Summary
holding that "the intended-payee defense is available to a bank in defending an action for breach of its presentment warranties"
Summary of this case from Pamar Enterprises v. Huntington BanksOpinion
Docket No. 160061.
Submitted August 11, 1994, at Detroit.
Decided June 20, 1995, at 9:10 A.M.
Kasiborski, Ronayne Flaska (by Chester E. Kasiborski, Jr.), for the plaintiff.
Douglas C. Bernstein and Gary J. Galopin, for the defendant.
In this action brought by plaintiff under Article Four of the Uniform Commercial Code (UCC), defendant appeals as of right the trial court's order granting summary disposition for plaintiff pursuant to MCR 2.116(C)(10). We reverse.
On November 1, 1987, four individuals formed a partnership, South Central Investment Associates, for the purpose of "purchasing, developing and/or operating income producing property and related ventures." Approximately ten months later, the partners incorporated SCI Professional Associates, Inc.
In 1988, plaintiff extended South Central a $100,000 line of credit that was secured by the personal guarantees of the partners. In July 1989, plaintiff increased the line of credit to $150,000 and subsequently issued a cashier's check for $149,850, listing "South Central Investment Associates" as the payee. In return, South Central executed a promissory note to plaintiff. The intended purpose of this unsecured loan was for the purchase of an apartment building. The purchase agreement, however, clearly reflected that SCI was the buyer. The cashier's check was endorsed "SCI Prof. Assoc., Inc." and deposited in SCI's account with defendant. Plaintiff's account with the Federal Reserve Bank was debited for the amount of the check.
South Central eventually failed to pay the promissory note when it matured in November 1989; nevertheless, plaintiff renewed the note on two subsequent occasions. On March 9, 1990, SCI assumed the loan by executing a promissory note in the amount of $150,000 and securing the note by two parcels of real estate that were owned by SCI. A few months later, two partners were arrested and charged with obtaining money under false pretenses. SCI subsequently failed to the pay the note when it matured.
Rather than foreclosing on the mortgage, plaintiff informed defendant on May 17, 1991, that defendant had improperly accepted and processed the cashier's check, because the check was improperly endorsed. Defendant refused to reimburse plaintiff the proceeds of the check. Plaintiff then filed the instant action on the basis that defendant was strictly liable for accepting an improperly endorsed check for deposit under Article Four of the UCC. Defendant, however, claimed that it was not responsible because the proceeds of the cashier's check were received by the intended payee, South Central. The trial court eventually granted plaintiff's motion for summary disposition, holding that defendant was liable because the check had not been endorsed by South Central.
Defendant's liability was predicated on UCC 4-207(1), MCL 440.4207(1), MSA 19.4207(1), which provided in relevant part:
Each customer or collecting bank who obtains payment or acceptance of an item and each prior customer and collecting bank warrants to the payor bank or other payor who in good faith pays or accepts the item that
(a) he has a good title to the item or is authorized to obtain payment or acceptance on behalf of one who has good title.
Pursuant to this "presentment warranty," which is now contained in MCL 440.4208(1)(a); MSA 19.4208(1)(a), the collecting bank warrants to the drawee bank that there are no forged or improper endorsements. If the bank breaches this warranty by presenting a check with an improper endorsement to the drawee bank for payment, then it is liable to the drawee bank for the amount of the check.
Defendant does not dispute that it breached the presentment warranty by accepting for deposit the cashier's check that was not endorsed by South Central. However, defendant contends that it should not be held liable, because South Central, the intended payee, received the proceeds of the check. This issue is one of first impression in this jurisdiction. However, some jurisdictions have held that a bank may escape liability for honoring a check on a faulty or improper endorsement, or even with no endorsement, if the bank can prove that the intended payee received the proceeds of the check. Ambassador Financial Services v Indiana Nat'l Bank, 605 N.E.2d 746 (Ind, 1992); Bankers Trust of South Carolina v South Carolina Nat'l Bank of Charleston, 284 SC App 238; 325 S.E.2d 81 (1985); Segel v First State Bank of Miami, 432 So.2d 1378 (Fla App, 1983); Northeast Bank of Clearwater v Bentley, 413 So.2d 480 (Fla App, 1982); Blackmon v Hale, 1 Cal.App.3d 548; 83 Cal.Rptr. 194; 463 P.2d 418 (1970). See also Atlantic Bank of New York v Israel Discount Bank Ltd, 108 Misc.2d 342; 441 N.Y.S.2d 315 (Sup Ct App Term, 1981); Commercial Credit Corp v Empire Trust Co, 260 F.2d 132 (CA 8, 1958). This defense is grounded on two basic principles. First, it is aimed at preventing a drawer from being unjustly enriched by recovering for an improperly paid check where the proceeds of the check in fact were received by the payee. It is also justified where a bank's improper payment is not a cause of the drawer's injury flowing from the transaction. Ambassador, supra at 752-753. Finding these decisions sound and persuasive, we hold that the intended-payee defense is available to a bank in defending an action for breach of its presentment warranties.
We now turn to the case at hand to determine whether defendant has established the defense. While it is true that South Central never endorsed the check and deposited the funds in its own account, it is undisputed South Central received the check. The South Central partners, who were also the incorporators of SCI, directed the funds into SCI's account by endorsing the check with the corporation's name. Regardless of whether South Central literally endorsed the check and placed the funds in its own account or another account, South Central obviously intended to transfer the proceeds to SCI in order to purchase the apartment complex. Indeed, plaintiff reviewed the purchase agreement, which clearly listed SCI as the purchaser. Therefore, plaintiff's argument that it never intended for anyone but South Central to receive the proceeds of the loan is irrelevant for purposes of applying the intended-payee rule to the facts of this case.
As a matter of policy, our decision further advances the intent behind the presentment warranty. In general, the drawee bank will seek reimbursement from the collecting bank under the presentment warranty when the drawee bank has recredited the amount of the check to the drawer's account. A drawee bank is strictly liable to the drawer for the amount of the improper payment where it pays a check over a forged or improper endorsement of a payee pursuant to UCC 3-417(1) (a), MCL 440.3417(1)(a); MSA 19.3417(1)(a). Naturally, this process begins once the payee has informed the drawer that it never received the check. See White Summers, Uniform Commercial Code (3d ed, 1988), § 15-9, pp 682-683. In this case, South Central never informed plaintiff, who was both the drawer and drawee of the cashier's check, that it never received the funds. Instead, plaintiff is utilizing the presentment warranty to recoup its loss for making a bad loan.
Accordingly, we find that defendant is not strictly liable for breaching its presentment warranty where it has sufficiently established the intended-payee defense. Therefore, the trial court erred as a matter of law in granting plaintiff's motion for summary disposition.
Reversed and remanded for entry of a judgment in favor of defendant. We do not retain jurisdiction.