Court Opinion

ID: 9635708
Source: CourtListenerOpinion
Date Created: 2023-08-22 14:01:07.853489+00
Date Added: 2024-06-11T18:09:33.244980
License: Public Domain

Schreiber, J.,
dissenting. I must respectfully dissent from the proposition that a bank which wrongfully converts cheeks must be freed as a matter of law from its responsibility to the payee where the payee has not unequivocally agreed to that relinquishment.
Thermo Contracting Corp. (Thermo), • a general contractor, engaged in business primarily with the federal government. Erequently it would subcontract the entire project, *366limiting its participation to purchases of some of the materials and insurance, and handling administrative details. The subcontractor would supervise the project, furnish all the labor, and install the materials.
In such a manner did Peter T. Kashulines serve as a Thermo subcontractor between January 1970 and May 1972. Of approximately 200 contracts which Thermo had in that period, Kashulines was the subcontractor for some 12 to 14 jobs. Throughout the entire period Kashulines, as Thermo’s subcontractor, was engaged in federal government work.
About November 1970 Kashulines believed that some business could be transacted with Seabrook Parms Co., Inc. (Seabrook). He knew that Seabrook wanted to remove six greenhouses from its farm at Seabrook, New Jersey. Kashulines also knew that he could not obtain the contract on his own because he did not have the financial capability, cash working capital or ability to obtain and produce the necessary workmen’s compensation and public liability insurance policies. He then discussed with Thermo’s president, Alexander Kueller, the possibility of obtaining the contract for Thermo. Kashulines and Kueller agreed that Kashulines, as Thermo’s representative, would bid for the project and, if successful, would supply the labor and equipment as he did on other Thermo jobs. Thermo, on the other hand, would accept the order, furnish the insurance certificates, and maintain the administrative and financial records. Thermo was to receive 25 percent of the contract price (a percentage which was comparable with the gross profits Thermo received from other projects on which Kashulines was the subcontractor).
Kashulines submitted on Thermo stationery, as Thermo’s representative, a proposal for removal of the greenhouses. Seabrook accepted the proposal with a purchase order addressed to Thermo. Kashulines’ employees did the work. Thermo’s certificate of insurance was furnished. Invoices were submitted on a Thermo letterhead.
*367Kashulines, with Kueller’s approval, obtained two other purchase orders from Seabrook. The arrangements between Kashulines and Thermo were the same except that new tubes for a refractory on a boiler had to be purchased, which Thermo agreed to order. Each proposal was made by Kashulines as Thermo’s agent. Each Seabrook purchase order was addressed to Thermo. Each invoice to Seabrook bore Thermo’s letterhead. Thermo furnished the certificates of insurance for each job. It ordered some $2600 worth of material for the two projects. William De Santis, Seabrook’s Manager of Engineering, called and spoke with Kueller on several occasions about the progress of the work. De Santis also submitted a complaint to him about some damage caused by the workmen. When Kashulines failed to complete the removal of the greenhouses, Seabrook charged Thermo with that failure. It was Thermo which incurred the exposure of a contracting party.
Seabrook paid all the invoices by checks, five in number. The initial check was delivered to and deposited by Thermo. Some of Kashulines’ employees picked up the remaining four checks and delivered them to him.
When Kueller learned of Kashulines’ defalcations in November 1971, he agreed to give Kashulines an opportunity to rectify the wrong, for he “had faith in the man.” More importantly, Thermo did not want to risk possible default on its government contracts in the event that Kashulines’ employees stopped working. Consequently, Kashulines continued as the subcontractor on Thermo’s government contracts. As indicative of this ongoing relationship, when Kashulines did not have the funds to pay his employees, Thermo, as it had in the past, continued to advance cash to Kashulines so that he could meet his payroll. As Kueller put it, he could not dare jeopardize a $250,000 job for the sake of $13,000, the approximate face amount of the four checks. The relationship between Thermo and Kashulines terminated in May 1972 after Kashulines finished part of *368a Thermo contract with the Navy to drill a well on Ascension Island.
