New Year's Nation, LLC v JP Morgan Chase Bank, N.A.

[*1] New Year's Nation, LLC v JP Morgan Chase Bank, N.A. 2008 NY Slip Op 52100(U) [21 Misc 3d 1119(A)] Decided on October 10, 2008 Supreme Court, New York County Goodman, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on October 10, 2008
Supreme Court, New York County

New Year's Nation, LLC, Plaintiff,

against

JP Morgan Chase Bank, N.A., and BANK OF AMERICA, N.A., Defendants.



109050/07

Emily Jane Goodman, J.

In this action, plaintiff New Year's Nation, LLC (NYN) seeks damages of $30,000 based upon a check allegedly improperly drawn on NYN's bank account at defendant JP Morgan Chase Bank, N.A. (JPMorgan) and deposited into an account maintained at defendant Bank of America, N.A. (BOA). The six-count complaint asserts causes of action based upon violations of sections 3-404, 3-405, 3-407, 3-417, 3-419, 4-207, 4-208 and 4-401 of the Uniform Commercial Code (UCC), for breaches of a duties of care in depositing and paying the check, breaches of express and implied warranties, and breach of contract. Defendants answered the complaint, asserting 13 affirmative defenses.

Defendants now move for summary judgment dismissing the complaint. Defendants also seek an award of attorneys' fees.

Facts

Jann Yogman (Yogman) is the owner of NYN, a company that hosts New Year's events in cities around the nation and connects them through live broadcasts. On December 2, 2006, NYN and a non-party most frequently referred to as Principal Staging entered into a contract whereby NYN was to pay that entity to provide audio, visual and production equipment and services for NYN's New Year's parties for December 31, 2006 through January 1, 2007 (Contract). Under the Contract, NYN was obligated to provide "payment on time and in ready condition for deposit." Yogman Aff., ¶ 2.

Yogman states that the contract was made with Principal Staging Corporation. The moving papers attach a Commonwealth of Massachusetts Certificate indicating that Colin Pearce (Pearce) is the president, treasurer, and a director of Principal Staging Corporation, which was incorporated on December 12, 2006, one week after the Contract was made. The moving papers also attach a Commonwealth of Massachusetts Business Certificate indicating that when the Contract was made Principal Staging, GP was established by Colin Pearce and Sanjay Merchant. For purposes of [*2]this motion, the Court will refer to the entity that contracted with Plaintiff as Principal Staging regardless of the true name of that entity.

Yogman states that, pursuant to the Contract, NYN delivered a check, drawn on its JPMorgan account, to Pearce. The check was dated December 10, 2006 and in the amount of $30,000, payable to the order of Principal Staging (Check). The Check was signed by Yogman, and Yogman's handwritten notation on the Check states: "New Year's Eve Staging." Bonilla Aff., Ex. B.

On December 11, 2006, Pearce deposited the Check into an account at BOA, indorsing the back of the Check with the following handwritten notation:

For Deposit Only

Principal Sound

Hot Prod. 1348

/s/ Colin Pearce

Id., Ex. B. Non-party Principal Sound and Production Services (Principal Sound) is a sole proprietorship owned by Pearce. Principal Sound maintains a "Business Economy Checking" account at BOA, its signature card also refers to this entity as "Hot Production" and Pearce is the authorized signatory. Id., Ex. C. According to Yogman, BOA deposited the Check into this account, and JPMorgan withdrew the $30,000 from Yogman's NYN account.

On December 17, 2006, Pearce sent an e-mail to Yogman, discussing pricing under the Contract. The next day, Yogman responded, in pertinent part, as follows:

I know you guys have sunk countless hours and days into coordinating my show. I've obviously taken a big part of this job off your plate, so it doesn't make sense that your production management fee would go up. The work you've already put in is done. And the rest of the job, although rushed at this point, will be less than it would have been.

I know what the video budget was before when it was much more extensive. So, it doesn't make sense why the money I've paid so far will only get me a video person in each venue. And it doesn't make sense that there isn't any room in these numbers for equipment.

Id., Ex. E (emphasis added).

