to an alteration or the forged endorsement.

An insurance company issued a workers’ compensation benefits check. The payee never received it. The insurance company then discovered that the check had been deposited and processed by its own bank. It obtained an affidavit from the payee that his endorsement was a forgery, after which the bank put the money back in the insurance company’s account. The insurance company then replaced the check.

An investor purchased the insurance company’s dishonored check from the check cashing company that had cashed it. The check cashing agency assigned its rights in the check to the investor and acknowledged to the investor that, at the time it cashed the check, it did not know of any evidence of forgery or that the check had been dishonored.

The investor then filed a suit seeking recovery on the dishonored check. The insurance company moved for summary judgment. The lower court granted the insurance company’s motion, holding that because the check was a forgery, the check cashing company was not a holder in due course. The court also rejected the investor-assignee’s contention that the insurance company was negligent in sending the check to the wrong address.

N.J.S.A. 12A:3-203(b) provides that even if a transferee is not a holder in due course because the transferor did not endorse the instrument, the transferee is still entitled to enforce the instrument if the transferor was a holder in due course at the time of the transfer. One cannot be deemed a holder in due course where the instrument in question is taken with notice that it has been dishonored. Thus, on appeal, the Appellate Division posed the question as to whether the investor was a holder in due course. The investor claimed that he was, even though he was aware that the check had been dishonored at the time of the assignment. He further argued that he could assert a claim against the maker because the check cashing company had no reason to believe the check was forged at the time it was cashed. The Court held that it did not have to decide whether the investor’s knowledge that the check had been dishonored at the time he purchased it precluded him from being a holder in due course because, as a holder in due course, he was unable to maintain his action against the insurance company.

Whether or not a holder in due course, a party who acquires a check from an assignor who paid the check in good faith without knowledge that the endorsement was unauthorized can only recover against the unauthorized signer. Thus, neither the assignee nor cash checking company could assert a claim against the insurance company, assuming they did not have reason to believe that the check was forged.

The insurance company would have been precluded from relying on an unauthorized signature to avoid liability to a holder in due course if it had failed to exercise ordinary care and that failure substantially contributed to an alteration of an instrument or to the making of a forged signature. Here, however, the investor’s only factual predicate for asserting negligence against the insurance company was that the first check was sent to a street address, but the replacement check was sent to a post office box. According to the Court, however, this didn’t matter because there was no indication that the payee did not reside or work at the street address or that the address was wrong. And, even if the investor could have established that the first check was sent to the wrong address, it was doubtful whether this, alone, would have been sufficient to establish that the maker’s failure to exercise ordinary care substantially contributed to the actual forgery of the instrument. According to the Court, it would be unreasonable and unduly burdensome to require a business to verify every address prior to mailing a check based on the unforeseeable assumption that a forgery would take place if a check was received by someone other than the person to whom it was addressed.

Therefore, the Court affirmed the lower court’s decision and granted the insurance company’s motion for summary judgment.

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