CHIOFALO v. RIDGEWOOD SAVINGS BANK (2006)

A non-jury trial was held in this matter on August 5, 2005.   Defendant Ridgewood Savings Bank (“Ridgewood”) served a post-trial memorandum of law;  plaintiff, Gaspare Chiofalo (“Chiofalo”), served a response to Ridgewood's memorandum of law;  and, upon the Court's direction in a letter to Ridgewood's counsel with copies to plaintiff and co-defendant, Vedwatee Brijlall (“Brijlall”), dated December 7, 2005, Ridgewood served a supplemental post-trial memorandum of law on December 29, 2005.   The issues before the court are whether defendant Ridgewood is liable to its depositor, plaintiff Chiofalo, for negligently accepting from non-party Chase Manhattan Bank (“Chase”) defendant Vedwatee Brijlall's affidavit of forgery and whether said defendant's signature was forged.

Defendant Ridgewood's Contentions

Defendant Ridgewood contends that it was under a duty to refund the money to Chase since an affidavit of forgery was filed and served on Ridgewood.   Defendant Brijlall contends that she never received the check, her signature was forged on the check and she never received the proceeds from the check.

Plaintiff's Contentions

Plaintiff contends that he and Ms. Brijlall endorsed the check in question at Ridgewood Savings Bank in the presence of the bank officer.   Plaintiff further contends that his account was improperly debited due to a patently false affidavit of forgery and Ridgewood must credit his account.

Findings of Fact

At the close of trial the court made the following findings of fact:

Plaintiff and co-defendant Brijlall are co-workers at Creedmore Psychiatric Center.   Over thirteen years ago Brijlall requested that Chiofalo assist her in filling out applications for loans from her New York State retirement account.   Chiofalo agreed to help Brijlall and further agreed to allow her to submit applications whereby New York State would issue checks to Brijlall in care of Chiofalo, which were deposited in Chiofalo's account at Ridgewood Savings Bank. The parties testified that the purpose of this arrangement was to cash the checks and keep Brijlall's husband from becoming aware of the withdrawing of funds.   Both Chiofalo and Brijlall testified that between 1992 and 2000 one or more checks were issued by the New York State Retirement System to Brijlall.   Chiofalo testified that he received gifts from Brijlall in exchange for his assistance.   In July 2002 New York State issued check no. 02223626 to Brijlall in care of Chiofalo drawn on an account held by New York State at JP Morgan Chase Bank. This check was cashed at Ridgewood Savings Bank on July 8, 2002.   Chiofalo further testified that Brijlall endorsed the check and received the proceeds.   Ridgewood Savings Bank offered the testimony of Mr. Jack Dafgard, Branch Manager.   Mr. Dafgard testified that check no. 02223626 bore signatures that purported to be those of Chiofalo and Brijlall.   Mr. Dafgard further testified that an employee ID of Brijlall was also supplied since Brijlall was not a Ridgewood Savings Bank customer.   At the time plaintiff opened his account at Ridgewood he executed an agreement card, received in evidence by the court at trial, that stated in pertinent part:  “We further agree that any indebtedness incurred by either of us to said bank shall be deducted from and charged to this account.”   The court found that Brijlall received the proceeds of said check and attempted to commit a fraud or acted in a way to create an injustice for the plaintiff in that two years later, on October 15, 2004, Brijlall submitted an affidavit of forgery to Chase Manhattan Bank swearing that the endorsement on the check was not hers.1  Despite defendant Brijlall's claims that she did not sign check no. 02223626, the court, pursuant to its authority (CPLR 4536), compared the signature on said check to the signature on documents admitted in evidence which Mrs. Brijlall admitted to signing including notarized New York State retirement loan applications dated 1993, 1994, 1996, 1999 and 2002.   The signature on said applications and check no. 02223626 are one and the same.   Therefore, the testimony of Mrs. Brijlall is incredible as a matter of law.   Accordingly, there was no forgery.   It appears that Mrs. Brijlall made the claim of forgery only when she neared retirement age and realized that her outstanding loans would permanently reduce her pension.

Chase Manhattan Bank thereafter issued a replacement check in December 2004 to Brijlall in the amount of $7,925.00 which Brijlall returned to the New York State Retirement System in order to replenish her account.   Thereafter, Chase made a claim upon Ridgewood Savings Bank for reimbursement pursuant to New York Uniform Commercial Code § 4-207.   Ridgewood, in turn, debited plaintiff Chiofalo's account in the amount of the replacement check.   On the propriety of this action by Ridgewood the court reserved decision and directed defendant Ridgewood to submit a memorandum of law, which was submitted, followed by a second such direction in December, 2005, which was also met.