On December 19, 2006, Seth Salinger sent a letter to Yogman and NYN as counsel for "Colin Pearce d/b/a Principal Staging," notifying Yogman and NYN that Principal Staging was cancelling the Contract due to NYN's purported "multiple material breaches" (12/19/06 Termination Letter). Id., Ex. E, at 1. In this letter, counsel confirmed that Principal Staging had received payment of $30,000. Id., at 3 (stating that NYN "tendered [*3]payment ... in the amount of $30,000," and that "Principal Staging has offset the monies that New [Y]ears Nation has already paid under the Contract").

Yogman claims that NYN never intended to pay Principal Sound or Pearce personally. Yogman claims that he reviewed his bank account online and discovered that the Check was deposited into the account of Principal Sound. Yogman maintains that he did not recognize the name "Principal Sound," and that, therefore, on December 20, 2006, he visited JPMorgan to fill out a "Statement of Fact" and an "Affidavit of Unauthorized Signature or Altered Item," describing the purported "unauthorized signature/alteration" of the Check (together, Claim), and the allegedly improper acceptance and clearance of the Check by BOA and JPMorgan, respectively. Id., Ex. A. In the Statement of Fact, Yogman stated that the Check was written "as a deposit on lighting/video integration work for a five-city event I'm hosting on December 31, 2006." Id. Yogman stated that the Check was written out to Principal Staging, that Yogman's contract was with Principal Staging, and that the Check was indorsed by Pearce. Yogman's Statement of Fact also states that, after the Check was deposited into a BOA account and cleared by JPMorgan, Principal Staging informed Yogman that it would not be doing his job. Id. Yogman then requested that the funds be returned to him so that he could "find a legitimate company to do [the] work." Id. By letter dated December 22, 2006, JPMorgan, on behalf of NYN, presented NYN's Claim to BOA, requesting either an official check in the amount of $30,000, or the return of the original item with evidence supporting proper payment.

By letter dated January 10, 2007, BOA denied the Claim. In the letter, BOA stated that "although the check was not endorsed by Principal Staging the intended party received benefit of the funds," and that BOA's customer's attorney had acknowledged receipt of the Check and the 12/19/06 Termination Letter. Id., Ex. F. Thereafter, NYN commenced this action.

Discussion

Defendants seek summary judgment dismissal, arguing that NYN sustained no damages because the proceeds of the Check reached the designated payee. NYN counters that defendants fail to establish that Principal Staging and Principal Sound are the same entity, thereby raising an issue of fact that precludes dismissal.

"It is a familiar legal principle that payments made on forged or unauthorized indorsements are at the peril of the bank unless it can claim protection upon some principle of estoppel."

Gotham-Vladimir Adv. v First Natl. City Bank, 27 AD2d 190, 192 (1st Dept 1967). However, "a drawer is precluded from recovering from the drawee bank for paying his check on a forged or unauthorized indorsement where the proceeds of the check actually [*4]reach the person whom the drawer intended to receive them." Id. at 192-93; see also Mouradian v Astoria Fed. Sav. and Loan, 91 NY2d 124, 129 (1997) ("recovery will be denied where the proceeds of an improperly paid check actually reach the person intended to receive them"). Accordingly, Plaintiff would be barred from recovering from JPMorgan if the proceeds of the check actually reached Principal Staging. This is " to prevent the depositor from being unjustly enriched by collecting from his creditor-bank the sum which has, in fact, reached the payee to whom the depositor intended the fund to go.'" Gotham-Vladimir Adv., Inc., 27 AD2d at 193, quoting Sweeney v National City Bank of Troy, 263 App Div 418 (3d Dept 1942), affd 290 NY 624 (1943); see also Kosic v Marine Midland Bank, 76 AD2d 89, 92 (4th Dept 1980) (" drawer should not be permitted to recover from the drawee bank where he has suffered no loss from the improper payment of a check' [citation omitted]").

For example, in Botchman v The Bank of NY (Sup Ct, Westchester County, June 17, 2004, Barone, J., index No. 5917-02), the plaintiff sought to recover based upon allegedly forged or unauthorized indorsements on several checks he had issued against his account at Bank of New York that were deposited at Fleet Bank. The court granted summary judgment dismissing the complaint against both the drawee bank and the depositary bank, based upon: the plaintiff's failure to establish a prima facie case indicating that any payee of the checks issued had been aggrieved, and only the plaintiff (not any payee) had asserted a claim; the fact that the payees had title or rights regarding the checks, not the plaintiff as the drawer, and no one had come forward to complain that proceeds due and owing were not paid; and the fact that discovery would elicit nothing further because, had any payee not received the owed funds, that organization or individual would have communicated with the plaintiff as the drawer of the check. Defendants' Mem. of Law, Ex. A. Similar results were reached by the courts in Jaedicke v Bank of Smithtown, et al. (Sup Ct, Suffolk County, Nov. 14, 1994, Gowan, J., index No. 15828-93) and Ross Refiners, Inc. v National Bank of N. Am. and Dime Sav. Bank of NY (Sup Ct, NY County, June 4, 1981, Kaplan, J., index No. 19039/78). Id., Exs. B and C.

