In the

United States Court of Appeals

For the Seventh Circuit

____________

No. 07-3746

AMERICAN NATIONAL INSURANCE COMPANY,

Plaintiff-Appellant,

v.

CITIBANK, N.A.,

Defendant-Appellee.

____________

Appeal from the United States District Court 

for the Northern District of Illinois, Eastern Division.

No. 02 C 3390—Joan B. Gottschall, Judge.

____________

ARGUED APRIL 16, 2008—DECIDED SEPTEMBER 11, 2008

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Before EASTERBROOK, Chief Judge, and WOOD and

WILLIAMS, Circuit Judges.

WOOD, Circuit Judge. Many rules of commercial law

allocate risk among different parties to transactions.

Sometimes, however, it is impossible to impose responsibility for losses on the party that caused them. People

disappear with ill-gotten gains, or they spend someone

else’s money on fleeting pleasures. At that point, all

that can be done is to allocate loss to one or another
2 No. 07-3746

relatively innocent party. This is such a case: the real

wrongdoer, Robert Carter, will never be able to restore

the money he embezzled from his employer, National

Accident Insurance Underwriters (“Underwriters”). So we

must decide whether Underwriters’ assignee, American

National Insurance Company (“ANICO”) must bear the

loss that remains, or if the bank that cashed checks that

Carter had altered to make payable to himself is responsible.

ANICO had engaged Underwriters to act as an agent

for managing an insurance pool known as “NAIG,” for

National Accident Insurance Group Underwriting Agreement. One of the duties Underwriters assumed was to

receive premium payments for the insurance pool, in

the form of checks payable either to Underwriters or

NAIG; it also had the job of managing the premium

trust account into which the premiums were deposited.

In 2002, Underwriters discovered that one of its vice

presidents, Robert Carter, had been intercepting

premium checks, altering the payee line to make them

payable to himself or his company “Sherman Imports,” and

depositing them in a Citibank account over which he

had control. Citibank accepted 44 altered checks, from

five different drawers, for a total face value of

$15,813,964.84.

Underwriters filed suit against Citibank for conversion of the checks under 810 ILCS 5/3-420, the Illinois

version of Uniform Commercial Code § 3-420, which

provides the rule for dealing with the conversion of

negotiable instruments. Citibank then filed a third-party
No. 07-3746 3

complaint against Carter and other people involved with

his scheme. ANICO moved to intervene in 2003, eventually

filing a complaint against Citibank also based on § 3-420.

Carter pleaded guilty to criminal charges of mail and tax

fraud in 2004; as part of his plea, he forfeited $5.2 million

in property to Underwriters. At that point, Underwriters

assigned its interests in this property to ANICO. In 2006,

Underwriters and Citibank settled, and all claims

arising from that suit were dismissed with prejudice.

This left the litigation between ANICO and Citibank

unresolved. In August 2007, the district court granted

Citibank’s motion for summary judgment against ANICO

on all of its claims. Citibank still had unresolved claims

pending against Carter and others, and so ANICO asked

the district court to direct entry of a partial final judgment on its suit against Citibank, on the ground that

there was no just reason to delay resolution. See FED. R.

CIV. P. 54(b). The court did so, and the appeal is now

before us. We review the court’s decision to grant summary judgment de novo. APS Sports Collectibles, Inc. v.

Sport Time, Inc., 299 F.3d 624, 628 (7th Cir. 2002).

We begin with the language of UCC § 3-420, as adopted

by Illinois: 

(a) The law applicable to conversion of personal

property applies to instruments. An instrument is

also converted if it is taken by transfer, other than a

negotiation, from a person not entitled to enforce the

instrument or a bank makes or obtains payment with

respect to the instrument for a person not entitled to

enforce the instrument or receive payment. An action
4 No. 07-3746

for conversion of an instrument may not be brought

by (i) the issuer or acceptor of the instrument or (ii) a

payee or indorsee who did not receive delivery of the

instrument either directly or through delivery to an

agent or a co-payee.

(b) In an action under subsection (a), the measure of

liability is presumed to be the amount payable on

the instrument, but recovery may not exceed the

amount of the plaintiff’s interest in the instrument.

(c) A representative, other than a depositary bank, that

has in good faith dealt with an instrument or its

proceeds on behalf of one who was not the person

entitled to enforce the instrument is not liable in

conversion to that person beyond the amount of any

proceeds that it has not paid out.

810 ILCS 5/3-420. In order to establish that a financial

institution is liable for conversion of a negotiable instrument in Illinois, a plaintiff must prove (1) her ownership of,

interest in or right to possession of the check; (2) the

fact that her apparent endorsement of the check was

forged or unauthorized; and (3) the fact that the defendant

bank was not authorized to cash the check. Continental

Casualty Co. v. American National Bank and Trust Co. of

Chicago, 768 N.E.2d 352, 361 (Ill. App. Ct. 2002); see also

Rodrigue v. Olin Employees Credit Union, 406 F.3d 434, 439

(7th Cir. 2005) (describing Illinois law). Our case turns

on the first of these three elements: whether ANICO had

any property interest in the checks. If not, then ANICO

may not bring a suit for conversion. (Otherwise, the final

clause of § 3-420(b) would make little sense, as it limits
No. 07-3746 5

recovery to “the amount of the plaintiff’s interest in the

instrument.” See, e.g., Edwards v. Allied Home Mortgage

Capital Corp., 962 So. 2d 194 (Ala. 2007) (construing Alabama’s version of § 3-420).)

