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Woods v. Bank of New York

decided: November 26, 1986.

MARVIN K. WOODS, PLAINTIFF-APPELLEE,
v.
THE BANK OF NEW YORK, AND THE 44 WALL STREET FUND, INC., DEFENDANTS-APPELLANTS



The Bank of New York and The 44 Wall Street Fund, Inc. appeal from a judgment of the United States District Court for the Southern District of New York (Stanton, J.) entered December 17, 1985 that held appellant bank liable in conversion and negligence to appellee Marvin K. Woods for its failure to follow his instructions written on a check sent to the bank. Reversed and remanded.

Author: Cardamone

Before: FEINBERG, Chief Judge, CARDAMONE, Circuit Judge, and KELLEHER, District Judge*fn*

CARDAMONE, Circuit Judge:

Involved in this appeal is a narrow but important issue affecting investment law: does a bank servicing shareholders as a transfer agent for a mutual fund have a duty to read and act upon directions written on the memorandum portion of a check? Opinions authored by Judges Holmes, Cardozo, and Hand -- whose views we will consider in a moment -- have answered in the negative a similar question where a bank acts in its ordinary commercial capacity. But the trial court reasoned that the rationale of those cases did not apply in this case. We disagree with the district court, and believe instead that to require a bank acting as transfer agent to look for notations on checks -- beyond those essential to its own requirements -- severely restricts the bank's everyday business by clogging the fast flow of information it must process. In this computer age the affairs of a transfer agent bank must be conducted just as rapidly as its regular commercial activities. Further, notations placed on the margin of a check are most often put there for the drawer's convenience.

The Bank of New York and the 44 Wall Street Fund, Inc. appeal from a judgment of the United States District Court for the Southern District of New York (Stanton, J.) in favor of plaintiff, Marvin K. Woods, entered December 17, 1985 following a jury trial. The defendant Bank of New York (Bank) acting on its own behalf and as transfer agent for the defendant 44 Wall Street Fund, Inc. (Fund) asserts several grounds on appeal. Principally, it claims that it cannot be liable to plaintiff, for conversion or negligence as a matter of law, and that, even if it can be found liable, the jury improperly calculated plaintiff's damages. For the reasons explained below, we reverse and remand for further proceedings.

FACTS

The parties have agreed to the following facts. Marvin K. Woods was a shareholder of the Fund, a mutual stock fund. The Bank was the shareholder servicing and transfer agent for the Fund, handling investments in and out of the Fund. Woods also had an investment in a money market fund called the Reserve Fund (Reserve) for which the Bank of New York did not act as transfer agent.

Under the Fund's 44/Reserve Switch Plan, a participating investor could telephone or write The Bank of New York and direct it to liquidate his investment in the 44 Wall Street Fund and "switch" it directly to the Reserve Fund. In order to participate in this switch plan, an investor had to claim that right in his original account application. If an investor did not elect to participate originally, the Fund's prospectus permits him to do so at a later date either by sending a new signature guaranteed application or a signature guaranteed letter of instruction to the Bank requesting such participation.

Believing that he had already elected switch plan privileges, Woods telephoned the Bank on June 22, 1983 and directed it to switch 1,000 shares of his Fund to Reserve shares. Woods was advised over the telephone that the Bank had no record of his choosing this option. After some discussion, Woods authorized the Bank to redeem his Fund shares and send him a switch-plan application. Pursuant to this conversation, the Bank liquidated Woods' Fund shares and mailed him a check for $22,054.72 together with the requested application.

On July 1, 1983 the Bank of New York received from Woods an executed application for the Switch Plan and a check in the amount of $21,000, payable to the Bank, and bearing on its lower left hand corner, on the memorandum portion, the following notation: "For Acct. 155-69-985-P RESERVE FUND." Woods also testified that he sent a hand-written note with the check and application indicating that the check was to be applied to the Reserve, though he did not retain a copy of it and the Bank denies receiving it. The parties agree that Woods' check and application were not signature guaranteed, and Woods concedes that his enclosed note was not signature guaranteed. Accordingly, the Bank returned Woods' application to him to obtain a signature guarantee, which Woods secured and returned on August 4, 1983.

But Woods' check was not returned. Instead, the Bank applied the $21,000 to the repurchase of Fund shares in his name. Upon receiving written confirmation of this transaction, Woods contacted The Bank of New York and demanded that it rescind the repurchase of the Fund shares and return his $21,000. He also contacted the Fund directly. Both the Fund and The Bank refused to refund his money and appellee chose not to exercise his switch privilege during the ensuing months. On March 13, 1985, pursuant to a stipulation and order, the Bank liquidated Woods' Fund shares, which as of that date amounted only to $7,260.05.

Woods then sued the Bank and the Fund in negligence and conversion for failure to handle properly his $21,000 check made payable to The Bank. The complaint sought damages of $21,000, interest that amount would have earned in the Reserve, punitive damages, attorney fees, and costs. After a two-day trial a jury rendered a verdict against appellants in the amount of $12,500. Their subsequent motion to reduce the verdict or to grant a new trial on the ground that the jury misapplied the court's instruction on mitigation of damages was denied by the district court in an order dated April 4, 1986. Appellants appeal from the judgment.

Discussi ...


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