Introduction
Negotiable instruments, like tangible movable property, are susceptible to misappropriation and theft. Article 3 of the Uniform Commercial Code (UCC) addresses the concept of “conversion” in the context of negotiable instruments, outlining rules and remedies related to such situations.
What is Conversion?
In the context of Article 3, conversion refers to the unauthorized exercise of control over a negotiable instrument belonging to another person. This unauthorized control deprives the rightful owner of their right to use or possess the instrument. While common law principles of conversion remain relevant, Article 3 provides specific provisions addressing the conversion of negotiable instruments.
Elements of Conversion
Article 3 establishes that an instrument is converted if:
- It is transferred other than by negotiation from a person not entitled to enforce the instrument.
- A bank takes the instrument for collection or payment from someone not entitled to enforce it or receive payment.
Forged Signatures and Conversion
A forged signature on a negotiable instrument payable to a specified person generally renders the instrument non-negotiable. This is because the forger does not have the legal right to negotiate the instrument. As a result, if someone obtains the instrument based on the forged signature and the transfer is not a valid negotiation, they have committed conversion. Similarly, if a bank accepts the instrument for payment based on the forged signature, the bank has also committed conversion.
Example of Conversion
Consider the following scenario: A law student working for their school’s civil litigation clinic negotiates a $20,000 settlement for a client who was injured in a grocery store. The insurance company issues a check for $20,000 payable to the client. Instead of giving the check to the client, the law student forges the client’s endorsement and deposits the check into their personal bank account. The bank credits the law student’s account.
In this situation, the law student has committed conversion by forging the client’s endorsement and depositing the check into their account. The bank has also committed conversion by accepting the check for deposit based on the forged endorsement.
Consequences of Conversion
The UCC provides various remedies for conversion, including the right of the rightful owner to recover the instrument, recover its value from the converter, or potentially pursue other legal actions.
Conclusion
The conversion of negotiable instruments is a serious legal matter. Article 3 of the UCC sets forth specific rules and remedies related to the conversion of these instruments. Understanding these rules is essential for anyone who deals with negotiable instruments, including individuals, businesses, and financial institutions.