Defendant Fleet National Bank (sued herein as FleetBoston Financial Corporation) ("Fleet") moves for summary judgment dismissing the complaint, pursuant to CPLR 3212.

Plaintiff, Arrow Transport Services, Inc. ("Arrow"), is in the business of providing courier and long distance freight/trucking services to various businesses such as Home Depot and Northrop Grumman. It seeks to recover damages against Fleet arising out of a fraudulent scheme executed by several Arrow employees, particularly third party Defendants, Richard Ottimo ("R. Ottimo"), Joyce Ottimo and Tracey Lavardere, of whom, R. Ottimo was convicted of bank fraud in the United States District Court for the Eastern District of New York on or about January 7, 2003. He was ordered to pay full restitution to Arrow in the amount of $84,976.64.

During the period in question, approximately one hundred fifty-six (156) checks were drawn on checking accounts maintained by Arrow at Fleet's Manhasset branch. The checks were genuinely issued and signed by Plaintiff as drawer, albeit in inflated amounts, payable to designated payees truckers for services actually rendered. The checks were apparently delivered by Arrow to R. Ottimo for disbursement to the named payees. However, he negotiated the checks which were paid by Fleet.

Plaintiff alleges that Fleet negligently cashed the checks containing forged indorsements in violation of Uniform Commercial Code ("UCC") 4-401 thereby making payment to individuals (i.e. R. Ottimo) other than the true named payees. Fleet maintains that R. Ottimo distributed the check proceeds to the various payees retaining for himself the difference between the true amount actually owed to each payee and the inflated or bogus amount for which the check was drawn based upon inflated invoices prepared by R. Ottimo and his cohorts for services rendered by various truckers.

Fleet seeks summary judgment dismissing the complaint on the grounds, that the action is barred by the "fictitious payee" rule set forth in UCC 3-405 as well as the three-year preclusion/condition precedent rule in UCC 4-406(4).

Since it is undisputed that the checks involved herein were all drawn on Arrow's corporate accounts, it is clear that Plaintiff, Sandra Cohen, has no individual cause of action vis-a-vis the checks. Her individual claims are, therefore, unsustainable.

As noted by the Court of Appeals in Guardian Life Ins. Co. of America v. Chemical Bank, 94 NY2d 418, 421 (2000): [*2]

"[t]he provisions of Article 3 of the Uniform Commercial Code ensure the ready negotiability of commercial paper. In addition, the provisions relating to check fraud further a policy of assigning loss based upon the relative responsibility of the parties 'by establishing commercially sound rules designed to place the risk of loss attributable to fraud such as forged indorsements with the party best able to prevent them.' (Getty Petroleum Corp. v. American Express Travel Related Servs. Co. 90 NY2d 322, 326 [1997])".

Losses caused by a forged instrument are, in the first instance, allocated to the drawee bank because, as between that bank and its drawer, the drawee bank is in the better position to detect the forgery before payment. Getty Petroleum Corp. v. American Express Travel Related Servs. Co., supra at 327. In this regard, the UCC deems a forged indorsement unauthorized and "wholly inoperative." Upon improper payment by the drawee bank over a forged indorsement, the drawee bank must recredit the drawer's account. UCC 1-201(43); 3-404(1); 4-401. See also, Fergang v. Flanagan, 174 Misc 2d 790, 793 (Sup. Ct. Nassau Co. 1997).

Generally, a drawee bank may not debit its customer's account when it pays a check over a forged indorsement. UCC 3-405 the "fictitious payee" rule creates an exception to the general principle that a drawer is not liable on a forged indorsement " 'in situations where the drawer is the party best able to prevent the loss'." Kersner v. First Federal Savings & Loan Assn. of Rochester, 264 AD2d 711, 713 (2nd Dept. 1999), quoting, Getty Petroleum Corp. v. American Express Travel Related Servs. Co., supra at 327. Uniform Commercial Code 3-405(1)(c), the "fictitious payee" or "padded payroll" rule, provides that "[a]n indorsement by any person in the name of the named payee is effective if * * * an agent or employee of the maker or drawer has supplied him with the name of the payee intending the latter to have no such interest." Losses arising in such manner have been determined, as a matter of public policy, to be more business risks than banking risks. Prudential-Bache Securities, Inc. v. Citibank, N.A., 73 NY2d 263, 270 (1989). Under such circumstances, a forged indorsement is treated as if it were the actual indorsement of the stated payee. Thus, payment on the instrument is proper.

