The Illinois Appellate Court, First District, recently held that a mortgage lender could not recover against a fire insurer under a fire insurance policy, where fire insurer paid out on a fire loss claim in connection with a property on which the lender held a mortgage, but the lender's indorsement on the checks was forged and the lender did not receive the proceeds of the insurance policy. Instead, the Appellate Court held that the lender's recovery was properly against the payor bank of the insurance policy checks, as the lender did not show that the forger cannot be found or is not amenable to service.
A copy of the opinion is available at http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1122387.pdf.
An insurance company issued a policy for the residence of two borrowers. The policy also named the bank which owned the loan secured by a mortgage on the borrowers' residence (the "bank") as mortgagee.
When a fire damaged the borrowers' residence, the borrowers contracted with a construction company to complete the necessary repairs. The borrowers assigned their right to receive payment under the insurance policy to the construction company.
The insurance company then issued two checks made payable to the borrowers, the bank, and the construction company. An employee of the construction company forged the bank's indorsement on the checks, and cashed same. The bank then demanded that the insurance company pay it the sum of those checks. The insurance company refused.
The bank filed a complaint for declaratory judgment against the insurance company, alleging it was entitled to relief in the amount of the checks per the insurance policy. The insurance company argued that the bank did not receive the checks due to the fraudulent acts of a third party, for which the insurance company should not be held liable. Both parties moved for summary judgment, and the lower court found in favor of the insurance company. The bank appealed.
On appeal, the Court looked to the provisions of Illinois' Uniform Commercial Code (the "UCC"). Specifically, the UCC provides that where a check is made payable jointly to multiple persons, the check may only be enforced by all of them. Further, if a payor bank pays a person not entitled to enforce the check, the underlying obligation is suspended. See 810 ILCS Ann. 5/3-310, Uniform Commercial Code Comment 4, at 180-81 (Smith-Hurd 1993).
In that circumstance, the co-payee may sue the payor bank for conversion, or the drawer for enforcement of a lost, destroyed or stolen instrument. However, the co-payee may not sue the drawer under the underlying contract. Id.
Here, the Court explained that the insurance company is the drawer, and the borrowers, the bank and the construction company are joint payees who are collectively entitled to enforce the checks written to them by the insurance company.
Because neither party disputed that the construction company was not entitled to endorse and cash the check, the Court indicated that the insurance company's obligation to pay was suspended. Therefore, the bank's "only possible recourse is to sue [the payor bank] for conversion of the checks...or to sue [the insurance company]...if it can show that the checks were lost, destroyed, or stolen."
However, because the bank's action "improperly seeks to recover from [the insurance company] on the underlying contract," the Court held that the lower court properly granted summary judgment in favor of the insurance company.
The Court also considered the insurance company's argument that the bank's only remedy was against the payor bank. Specifically, the Court noted that the UCC provides that where an instrument is lost, destroyed or stolen, a person not in possession of that instrument is nevertheless entitled to enforce that interest where, among other things, the instrument is "is in the wrongful possession of an unknown person that cannot be found or is not amenable to service." 810 ILCS 5/3-309 (West 2010).
Here, however, the Court noted that the bank did not show that the construction company could not be found, or was not amenable to service. Accordingly, the Court held that the bank's "only remedy" was against the payor bank for conversion.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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