The opinion of the court was delivered by: TENNEY
Plaintiff, Swiss Credit Bank ("Swiss Credit"), moves for summary judgment, pursuant to Rule 56 of the Federal Rules of Civil Procedure on the grounds that under Sections 3-404 and 3-406 of the New York Uniform Commercial Code ("N.Y.U.C.C." or the "Code") defendant Chemical Bank is precluded from denying its forged endorsements on three promissory notes, the subject matter of this suit. In the alternative, Swiss Credit moves for summary judgment on the ground of an alleged constructive fraud.
The following facts are not in dispute. The three promissory notes involved herein were purportedly made by Avery Brundage ("Brundage") on November 11, 1971 and due November 10, 1972, payable to the order of Er Shih Chiang ("Chiang") in the amounts of $350,000, $100,000 and $50,000 (Notes A, B, and C respectively). Each note bears the endorsement of the payee, Chiang, and purports to bear the endorsement of defendant Chemical Bank by Yerbury Burnham ("Burnham"), a vice-president of that bank. It is not disputed that at all times relevant hereto, Burnham had actual authority to act on behalf of Chemical Bank in endorsing promissory notes, communicating with other banks, and making representations of fact to such banks in the carrying out of Chemical Bank's banking business.
Prior to the transactions at issue in this suit Swiss Credit had extended lines of credit to Chiang. On two such occasions advances under those lines were secured by promissory notes made by Brundage, payable to the order of Chiang, and bearing Chemical Bank's endorsement by Burnham. On one of these occasions Burnham had forwarded to Swiss Credit two Brundage promissory notes which bore on their reverse side Burnham's obliteration of the words "signature guaranteed."
On February 8, 1972 Chiang approached Swiss Credit and requested that they increase his line of credit from 800,000 Swiss Francs to 1,800,000 Swiss Francs. As partial security for his indebtedness to Swiss Credit, Chiang offered Notes A ($350,000) and B ($100,000). On that date Swiss Credit, seeking to verify the endorsement of Chemical Bank by Burnham, which appeared on the reverse side of the notes, sent a telex message to Burnham at Chemical Bank requesting that he confirm Chemical Bank's endorsements on Notes A and B and asking whether Chiang could freely dispose of these notes. On the same date, Burnham sent a telex message to Swiss Credit requesting that it forward photocopies of Notes A and B to him for his inspection. Whether Burnham knew at this time that he had not endorsed these notes is disputed but not material. In any event, upon receipt of Chemical Bank's telex and on February 9, 1972, Swiss Credit mailed to Burnham photocopies of the front and reverse sides of Notes A and B and requested that Burnham reply to Swiss Credit by tested cable, i.e., a cable with a confidentially known test key which serves to guaranty the identity of the sender. On or about the same date, February 9, 1972, Chiang obtained Notes A and B back from Swiss Credit and on or about February 14, 1972 brought the notes to Burnham at Chemical Bank. Chiang told Burnham that he had forged Burnham's signature and the endorsement of Chemical Bank on the reverse side of the notes and asked Burnham not to inform Swiss Credit of the forgeries. Although Burnham knew that Chiang had committed forgery, he did not inform Swiss Credit of that fact. Instead, Burnham took Notes A and B from Chiang and obliterated the endorsements of Chemical Bank. On the same date, February 14, 1972, Burnham sent a telex to Swiss Credit without a test key, in reply to Swiss Credit's telex of February 8, 1972 and letter of February 9, 1972. Burnham, in the telex, replied to Swiss Credit's inquiries by stating "confirm all in order." Because Burnham's telex of February 14 did not bear a test key, the next day Swiss Credit sent a telex to Chemical Bank requesting that it reply to the earlier inquiries by a telex bearing a test key. In reply to Swiss Credit's February 15 telex, Burnham, on the same date, sent a telex to Swiss Credit, this time with a test key, again stating "confirm all in order." At the time that he was sending the February 14 and 15 telexes confirming to Swiss Credit that all was in order, Burnham had in his possession Notes A and B and had obliterated the endorsements which he knew had been forged by Chiang. Burnham retained possession of Notes A and B until late March or early April 1972 when he returned them to Chiang, allegedly with the understanding that Chiang would return them to Brundage. However, on April 14, 1972, Chiang, having once again forged Chemical Bank's endorsement, presented Notes A and B to Swiss Credit as security for his existing indebtedness and for the purpose of expanding his line of credit. Swiss Credit took the notes in exchange for Chiang's blank amount promissory note which had been held by that bank as security since February 16, 1972 and for another promissory note of Brundage in the amount of $225,000. As of April 14, 1972 Chiang's debit balance was 1,203,561 Swiss Francs.
