1. What is the difference between a drawer action against a bank and a payee action?

2. Why is SBU liable when it did in fact deposit the checks?

3. What should SBU do in the future?

B.D.G.S., Inc., a New York corporation with headquarters in Washington, owns a warehouse in Utica, New York. In 1991, B.D.G.S. entered into an oral agreement with two local men, Anthony Balio and his employee, Peter Duniec, to manage the warehouse. Their responsibilities included finding tenants and collecting rent, which was then to be forwarded to B.D.G.S. and deposited into its bank account in Washington. Balio and Duniec formed the Beechgrove Warehouse Corporation and maintained a business account in that name at Savings Bank of Utica (SBU).

Between 1996 and 2000, B.D.G.S. believed that one of its tenants, Rite-Aid, had been falling behind and failing to make its rent payments. B.D.G.S. later discovered that Rite- Aid had been making the payments, but 16 checks had been  indorsed to Beechgrove Warehouse and deposited into Beechgrove’s SBU account. The checks had been made payable to DBGS (an apparent typographical error). There was a handwritten indorsement on the back of each check stating:

DBGS, Inc.

Pay to the order of

Beechgrove Warehouse

For Deposit [followed by Beechgrove’s SBU account number]

A refund check from Niagara Mohawk for $427,781.82 had similarly been indorsed and deposited in the SBU account. B.D.G.S. filed suit against SBU, Balio, Duniec, and Beechgrove Warehouse. B.D.G.S. also brought a claim against SBU. The jury found that SBU had not followed reasonable commercial standards by accepting the checks for deposit. The appellate court affirmed and SBU appealed.

JUDICIAL OPINION

CIPARICK, Justice … Section 3-419(3) limits the liability of representatives—including, as relevant here, depositary banks. As long as the bank complies with any restrictive indorsements and acts in good faith and in accordance with reasonable commercial standards, its liability will be limited to “the amount of any proceeds remaining in [its] hands” (UCC 3-419[3]). Since the statute provides that the bank will not be “liable in conversion or otherwise,” the defense applies to a claim for money had and received.

SBU argues that compliance with the restrictive indorsements is tantamount to acting in accordance with reasonable commercial standards under the statute. In support of this argument, SBU relies on Spielman v Manufacturers Hanover Trust Co., 60 NY.2d 221, 469 NY.S.2d 69, 456 N.E.2d 1192 (1983). In that case, an attorney forged the payee’s indorsement on a settlement check made out to a law firm, and the drawer of the check commenced an action against the depositary bank.

Spielman is inapposite. Most notably, the party bringing suit in Spielman was the drawer of the check, rather than—as here—the payee. The Court observed that a drawer generally will not have a cause of action against a depositary bank; “either the forgery is effective to transfer ……………