Simmons v. Lennon

SALMON, Judge. Beginning sometime in 1995 and continuing into early 1998, a secretary and a bookkeeper conspired with one another to defraud their employer, Luiz R.S. Simmons, Esq., of funds he kept in his escrow accounts and in his general office accounts. As a consequence of their scheme, Simmons’s signature was forged on numerous checks, and large sums of money were withdrawn from his accounts without his knowledge. One of the checks forged by Simmons’s secretary was in the amount of $13,000 and was made payable to Michael Lennon (“Lennon”), who sold a vehicle to the secretary and received the forged check in partial payment for the vehicle.

According to Simmons, Lennon knew, or should have known, that the check was forged when he accepted it. In this case, we are called upon to decide two issues: (1) whether, under either the Uniform Commercial Code or Maryland common law, the payee of a check bearing the forged signature of the drawer can be successfully sued by the drawer for conversion of the check and (2) whether the payee of a check, who knows or should have known that the check bears the drawer’s forged signature, owes a duty, which will support a cause of action sounding in negligence, to warn the drawer that his signature has been forged. Like the trial judge below, we answer both questions in the negative. ¹⁸ I. FACTS 1 In 1993, Luiz Simmons hired Michelle Campbell as a receptionist at his Silver Spring, Maryland, law office. She later became Simmons’s secretary.

After Ms. Campbell was hired, she formed an acquaintanceship with Simmons’s outside bookkeeper, Denise Evans, who kept track of funds in Simmons’s office and escrow accounts. Neither Ms. Campbell nor Ms. Evans was authorized to sign cheeks drawn on any of Simmons’s accounts — Simmons alone had check signing authority. At all times here relevant, Ms. Campbell’s responsibility included keeping Simmons’s check register accurate and making deposits into his accounts. Ms. Campbell began in 1995 to forge Simmons’s name to checks drawn on several of her employer’s accounts.

Because Ms. Evans was a participant in the scheme and because Simmons trusted his employees, Ms. Campbell’s forgeries went undetected by Simmons for over two years. Appellee, Michael Lennon, is a retired Prince George’s County police officer. At one time Ms. Campbell was Lennon’s live-in girlfriend. While residing with Lennon, Ms. Campbell forged Lennon’s name to several credit card application forms resulting in her receipt of credit cards from four companies.

The cards were issued in Lennon’s name. Ms. Campbell proceeded to use the credit cards to fraudulently accumulate over $17,000 in credit card debt in Lennon’s name. In March 1994, Lennon discovered that Ms. Campbell had forged his name to the credit card applications. He reported the matter to the credit card companies and to the police.

In 1994, Ms. Campbell was convicted of fraud based on her forgery of Lennon’s name on the credit card applications. Ms. Campbell introduced Mr. Lennon to Simmons sometime in 1994. Thereafter, Lennon periodically worked as a private process server for Simmons. As a consequence of his work as ¹⁹ a private process server, Lennon saw Simmons fairly frequently — and the two enjoyed a cordial relationship.

In October 1996, at a point when Lennon was still friendly with Ms. Campbell but was no longer romantically involved with her, Lennon agreed to sell Ms. Campbell his Chevrolet Blazer for $22,000. Ms. Campbell paid for the vehicle with a $9,000 check, which represented the proceeds of a bank loan, and a separate $13,000 check, payable to Lennon, drawn on an escrow account Simmons held at NationsBank. Simmons’s signature on the $13,000 check was forged by Ms. Campbell. Lennon cashed the two checks and transferred title to the Blazer to Ms. Campbell in late October 1996.

In early February 1998, which was more than fifteen months after the sale of the Chevrolet Blazer, Simmons discovered that Ms. Campbell, with the aid of Ms. Evans, had been embezzling funds from his accounts for over two years. In the period after the $13,000 check was forged, scores of checks, totaling $109,362, were cashed by Ms. Campbell after she had forged Simmons’s signature as the drawer of those checks.

II

COMPLAINT AND PROCEEDINGS Simmons filed a complaint against Lennon in the Circuit Court for Prince George’s County on June 8, 1998. He asked for a jury trial. One count in his complaint was for conversion and related solely to the $13,000 check. Another count was for negligence. 2 On the morning of trial, Simmons, representing himself, made an opening statement, as did counsel for Lennon.

Simmons then began his testimony, but shortly after his testimony commenced, Judge Stephen I. Platt told Simmons, out of the presence of the jury, that he had grave doubts as to whether he could prevail even if everything he had said in his testimony and in his opening statement were believed by the jury. ²⁰ Specifically, in regard to the negligence count, the trial court said he doubted that Lennon had breached any duty owed to Simmons. He invited Simmons to try to convince him otherwise. Simmons argued that Lennon, on the date he received the $13,000 check, had a duty to notify him that Campbell had forged his name to the escrow account check. According to Simmons, if Lennon had not breached that duty, he would have fired Campbell immediately, and her forgeries would have stopped.

