## Facts

- McMullen Oil Company filed Chapter 11; a creditors’ trust was created under the confirmed plan to pursue estate causes of action.
- McMullen’s president, Andrew Hopwood, took 15 checks payable to “McMullen Oil Company” and deposited them into the “McMullen Oil Company Pension Plan” account at Comerica (or its predecessor).
- The checks were endorsed by the pension plan, not by McMullen as the named payee.
- Five checks were deposited before the Chapter 11 filing and ten after the filing.
- The creditors’ trust sued Comerica in an adversary proceeding alleging (1) conversion, (2) negligence, and (3) liability for paying checks with fraudulent endorsements based on the acceptance and processing of these deposits.
- Comerica moved for summary judgment; the court resolved the parties’ cross-motions at the summary-judgment stage.

## Issues

1. Whether the bank was liable for conversion under California Commercial Code § 3420 (UCC § 3-420) for processing checks payable to McMullen that were deposited into the pension plan account without McMullen’s endorsement.
2. Whether the bank’s asserted status as a holder in due course under California Commercial Code § 3302 limited or defeated the trust’s theories of recovery.
3. Whether the bank owed a common-law duty of care to a non-customer payee, and whether negligence claims were displaced by the UCC’s loss-allocation rules for negotiable instruments.
4. Whether the trust, standing in the debtor’s shoes, could assert these claims for both prepetition and postpetition deposits.

## Decision

- The court granted summary judgment in substantial part for Comerica.
- The court rejected the trust’s conversion claim under Article 3.
- The court rejected the trust’s negligence claim, concluding the asserted common-law theory did not supply a viable basis for liability in this setting.
- The court rejected the separate “fraudulent endorsement” payment theory to the extent it sought recovery beyond the UCC framework.
- The disposition effectively ended the adversary proceeding in Comerica’s favor as to the claims presented.

## Legal Principles

- Article 3 distinguishes “transfer” from “negotiation”; delivery can transfer rights to enforce an instrument even if negotiation formalities are not satisfied.
- A bank that takes an instrument for value, in good faith, and without notice of claims or defenses may qualify as a holder in due course, taking free of many claims under California Commercial Code §§ 3302 and 3305.
- Conversion liability for instruments under California Commercial Code § 3420 is limited and does not automatically arise from an irregular deposit into an account other than the named payee’s where the statutory requirements for conversion are not met.
- Common-law negligence claims seeking to reallocate loss from check-processing irregularities may be unavailable where the UCC provides a comprehensive allocation of rights and remedies, particularly as to claims by non-customer payees.

## Conclusion

The bankruptcy court held that the estate’s successor could not recover from the depositary bank for checks payable to the debtor but deposited into a related pension plan account without the payee’s endorsement, because the UCC’s rules on transfer, holder-in-due-course protections, and statutory limits on conversion and negligence foreclosed liability on the facts shown at summary judgment.


In re McMullen Oil Co., 251 B.R. 558 (Bankr. C.D. Cal. 2000)