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CITY NATL. BANK v. CHASE MANHATTAN BANK

May 9, 1989

CITY NATIONAL BANK, Plaintiff,
v.
CHASE MANHATTAN BANK, Defendant



The opinion of the court was delivered by: ROSZKOWSKI

 STANLEY J. ROSZKOWSKI, UNITED STATES DISTRICT JUDGE

 This action comes before the Court on plaintiff and counter-defendants' motion to dismiss defendant and counter-plaintiff's amendment to the amended counterclaim. For the reasons set forth in the opinion below, the Court grants plaintiff and counter-defendants' motion to dismiss.

 BACKGROUND

 Travelers Insurance Company entered into a group annuity contract (No. GR-11051) with the trustees of the Barber-Colman Company Profit Sharing Trust, which contract was effective June 26, 1980. Pursuant to the group annuity contract, the trustees invested funds of the profit sharing trust with Travelers for the benefit of some of the plan's participants. For their part, Travelers agreed to disburse the invested funds upon the occurrence of certain events which were specified in the contract.

 The trustees then appointed George E. Couper, an independent insurance broker doing business in the Rockford area, to be the administrator and agent of the plan and to service the plan pursuant to the contract with Travelers. During the time period relevant to this action, Couper maintained one or more accounts at City National Bank & Trust Co. of Rockford and had an ongoing relationship with City National Bank & Trust Co.

 The procedure for disbursement of any of the funds involved the execution by a participant of a termination form and the submission of that form to Travelers. In accordance with customary practice in the industry, those forms were actually given to Couper who then forwarded the executed forms to Travelers.

 It has since been learned that although some of the termination forms were, in fact, signed by the plan participants, some of those forms may have been forged by Couper.

 Upon receipt of the checks from Travelers, Couper fraudulently endorsed the checks by forging the name of the payee (participant) and depositing the checks into an account Couper maintained at City National Bank & Trust Co. of Rockford. Thereafter, Couper withdrew those funds from the City National Bank account and used them for his own personal purposes. The total face amount of the converted checks was $ 342,724.24. The checks issued by Travelers were written on Travelers' accounts maintained at either the Connecticut National Bank or Chase Manhattan Bank, N.A. Of the $ 342,724.24 converted by Couper, $ 229,182.79 were written on the Chase Manhattan Bank account and $ 113,541.45 were written on the Connecticut National Bank account. After the checks were deposited with City National Bank, City National Bank collected the funds from Chase Manhattan Bank and Connecticut National Bank. In February, 1985, Travelers and the trustees of the Barber-Colman Company Profit Sharing Trust each agreed to contribute fifty percent (50%) of the loss occasioned by Couper's embezzlement scheme into an escrow account. The funds in that escrow would be used to reimburse the plan participants whose monies Couper had embezzled. Pursuant to that agreement, Travelers deposited $ 212,000.00 into the escrow account.

 In Count IV, defendant and counter-plaintiff Travelers Insurance Company alleges the following: the checks deposited by Couper into the City National Bank account were all in substantial amounts and lacked objective indicia from which City National Bank could have reasonably concluded that Couper was authorized to negotiate those checks; City National Bank knew or should have known that Couper was not authorized by the payees to cash or deposit the checks; City National Bank took no reasonable steps to investigate Couper's authority to either negotiate the checks or to deposit the collected funds in his own account; pursuant to the contract, as holder of the funds, and as drawer of the checks under U.C.C. § 3-403(2)(a), Travelers was obligated to the plan participants for the face amount of the checks, therefore, as payees of the checks, the plan participants had the right under U.C.C. § 3-419(1)(c) to proceed against City National Bank and Connecticut National Bank for conversion -- and to the extent Travelers has paid the plan participants via the escrow account, Travelers is subrogated to these claims.

 In Count V, Travelers alleges that City National Bank and Connecticut National Bank owed a duty of care in handling the checks to the plan participants, and in negligently paying the checks over forged endorsements by Couper breached its duty of care to the plan participants. Again, Travelers alleges that to the extent Travelers has paid the plan participants via the escrow account, Travelers is subrogated to the plan participants' claims against City National Bank and Connecticut National Bank for negligence.

 In both Counts IV and V, Travelers prays for declaratory relief stating that Travelers is subrogated to the claims of the plan participants and declaratory relief stating that Travelers is entitled to reimbursement from City National Bank and Connecticut National Bank for the amount of Travelers' payment into the escrow account.

 City National Bank and Connecticut National Bank have moved to dismiss the amendment to the amended counterclaim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted. It is the position of City National Bank and Connecticut National Bank that only the trustees have standing to sue to recover assets for the trust, that the plan participants can only sue to recover against the plan or against the plan's fiduciaries; therefore, Travelers cannot be subrogated to claims ...


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