At the January 14 hearing First Fidelity basically dropped the ratification defense, conceding that ratification cannot be based upon negligence. First Fidelity stated that it is not pressing the ratification defense on the motion for reconsideration.
This leaves for disposition the defenses of estoppel, laches and negligence. As to these, it is clear that there is a triable issue of fact as to whether plaintiffs were negligent in their failure to prevent the fraud or take legal action at an earlier point. However, plaintiffs assert that these defenses are barred because First Fidelity acted in a commercially unreasonable manner.
U.C.C. § 3-404(1) contains no provision expressly authorizing plaintiffs to set up commercial unreasonableness as a bar to the defenses of estoppel, laches and negligence. However, § 3-404(1) must be read in conjunction with § 3-406. The latter section deals with a claim made by a person whose "negligence substantially contributes . . . to the making of an unauthorized signature." Such a person may be precluded from asserting the lack of authority against a payor, but only where the payor acts in good faith and in accordance with "reasonable commercial standards."
Section 3-406 should be read as applying not only to situations where an affirmative defense denominated "negligence" is asserted, but to any circumstance where, in the language of the statute, a person's "negligence substantially contributes . . . to the making of an unauthorized signature." It is the view of the court that where there is a factual contention of negligence, commercial unreasonableness is a bar to a defense based on such negligence whether the defendant uses the legal theory "negligence" or uses some other theory based on the alleged negligent conduct, such as estoppel or laches. A negligence-based defense asserted under § 3-404(1) is barred by § 3-406 if the proponent of the defense has acted in a commercially unreasonable manner. See Am. Mach. Tool Distrib. Assoc. v. Nat'l Permanent Fed. Savings and Loan Assoc., 464 A.2d 907 (D.C. 1983); Trust Co. of Ga. Bank of Savannah v. Port Terminal and Warehousing Co., 153 Ga. App. 735, 266 S.E.2d 254 (Ga. Ct. App. 1980).
In the motion for reconsideration First Fidelity has cited Stella v. Dean Witter Reynolds, Inc., 241 N.J. Super. 55, 574 A.2d 468 (N.J. Super. Ct. App. Div. 1990). However, Stella is of no real assistance to First Fidelity. That case held that the defense of ratification under § 3-404(1) is available even where the party posing that defense acts in a commercially unreasonable manner. But ratification involves knowing and intentional conduct, not mere negligence. In the present case, it is now clear that the defense of ratification has no factual basis, and the defense has been withdrawn. Stella does not deal with negligence or negligence-based defenses.
The result is that First Fidelity's commercial unreasonableness bars the defenses of estoppel, laches and negligence.
At the January 14 hearing First Fidelity argued for the first time that the type of negligence it is asserting does not come within the language of § 3-406 dealing with negligence which "substantially contributes . . . to the making of an unauthorized signature." First Fidelity argued that § 3-406 applies to situations such as the mishandling of a check-signing device or a check-endorsing device, but does not apply to negligent failure to detect a scheme over a period of 5 1/2 years.
The court believes this argument to be without merit. If the management of the plaintiff companies was negligent in failing to detect the scheme, certainly this failure substantially contributed to the ability of the thieves to perform their thievery - i.e., their ability to proceed with the making of the unauthorized signatures.
Upon reconsideration, the court affirms that plaintiffs' motion for summary judgment on their conversion claim against First Fidelity should be granted.
Dated: New York, New York
March 5, 1992
THOMAS P. GRIESA
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