On or about April 28, 1972 Swiss Credit took allegedly as additional security for Chiang's line of credit, a third promissory note, Note C, bearing the purported signature of Brundage as maker, dated November 11, 1971 and due November 10, 1972, payable to the order of Chiang in the amount of $50,000. Note C bore Chiang's endorsement and the stamped endorsement of Chemical Bank bearing the purported signature of Burnham. At that time Chiang's indebtedness to Swiss Credit was 1,476,236 Swiss Francs. On the following day, April 29, 1972, Chiang died.
On the due date, November 10, 1972, all three notes -- A, B, and C -- were presented for payment in accordance with their terms, but payment was refused and the notes were dishonored and protested. Thereafter, in November 1972, Swiss Credit gave Chemical Bank notice of the protest and dishonor and presented the three notes to Chemical Bank, but Chemical Bank refused and still refuses to pay the notes. As of November 10, 1972 the debit balance in Chiang's account with Swiss Credit was 1,627,819.75 Swiss Francs.
In the light of the foregoing, Swiss Credit contends that Chemical Bank is liable to it, as a matter of law, on its contracts of endorsement on the three notes and for constructive fraud. This endorser's liability is based on two alternative theories. The first is that Chemical Bank is precluded from denying its endorsements under N.Y.U.C.C. § 3-404 because, under principles of estoppel, it must bear the loss caused by forgeries it could have prevented. The second is that Chemical Bank is precluded from denying its endorsement under N.Y.U.C.C. § 3-406 because its own negligence in giving Notes A and B back to Chiang, knowing that he had previously forged them, as a matter of law, substantially contributed to Chiang's subsequent forging of Chemical Bank's endorsements on the notes. Finally, Swiss Credit asserts that Chemical Bank is liable for constructive fraud.
Directing our attention to the first theory upon which Swiss Credit predicates its right to recover, we must determine whether Chemical Bank's actions in (1) sending the intentionally misleading telexes to Swiss Credit, (2) failing to notify Swiss Credit of Chiang's forgeries, and (3) returning Notes A and B to Chiang, knowing him to be a forger -- all of which are uncontroverted -- preclude Chemical Bank from denying its endorsements on all three notes, i.e., Notes A, B, and C, under the provisions of N.Y.U.C.C. § 3-404 which reads, in pertinent part, as follows:
"(1) 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; . . ."
The Official Comment to this section states:
"The words 'or is precluded from denying it' are retained in subsection (1) to recognize the possibility of an estoppel against the person whose name is signed, as where he expressly or tacitly represents to an innocent purchaser that the signature is genuine; and to recognize the negligence which precludes a denial of the signature." Comment 4.
Pursuant to the provisions of N.Y.U.C.C. § 1-201(43), an "unauthorized" signature specifically "includes a forgery."
Futhermore, N.Y.U.C.C. § 1-103, by its express terms, provides that the common law principles of equity and estoppel are preserved under it and are applicable to transactions falling within its purview. Thus, rights under that Code are governed by the common law rule of equitable estoppel that when one of two innocent persons is to suffer a loss caused by a wrongdoer (the forger), the person who enabled the forger to cause the loss must sustain it. National Safe Deposit Co. v. Hibbs, 229 U.S. 391, 33 S. Ct. 818, 57 L. Ed. 1241 (1913); Bunge Corp. v. Manufacturers Hanover Trust Co., 31 N.Y.2d 223, 335 N.Y.S.2d 412, 286 N.E.2d 903 (1972); West Penn ...