The four checks in question were drawn by Seabrook on the First National State Bank of New Jersey. Three cheeks were payable to Thermo Contracting Corp. and one to Thermo Contracting Co. The indorsements varied, but all were indorsed for deposit to the account of American Boiler Co. The indorsement on one, for example, read: “Thermo Contracting Corp. Deposit to the. account of American Boiler. Peter T. Kashulines.” The checks were dated March 25, 1971, April 7 and 23, 1971, and June 22, 1971. Each was deposited shortly after those respective dates with The Bank of New Jersey where Kashulines maintained an account for his company, the American Boiler Co. The Bank of New Jersey collected the funds from the drawee bank and credited the account of the American Boiler Co. All the checks had been paid long before Kueller became aware in November 1971 of Kashulines’ unauthorized acts.
It is not our province on a summary judgment motion to evaluate Thermo’s business morality on the basis of its contemplated profits on the Seabrook contracts. Kashulines was not legally justified in seizing and indorsing the checks for his personal benefit. Nor was The Bank of New Jersey justified in crediting the proceeds to the American Boiler Co. account. In this action Thermo seeks to right the wrongs done it by the two tort-feasors.
The Bank of New Jersey tortiously converted the proceeds of the checks by diverting -the funds to the American Boiler Co. Payment by a bank of a check payable to a corporation, indorsed by an unauthorized person to a second corporation, is illegal, and the bank makes such a payment at its peril. Passaic-Bergen Lumber Co. v. United States Trust Co., 110 N. J. L. 315 (E. & A. 1933); Singer Sewing Machine Co. v. Citizens Nat. Bank, Englewood, 111 N. J. L. 199 (Sup. Ct. 1933); Annotation, “Right of check owner to recover against one cashing it on forged or unauthorized indorsement and procuring payment by drawee,” 100 A. L. B. 2d 670 (1965). *369In the absence of a corporate resolution authorizing the transfer of the check to another party, proceeds of a corporate payee cheek may only be credited to the account of the payee corporation. The bank is put on notice whenever the payee is a corporation that the check proceeds must he paid to the corporation, unless of course the corporation directs otherwise.
These principles have been substantially incorporated in the Uniform Commercial Code. N. J. 8. A. 12A:3-404 provides that any unauthorized signature is “wholly inoperative as that of the person whose name is signed unless he ratifies it or is precluded from denying it”.1 Collection of the funds by The Bank of Few Jersey constituted a conversion. Salsman v. Nat’l Com. Bank of Rutherford, 102 N. J. Super. 482 (Law Div. 1968), aff’d o. b. 105 N. J. Super. 164 (App. Div. 1969); Teas v. Third Nat’l Bank & Trust Co., 125 N. J. Eq. 224 (E. & A. 1939). The bank does not question its wrongdoing hut seeks to avoid responsibility because of the payee’s ratification. It is important to recognize that the issue of ratification arises within a factual context which concerns an innocent payee of a check whose agent has, in effect, forged the indorsement, and of a collecting and depositary bank which, although it should have been aware of that fact, wrongfully honored that cheek.
*370A principal, haying full knowledge of all the material facts, who approves its agent’s unauthorized act, is deemed to ratify that act. The effect and extent of ratification depend upon the circumstances within which it occurs and the nature of the specific acts to be confirmed. Eor example, an agent without authority may nonetheless enter into a contract on behalf of the principal to purchase or sell certain products. As between the third party and the principal, the principal would have to ratify the entire agreement. He could not pick and choose only the favorable aspects of the contract. On the other hand, where the agent and the third parties have committed tortious acts for which they may each be respectively responsible to the principal as tort-feasors, then the principal may accept partial redress from the agent without relinquishing his right to complete satisfaction from the third party.2
In all ratifications the intent of the principal to accept and adopt the unauthorized act of the agent must be clearly established. Passaic-Bergen Lumber Co. v. United States Trust Co., supra. Intent can only be meaningful if the ratifying party is aware of all the relevant facts unless he desires to ratify irrespective of that knowledge. In Passaic-Bergen Lumber Co. v. United States Trust Co., supra, the Court wrote:
In order that ratification may be shown, it is incumbent on defendant to prove that the plaintiff had full knowledge of all the material facts. [110 N. J. L. at 318].
