## Facts

- An executive of International Charter Mortgage Company (ICMC), Jorge Pagan Lizardi, embezzled corporate funds by issuing corporate checks to banks to pay his personal credit card debts.
- Pagan had authority to write corporate checks if they were countersigned by another ICMC employee; he obtained countersignatures by misrepresenting that the checks paid ICMC obligations.
- Pagan made checks payable to banks where he held personal Visa/MasterCharge accounts, wrote his account number on the back, and mailed the checks with payment stubs.
- Banco de Ponce received sixteen ICMC checks between October 1977 and April 1979 totaling about $46,000 and applied them to Pagan’s credit card balance.
- ICMC discovered the embezzlement in August 1979; an investigation completed in February 1980 found total losses of several hundred thousand dollars.
- ICMC’s fidelity insurers (Federal Insurance Company I.C. and Aetna Insurance Company) paid ICMC and sued Banco de Ponce as subrogees/assignees seeking recovery of the $46,000.
- The case was tried on stipulated facts; after the insurers dropped negligence, the remaining claims were conversion and unjust enrichment.

## Issues

1. Whether a bank commits conversion by receiving facially valid, properly countersigned corporate checks and applying them to an employee’s personal credit card debt without notice that the checks were unauthorized.
2. Whether the bank is unjustly enriched when it applies such check proceeds to satisfy an existing cardholder debt under an ordinary creditor–debtor relationship.

## Decision

- The First Circuit affirmed judgment for Banco de Ponce.
- On the stipulated facts, the insurers could not recover from the bank under either conversion or unjust enrichment.
- The bank’s routine processing of facially valid checks to satisfy the drawer-designated debt, without notice of wrongdoing, did not constitute a wrongful exercise of dominion over the corporation’s property.
- The bank did not receive an unjustified net benefit; the payments satisfied Pagan’s contractual debt to the bank.

## Legal Principles

- Conversion requires an intentional exercise of dominion or control over another’s property that is seriously inconsistent with the owner’s rights; routine receipt and application of a facially valid check to pay a designated debt, without notice of irregularity, is not conversion.
- For unjust enrichment under Puerto Rico law, the plaintiff must show enrichment, a corresponding loss, and lack of legal cause; payment of an existing debt pursuant to a contractual relationship supplies legal cause and typically defeats the claim.
- In embezzlement schemes where an employee misuses apparent authority to issue properly executed corporate checks, the loss is generally allocated to the employer (and its fidelity insurer) rather than an innocent payee lacking notice of the internal misuse.

## Conclusion

The court held that Banco de Ponce, acting in good faith and without notice, was not liable for conversion or unjust enrichment for applying properly executed corporate checks to the employee’s personal credit card debt, leaving the embezzlement loss with the employer and its insurers.


Fed. Ins. Co. I.C. & Aetna Ins. Co. v. Banco de Ponce, 751 F.2d 38 (1st Cir. 1984)