Conclusions of Law

According to Ridgewood Savings Bank, it was obligated to make payment to Chase Manhattan Bank upon receiving Brijlall's affidavit of forgery from that bank (see UCC § 4-207[2] ).

UCC § 4-207(2) states in relevant part:

Each customer and collecting bank on transfer or presentment of items and received a settlement or other consideration for it warrants to his transferee and to any subsequent collecting bank who takes the item in good faith that he has good title to the item or is authorized to obtain payment or accept on behalf of one who has good title and the transfer is otherwise rightful;  and all signatures are genuine or authorized and the item has not been materially altered;  and no defense of any party against him.

 The breach of the above warranty of prior endorsement is based on strict contractual liability (see Perez v. Charter One FSB, 298 A.D.2d 447, 448, 748 N.Y.S.2d 392 [2d Dept. 2002] ).  “Thus, a depositary bank (the defendant) is entitled to recover from its customer (the plaintiff) the amounts it was required to pay to a drawee bank for accepting the customer's deposit of a check bearing a prior forged endorsement, the proceeds of which the depositary bank had furnished to the customer (citation omitted).”  Id. Therefore, according to Ridgewood, once it received notice of the forgery affidavit from Chase Manhattan Bank it was obligated to make payment to Chase and entitled to debit plaintiff Chiofalo's account for that amount.

Here, however, the subject check did not in fact bear a forged endorsement;  the evidently never-investigated allegation of forgery by defendant Brijlall has been discounted by the finding of this court.   Secondly, even had there in fact been a forgery, the attempted charge back of plaintiff's account by defendant Ridgewood was untimely as a matter of law as it came more than two years after what the court, after trial, further finds was final settlement of the check (UCC §§ 4-212, 4-213 and 4-301).

 “When the foregoing three sections are read together, it is clear that the rule as governed by the Uniform Commercial Code allows a bank to charge back or obtain a refund of a provisional settlement (§ 4-212), as long as final payment (§ 4-213) has not been made (§ 4-301).”  (Regal Tour, Inc. v. European American Bank, 108 Misc.2d 699, 702, 438 N.Y.S.2d 947 [Civ. Ct., Queens County 1981].)

Having found that there was no forgery in this matter, that the claim of forgery was made by Mrs. Brijlall only when she neared retirement age and realized that her outstanding loans would permanently reduce her pension, the court implicitly finds that final payment was in fact made on the subject check.   In turn, the court finds that the chargeback of plaintiff's account was untimely as a matter of law (see 622 West 113th Street Corp. v. Chemical Bank N.Y. Trust Co., 52 Misc.2d 444, 276 N.Y.S.2d 85 [Civ. Ct., N.Y. County 1966] ).

In its supplemental post-trial memorandum of law, defendant Ridgewood submits with reference to the above case that:  “In dicta the court stated that Chemical Bank had failed to establish that it would be entitled to judgment absent a forgery because it waited six months after final settlement of the check to reverse the transaction.   Ridgewood respectfully submits that the dicta of the New York County Civil Court is not binding on this Court and that given the circumstances of this case, Ridgewood acted in a commercially reasonable manner.”

Contrary to being dicta in the case, such finding was in fact critical to the ultimate determination of the case.   Judge Edward Greenfield pointed out that were it not for crediting the third-party defendant's (the drawer of the check) defense and proof of forgery, causing dismissal of the action in chief rather than allowing for the depositary bank to pay out on an obviously forged instrument, the action would have proceeded to a judgment in favor of the depositor of the check against the depositary bank.

The court noted that the invocation of the charge-back procedure by the defendant, “․ came six months after the initial deposit of the check by plaintiff, and long after final settlement of the item (emphasis supplied)” (Chemical Bank, supra, at 446, 276 N.Y.S.2d 85);  that “[o]nce a final settlement has taken place, the collecting bank is no longer an agent, but has been credited with ownership of the proceeds of the item and a debtor-creditor relationship with its customer ensues (citation omitted)” (Id.) and that “[t]he bank cannot then unilaterally deduct sums from the amount credited to a depositor.”  (Id.)

Similarly, in Boggs v. Citizens Bank and Trust Company of Maryland, 32 Md.App. 500, 505, 363 A.2d 247 [Md. Ct. Spec. App. 1976], the Court found as follows:

Patently, in this case, the Prudential [the drawer] check had been finally settled and paid long before the intermediate bank called for a refund from the collecting appellee.   The fact that the appellee bank acceded to the intermediate bank's request to refund the $580.80 did not give the appellee bank the right unilaterally to charge back to Mrs. Boggs' [the depositor/customer] account the amount it had so refunded or to place a hold' on her account.   Any such right terminated when the payor bank made final settlement seven months before.   In commenting on s. 4-212, Anderson on the Uniform Commercial Code (2d Ed. Vol. 3, 1971) has this to say, at p. 263, s. 4-212:10:  After final settlement of an item, a customer's bank changes from an agent for collection to a debtor of the customer, from which it follows that the bank cannot make any refund from the customer's account to the drawee bank upon the basis that the latter claims that an indorsement was forged.'