The principal, cognizant of the relevant data, must then demonstrate the intent to adopt and accept the unauthorized *371act. Intent may be manifested by language or conduct. Where conduct is relied upon to constitute ratification as a matter of law, it must be consistent with an intent to affirm the unauthorized act and inconsistent with any other purpose. Restatement, Agency 2d § 83(b) at 212-213 (1958), Comment c.; Seavey, “Ratification by Silence,” 103 U. Pa. L. Rev. 30-31, 40-42 (1954). Recognized types of such inconsistent conduct occur when the principal receives or retains the benefits of the unauthorized transaction to which he would not be entitled absent ratification; or where the principal asserts a claim or defense dependent for its validity upon the unauthorized act.
The majority seems to rely upon Kueller’s conduct in concluding that ratification was established as a matter of law on the summary judgment motion. Reference is made to his (a) not proceeding against The Bank of New Jersey in November 1971; (b) conducting other business with Kashulines besides the Seabrook transaction; and (c) not moving against the bank until there was a complete breakdown in the business relationship with Kashulines. None of these matters, either individually or in toto, establish as a matter of law the proposition that Kueller approved the forgery of the checks and conversion of the funds by Kashulines. The proof is not conclusive that Kueller ever intended to free the bank from its liability if Kashulines did not pay the monies unlawfully taken by him. Although some five months passed before Kueller decided to proceed against The Bank of New Jersey, this inaction is not necessarily consistent with ratification of Kashulines’ wrongs. Kueller’s delay is equally consonant with the concept that the principal would look to the tort-feasor bank if the agent did not rectify his defalcation. Is it reasonable to conclude that Kueller would have been willing to absolve the bank and accept only Kashulines’ responsibility rather than deciding to look primarily to Kashulines, and, if he did not pay, then to seek redress from the bank? This is not to say that lapse of time may not *372be a factor -which a fact finder may consider with other appropriate circumstances to determine if the principal has approved of the unauthorized acts of his agents.3
The fact that the plaintiff continued its business relationship with Kashulines to prevent default on plaintiff’s government contracts represents conduct not necessarily consistent with approval of the agent’s wrongdoing so as to free the wrongdoer bank. The Seabrook contract was not related in any way with plaintiff’s government contracts. Seavey in his Handbook of the Law of Agency (1964) describes the import of independent contracts in the following manner:
3 * * An indivisible transaction such as a contract or conveyance, can be ratified only in its entirety. In cases involving consensual affirmance, the question is one of the interpretation of the consent given, that is, whether there was a willingness to accept the transaction with all its terms; if less than that there is no ratification but something like a counter offer. In cases involving inconsistent conduct, there either is or is not conduct which is so inconsistent that it is equitable to create the liabilities or loss of rights which result from ratification.
These cases must be distinguished from those in which there are several distinct transactions. If there is a series of transactions, the initial ones can be affirmed without ratification of later ones. Thus if an agent makes an unauthorized settlement, receiving a check in payment and then cashes the check, the principal can ratify the receipt of the check without affirming the endorsement. Likewise there may be a number of independent simultaneous transactions. If these are independent of each other, one may be ratified without affirming the others. In a case involving an “oil” lease *373for three separate tracts of land, a court of equity was persuaded that since the tracts were distinct units, the lease of one not being dependent upon the lease of the others, there could be ratification as to some, without affirmance as to the remaining one to which the principal had not assented; perhaps good sense on the facts. [§ 38 at 72; citations omitted].