And, if the forgery scheme had been terminated at that point, the loss of $109,362 would have been avoided. In addition, the $13,000 check would not have been paid by NationsBank. Simmons based his allegation that Lennon “knew or should have known” that the check he received was forged upon the following facts: 1. The words “escrow account” were printed on the Nati-onsBank check that Lennon received; 2.

Lennon, who obtained a Florida real estate license in 1985, knew or should have known that it was impermissible for an attorney to pay for an employee’s motor vehicle out of an escrow account; 3 3. Lennon, due to the fact that he served private process for Simmons, was familiar with Simmons’s signature; 4. The signature on the $13,000 check did not look like Simmons’s signature; and 5. Based on the fact that Campbell had been convicted of fraud due to her forgery of Lennon’s name on forged credit card applications, Lennon knew that Campbell was a person likely to forge checks.

At the trial judge’s invitation, and with Simmons’s acquiescence, Lennon’s counsel then moved for summary judgment as to both counts. The parties agreed that Judge Platt should ²¹ decide the motion based on the assumption that all statements of facts in the complaint, together with all statements of facts set forth in either Simmons’s opening statement or in his trial testimony, were truthful. Judge Platt ruled that the facts relied upon by Simmons were insufficient to support a cause of action for conversion. He also ruled that Simmons could not recover against Lennon on the negligence count because Lennon owed Simmons no duty to warn him that Campbell had forged an escrow check.

III

ANALYSIS A. The Conversion Count Simmons argues: Granting summary judgment on the conversion count was improper because the [defendant’s acceptance for value of the stolen and forged checks [sic] and subsequent receipt of the underlying proceeds wrongfully deprived the [p]laintiff of the proceeds [in] his Attorney Escrow Account. 1. The Uniform Commercial Code (1996 Version) Because the $13,000 check received by Lennon was a negotiable instrument, we must first look to the Uniform Commercial Code to determine whether Lennon’s actions concerning the $13,000 check constituted a conversion of it. In October 1996, when Lennon cashed the check, the Maryland legislature had recently revised the Uniform Commercial Code in several significant respects, but the effective date of the revision was January 1, 1997. 1996 M. Laws, Chap. 91 § 2. As of October 1996, Simmons’s rights and Lennon’s liability were governed by the Uniform Commercial Code (U.C.C.) codified at section 3-101 et seq. of the Commercial Law article of the Maryland Code (1975, 1992 Repl.Vol.). 4 ²² Section 3-301 et seq. of the U.C.C. provides for loss allocation in cases of forged drawers’ signatures.

Bank of Glen Burnie v. Loyola Fed. Sav. Bank, 336 Md. 331, 336 , 648 A.2d 453 (1994). NationsBank, the drawee, which held the monies in Simmons’s escrow account, ordinarily would have had no right to deduct the amount of the check from the drawer’s (Simmons’s) account because the drawer’s signature was forged. NationsBank 'nevertheless paid the $13,000 check.

The payee’s signature (Lennon’s) was not forged. Under such circumstances, usually the drawee bank would be liable to the drawer and would be required to re-credit the drawer’s account. 5 ²³ Under the U.C.C., as it read prior to January 1,1997, a drawer could not successfully sue a payee, such as Lennon, for the conversion of a check paid on the drawer’s forged signature. See U.C.C. § 3-419(1), which read: Conversion of instrument; innocent representative. (1) An instrument is converted when (a) A drawee to whom it is delivered for acceptance refuses to return it on demand; or (b) Any person to whom it is delivered for payment refuses on demand either to pay or to return it; or (c) It is paid on a forged indorsement.

As can be seen, section 3-419(l)(a) and (b) have no application to this case. Section 3-419(l)(c) is likewise inapplicable because the $13,000 check that Lennon cashed was not paid on a forged indorsement — it was paid on a forged drawer’s signature, but the indorsement by Lennon was genuine. The “Code distinguishes between forgeries of drawers’ signatures and forgeries of indorsements.” See George D. Triantis, Allocation of Losses from Forged Indorsements on Checks and the Application of § 3-105 of the Uniform Commercial Code, 39 Okla. L.Rev. 669, 669 (1986); see also Perini Corp. v. First Nat’l Bank of Habersham County, 553 F.2d 398, 404 (5th Cir.1977) (when drawee bank pays check on forged in-dorsement it may generally pass liability back through the indorsement chain, whereas with forged drawer’s signatures, drawee bank remains liable). 6 ²⁴ The Court of Appeals recognized this distinction in Bank of Glen Bumie.

