mers v boa
TRANSCRIPT
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In this appeal, we are required to determine whether a
payee who rejects and returns a check to the payor has standing
to hold a depositor bank liable for thereafter permitting athird party to fraudulently convert the proceeds of the check.
Stated differently, we must decide whether the return of the
check by the payee constituted an intentional and voluntary
surrender of the instrument under N.J.S.A. 12A:3-604(a); and if
such action does constitute a surrender, whether it revokes the
payee's standing to enforce payment of the check under N.J.S.A.
12A:3-420(a).
I
This dispute arose when homeowner Magdy Omar ostensibly
sought to refinance an outstanding loan, which was originally
issued in 2003 by Metro Center Mortgage, Inc., (Metro) andsecured by a first-lien mortgage on real property Omar owned in
the City of Bayonne. Metro named as nominee the Mortgage
Electronic Registration Systems (MERS). MERS then assigned the
mortgage to JP Morgan, who designated Homecomings Financial
Network, Inc. (Homecomings) as the servicer of the loan.
Although Omar defaulted on the Metro loan, he was able to
refinance the loan in 2004 through FGC Commercial Mortgage
Finance, d/b/a/ Fremont Mortgage (Fremont). Homecomings
generated a payoff statement of the 2003 loan that reflected an
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outstanding balance of $298,219,57, with a per diem rate of
interest accrual of $79.95. At the closing for the refinance
loan, Fremont's agent, Yorktown Title LLC, sent Homecomings a
check in the amount of $298,219.57, 1 along with a transmittal
letter that stated that the check was intended to payoff the
2003 Metro loan. Of particular relevance here, the transmittal
letter also indicated that if the funds were insufficient, the
check should be applied to the debt and Homecomings should
contact the sender.It is undisputed that Homecomings received the check and
that, according to the per diem rate, the payoff amount was
short by $559.65 in accrued interest. However, instead of
applying the $298,219.57 check to the outstanding loan balance
and contacting Yorktown to arrange for the receipt of the
additional accrued interest, Homecomings returned the check to
Yorktown, insisting that the check was insufficient to discharge
the loan. The record also shows that Yorktown sent the payoff
check to Homecomings a second time, and that Homecomings again
rejected it.
Instead of returning the payoff check to Yorktown,Homecomings returned the check to Omar, the delinquent borrower.
1 The check was made payable to Homecomings Funding, notHomecomings Financial Network, Inc.
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constituted a surrender of the instrument pursuant to N.J.S.A.
12A:3-604(a), thus depriving Homecomings of standing to seek
payment of the check under N.J.S.A. 12A:3-420(a).
Under the U.C.C., a "payee" who "receive[d] delivery of
[an] instrument" may bring an action for conversion against a
depository bank who caused payment to be made to "a person not
entitled to enforce the instrument." N.J.S.A. 12A:3-420. A
person "receives delivery of [an] instrument" under N.J.S.A.
12A:3-420 "when the check comes into the payees possession, asfor example when it is put into the payee's mailbox." Ibid.,
comment 1. Delivery is required because it is not until this
point when the payee becomes the holder or a "person entitled to
enforce the check." Ibid. If the check is not delivered to the
payee, the underlying obligation for which the check was issued
is not affected, and therefore, the payee's right to enforce the
underlying obligation remains fully intact. Ibid. The drawee
can still bring an action under N.J.S.A. 12A:3-417(a)(1) against
the depository bank for breach of warranty. However, because
the payee's rights to enforce the underlying obligation against
the payor are unaffected, there is no reason to give the payeean additional remedy for conversion. Ibid.
A payee can also "discharge [an] obligation of a party to
pay the instrument by an intentional voluntary act, such as
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surrender of the instrument to the party . . . ." N.J.S.A.
12A:3-604a. Consequently, a discharge of the obligation to pay
would simultaneously revoke any entitlement the payee had to
enforce payment on the instrument. If no entitlement to enforce
payment exists, there can be no right to sue for conversion
under N.J.S.A. 12A:3-420. A depository bank "is strictly liable
for conversion on a forged or stolen instrument" to a party that
received delivery. 2 Leeds v. Chase Manhattan Bank, 331 N.J.
Super. 416, 422 (App. Div. 2000) (citing N.J.S.A. 12A:3-420,comment 1); wsee also New Jersey Lawyers' Fund for Client Prot.
v. First Fidelity Bank, N.A., 303 N.J. Super. 208, 226-27 (App.
Div.), cert. denied, 152 N.J. 13 (1997).
Here, the Law Division found that Homecomings received the
check, and that BOA was strictly liable to Homecomings under
N.J.S.A. 12A:3-420a. As previously noted, however, it is
undisputed that Homecomings rejected and returned the check on
two separate occasions, and that its employees caused the check
to be erroneously sent to Omar. By finding liability under
N.J.S.A. 12A:3-420, the Law Division overlooked the legal
2 "The justification for strict liability upon the depositorybank is that 'the loss should normally come to rest upon thefirst solvent party in the stream after the one who forged theindorsement . . . .'" Leeds, supra, 331 N.J. Super. at 423(quoting 2 James J. White & Robert S. Summers, Uniform Commercial Code 18-4 at 209-10 (4th ed. 1995)).
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