The majority emphasizes the fact that while Kashulines was working on the government matters Kueller did not press or back-charge him. But such conduct does not as a matter of law reflect an intent to relieve The Bank of New Jersey from its responsibility. To the contrary, it could be argued that pressuring and back-charging would perhaps indicate that Kueller was looking only to Kashulines and not the bank. The failure to dun and,- back-charge supports the conclusion that the plaintiff was comforted by the thought that the bank’s financial responsibility was always available if Kashulines failed to pay. That the’ principal derives and accepts benefits arising from independent transactions and not the unauthorized act does not and cannot support the concept of ratification as a matter of law. In 1 Mechem, Agency (2d ed 1914) § 439 the proposition has been stated in this manner:
* * * acceptance and receipts of the benefits must, to work a ratification, have been voluntary, and must find their warrants in rights flowing from the act. For, if the principal had no choice, if the benefits could not be separated from something to which he was in any event entitled, or if his act was not confirmatory, as where he would have been entitled to the same benefit independently of the act in question, the acceptance and receipt under such circumstances would not constitute a ratification, [at 322],
The majority does not contend that the principal expressly or impliedly ratified Kashulines’ acts at the time the November discussion occurred between Kueller and him. This is understandable, for all Kueller said was that he was willing to have Kashulines pay the wrongfully diverted funds “as soon as he possibly could”. This understanding is not necessarily inconsistent with the thought that the plaintiff *374did not intend in any event to forego its claim against the bank which had wrongfully warranted the unauthorized indorsement and converted the funds which it received on the basis of that indorsement. Inaction against the bank does not conclusively establish the plaintiff’s state of mind.4
The majority relies substantially on two decisions for its position. A factual recitation demonstrates the inapplicability of both cases. In Rakestraw v. Rodrigues, 8 Cal. 3d 67, 104 Cal. Rptr. 57, 500 P. 2d 1401 (Sup. Ct. 1972), a husband forged his wife’s (Joyce) name to a $75,000 note and to a mortgage on some realty she owned. The lender’s check was' made payable to both husband and wife, which cheek she indorsed. Shortly after Joyce indorsed the check, she learned of the forgeries and consulted an attorney. She did not heed his advice to immediately notify the creditor. The bulk of the funds were applied to a supermarket business, a corporation all of whose stock was owned by the husband. She then demanded but was refused stock in the supermarket enterprise, and thereafter took an active role in its affairs. Joyce, in fact, received some direct monetary benefits from the loan. The corporation applied $1,000 of the funds to reduce an indebtedness owed to her; over $3,600 was paid for taxes owing on some property owned by her; and her husband’s pay checks were deposited in a joint account in their names. When Joyce was sued three years after she discovered the forgeries, she filed a third party claim against one Rodrigues who had allegedly misrepresented to a notary public that her signature appeared on the note and mortgage. The defense of ratification was sustained because she had accepted the benefits- of the unauthorized transaction.
*375In American Cast Iron Pipe Co. v. American R. Co., 87 F. 3d 350 (1 Cir. 1936), the court upheld a jury verdict which found that ratification existed. The defendant-debtor delivered its check in payment of the indebtedness due the plaintiff to the plaintiff’s agent. The check was payable to the agent, which deposited the check in its account. The agent ultimately transmitted its check to the plaintiff. That check was dishonored for insufficient funds, and plaintiff instituted a suit against the debtor. The court concluded that, on the basis of correspondence between the plaintiff and defendant, plaintiff’s acceptance of the agent’s check by indorsement and deposit, and plaintiff’s persistent efforts to collect from the agent, the jury would have been warranted in finding that the plaintiff had ratified its agent’s act in accepting payment from the defendant. This case confirms the proposition that the inferences to be drawn under these circumstances to establish ratification are for the fact finder.
