Colorado § 4-3-420 - Conversion of instrument.

§ 4-3-420. Conversion of instrument.

(a) The law applicable to conversion of personal property applies to instruments. An instrument is also converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment. An action for conversion of an instrument may not be brought by (i) the issuer or acceptor of the instrument or (ii) a payee or indorsee who did not receive delivery of the instrument either directly or through delivery to an agent or a co-payee.

(b) In an action under subsection (a) of this section, the measure of liability is presumed to be the amount payable on the instrument, but recovery may not exceed the amount of the plaintiff's interest in the instrument.

(c) A representative, other than a depositary bank, who has in good faith dealt with an instrument or its proceeds on behalf of one who was not the person entitled to enforce the instrument is not liable in conversion to that person beyond the amount of any proceeds that it has not paid out.

Source: L. 94: Entire article R&RE, p. 872, § 1, effective January 1, 1995.

Editor's note: This section is similar to former § 4-3-419 as it existed prior to 1994.

ANNOTATION

Law reviews. For article, "Payee v. Depository Bank: What is the UCC Defense to Handling Checks Bearing Forged Indorsements?", see 45 U. Colo. L. Rev. 281 (1974). For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 333 (1974-75).

Annotator's note. The following annotations include cases decided under former provisions similar to this section.

Elements of conversion. There is a conversion of a negotiable instrument when any person unlawfully takes, detains, or refuses to surrender a negotiable instrument belonging to another person. Commercial Credit Corp. v. Univ. Nat'l Bank, 590 F.2d 849 (10th Cir. 1979).

While a showing of fraud, misrepresentation, or mistake may constitute a defense to payment, it does not establish the right to immediate possession, a necessary prerequisite to establishing a claim for conversion. Commercial Credit Corp. v. Univ. Nat'l Bank, 590 F.2d 849 (10th Cir. 1979).

Bank's wrongful deposit of corporate checks into treasurer's personal account, absent commercially reasonable inquiries as to the authority of the treasurer to deposit such checks, constitutes conversion. Central Inc. v. Cache Nat'l Bank, 748 P.2d 351 (Colo. App. 1987).

If payment by a collecting or depository bank occurs on a check with no indorsement or with a missing endorsement, it is the legal equivalent of payment on a forged indorsement, which constitutes conversion. Central Inc. v. Cache Nat'l Bank, 748 P.2d 351 (Colo. App. 1987).

Common-law recognized right of payee to maintain action for conversion against bank under circumstances where the bank wrongfully paid out moneys based upon a forged endorsement. Citizens State Bank v. Nat'l Sur. Corp., 199 Colo. 497, 612 P.2d 70 (1980).

Adoption of this section has not altered the law in Colorado by abolishing the common-law payee's conversion action against a depositary bank that has cashed a check upon a forged endorsement. Nat'l Sur. Corp. v. Citizens State Bank, 41 Colo. App. 580, 593 P.2d 362 (1978), aff'd, 199 Colo. 497, 612 P.2d 70 (1980).

Former version of subsection (1) not all inclusive. The three listed situations in subsection (1) of this section are not meant to be exclusive examples of actionable conversion. Commercial Credit Corp. v. Univ. Nat'l Bank, 590 F.2d 849 (10th Cir. 1979).

Purpose of former version of subsection (3) was to create an affirmative defense which a defendant-bank may assert. Citizens State Bank v. Nat'l Sur. Corp., 199 Colo. 497, 612 P.2d 70 (1980).

Where undisputed evidence established that collecting bank failed to make inquiries as to the authority of a corporate treasurer to deposit checks payable to corporation into the personal account of the treasurer, the court properly determined that the bank had not acted according to reasonable commercial standards and was not entitled to take advantage of the statutory defenses. Central Inc. v. Cache Nat'l Bank, 748 P.2d 351 (Colo. App. 1987).

The affirmative defense was not available to bank which paid checks without any indorsement. The bank as a matter of law did not act in accordance with reasonable commercial standards in handling the checks without the payee's signature. Kelly v. Central Bank and Trust Co., 794 P.2d 1037 (Colo. App. 1989).

Phrase "or otherwise" in former version of subsection (3) only has meaning if the drafters anticipated a cause of action other than conversion, e.g., an action for moneys had and received. Citizens State Bank v. Nat'l Sur. Corp., 199 Colo. 497, 612 P.2d 70 (1980).

Applied in Nat'l Sur. Corp. v. Citizens State Bank, 651 P.2d 460 (Colo. App. 1982).

PART 5

DISHONOR