Court Opinion

ID: 5823659
Source: CourtListenerOpinion
Date Created: 2022-01-12 21:16:36.633708+00
Date Added: 2024-06-11T08:43:12.675781
License: Public Domain

Sandler, J. (concurring).
In addition to the analysis presented in the opinion of the court, I think it important to stress one aspect of the problem that seems to me critical. In Soma v Handrulis (277 NY 223) the court held an intermediary bank liable to a payee where an instrument was collected through it inconsistent with a restrictive indorsement.
In the view that practical aspects of the bank collection process made it important to continue the negotiability of an instrument restrictively indorsed, several sections of the Uniform Commercial Code were carefully designed to avoid liability with regard to the negotiation of instruments bearing restrictive indorsements by an intermediary bank or a payor *632bank which is not a depositary bank. Thus, section 3-206 of the Uniform Commercial Code provides as follows:
"(1) No restrictive indorsement prevents further transfer or negotiation of the instrument.
"(2) An intermediary bank, or a payor bank which is not the depositary bank, is neither given notice nor otherwise affected by a restrictive indorsement of any person except the bank’s immediate transferor or the person presenting for payment.
"(3) Except for an intermediary bank, any transferee under an indorsement which is conditional or includes the words 'for collection’, 'for deposit’, 'pay any bank’, or like terms (subparagraphs (a) and (c) of Section 3-205) must pay or apply any value given by him for or on the security of the instrument consistently with the indorsement and to the extent that he does so he becomes a holder for value.”
The same theme was further carried out in section 3-419 of the Uniform Commercial Code concerned primarily with defining when an instrument is converted:
"(3) Subject to the provisions of this Act concerning restrictive indorsements a representative, including a depositary or collecting bank, who has in good faith and in accordance with the reasonable commercial standards applicable to the business of such representative dealt with an instrument or its proceeds on behalf of one who was not the true owner is not liable in conversion or otherwise to the true owner beyond the amount of any proceeds remaining in his hands.
"(4) An intermediary bank or payor bank which is not a depositary bank is not liable in conversion solely by reason of the fact that proceeds of an item indorsed restrictively (Sections 3-205 and 3-206) are not paid or applied consistently with the restrictive indorsement of an indorser other than its immediate transferor.”
The result of these sections has been to create a situation dramatically different from that which obtains with regard to forged instruments. It is, of course, well established that a payee bank which transfers funds on the strength of a forged instrument is liable in the first instance to its drawer. (Shipman v Bank of State of N. Y., 126 NY 318; Commercial Trading Co. v Trade Bank & Trust Co., 286 App Div 722, 726.) Under the sections quoted above no such remedy is available to the drawer against a payor bank (which is not also a depositary bank) which has paid out the drawer’s money on *633an instrument negotiated in violation of a restrictive indorsement.
It is not easy to believe that the drafters of the Uniform Commercial Code carefully defined restrictive indorsements (Uniform Commercial Code, § 3-205), meticulously exempted from liability for negotiation of such instruments intermediary banks and payor banks which are not depositary banks (Uniform Commercial Code, § 3-206, subds [1] and [2]), unmistakably pointed out the special liability for conversion of a depositary bank that does not pay or apply an instrument consistently with a restrictive indorsement (Uniform Commercial Code, § 3-419, subds [3] and [4]), if it were intended to deny any remedy to the drawer of a check who suffers a loss because a depositary bank failed to act consistently with a restrictive indorsement. To suggest, as is implicit in the dissenting opinion, that a payee who has suffered a loss because of a depositary bank’s failure to comply with a restrictive indorsement might recover, but not a drawer who has sustained a similar loss, is to import a distinction that cannot here be reconciled with common sense or justice.