When a drawee bank makes payment on an instrument bearing a forged drawer’s signature and a genuine indorsement, the drawee bank is “bound on [its] acceptance and cannot recover back [its] payment.” See § 3-418 cmt. 1. The traditional justification behind the “finality” rule is that the drawee is expected to know the drawer’s signature and has the superior ability to detect a forgery. See § 3-418 cmt. 1. The modern justification for the rule is that it is “highly desirable to end the transaction on an instrument when it is paid rather than reopen and upset a series of commercial transactions at a later date when the forgery is discovered.” See id.

In contrast, when a drawee bank makes payment on an instrument bearing a genuine drawer’s signature and a forged indorsement, the drawee bank can generally pass liability back to the collecting bank in an action for a breach of the presentment warranty of good title. See §§ 3-417(l)(a) and 4-207(l)(a) (prior transfers warrant that they have “good title to the instrument”). Because a forged indorsement generally does not confer good title, the draw-ee bank can recover upstream under a breach of warranty claim “against a[ny] person who presented a check bearing a forged indorsement.” See Perini 553 F.2d at 404 . 336 Md. at 337 , 648 A.2d 453 (footnote omitted). Based on the facts proffered by Simmons, his check was not “converted” by Lennon within the meaning of the U.C.C. ²⁵ because it was not paid on a forged indorsement, nor was any other provision of section 3-419(1) applicable.

Simmons disagrees and contends that Judge Platt erred in granting summary judgment on the conversion count. He supports his argument by relying on two New York cases, viz: Sales Promotion Executives Association v. Schlinger & Weiss, Inc., 234 N.Y.S.2d 785 (Civ.Ct.1962), and Stockton v. Gristedes Supermarkets, Inc., 177 A.D.2d 425 , 576 N.Y.S.2d 267 (App.Div.1991). In the Sales Promotion Executives Association case, an employee of the payee stole forty-nine checks from the payee and, over a course of nine months, cashed them at the defendant’s supermarket. 234 N.Y.S.2d at 786. On each of the checks, the dishonest employee signed the payee’s name and then wrote his own name underneath.

Id. The court opined: Normally, a corporation-payee deposits it[s] checks in its bank account. It is unusual for a corporate-payee to cash a check or endorse it over to a third person. Therefore, when a person is asked to cash a check which bears the purported endorsement of a corporate-payee, he should be placed on guard.

He should check to see whether the endorsement is authentic and whether the person attempting to cash the check is authorized so to do by the corporation. One who pays out on such a check does so at his own peril. In the case at bar, the defendant failed to take any steps to ascertain whether the corporate-payee’s endorsement was genuine and whether the “agent” had any authority from the corporation to cash these checks. The matter of good faith on the part of the defendant does not enter into the picture.

The fact that the defendant did not have knowledge that the checks were stolen is not a defense. The defendant took a chance on the face of an “honest” customer, without verification, and it develops that the defendant misplaced its trust and confidence in a thief. The defendant therefore cashed these checks at its own peril. ²⁶ By depositing these checks in its bank and receiving credit therefor, the defendant exercised dominion over the plaintiffs property. By obtaining the proceeds of the checks, the defendant had converted the plaintiffs property to its own use.

The receiver from the thief obtains no greater rights or better title than the thief. If an action in conversion will lie against the thief, so will it against the receiver from the thief. The plaintiff-payee is not limited to an action on a check under the Negotiable Instrument Law against each of the 49 drawee banks scattered throughout the country. It has the choice of pursuing the alternative remedy of proceeding in conversion directly against the thief and the thiefs receiver (regardless of guilty knowledge).

I do not dispute that under the Negotiable Instrument Law that the drawee bank becomes liable to the payee for payment of a check bearing a forged endorsement on the ground that in such instances the bank has made payment out of its own funds rather than those of the drawer’s. 7 I do not dispute that each of the 49 drawee banks can recover from the collecting bank on the ground that the collecting bank is the guarantor that all prior endorsements are not forgeries. In the final analysis, however, the collecting bank may recover from its depositor the defendant herein, which is a prior endorser to the bank but a subsequent endorser of a forged endorsement. I see no earthwhile reason for the suggested circuitous route. There’s no need to cross the Mississippi by way of Siberia.

