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NORTHERN TRUST CO. v. CHASE MANHATTAN BANK

March 23, 1984

THE NORTHERN TRUST COMPANY, Plaintiff, against THE CHASE MANHATTAN BANK, N.A. Defendant.


The opinion of the court was delivered by: WYATT

WYATT, District Judge.

This is the decision after a trial to the Court without a jury, no demand having been made for a jury.

 The action was brought by The Northern Trust Company ("Northern"), an Illinois corporation with its principal place of business (banking) in Chicago. The defendant is The Chase Manhattan Bank, N.A. ("Chase"), a national banking association with its principal place of business (banking) in the City of New York. There is diversity jurisdiction under 28 U.S.C. § 1332, Chase being deemed a citizen of New York for the purpose of suits by or against it (28 U.S.C. § 1348). The parties are agreed that New York law is to be applied.

 The action was brought by reason of a check which was forged by an unknown person and which has caused Northern to be presently out-of-pocket $473,272.22. Northern is here seeking to recover this amount from Chase.

 There is little, if any, dispute as to the facts. A stipulation sets out the principal facts. The trial transcript is somewhat confused, but the stipulation appears to have been received in evidence as Exhibit 1 (Tr. 31; "Tr." references are to pages of the trial transcript; the stipulation itself will be referred to as "Stip.").

 The contest here, consequent on the fraud with forgery, is to determine which of two innocent banks is to bear the loss caused by the fraud. The conclusion is that, on balance, judgment must be for Chase.

 1. At some time before October 20, 1979, an unknown person took without authority (stole) from the offices of Northern in Chicago a special form of check (referred to by the parties as an "official check form") and a sheet of Northern stationery. The check taken was in the form used by Northern when it wished as fiduciary to issue a check drawing on itself as, for example, in payment for securities bought by Northern for a trust account. A person unknown and unauthorized filled out the stolen official check form: the date was shown as "9-21-79"; the payee was shown as "Chase Bank International"; and the amount was shown as $473,272.22. The check form has a printed signature of Northern as drawer "As Fudiciary" with then a space for a manual signature for Northern over the words "Authorized Signature". An unknown person in this space forged the signature of Chester Dziewa, who was an employee of Northern authorized to sign checks of this type.

 Chase has four "affiliated entities" (Stip., para 28) named "Chase Bank International (Chicago)", "Chase Bank International (Los Angeles)", "Chase Bank International (Miami)", and "Chase Bank International (Houston"), which are located only in the respective cities shown in their names. There is no separate entity known simply as "Chase Bank International".

 A person unknown and unathorized prepared a one-page letter on the stolen sheet of Nrothern stationery, and forged the signature to it of David W. Holman, a vice-president of Northern. This letter was dated October 11, 1979, was addressed to "Chase Manhattan Bank" in New York, and described itself as a "letter of direction". The letter requested that Chase "wire the enclosed funds in the amount of $473,272.22 to Mr. R. L. Fraise's account at the address listed below" and then listed an address, apparently that of the Amro Bank in Amsterdam ("Amro") (Stip., para 3).

 Amro Bank had a correspondent account with Northern (Stip., para 50). Evidently Amro also had such an account with Chase. Northern also had such an account with Chase, but there is nothing in the record as to the state of the account at the relevant times.

 On Saturday, October 20, 1979, the check and letter were received by Chase in New York; they had been "mailed to Chase Manhattan Bank in New York" (Stip., para 17).

 On Monday, October 22, Chase credited the amount of the check to the account of Amro at Chase, advised Amro by "a telecommunications system" (presumably radio) that it had done so, and mailed to Amro a "statement copy of credit previously advised" (Stip., paras 21, 22, Ex. D). This is the manner in which Chase normally effects wire transfers to its correspondent banks (Stip., para 21). On the same day, October 22, Chase endorsed the check ("Chase Manhattan Bank") and forwarded it by air to Federal Reserve Bank of Chicago for presentment to Northern (Stip., para 24). Chase thus acted on the reasonable but mistaken belief that the forged check and letter were genuine; Chase carried out the presumed instructions of Northern contained in the forged letter.