ANICO asserts that it is the “true owner” of the checks,

and thus that it has enough of an ownership interest to

permit it to pursue this suit. Underwriters managed and

administered the premium trust account. The checks

were made out to Underwriters or NAIG; ANICO

admits that the checks were never made out to it, nor was

it ever an indorsee. ANICO had no signatory or drawing

rights on the account and could not touch the funds.

Instead, Underwriters wrote a check to ANICO each

month based on the fees it had collected and deposited

into the account. ANICO argues nevertheless that it is the

“true owner” of the checks, relying on some kind of quasitrust theory. Underwriters, it reasons, acted as ANICO’s

agent, and ultimately all of the funds in the premium trust

account (minus Underwriters’ fees) belonged to ANICO;

Underwriters simply administered the premium trust

account for ANICO’s benefit. Thus, ANICO contends, it

has at least an equitable interest in the checks, no matter

what the “Pay To the Order Of” line might have said.

This novel interpretation of the familiar drawer-draweeindorsee-payee relationship is unprecedented, and for

good reason: it betrays the fundamental axiom of negotiable instruments that banks must pay the payee. ANICO

cites a case from a trial-level court in New York to support its argument that this rule has its exceptions, but

we do not find it persuasive. See Clients’ Security Fund of
6 No. 07-3746

N.Y. v. Goldome, 560 N.Y.S.2d 84 (N.Y. Sup. Ct. 1990).

ANICO seems oblivious to the burden that its theory

would put on every bank that was presented with a

check for negotiation. Instead of being able to look at the

payee line and to verify that the person presenting the

check was indeed entitled to do so, banks in ANICO’s

world would need to conduct a full-blown investigation

every time to make sure that a party with an equitable

interest in the check was not lurking in the background.

Such a system would bring commercial transactions to

a grinding halt.

The payee on the 44 checks at issue here, before Carter

unlawfully altered them, was Underwriters or NAIG, never

ANICO. Not surprisingly, Underwriters sued Citibank

and secured a settlement; it also assigned the $5.2 million

that was recovered from Carter to ANICO.

ANICO appears to be confusing an interest in the funds

backing the checks with an interest in the checks themselves. Perhaps it is the ultimate beneficiary of the funds.

Once Underwriters received the checks, it owed ANICO

most of the money, according to the terms of a separate

contract. The terms of this debt, however, are tied to this

ancillary contract, not the negotiable instruments in

question. We considered a similar situation in Kentuckiana

Healthcare, Inc. v. Fourth Street Solutions, LLC, 517 F.3d

446 (7th Cir. 2008), where we held that a party to whom

a debt was owed was not entitled to sue for conversion.

See id. at 447. 

Illinois courts do not recognize an action for conversion

of intangible rights. Janes v. First Federal Savings & Loan
No. 07-3746 7

Ass’n., 297 N.E.2d 255, 260 (Ill. App. Ct. 1973). The

rights involved with commercial paper merge into the

document, a tangible thing, and thus conversion of the

document is possible. Hayes v. Massachusetts Mutual Life

Ins. Co., 18 N.E. 322, 325 (Ill. 1888). The rights associated

with Underwriters’ separate contract with ANICO, on the

other hand, are intangible and do not merge into the

negotiable instruments. Unless ANICO can show a

possessory interest in the checks, it cannot sue for conversion, because its only interest is a derivative claim to

the funds, not a claim to the instruments themselves.

The payee does have a property interest in checks made

out to her, as does the indorsee. ANICO is neither and has

not succeeded in showing how the “true owner” entity

it posits fits into the real world of payees, drawers,

drawees, and indorsees. These roles carry specific and

well established meanings: for the reasons we have

already mentioned, banks cannot be asked to go beyond

the name on the payee line except where due care

demands it. If banks were required to look behind the

names on the check itself and delve into the contractual

relationships of named payees and other, unnamed

entities, writing checks would become an impossibility.

It is precisely in order to maintain a workable financial

system that the UCC does not resort to generalities like

the “true owner” and instead insists on terms of art

like “payee.”

To summarize, ANICO has no property interest in the

checks at issue here: it is not a payee, indorsee, or any

other entity recognized upon the instruments themselves.
8 No. 07-3746

To the extent that it has any relevant property interest, it

is in the funds backing the checks, and its interest in

those funds is determined by a separate contract. That

contract is not merged into the checks, however, and

therefore at most gives rise to an intangible right. While

Illinois permits suits for conversion of negotiable instruments by those with a possessory interest, it does not

recognize causes of action on intangible rights.

Underwriters does have a clear property interest: it is

the named payee. Banks must pay the payee, and if there

is a question in a particular case about that obligation,

the payee may sue. Underwriters did and reached a

settlement. If ANICO has any dispute, it is with Underwriters, under the terms of the agreements that govern

their relationship. ANICO has no dispute with Citibank,

and so the district court’s grant of summary judgment

against ANICO and in favor of Citibank is AFFIRMED.

9-11-08