MERS V BOA

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In this appeal, we are required to determine whether a

payee who rejects and returns a check to the payor has standing

to hold a depositor bank liable for thereafter permitting athird party to fraudulently convert the proceeds of the check.

Stated differently, we must decide whether the return of the

check by the payee constituted an intentional and voluntary

surrender of the instrument under N.J.S.A. 12A:3-604(a); and if

such action does constitute a surrender, whether it revokes the

payee's standing to enforce payment of the check under N.J.S.A.

12A:3-420(a).

I

This dispute arose when homeowner Magdy Omar ostensibly

sought to refinance an outstanding loan, which was originally

issued in 2003 by Metro Center Mortgage, Inc., (Metro) andsecured by a first-lien mortgage on real property Omar owned in

the City of Bayonne. Metro named as nominee the Mortgage

Electronic Registration Systems (MERS). MERS then assigned the

mortgage to JP Morgan, who designated Homecomings Financial

Network, Inc. (Homecomings) as the servicer of the loan.

Although Omar defaulted on the Metro loan, he was able to

refinance the loan in 2004 through FGC Commercial Mortgage

Finance, d/b/a/ Fremont Mortgage (Fremont). Homecomings

generated a payoff statement of the 2003 loan that reflected an


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outstanding balance of $298,219,57, with a per diem rate of

interest accrual of $79.95. At the closing for the refinance

loan, Fremont's agent, Yorktown Title LLC, sent Homecomings a

check in the amount of $298,219.57, 1 along with a transmittal

letter that stated that the check was intended to payoff the

2003 Metro loan. Of particular relevance here, the transmittal

letter also indicated that if the funds were insufficient, the

check should be applied to the debt and Homecomings should

contact the sender.It is undisputed that Homecomings received the check and

that, according to the per diem rate, the payoff amount was

short by $559.65 in accrued interest. However, instead of

applying the $298,219.57 check to the outstanding loan balance

and contacting Yorktown to arrange for the receipt of the

additional accrued interest, Homecomings returned the check to

Yorktown, insisting that the check was insufficient to discharge

the loan. The record also shows that Yorktown sent the payoff

check to Homecomings a second time, and that Homecomings again

rejected it.

Instead of returning the payoff check to Yorktown,Homecomings returned the check to Omar, the delinquent borrower.

1 The check was made payable to Homecomings Funding, notHomecomings Financial Network, Inc.


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constituted a surrender of the instrument pursuant to N.J.S.A.

12A:3-604(a), thus depriving Homecomings of standing to seek

payment of the check under N.J.S.A. 12A:3-420(a).

Under the U.C.C., a "payee" who "receive[d] delivery of

[an] instrument" may bring an action for conversion against a

depository bank who caused payment to be made to "a person not

entitled to enforce the instrument." N.J.S.A. 12A:3-420. A

person "receives delivery of [an] instrument" under N.J.S.A.

12A:3-420 "when the check comes into the payees possession, asfor example when it is put into the payee's mailbox." Ibid.,

comment 1. Delivery is required because it is not until this

point when the payee becomes the holder or a "person entitled to

enforce the check." Ibid. If the check is not delivered to the

payee, the underlying obligation for which the check was issued

is not affected, and therefore, the payee's right to enforce the

underlying obligation remains fully intact. Ibid. The drawee

can still bring an action under N.J.S.A. 12A:3-417(a)(1) against

the depository bank for breach of warranty. However, because

the payee's rights to enforce the underlying obligation against

the payor are unaffected, there is no reason to give the payeean additional remedy for conversion. Ibid.

A payee can also "discharge [an] obligation of a party to

pay the instrument by an intentional voluntary act, such as


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surrender of the instrument to the party . . . ." N.J.S.A.

12A:3-604a. Consequently, a discharge of the obligation to pay

would simultaneously revoke any entitlement the payee had to

enforce payment on the instrument. If no entitlement to enforce

payment exists, there can be no right to sue for conversion

under N.J.S.A. 12A:3-420. A depository bank "is strictly liable

for conversion on a forged or stolen instrument" to a party that

received delivery. 2 Leeds v. Chase Manhattan Bank, 331 N.J.

Super. 416, 422 (App. Div. 2000) (citing N.J.S.A. 12A:3-420,comment 1); wsee also New Jersey Lawyers' Fund for Client Prot.

v. First Fidelity Bank, N.A., 303 N.J. Super. 208, 226-27 (App.

Div.), cert. denied, 152 N.J. 13 (1997).

Here, the Law Division found that Homecomings received the

check, and that BOA was strictly liable to Homecomings under

N.J.S.A. 12A:3-420a. As previously noted, however, it is

undisputed that Homecomings rejected and returned the check on

two separate occasions, and that its employees caused the check

to be erroneously sent to Omar. By finding liability under

N.J.S.A. 12A:3-420, the Law Division overlooked the legal

2 "The justification for strict liability upon the depositorybank is that 'the loss should normally come to rest upon thefirst solvent party in the stream after the one who forged theindorsement . . . .'" Leeds, supra, 331 N.J. Super. at 423(quoting 2 James J. White & Robert S. Summers, Uniform Commercial Code 18-4 at 209-10 (4th ed. 1995)).


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MERS V BOA

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