The court, in Chemical Bank, supra, at 446, 276 N.Y.S.2d 85, went on in that case to note that:  “After final settlement, and the charging of the amount of the check against the drawer's account, a voluntary refund by the collecting bank is at its own peril, for there are defenses it could interpose to resist payment.  (Citation omitted)[;]” that “[t]he mere assertion of a claim to any part of a deposit does not permit a bank on its own to recognize the validity of that claim.  (Cf. Banking Law, § 134, subd. 5.)” Id.

And, to the extent that defendant Ridgewood asserts that it was not negligent and acted within a commercially reasonable manner with respect to the subject transaction, the court notes that UCC § 4-212(1) indeed allows that a charge-back of a customer's account “if by its midnight deadline or within a longer reasonable time after it learns the facts it returns the item or sends notification of the facts (emphasis supplied).”   Arguably this standard would support Ridgewood's defense except that the section goes on to provide that:  “These rights to revoke, charge-back and obtain refund terminate if and when a settlement for the item received by the bank is or becomes final ․” That is what occurred here.

Thus, the court in this matter finds that the charge-back by defendant Ridgewood of plaintiff Chiofalo's account after the final settlement of check no. 02223626 was improper as a matter of law.

 In those instances where the right to charge-back no longer exists due to final payment of the item, such as in this case, “any deduction must come as a result of the common law right of set-off (citation omitted).”  (Travalio, Now You Have It, Now You Don't:  The Depositary Bank's Rights of Charge-Back and Set-Off, 30 Ariz. L. Rev. 719, 743 [1988].)   This article recognizes Chemical Bank, supra, as just such a case although not labeled as such in its text (see footnotes 141, 145 and 146), and concludes, as occurred in Chemical Bank, that “the courts have reached the correct conclusion that the depositary bank cannot unilaterally choose to recognize the claim of forgery of the payor and debit the customer's account in the absence of proof of forgery (citation omitted).   That is, unless the bank can prove a forgery existed, the customer is entitled to have his account recredited, and presumably to be compensated for wrongful dishonor for those checks that bounced as a consequence of the bank's unjustified debit of the customer's account.”

 Here, even recognizing the pre-UCC common law right of set-off, a number of factors militate against a finding that defendant Ridgewood was not negligent or acted in a commercially reasonable manner with respect to the subject transaction.   In his article, at 744-5, Professor Travalio notes that:  “While the Code does not specifically require prior notice with respect to set-off, (footnote omitted) the structure of the Code certainly suggests the implication of such a requirement within the bank's obligation of reasonable care.”   He continues:  “Because a set-off, unlike a typical charge-back, will usually involve an item which has already been paid, the customer probably has a greater expectation that the funds represented by the check are available to him, and, thus, notice is even more important in the set-off context.”  (Id., at 745.)

Following its receipt of a letter from Chase dated October 28, 2004 referencing defendant Brijlall's forged endorsement, Ridgewood reimbursed Chase's account by tellers check dated November 17, 2004, notified plaintiff Chiofalo by letter on the same date ² that his account “has been debited” in the amount of the allegedly forged check.³  Thus, the debiting of plaintiff's account by Ridgewood took place fully twenty-eight months after the original negotiation of the subject check on July 8, 2002, and without prior notice to plaintiff.

Given the extensive, well over two-year passage of time between the final settlement of the subject check and the set-off against plaintiff's account, coupled with the unilateral, but more importantly, incorrect deduction of funds based on Ridgewood's unquestioning reliance on the payor bank's (Chase), in turn, unquestioning reliance on a falsified affidavit of forgery, the court finds that defendant Ridgewood acted negligently and not in a commercially reasonable manner with regard to plaintiff's account.   It appears that an investigation of the forgery allegation would have revealed the actual nature of what was carried out by defendant Brijlall first to the detriment of the drawer State retirement fund and ultimately to the remaining parties to the present litigation.⁴

The court finds that plaintiff did not breach the warranty of presentment to the depositary or collecting bank, Ridgewood (see UCC § 4-207), i.e., that defendant Brijlall had good title to the subject check and that the signature endorsed on it by Ms. Brijlall for deposit into plaintiff's account was in fact genuine;  and that defendant Brijlall's claim of forgery was a subsequent, separate act which did not impair plaintiff's warranty.