Id. at 786-87. Aside from the fact that it did not apply the U.C.C., the Sales Promotion Executives Association case is distinguishable from the case at hand because it did not deal with the forgery of a drawer’s signature; rather, it concerned the ²⁷ forged indorsement of the payee’s signature, and the payee was the plaintiff, not the drawer. Because the U.C.C. treats forged indorsements differently from the forgery of a drawer’s signature, this distinction is dispositive. See U.C.C. 3-419(7); see also Aritor v. Chase Manhattan Bank, 39 Misc.2d 427 , 240 N.Y.S.2d 615, 616 (Sup.Ct.1963) (distinguishing the Sales Promotion Executives Association case on the grounds that the payee and not the drawer was the plaintiff).

In Stockton, the decedent’s housekeeper stole 285 of the decedent’s checks and forged the decedent’s (drawer’s) signature on each of them. Stockton, 576 N.Y.S.2d at 268. The housekeeper was able to cash the checks because she and the manager of the defendant supermarket entered into an illicit scheme whereby the manager would cash the checks over the drawer’s forged signatures. Id.

As a result of the scheme, “in excess of $147,000” was realized. Id. The Stockton court held that the decedent’s executor could sue the defendant store (the payee of the checks) for conversion. The only analysis the court gave in support of this holding was the following: [T]he cause of action for conversion should not have been dismissed.

By accepting and cashing decedent’s stolen and forged checks, and then obtaining payment from decedent’s drawee bank defendant converted decedent’s stolen checks (see Sales Promotion Executives Association v. Schlinger & Weiss, Inc., 234 N.Y.S.2d 785 ). Id. at 269. Although Stockton is factually on point, we decline to follow it for three reasons. First, the only authority for its decision is the Sales Promotion Executives Association case, which dealt with a forged indorsement and is thus distinguishable.

Second, and at least as important, under section 3-419(l)(c), the $13,000 check was not converted. 8 Third, as will be seen, under Maryland common law, no conversion took place. ²⁸ B. The Uniform Commercial Code — Present Form Even if the $13,000 check made payable to Lennon were governed by the U.C.C. as it is presently written, Simmons still would not have been able to sue Lennon for conversion. Effective January 1, 1997, section 3-419 was redrafted and section 3-420 was added to the Code. Section 3-420 now governs conversion actions and provides: Conversion of instrument. (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 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 plaintiffs interest in the instrument. (c) A representative, other than a depository bank, who 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.

Md.Code Ann., Com. Law I § 3-420 (1997 Repl.Vol. & Supp. 2000) (emphasis added). The term “issuer” means “a maker 9 or drawer of an instrument.” U.C.C. § 3-105(c). The term “drawer” means “a person who signs or is identified, in a draft as a person ordering payment.” U.C.C. § 3-103(a)(3) (emphasis added). ²⁹ In the case at hand, Simmons was a drawer, as that term is defined in the Code, because he was identified in a draft as a person making payment.

As shown by the emphasized portion of section 3-420(a) quoted above, a drawer whose signature is forged cannot successfully bring an action against a payee — such as Lennon — for conversion. C. Common Law Action for Conversion In Hawkland, Uniform Commercial Code series, vol. 4, Commercial Papers, art. 3-899 (2000), the author says: From even a cursory reading of Section 3-419, it is apparent that the section was not intended to constitute the exclusive basis for an action for conversion. The drafters apparently intended only to cover those situations in which they wanted either to deviate from, or to clarify, the rule under the NIL. Consequently, the failure of section 3-419 to specify that a particular act constitutes a conversion does not imply that no action for conversion can be maintained.

Rather, the contrary implication is closer to the fact. If the common law of conversion is not specifically negated by a provision of Section 3-419, the common law rule should be deemed to be incorporated into Article 3 by virtue of Section 1-103. Id. (footnote omitted.) Section 3-419 referred to by Hawkland in the above excerpt is the version that was in effect in Maryland when Lennon cashed the $13,000 check bearing Simmons’s forged signature.

The question then becomes whether, under Maryland common law, Simmons could recover against Lennon for conversion of the check. Under Maryland common law, a conversion is any distinct act of ownership or dominion exercised by one person over the personal property of another in denial of his rights or inconsistent with it. Interstate Ins. Co. v. Logan, 205 Md. 583, 588-89 , 109 A.2d 904 (1954) (citing Martin v. W.W. Lanaham and Co., 133 Md. 525 , 105 A. 777 (1919)); see also Allied Inv.

Corp. v. Jasen, 354 ³⁰ Md. 547, 560, 731 A.2d 957 (1999). In the conversion count of his complaint, Simmons did not seek to have Lennon return the forged check to him. This is understandable because Lennon would no longer have had physical possession of the check once he cashed it. Simmons alleged in his complaint: 10 21.

