Hey, But It’s My Money! Ownership and the Enforcement of Conversion Liability Under U.C.C. § 3-420
44 Pages Posted: 18 Jun 2014
Date Written: June 16, 2014
One of the driving engines of the American economy is the creativity of the businesspeople that build the new and unique commercial arrangements which foster society-wide growth. The only limit on that growth engine should be the imagination of the business community. The Uniform Commercial Code (“Code”) regulates commerce in a way that ensures such visionary thinking will not be stymied and new, unique commercial arrangements will flourish. This Article concerns one section of the Code which courts and practitioners wrongly have interpreted to undermine the intent of the Code’s drafters and impede American business.
The Code’s provision for conversion, section 3-420, creates a broad understanding of liability for conversion of an instrument under the statute. When written, it meaningfully broadened the category of potential conversion defendants. That section should thus be read to ensure that the parties able to enforce conversion liability include all of its potential victims, such as the entity to whom an instrument’s proceeds were due and owing on account of services it had rendered. This may not always be the payee or indorsee on the instrument in commercial arrangements vital to the health of the broader economy, such as modern commercial insurance underwriting and a variety of trustee-beneficiary relationships.
In this Article, we take a unique case-by-case view to examine how courts have gone wrong in their understanding of section 3-420. By closely following the evolution of the misguided judicial limitation on the proper party plaintiffs to a statutory conversion action, the Article demonstrates how seemingly logical statements of law led later courts to reach illiberal understandings of conversion contrary to the design of the Code. The Article then argues that a proper understanding of section 3-420 should permit an instrument’s true owner to enforce a party’s liability for converting that instrument, even when the true owner is not the named payee or indorsee. Finally, in light of the prevalence of judicial misunderstanding of section 3-420, we recommend a simple amendment to that section’s language that would correct those errors and ensure the smooth flow of commerce in the future.
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