 On Tuesday, October 23, the check was presented to Northern in Chicago, presumably by the Federal Reserve Bank there, although the stipulation (para 37) states that "presentment" was made "by Chase". Although the check purported to be signed by Northern and drawn on it, Northern did not recognize that the check was forged, treated it as genuine and paid it. The stipulation does not detail the manner of payment but undoubtedly it was settled through the routine Federal Reserve Bank of Chicago clearing system. On the same date, October 23, the account of Chase at Federal Reserve Bank of New York was credited with the amount of the check on instructions of Federal Reserve Bank of Chicago.

 On October 23, 1979, the account at Amro in the name of R. L. Fraise showed a credit balance of 24.45 Dutch florins (about $12). On October 24, 25, 26, and 27, there were four sizable withdrawals from the account aggregating 896,972.25 Dutch florins (about $448,660). It is evident that Amro permitted these withdrawals only because, having already in hand the telecommunication advice from Chase of the $473,272.22 credit for the R. L. Fraise account for the check supposedly drawn by Northern, it could use the credit at Chase to reimburse it for the R. L. Fraise account withdrawals. So it was that, on October 26, Amro credited the R. L. Fraise account with 946,176.13 Dutch florins, the Dutch florin equivalent of the Chase $473,272.22 credit to Amro of the forged Northern check. After the last of the withdrawals from the R. L. Fraise account at Amro on October 27, there was a credit balance in that account of $49,228.33 Dutch florins (Stip., para 26) (about $24,625). Nothing is shown as to who R. L. Fraise is, or where he is, but presumably he is one of the criminal conspirators or the name is fictitious and was used for purposes of the fraud. Thus, within a few days of the receipt by Chase of the forged check and letter, the avails of the forgeries (except for some salvage later to be noted) had been transferred beyond the possibility of recovery.

 At the end of November or the beginning of December, 1979, Northern realized that it had not located a copy of the check here in suit (Northern normally kept a copy of checks it drew) nor any record of a transaction with which that check could be reconciled. Mr. Dziewa examined a microfilm of the check in mid-December but did not recognize the forgery of his signature. He examined the original check on December 26 or 27, 1979, and then determined (from ink color, among other things) that his purported signature on the check was a forgery.

 By telephone on December 27 or 28, 1979, Northern notified Chase of "a possible problem relating to the check" (Stip., para 42).

 On or about December 28, Chase advised Northern of the letter supposedly signed by Mr. Holman. Since Mr. Holman had no knowledge of any such letter, nor of the check, nor of the transaction, it was then beyond doubt that there had been a fraud. Northern advised Chase that the letter was a forgery and that there was an investigation of the check.

 In the fulness of time, this action was commenced.

 2.

 The principal claim pressed by Northern seems to be based on the theory of money had and received, as contained in the second cause of action.

 The "money had and received" theory is that Northern paid Chase $473,272.22 "on or about October 23, 1979," that Chase had a duty to inquire of Northern "as owner of the funds Chase received, as to the proper disposition of those funds", and that Chase in violation of a duty to Northern made no inquiry of Northern but relied on a forged letter and paid out "on or about October 23, 1979" the $473,272.22 paid to it by Northern. The quotations are from the second cause of action in the complaint. The decision on which Northern principally relies (Memorandum, pp. 4-9) is Federal Ins. Co. v. Groveland State Bank, 37 N.Y.2d 252, 372, 372 N.Y.S.2d 18, 333 N.E.2d 334 (N.Y.S.2d 18 (1975), which was "an action for money had and received" (372 N.Y.S. 2d at 19-20).

 There are initial difficulties with this theory. The check received by Chase was not drawn by Northern; it was a forgery and thus could not have imposed on Chase any duty to Northern. The Groveland case, where the check to the payee was genuine and authorized, is inapplicable to the facts here. Northern argues (Memorandum, p. 5) that all the cases "hold that the payee bank owes the drawer a duty to inquire as to the proper disposition of the funds". But Northern was not the drawer of the check; it did not draw the check. Its signature was forged. Had Northern, the drawee-drawer, refused to pay the forged check as it should have done, Chase would have had to bear the loss, not because it had violated a duty to Northern by failing to inquire but because it could have had no claim against Northern on a forged Northern signature to the check.

 The "money had and received" theory of Northern is also based on a mistaken notion of the chronology. Northern seems to argue that when Chase credited Amro with the amount of the check, Chase was dealing with "the proceeds of a check" (Memorandum p. 11) paid by Northern, that is, that Chase was dealing with funds belonging to Northern. This is the timing averred in the complaint as shown above. The sequence of events shown on the record, however, ...


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