Here, neither the payee nor any representative of the payee or holder has come forward to allege any forgery, impropriety, or non-receipt of the Check or its proceeds. To the contrary, the documentary evidence, including the e-mails between Pearce and Yogman on December 17 and 18, 2006, the 12/19/06 Termination Letter, and Yogman's Claim, establishes that the proceeds of the Check actually reached the intended party. See also Despotakis Reply Aff., Ex. B (exhibit includes January 5, 2008 letter from Pearce's counsel, stating that "Mr. Pearce d/b/a Principal Staging, G.P., accepted the check from NYN, LLC, in good faith [*5]for services being rendered under a contractual agreement between the parties, and in contemplation of complete performance under that same contract"). In short, there is no aggrieved payee. NYN, as the drawer, has suffered no loss from the improper payment of a check.

In support of its argument, NYN cites Kosic (76 AD2d 89, supra) and Seaboard Sur. Co. v Chase Manhattan Bank, N.A. (172 AD2d 423 [1st Dept 1991]). However, these cases are distinguishable on their facts. NYN also cites McIsaac v Bank of New York, 74 AD2d 717 [4th Dept 1980]), which, if anything supports defendants' argument that the proceeds of the Check actually reached the intended recipient. For the foregoing reasons, NYN is precluded from recovering against JPMorgan.

Additionally, NYN is precluded from recovering against BOA because the general rule is "that a drawer does not have a direct cause of action against a depositary bank for collecting an improperly indorsed check." Horovitz v Roadworks of Great Neck, 76 NY2d 975, 976 (1990) (citations omitted). "[T]he rationale underlying this rule is not limited to situations where the payee's name is forged, but instead applies whenever a check is ineffectively indorsed." Id. In Spielman v Manufacturers Hanover Trust Co. (60 NY2d 221, 224 [1983]), the Court of Appeals held that:

the drawer of a check paid by a depositary over a forged indorsement normally has no cause of action against the depositary for the obvious reason that either the forgery is effective to transfer the instrument, as it is here, or if it is not, the depositary has received nothing of the drawer for which the drawer may recover. In both instances, the drawer's action is against the drawee who has honored the check and debited the drawer's account. In those circumstances in which the statute provides that the forgery is effective to transfer the check, it does so on the premise that because the drawer has dealt with the forger, the drawer can best avoid the loss. Accordingly, the drawer may not recover from the drawee (see, generally, Uniform Commercial Code, § 3-405). In most cases, however, the forgery is not effective to transfer the instrument and the drawee is liable because it is in a position to detect the forgery before payment. Thus, in such cases it is the drawee, as between two innocent parties, who is accountable for the loss.

An exception to the general rule exists, whereby the drawer may recover from the depositary bank (here, BOA), but "only in those comparatively rare instances in which the depositary bank has acted wrongfully and yet the drawee has acted properly ... ." Underpinning & Found. Constructors v Chase Manhattan Bank, N.A., 46 NY2d 459, 466 (1979). However, Underpinning & Found. [*6]Constructors, Inc. arose from application of UCC § 3-405 (titled, "Impostors; Signature in Name of Payee"), which is not applicable in the instant action. In any event, contrary to Plaintiff's argument, Underpinning & Found. Constructors, Inc. is not precedent for an exception here. In that case, where plaintiff's employee forged the indorsements of named payees by means of a stamp containing restrictive endorsements (such as for deposit only), the depository bank's conduct of disregarding the endorsements was wrongful. Here, there is no evidence of any wrongful act. NYN also relies upon Parker v Flores, 202 AD2d 561 (2d Dept 1994), where the plaintiff's secretary/bookkeeper allegedly stole 29 checks by either forging the payee's indorsement, forging her boss's signature, or writing "For Deposit Only" and her account number on the check. The employee deposited these checks in her account at Norstar Bank, but the plaintiff did not maintain an account at Norstar Bank. The Second Department denied summary judgment dismissal, finding an issue of fact based upon "evidence of the possibility that the inadequacy of some endorsements should have placed the bank on notice of an irregularity." Id. at 562. Again, evidence of irregularity is lacking here. Accordingly, NYN's claims against BOA are dismissed because NYN has no direct cause of action against BOA.