The statute is not limited, however, to forged indorsements but also covers situations where, as here, the drawer's employee starts the wheels of normal business procedure in motion to produce a check for an unauthorized transaction. Prudential-Bache Securities, Inc., v. Citibank, N.A., supra at 271; and Touro College v. Bank Leumi Trust Co. of New York, 186 AD2d 425 (1st Dept. 1992).

It is undisputed that Plaintiff's employee, Richard Ottimo, a shipping agent/broker, supplied Arrow, as the drawer of the checks, with the names of the payees, as well as with inflated and/or bogus invoices showing the amounts allegedly owed each trucker/payee. As is plain from the undisputed facts, Arrow was in a position to prevent the loss at issue here by proper supervision of its employees and by careful examination of its internal records, so that the fraud, that was ongoing for more than two years, would have been discovered. Any recovery, therefore, by Arrow against Fleet is barred by UCC 3-405(1).

Also undisputed is the fact that the named payees received the proceeds of the [*3]checks payable to them which were validly signed by Plaintiff for the amount for which each check was issued. The "padded" excess proceeds that Arrow's employee intended for himself were clearly proceeds in which the designated payees had no interest. R. Ottimo's indorsements of the subject checks in the names of the various payees were effective. As such, Fleet has no liability to Arrow.

A bank's negligence is irrelevant under UCC 3-405(1). Moreover, disregard of suspicious circumstances which might well have induced a prudent banker to investigate and other manifestations of negligence are similarly not relevant under § 3-405. Calisch Assocs., Inc. v. Manufacturers Hanover Trust Co., 151 AD2d 446, 447 (1st Dept. 1989).

Pursuant to UCC 4-406(4), a customer who claims a check contains an unauthorized indorsement must discover and report the unauthorized indorsement to the bank within three years "from the time the statement and items are made available to the customer" or "is precluded from asserting against the bank such unauthorized * * * indorsement." See, Touro College v. Bank Leumi, supra at 426-7. The provision is not a statute of limitations fixing the time within which an action may be brought. Rather, it is a rule of substantive law which creates a statutory prerequisite of notice.

Arrow has failed to set forth any evidence of "commercial bad faith" i.e., actual knowledge of the alleged fraud on the part of Fleet so as to constitute knowing and intentional participation in the fraudulent scheme. Prudential-Bache Securities, Inc. v. Citibank, N.A., supra at 275; and Burns & Beck v. Citibank, N.A., 226 AD2d 142 (1st Dept. 1996). A claim of commercial bad faith against a bank requires allegations of a scheme or acts of wrongdoing, together with allegations of the bank's actual knowledge of the scheme or wrongdoing that amounts to bad faith or allegations of complicity by bank principals in concert with the wrongdoers. Peck v. Chase Manhattan Bank, N.A., 190 AD2d 547, 548-9 (1st Dept. 1993).

Here, there is no showing of fraudulent conduct on the part of any bank employee sufficient to defeat summary judgment. Plaintiff has failed to present any evidence to create a question of fact as to whether Fleet lacked ordinary care in paying the checks. Where allegations amount to a claim that a Defendant bank was negligent in not being sufficiently vigilant and/or not providing satisfactory instruction to its staff, such allegations are insufficient to establish conduct falling outside the allocation of the business risks contemplated by UCC 3-405(1)(c). Arrow, which was in a better position than Fleet to detect the loss created by its employees, to prevent the forgery by exercising reasonable care in its selection and supervision and to promptly review its bank statements and checks, failed to detect the forged indorsements or to notify Fleet in accordance with UCC 4-406 (4) which requires a writing clearly identifying the items claimed to have been improperly paid. New Gold Equities Corp. v. Chemical Bank, 251 AD2d 91 (1st Dept. 1998).

In opposition to Fleet's motion for summary judgment, Arrow has failed to deny any of Fleet's factual allegations, contradict the applicable law or demonstrate the existence of a genuine factual issue requiring resolution at trial. The affirmation by Arrow's counsel and the one page affidavit of Arrow's principal, Sandra Cohen-Bernstein are wholly conclusory, lacking in evidentiary support and insufficient to defeat Fleet's motion. Mere conclusory assertions which are devoid of evidentiary facts are [*4]insufficient to defeat a well supported summary judgment motion as is reliance upon surmise, conjecture or speculation. Grullon v. City of New York, 297 AD2d 261 (1st Dept. 2002). See also, Zuckerman v. City of New York, 49 NY2d 557, 562 (1980).

Accordingly, it is,

ORDERED, that Defendant's motion for summary judgment dismissing the complaint is granted. The complaint is hereby dismissed.

This constitutes the decision and Order of the Court.

Dated: Mineola, NY _____________________________

January 18, 2005 Hon. LEONARD B. AUSTIN, J.S.C.

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