That on or about October 23, 1996 the [defendant did willfully endorse and cash and deposit the proceeds from a forged instrument in the amount of $13,000, ... and deposited said funds into his credit union accounts with the intention and result of depriving the lawful owner of these funds. 22. That as a direct and proximate result of the conduct of the [defendant the [p]laintiff has suffered proximate [sic] damages in the amount of $25,000. WHEREFORE the premises considered your [p]laintiff demands judgment against [defendant Michael Lennon in the amount of $25,000 plus costs of this suit. 11 The case of Maryland Casualty Company v. Wolff, 180 Md. 513 , 25 A.2d 665 (1942), dealt with a suit by the drawer of a check against one Wolff, the payee. Id. at 514 , 25 A.2d 665 .

The drawer (Fidelity and Guaranty Fire Corporation) was the employer of one John Joyce. Id. Joyce’s job was to prepare and approve requisitions for payment to field agents and brokers. Id.

After Joyce prepared requisitions, his employer’s agent would prepare checks in conformity with Joyce’s requisitions and the checks would be mailed to the payee(s). Id. Joyce devised a scheme whereby he would give his employer requisitions naming as payee certain friends of his; the checks would be drawn as directed, and Joyce would intercept the checks before they were mailed. Id. at 515 , 25 A.2d 665 . ³¹ Joyce would then convince his friends to cash the checks and give him the money by telling them that the money was due to him for commissions on insurance sold by him, but that the names of friends must be used because it was not customary for office employees of the corporation to collect premiums on such insurance, as it did not want its agents to know that office employees were thus engaging in the business of selling.

Id. Using that scheme, Joyce got Wolff to cash one of the checks and give him (Joyce) the proceeds. Id. The employer’s insurer (as assignee of the employer’s rights) sued Wolff for conversion.

The trial court ruled that Wolff had not committed the tort of conversion, and the Court of Appeals affirmed. Id. at 516-17 , 25 A.2d 665 . The Wolff Court said: Conversion of a check as a chattel, a tort, is, of course, the subject of the suit. The money represented by it is not the direct subject, as trover does not lie to recover money converted; it lies to recover damages for the tort.

See authorities collected in Davin v. Dowling, 146 Wash. 137, 140 , 262 P. 123 . And the conversion alleged is a wrongful assumption of property or right of possession in the check by endorsing it, or an intermeddling with a right of possession in the corporation, an “unauthorized assumption of the powers of the true owner.” Pollock, Torts, 14th Ed., 286; Hammond v. Du Bois, 131 Md. 116 , 101 A. 612 . Id. at 515 , 25 A.2d 665 . The Court’s holding in Wolff was that although the defendant had innocently helped Joyce to defraud the employer, he had not actually interfered with the employer’s right to possess the check because the employer was the check’s drawer and not its payee.

Id. at 516 , 25 A.2d 665 ; see also Lawson v. Commonwealth Land Title Ins. Co., 69 Md.App. 476, 481-82 , 518 A.2d 174 (1986) (analyzing the Wolff decision). The significance of the fact that Wolff was the payee “flowed ... from the Court’s view that only the check[ ] [itself], and not ... [its] proceeds could be the subject of conversion.” Law ³² son, 69 Md.App. at 482 n. 1, 518 A.2d 174 . The holding in Wolff is of particular relevance here because Simmons, like the plaintiff in the Wolff case, sued for the proceeds of the check— not for the return of the check itself.

In Lawson , Judge Wilner, for this Court, focused on the statement in Wolff that “ ‘[t]he money represented by [the check] is not the direct subject [of a conversion action], as trover did not lie to recover money converted; it lies to recover damages for the tort.’ ” Id. at 481, 518 A.2d 174 . Judge Wilner explained: If this statement from Wolff is a bit cryptic, the holdings in Davin v. Dowling and the cases cited in it are not. The point made there, as expressed in Shrimpton & Sons v. Culver, 109 Mich. 577 , 67 N.W. 907 (1896), cited in Davin, 262 P. at 125 , is that, while an action of trover will lie to recover money, i.e., currency, as money is a chattel, the action “is not maintainable for money unless there be an obligation on the part of the defendant to return the specific money entrusted to his care.” See also Larson v. Dawson, 24 R.I. 317 , 53 A. 93 (1902), also cited in Davin . That principle remains current.

In Lyxell v. Vautrin, 604 F.2d 18, 21 (5th Cir.1979), applying Alabama law, the Court held: “When there is no obligation to return the identical money, but only a relationship of debtor or creditor, an action for conversion of the funds representing the indebtedness will not lie against the debtor Id. at 482, 518 A.2d 174 (footnote