Lakusta (L) was sole owner of 373409 and Legacy. L received a cheque payable to 373409. L altered the cheque by adding "/Legacy" to the payee field. L deposited the cheque without endorsing it, the cheque cleared and L withdrew the money.
373409 went into liquidation and it’s receiver/manager brought an action in conversion against the Bank for accepting the cheque into Legacy’s account.
At trial and appeal: L did not endorse the cheque and therefore did not give authorization to the Bank to deposit the cheque in the Legacy account.
Did the Bank by itself or with others act in any way to cause financial loss to the respondents? (Was the bank authorized by 373409 to deal with the cheque as it did?)
In the context of money or negotiable instruments, a party acting with proper authorization from the rightful owner is not liable in conversion.
Tort of conversion: "involves a wrongful interference with the goods of another, such as taking, using or destroying these goods in a manner inconsistent with the owner’s right of possession." It is no defence that the wrongful act was committed in all innocence.
** But: An owner’s right of possession includes the right to authorize others to deal with his chattel in any manner specified. Therefore, dealing with another’s chattel in a manner authorized by the rightful owner is consistent with the owner’s right of possession, and does not qualify as wrongful interference.
In the case at bar: 373409 was the rightful holder of the cheque. Deposit in to the Legacy account constituted a dispossession of 373409’s entitlement. If 373409 authorized the Bank to deposit the cheque into Legacy’s account, then the Banks action cannot be wrong or subject to liability (because it acted with the authority of the true owner of the cheque).
** Endorsement doesn’t matter. Endorsement is merely the formal mechanism through which title is transferred to another party; transfer of title isn’t the issue here. The issue is whether the Bank dealt with the cheque on the authority of 373409. The cheque owner can delegate such authority, even without a formal transfer of title.
** Bank assumes risk in accepting an unendorsed cheque into a customer’s account. Endorsement allows Bank to verify authority. But if the rightful owner is depositing the cheque, it is authorizing the Bank, so endorsement does not negate that authority.
** A bank’s assumption of this risk is not conversion. L was sole owner of 373409, so he was capable of authorizing the Bank to deal with 373409’s cheque. The impropriety of the diversion of funds is irrelevant. 373409, through L, authorized the Bank to deposit the cheque into Legacy’s account.
Appeal allowed in favour of Bank; Bank acted with proper authority.