Although the underlying operative facts relied upon on this summary judgment motion are substantially undisputed, conflicting inferences may be drawn from those facts. “Facts are not to be stretched, or ambiguous, inconclusive or independent acts made the basis of a ratification.” Gates v. Bank of America Nat. Trust & Sav. Ass’n, 120 Cal. App. 3d 571, 361 P. 2d 545, 547 (D. Ct. App. 1953); 1 Mechem, supra, § 474 at 348. This precaution is peculiarly appropriate where intent must be shown. The applicable standard on summary judgment motions remains inviolate: “All inferences of doubt are drawn against the movant in favor of the opponent of the motion. The papers supporting the motion are closely scrutinized and the opposing papers indulgently treated * * Judson v. Peoples Bank & Trust Co. of Westfield, 17 N. J. 67, 75 (1954). This standard has not been met.
Seabrook also contends that it is entitled to a summary judgment in its favor because Thermo had no interest in its contract with Seabrook. There is evidence in the record to the contrary. Seabrook also argues that delivery of the *376checks to Kashulines was authorized and that its liability to Thermo is discharged. However, there is a factual question of whether delivery of the checks to Kashulines was authorized. I note that Seabrook mailed the initial payment to the plaintiff.
Eor all the foregoing reasons I would reverse the summary judgments entered in favor of Seabrook and The Bank of Hew Jersey and the judgments on the crossclaims filed among all the defendants, and remand for trial.
For affirmance—Chief Justice Hughes, Justices Mountain, Sullivan and Clifford, and Judge Conford—5.
For reversal and remandment—Justice Schreiber.
Justice Pashman, concurring and dissenting.

Under N. J. 8. A. 12A:3-419(1) (c) an instrument is converted ■when it is paid on a forged indorsement but the monetary responsibility on the part of a collecting bank, which acts in accordance with reasonable commercial standards, is limited to the proceeds of the instrument remaining in its hands. N. J. 8. A. 12A:3-419(3).
The plaintiff did not appeal from the summary judgment entered in favor of the First National Bank of New Jersey, probably because The Bank of New Jersey recognized and admitted at the oral argument on the motion for summary judgment that it did not act in accordance with reasonable commercial standards. The payee may bring a conversion action against the drawee and recover the face amount of the check. N. J. S. A. 12A:3-419(2). In that event the collecting bank may be liable to the drawee bank on the warranties arising out of the presentment and transfer. N. J. 8. A. 12A :3-417 and 12A :4-207. '

The majority opinion relies on a quotation from 2A O'. J. S. Agency § 77, at 672-673 to the effect that a principal may not ratify his agent’s act conditionally upon his principal’s suffering no loss. This principle applies in the contract example of the type described in the text, but not where tort-feasors are involved. The text states that “[t]he rule that ratification must affirm the entire transaction has been held to be inapplicable as between joint tortfeasors; and it does not extend to separate and independent transactions.” Id. at 673 [footnotes omitted].

When Kueller learned of the conversion of the funds, the monies had already been paid by the drawee and collecting banks. The record is not clear whether the banks suffered any prejudice as a result of not knowing of the Kashulines forgery. Nor, of course, was there any reliance by the banks on the plaintiff’s conduct. In the absence of prejudice, preclusion from denying ratification, or estoppel ratification of the agent’s act would not lie. It has been indicated that laches will not operate as a valid defease unless the collecting bank has been injured by the delay. Lindenthal v. Northwest State Bank, 221 Ill. App. 145 (1921) ; Independent Oil Men’s Ass’n v. Fort Dearborn Nat. Bank, 311 Ill. 278, 142 N. E. 458 (1924).

Seavey in “Ratification by Silence” comments that: “As in other determinations of states of mind, the question whether the failure to act indicated a willingness which causes the affirmance is a matter for the jury unless the proved facts are clear beyond a substantial doubt.” 103 U. Pa. L. Rev. at 39.