Moreover, NYN's claims are dismissed due to its lack of title or rights concerning the Check once it was delivered. Under UCC § 1-201 (20), a "[h]older" is "a person who is in possession of ... an instrument ... drawn, issued or indorsed to him or to his order or to bearer or in blank." See also See State of New York v Barclays Bank of NY, 76 NY2d 533 (1990) (only those persons with rights in a check or other negotiable instrument may bring suit for its conversion); Wolfin v Security Bank of NY, 170 App Div 519, 520 (1st Dept 1915), affd 218 NY 709 (1916)("[a]n instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. ... [I]f payable to order it is negotiated by the indorsement of the holder completed by delivery ... Delivery means transfer of possession, actual or constructive, from one person to another" [internal quotation marks omitted]). "An act of transfer and intention are the essential criteria of a valid delivery' within the meaning and intent of the applicable statute." First Natl. City Bank of NY v Frederics-Helton Travel Serv., 29 Misc 2d 1041, 1043 (Sup Ct, NY County 1961).

Here, Yogman admits that NYN delivered the Check to Pearce pursuant to NYN's obligations under the Contract. Yogman Aff., ¶ 3. Thus, NYN delivered the Check by completing the act of transfer and intending for that transfer to occur. Sheehan v [*7]Municipal Light & Power Co., 54 F Supp. 169, 171-72 (SD NY 1943), affd 151 F2d 65 (2d Cir 1945) ("possession of the notes created a presumption that the person in possession was the owner thereof"); Poess v Twelfth Ward Bank, 43 Misc 45, 48 (App Term, NY County 1904) (" [w]here the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery is presumed until the contrary is proved'"). The very issuance of the Check creates a presumption "that it was issued in payment of a debt or the discharge of a current transaction" (Matter of Hewitt, 281 App Div 734, 734 [3d Dept 1952]), a presumption which is confirmed by the documentary evidence discussed above.

Thus, NYN, as the drawer of the Check, had no title or rights regarding the Check once it was delivered to Pearce, who then became the holder of the instrument. Underpinning & Found. Constructors v Chase Manhattan Bank, N.A., supra at 465 ("since the drawer is not a holder, and could not present the check for payment, the drawer is normally considered as having no interest in the check"). It is undisputed that Pearce was a principal of Principal Staging. He was free to negotiate the instrument as he saw fit. See UCC § 3-301 ("[t]he holder of an instrument whether or not he is the owner may transfer or negotiate it and ... discharge it or enforce payment in his own name"); UCC § 3-201 (1) ("[t]ransfer of an instrument vests in the transferee such rights as the transferor has therein"); UCC § 3-202 (1) ("[n]egotiation is the transfer of an instrument in such form that the transferee becomes a holder. If the instrument is payable to order it is negotiated by delivery with any necessary indorsement"); see also Botchman v The Bank of NY (Sup Ct, Westchester County, June 17, 2004, Barone, J., index No. 5917-02); Jaedicke v Bank of Smithtown, et al. (Sup Ct, Suffolk County, Nov. 14, 1994, Gowan, J., index No. 15828-93); Ross Refiners, Inc. v National Bank of N. Am. and Dime Sav. Bank of NY (Sup Ct, NY County, June 4, 1981, Kaplan, J., index No. 19039/78).

Defendants also request attorney's fees and costs pursuant to Rule 130. However, defendants have failed to demonstrate that they are entitled to attorney's fees and costs under Rule 130.

Accordingly, it is hereby

ORDERED that defendants' motion for summary judgment is granted to the extent that the complaint is dismissed with costs and disbursements to defendants as taxed by the Clerk of the Court upon the submission of an appropriate bill of costs, and the motion is otherwise denied; and it is further

ORDERED that the Clerk is directed to enter judgment accordingly. [*8]

This Constitutes the Decision and Order of the Court.

Dated: October 10, 2008

ENTER:

_________________________

J.S.C.