 As noted earlier, “After final settlement, and the charging of the amount of the check against the drawer's account, a voluntary refund by the collecting bank is at its own peril, for there are defenses it could interpose to resist payment.  (Citation omitted.)   The mere assertion of a claim to any part of a deposit does not permit a bank on its own to recognize the validity of that claim.  (Cf. Banking Law, § 134, subd. 5.)” Chemical Bank, supra, at 446, 276 N.Y.S.2d 85.

However, the court, in Chemical Bank, also noted that:  “The final settlement of a deposited item then, while terminating the collecting bank's right of charge-back in reliance upon a simple notification from the drawee bank, does not in any way preclude the bank from pursuing its remedies by way of plenary suit, in order to hold the depositor on its indorsement and the warranties connected therewith.  (Citation omitted.)”  Id.

Defendant Ridgewood did not do this, i.e., did not interpose a counterclaim against plaintiff in this action;  thus, plaintiff is entitled to judgment.   Id.

However, Judge Greenfield, by then in State Supreme Court, recognized in a later action, Chemical Bank v. Ferst, N.Y.L.J., Jan. 15, 1991, at 21, col. 2, that a depositary bank, although no longer in a position to charge back its customer's account, could still pursue its remedies by way of a plenary action against the endorser and/or drawer of the check (citing 622 West 113th Street Corp. v. Chemical Bank N.Y. Trust Co., supra ).   The decision continues:

“Money paid under a mistake of fact may be recovered back, however negligent the party paying may have been in making the mistake, unless the payment has caused such a change in the position of the other party that it would be unjust to require him to refund.”  (National Bank of Commerce v. National Mechanics' Banking Assoc., 55 N.Y. 211, 213;  Miller v. Schloss, 218 N.Y. 400, 407 [113 N.E. 337] [1916];  Liberty Mutual Ins. Co. v. Newman, 92 A.D.2d 613 [459 N.Y.S.2d 806] [2nd Dept.1983] ).   An action for moneys had and received “lies for money paid by mistake or an undue advantage taken of the plaintiff's situation [T]he gist of this kind of action is that the defendant, upon the circumstances of the case, is obliged by the ties of natural justice and equity to refund the money.”  Friar v. Vanguard Holding Corp., 78 A.D.2d 83, 88 n. 2 [434 N.Y.S.2d 698] quoting Mansfield Moses v. Macferlan, 2 Burr. 1005, 1 Wm.Bl. 219, 97 Eng.Rep. 676, All Eng.Law Rep.Reprint, 1598-1774 [1760], 581, 585.   See also Citibank v. Warner, 113 Misc.2d [748] 749, 750 [449 N.Y.S.2d 822].

Based on the foregoing, plaintiff shall have judgment against defendant Ridgewood and defendant Brijlall, each being severally liable to plaintiff, in the amount of $7,925.00, together with statutory interest from November 17, 2004, and applicable costs and disbursements of the action.   Judgment on the cross-claim is granted in favor of Ridgewood over against co-defendant Brijlall for the amount recovered against Ridgewood by plaintiff.

The above relief is without prejudice to the institution by defendant Ridgewood of any action against plaintiff Chiofalo, Chase Manhattan or the New York State Retirement System.

This shall constitute the decision and judgment of the court.   The clerk is directed to enter judgment in accordance with the foregoing.

FOOTNOTES

1.   A letter to Ms. Brijlall from the Bureau of Accounting of the Office of the New York State Comptroller, New York State and Local Retirement System, dated October 4, 2004, contains the following paragraph:In accordance with our telephone conversation today, enclosed is an Affadavit [sic] of Forgery of Check Endorsement for you to complete, in order to file a forgery claim for the July 2002 loan check.   The amount of time that the bank is liable for paying a forgery claim is three years.   Therefore, I am not sending affidavits for the 1999, 1998, 1996 and 1994 loans as these exceed the three year time limit.

2.   Although the letter is dated November 17, 2002, it was agreed and stipulated at trial that the actual intended date was November 17, 2004.

3.   Plaintiff's response to Ridgewood's initial memorandum of law notes that the sum of the disputed check was withdrawn from his account on November 17, 2004 pursuant to a Ridgewood Savings Bank debit memo dated November 16, 2004, a copy of which is attached to his response.

4.   A reading of the circumstances alluded to in the retirement funds letter to Ms. Brijlall dated October 4, 2004 (see footnote 1, supra ), alone, is enough to raise suspicion.

TIMOTHY J. DUFFICY, J.