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July 15, 1991


The opinion of the court was delivered by: Sweet, District Judge.


Defendant Chemical Bank, New York Trust Company ("Chemical") has moved pursuant to Rule 56, Fed.R.Civ.P., for summary judgment dismissing the diversity action of plaintiffs Simcoe & Erie General Insurance Company ("Simcoe") and its subrogee, the Guarantee Insurance Company of North America ("Guarantee"). For the reasons set forth below, the motion is granted in part and denied in part.

The Parties

Simcoe is a Canadian corporation with its principal office in Hamilton, Ontario, Canada. Simcoe is a customer of Chemical.

Guarantee is a Canadian corporation with its principal office located in Willowdale, Ontario, Canada. Guarantee is Simcoe's insurer.

Chemical is a New York corporation engaged in the business of banking, with its principal offices located in New York City.

Prior Proceedings

Simcoe and Guarantee commenced this action on December 14, 1988. On February 10, 1989, Chemical served its answer raising several affirmative defenses including lack of complete diversity and the bar of certain of the claims in the complaint by the statute of limitations. On May 17, 1990, Chemical moved pursuant to Rules 11 and 37, Fed.R.Civ.P., to dismiss the complaint for Simcoe's and Guarantee's failure to obey the pre-trial scheduling orders. On May 21, 1990 the court dismissed the action sua sponte for failure to comply with the scheduling orders. In a letter of June 1, 1990, Simcoe and Guarantee asked the court to vacate the order of May 21. The court treated the letter as a motion pursuant to Rule 60, Fed.R.Civ.P., and scheduled oral argument. On June 27, the court issued an order vacating the default.

On February 8, 1991 Chemical filed the instant summary judgment motion. By consent of the parties, the return date of the motion was adjourned until March 29, 1991, when oral argument was heard. As Simcoe and Guarantee raised a legal argument that had not been briefed by the parties, counsel for both sides made additional submissions on that issue.

The Facts

This action arises from a check forgery scheme perpetrated by Lily Lee ("Lee"), Simcoe's employee, over the period March 14, 1985 through July 30, 1986.

Between March 1985 and August 1986, Simcoe maintained a checking account (the "operating account") with Chemical.

Simcoe hired Lee in January 1985. On January 3, 1985, Simcoe filed a Representative Card with Chemical. The card read, in pertinent part, as follows:

  Please cash any checks bearing my/our signature
  (or endorsement) when presented by my/our
  representative whose signature appears below.
  These instructions remain in effect until written
  revocation is received by you.

The card bore Lee's signature, identifying her as Simcoe's representative, and was issued in the name of and signed by Raymond J. Morton ("Morton"), Simcoe's vice president-secretary and treasurer during the relevant period. The representative card remained effective until July 31, 1985.

On June 22, 1982, Simcoe had executed a resolution (the "Resolution") signed by Morton and Shang C. Lee, Simcoe's assistant treasurer and Lee's mother, that stated:

  that the Secretary or any Assistant Secretary . .
  . is hereby authorized and directed to certify, .
  . . to the Bank . . . the names of the officers
  and other representatives of this Corporation . .
  . and specimens of the respective signatures, and
  that the Bank may conclusively assume that
  persons at anytime certified it to be . . .
  representatives of this Corporation continue as
  such until receipt by the Bank of written notice
  to the contrary.

Of the employees of Simcoe's New York office, Lee alone drew the checks, made all the entries in Simcoe's books, and reconciled the checks against the bank statements when they were returned by Chemical.

At the beginning of the forgery scheme, Lee would present the checks to the Chemical representative listing herself as payee and containing Morton's signature forged by Lee. After the checks were returned by Chemical, Lee would alter the payee of the check to reflect the names of legitimate companies with which Simcoe regularly did business. Lee also altered the voucher copies in Simcoe's ledgers. Later in the course of the scheme, Lee returned the checks to Simcoe's files leaving her name as payee.

After the forgery scheme was uncovered, Morton upon examining the checks was unable to discern which checks contained his signature and which were forgeries.

In 1985, Simcoe's actual expenses exceeded its budgeted expenses by $82,392. The amount of forged checks ...

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