Continental Casualty Co. v. Huron Valley National Bank ( 1978 )

D. E. Holbrook, Jr., J.

The major issue in this case is what statute of limitations applies when a check is converted?

There are no factual disputes and plaintiff appeals the lower court’s grant of accelerated judgment in favor of defendant bank. Plaintiff Continental Casualty is the assignee and subrogee of the now-bankrupt Electric Apparatus Company which was located in Livingston County during its years of operation. This action arises out of a scheme of a bookkeeper, David Roth, who was employed by Electric Apparatus Company. In 1970 in nearby Washtenaw County Mr. Roth filed an assumed name certificate as "David Roth d/b/a Electric Apparatus” and opened an account in the name of David Roth d/b/a Electric Apparatus at defendant Huron Valley National Bank. For almost two years, Mr. Roth intercepted checks made payable to Electric Apparatus Company, indorsed them and deposited them in the account at defendant bank.

Subsequently Electric Apparatus Company sustained financial losses and was placed in bankruptcy in 1972 and operated under a receiver until 1974. In 1974, Roth’s scheme was discovered and plaintiff insurance company paid Electric Apparatus Company pursuant to its fidelity bond. Plaintiff, as assignee and subrogee, brought suit for conversion against the bank in January 1976.

The lower court concluded that plaintiff’s conversion action was one for "injury to property” and therefore barred by the three-year statute of limitations contained in MCL 600.5805(7); MSA 27A.5805(7). Plaintiff appeals and argues that the proper statute of limitations is the residual six-year limitation period contained in MCL 600.5813; MSA 27A.5813.

The lower court held the following statute of limitations, MCL 600.5805; MSA 27A.5805, controlling:

"Sec. 5805. No person may bring or maintain any action to recover damages for injuries to persons or property unless, after the claim first accrued to himself or to someone through whom he claims, he commences the action within the periods of time prescribed by this section.

"(7) The period of limitations is 3 years for all other actions to recover damages for injuries to persons and property.” (Emphasis added.)

The application of this statute turns on whether plaintiffs action for conversion can be characterized as an "injury to property”. This is a question of first impression in Michigan.

It is clear under the Uniform Commercial Code that when a check is paid on a forged indorsement, an action lies for conversion. In relevant part MCL 440.3419(l)(c); MSA 19.3419(l)(c) reads:

"(1) An instrument is converted when

"(c) it is paid on a forged indorsement.”

For further elaboration we look to Official UCC Comment 3 to MCL 440.3419; MSA 19.3419:

"3. Subsection (l)(c) is new. It adopts the prevailing view of decisions holding that payment on a forged indorsement is not an acceptance, but that even though made in good faith it is an exercise of dominion and control over the instrument inconsistent with the rights of the owner, and results in liability for conversion.”

This definition is consistent with Michigan cases which define the tort of conversion as an "act of dominion wrongfully exerted over another’s personal property”. Nelson & Witt v Texas Co, 256 Mich 65, 70; 239 NW 289 (1931), Thoma v Tracy Motor Sales, Inc, 360 Mich 434, 438; 104 NW2d 360 (1960), Embrey v Weissman, 74 Mich App 138, 143; 253 NW2d 687 (1977).

It is also clear that as the payee of the converted checks, Electric Apparatus is the rightful "owner” of the checks. See White and Summers, Uniform Commercial Code (1972), § 15-4, p 499. This concept of ownership is consistent with the characterization of a check as "property”. As noted in Official UCC Comment 2 to MCL 440.3419; MSA 19.3419:

"A negotiable instrument is the property of the holder. It is a mercantile specialty which embodies rights against other parties, and a thing of value.”

Although in a different setting, now Justice Levin has stated:

"When [the defendant] deliberately obliterated plaintiff’s interest in the check, it would appear on the present record that it converted property belonging to the plaintiffs * * * .” (Emphasis supplied.)

Warren Tool Company v Stephenson, 11 Mich App 274, 298; 161 NW2d 133 (1968). This is consistent with the view of courts in other jurisdictions which have deemed checks to be "property”. Fabricon Products v United California Bank, 264 Cal App 2d 113, 116; 70 Cal Rptr 50, 53 (1968).

Plaintiff argues that the three-year statute of limitations for injuries to persons or property is limited to cases where there is a physical or tangible injury, therefore, MCL 600.5805(7); MSA 27A.5805(7) does not apply in the present case since conversion involves no physical or tangible injury. We disagree. Plaintiffs argument was expressly rejected in Stringer v Sparrow Hospital, 62 Mich App 696; 233 NW2d 698 (1975), lv den, 395 Mich 768 (1975). See also Glowacki v Motor Wheel Corp, 67 Mich App 448, 459-460; 241 NW2d 240 (1976), Campos v General Motors Corp, 71 Mich App 23, 26; 246 NW2d 352 (1976). In the above cited cases, various panels have recognized that the three-year statute applies to several types of "injuries” which involve no physical or tangible damage.

Although not controlling and although in the context of different statute of limitation schemes, courts in California, New York and Tennessee have adopted a three-year statute of limitations for conversion actions based on forged indorsements. Fabricon Products, supra, Forman v First National Bank of Woodridge, 66 Misc 2d 432; 320 NYS2d 646 (1971), Gerber v Manufacturers Hanover Trust Co, 64 Misc 2d 687; 315 NYS2d 601 (1970), McConnico v Third National Bank in Nashville, 499 SW2d 874, 891 (Tenn 1973).¹ A major purpose of the Uniform Commercial Code is to "make uniform the law among the various jurisdictions”. MCL 440.1102(2)(c); MSA 19.1102(2)(c). In this day of sophisticated interstate commercial transactions, a major purpose of the Code would be undermined if identical conversion actions were subject to widely varying statutes of limitation from state to state.

We hold that when a check is converted, the payee-owner has suffered an injury to property within the meaning of MCL 600.5805(7); MSA 27A.5805(7)._

We next turn to the issue raised in our brother’s dissent. Initially we note that plaintiff never raised an implied warranty or implied contract theory at the trial court level. On appeal plaintiff concedes that the implied warranty of good title, MCL 440.4207; MSA 19.4207, does not run in favor of a payee. The implied warranty of good title runs from a customer or collecting bank who obtains payment or acceptance of an item or transfers an item for value to each subsequent payor bank or other payor who, in good faith, pays or accepts the item. Since here plaintiff is a payee and not a payor of the item, plaintiff has no cause of action based on this theory. Even if plaintiffs "implied contract” theory had been properly raised below and even assuming the theory has merit, we would still conclude plaintiffs action is barred by the three-year statute of limitations. Where, as here, there is no express contract or express promise and defendant’s liability, if any, is implied by law, an action for injury to persons or property is controlled by the three-year statute regardless of whether the action is labeled as one in tort or implied contract. Huhtala v Travelers Ins Co, 401 Mich 118; 257 NW2d 640 (1977), Case v Goren, 43 Mich App 673, 682; 204 NW2d 767 (1972).

The only remaining issue is when the statute of limitations begins to run. We reject the plaintiffs argument that the cause of action accrues when the forgery or conversion is discovered. The statute begins to run when the checks are paid on a forged indorsement. MCL 440.3419(l)(c); MSA 19.3419(l)(c), Gerber, supra, Fuscellaro, supra, fn 1. Because plaintiff commenced its action more than three years after the checks were converted, the trial court was correct in holding the action is barred by MCL 600.5805(7); MSA 27A.5805(7).

The trial court’s grant of accelerated judgment in favor of defendant is affirmed.

Allen, P. J., concurred.

1 But see Fuscellaro v Industrial National Corp, 368 A2d 1227 (RI 1977).