Mortgagee Was Not Entitled To Recover From The Insurer For Property Damage Loss When The Insurer Had Previously Issued A Check Payable To The Borrower And The Mortgagee But The Borrower Had Forged The Mortgagee’s Signature

In _Parkway Bank and Trust Co. v. State Farm Fire and Cas. Co._, 2013 IL App (1st) 122387 (May 2013), the mortgagee filed a declaratory judgment action seeking declaration that it is entitled to receive insurance proceeds, of $252,830.94, for fire loss that occurred to the property. The insurer answered that it had already issued checks for that amount naming the mortgagee as co-payee and those checks were cashed. Apparently the borrower’s contractor had forged the mortgagee’s name and cashed the check. The insurer therefore asserted that it performed its obligation under the policy and should not be required to double pay the insurance proceeds. The circuit court granted summary judgment for the insurer and the mortgagee appealed. Affirming the circuit court’s judgment, the appellate court considered whether the insurer satisfied its obligation to the mortgagee when it issued two checks naming the mortgagee as co-payee or whether the insurer’s obligation remained unsatisfied because of the forgery. The appellate court found that the UCC governs the outcome of these questions. The mortgagee’s only recourse was under section 3-3 comment 4, of the UCC. That section provides that the mortgagee has a claim against the payor bank in conversion, (under sections 3-420 of the UCC), for paying the check to a person not entitled to enforce it (the forger). That section also provides that the mortgagee has a claim against the drawer of the checks (the insurer) if the checks were lost, destroyed or stolen. Section 3-310 prohibits the payee (the mortgagee) from ignoring the instrument and seeking recovery under the contract (the policy). Since there was no evidence that the checks were lost, destroyed or stolen the mortgagee had no recourse against the insurer. The only recourse was for the mortgagee to sue the bank, who paid the check to the borrower’s contractor, for conversion under section 3-420. It could not recover from the insurer for the forgery.

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