Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 02 C 3390-Joan B. Gottschall, Judge.
The opinion of the court was delivered by: Wood, Circuit Judge
Before EASTERBROOK, Chief Judge, and WOOD and WILLIAMS, Circuit Judges.
Many rules of commercial law allocate risk among different parties to transactions. Sometimes, however, it is impossible to impose responsibility for losses on the party that caused them. People disappear with ill-gotten gains, or they spend someone else's money on fleeting pleasures. At that point, all that can be done is to allocate loss to one or another relatively innocent party. This is such a case: the real wrongdoer, Robert Carter, will never be able to restore the money he embezzled from his employer, National Accident Insurance Underwriters ("Underwriters"). So we must decide whether Underwriters' assignee, American National Insurance Company ("ANICO") must bear the loss that remains, or if the bank that cashed checks that Carter had altered to make payable to himself is responsible.
ANICO had engaged Underwriters to act as an agent for managing an insurance pool known as "NAIG," for National Accident Insurance Group Underwriting Agreement. One of the duties Underwriters assumed was to receive premium payments for the insurance pool, in the form of checks payable either to Underwriters or NAIG; it also had the job of managing the premium trust account into which the premiums were deposited. In 2002, Underwriters discovered that one of its vice presidents, Robert Carter, had been intercepting premium checks, altering the payee line to make them payable to himself or his company "Sherman Imports," and depositing them in a Citibank account over which he had control. Citibank accepted 44 altered checks, from five different drawers, for a total face value of $15,813,964.84.
Underwriters filed suit against Citibank for conversion of the checks under 810 ILCS 5/3-420, the Illinois version of Uniform Commercial Code § 3-420, which provides the rule for dealing with the conversion of negotiable instruments. Citibank then filed a third-party complaint against Carter and other people involved with his scheme. ANICO moved to intervene in 2003, eventually filing a complaint against Citibank also based on § 3-420. Carter pleaded guilty to criminal charges of mail and tax fraud in 2004; as part of his plea, he forfeited $5.2 million in property to Underwriters. At that point, Underwriters assigned its interests in this property to ANICO. In 2006, Underwriters and Citibank settled, and all claims arising from that suit were dismissed with prejudice.
This left the litigation between ANICO and Citibank unresolved. In August 2007, the district court granted Citibank's motion for summary judgment against ANICO on all of its claims. Citibank still had unresolved claims pending against Carter and others, and so ANICO asked the district court to direct entry of a partial final judgment on its suit against Citibank, on the ground that there was no just reason to delay resolution. See FED. R. CIV. P. 54(b). The court did so, and the appeal is now before us. We review the court's decision to grant sum-mary judgment de novo. APS Sports Collectibles, Inc. v. Sport Time, Inc., 299 F.3d 624, 628 (7th Cir. 2002).
We begin with the language of UCC § 3-420, as adopted by Illinois:
(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 endorsee 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), 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, that 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.
810 ILCS 5/3-420. In order to establish that a financial institution is liable for conversion of a negotiable instrument in Illinois, a plaintiff must prove (1) her ownership of, interest in or right to possession of the check; (2) the fact that her apparent endorsement of the check was forged or unauthorized; and (3) the fact that the defendant bank was not authorized to cash the check. Continental Casualty Co. v. American National Bank and Trust Co. of Chicago, 768 N.E.2d 352, 361 (Ill. App. Ct. 2002); see also Rodrigue v. Olin Employees Credit Union, 406 F.3d 434, 439 (7th Cir. 2005) (describing Illinois law). Our case turns on the first of these three elements: whether ANICO had any property interest in the checks. If not, then ANICO may not bring a suit for conversion. (Otherwise, the final clause of § 3-420(b) would make little sense, as it limits recovery to "the amount of the plaintiff's interest in the instrument." See, e.g., Edwards v. Allied Home Mortgage Capital Corp., 962 So. 2d 194 (Ala. 2007) (construing Alabama's version of § 3-420).)
ANICO asserts that it is the "true owner" of the checks, and thus that it has enough of an ownership interest to permit it to pursue this suit. Underwriters managed and administered the premium trust account. The checks were made out to Underwriters or NAIG; ANICO admits that the checks were never made out to it, nor was it ever an endorsee. ANICO had no signatory or drawing rights on the account and could not touch the funds. Instead, Underwriters wrote a check to ANICO each month based on the fees it had collected and deposited into the account. ANICO argues nevertheless that it is the "true owner" of the checks, relying on some kind of quasi-trust theory. Underwriters, it reasons, acted as ANICO's agent, and ultimately all of the funds in the premium trust account (minus Underwriters' fees) belonged to ANICO; Underwriters simply administered the premium trust account for ANICO's benefit. Thus, ANICO contends, it has at least an equitable interest in the checks, no matter what the "Pay To the Order Of" line might have said.
This novel interpretation of the familiar drawer-draweeindorsee-payee relationship is unprecedented, and for good reason: it betrays the fundamental axiom of negotiable instruments that banks must pay the payee. ANICO cites a case from a trial-level court in New York to sup-port its argument that this rule has its exceptions, but we do not find it persuasive. See Clients' Security Fund of N.Y. v. Goldome, 560 N.Y.S.2d 84 (N.Y. Sup. Ct. 1990). ANICO seems oblivious to the burden that its theory would put on every bank that was presented with a check for negotiation. Instead of being able to look at the payee line and to verify that the person presenting the check was indeed entitled to do so, banks in ANICO's world would need to conduct a full-blown ...