Statutory Conversion of Check Under UCC 3-420: Delivery Required

Statutory Conversion of Check Under UCC 3-420: Delivery Required

 LDI Growth Partners LLC v. JPMorgan Chase Bank, N.A.

 (California Court of Appeal, 2013 Cal. App. Unpub. LEXIS 7995, First Dist., Div. 5;  November 5, 2013; unpublished) [an enhanced version of this opinion is available to subscribers]

In this unpublished decision by the First District, Division 5, of the California Court of Appeal, a factoring company unsuccessfully sued a bank for statutory conversion of three checks under California Uniform Commercial Code § 3420 (UCC § 3-420).

Under UCC 4-320, a bank can be liable for statutory conversion of a check if it makes payment on the instrument for a person not entitled to receive the instrument or payment.  There’s a catch, however: if the payee (or payee’s agent) did not receive delivery of the check, the payee cannot sue the bank, based on the condition imposed in UCC § 3-420(a)(2).  The rationale is that the payee has no interest in a check, and does not become a holder of a check, unless and until it is delivered to the payee.  (See Comment 1, at 3rd & 4th paragraphs, to UCC § 3-420.)

In this case, the plaintiff factoring company/payee did not physically receive the checks, which were delivered to the factoring company’s debtor/customer.  The debtor/customer was not an authorized agent to receive the checks on behalf of the factoring company.  The court of appeal held that the factoring company’s failure to satisfy the delivery condition of UCC § 3-420(a)(2) invalidated its claim, reversing the trial court.

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