"Substantially Contributes" in Payment Disputes

Posted Thursday, January 8, 2009

Say you’re a large bank, taking tens of thousands of items per day for deposit.  Your tellers know generally that endorsements must match the payee on deposited items.  What if a check is payable jointly to two payees, one of whom is your depositor?  Do you need to tell your tellers to refuse to accept such checks unless both payees appear in person at the teller window to present identification?

Under a recent ruling by the Honorable Dennis Burke of the Individual Commercial Calendar of the Circuit Court of Cook County, Illinois, the answer is “no,” at least when the deposits are to a lawyer trust account.  This sound ruling correctly applies often misunderstood provisions of the payments articles of the Uniform Commercial Code.  Judge Burke should be commended for his ruling.  (It’s only proper to disclose that I represented the bank in this matter.)

In Henry v. Olson (December 28, 2008), the plaintiff hired a collection agency to collect a judgment.  The collection agency hired a lawyer on a contingent fee.  The lawyer settled the case and received two checks, both jointly payable to the lawyer and the client.  The lawyer sent the checks to the collection agency to obtain the endorsement of the client.  Once the collection agency returned the checks with endorsements, the lawyer also endorsed the items and deposited them to his attorney-client trust account.  He then drew checks on the account payable to the client for her share of the settlement and sent the checks to the collection agency to deliver them to the client.

Unfortunately, the collection agency was run by a crook, who apparently forged the client’s endorsement on the original settlement checks and on the attorney’s client trust account checks.  He absconded with the funds, never to be found. 

The client sued the collection agency, but that was a lost cause.  The client also sued the lawyer for malpractice under the theory that he should have sent her the checks directly rather than through the collection agency.  That action remains pending.

The client also sued the lawyer’s bank for taking the checks for deposit.  A bank that accepts a check with a forged endorsement is liable for conversion under Uniform Commercial Code § 3-420, the client argued, so the bank converted the original settlement checks by taking them for deposit to the lawyer’s client trust account.

The implications of this theory are staggering.  Banks could not possibly be in the business of offering IOLTA accounts (“interest on lawyer trust accounts”) if they had to confirm with a picture ID the identity of clients listed as payees along with the lawyer.  A bank has the right to assume that a lawyer will not be converting his client’s money by depositing the money to his client trust account.

In the Henry litigation, the court granted summary judgment on two, equally valid, independent grounds.  First, the court held as a factual matter that the bank did not fail to exercise ordinary care under UCC § 3-405(b).  (The court had previously ruled that the collection agency was the client’s employee with responsibility under § 3-405, so the comparative negligence scheme of § 3-405(b) applied.)  The testimony of two expert witnesses, one from the banking industry and one an expert in law firm management, persuaded the court.

Second, and perhaps more interestingly, the court held as a matter of law that the deposit of the checks did not “substantially contribute” to the client’s loss.  The client had property in the form a check payable to her (jointly with the lawyer).  Upon deposit to the client trust account, that property was transformed from an instrument to intangible funds on account, but, importantly, the client did not lose any money by this transformation.  Remember that the funds were deposited to a trust account for her benefit.  She still had a property interest in the funds.  The client only suffered damages when the lawyer withdrew the funds out of the account several days later and failed to deliver them to the client.

This is was a good decision with a tricky set of facts under the payment provisions of the UCC.

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