In the

United States Court of Appeals
               For the Seventh Circuit
                          ____________

No. 07-3746

A MERICAN N ATIONAL INSURANCE C OMPANY,

                                                  Plaintiff-Appellant,
                                  v.

C ITIBANK, N.A.,
                                                 Defendant-Appellee.
                          ____________
             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
              No. 02 C 3390—Joan B. Gottschall, Judge.
                          ____________

    A RGUED A PRIL 16, 2008—D ECIDED S EPTEMBER 11, 2008
                          ____________



 Before EASTERBROOK, Chief              Judge,    and     WOOD and
WILLIAMS, Circuit Judges.
  W OOD , Circuit Judge. Many rules of commercial law
allocate risk among different parties to transactions.
Sometimes, however, it is impossible to impose responsi-
bility for losses on the party that caused them. People
disappear with ill-gotten gains, or they spend someone
else’s money on fleeting pleasures. At that point, all
that can be done is to allocate loss to one or another
2                                             No. 07-3746

relatively innocent party. This is such a case: the real
wrongdoer, Robert Carter, will never be able to restore
the money he embezzled from his employer, National
Accident Insurance Underwriters (“Underwriters”). So we
must decide whether Underwriters’ assignee, American
National Insurance Company (“ANICO”) must bear the
loss that remains, or if the bank that cashed checks that
Carter had altered to make payable to himself is responsi-
ble.
  ANICO had engaged Underwriters to act as an agent
for managing an insurance pool known as “NAIG,” for
National Accident Insurance Group Underwriting Agree-
ment. One of the duties Underwriters assumed was to
receive premium payments for the insurance pool, in
the form of checks payable either to Underwriters or
NAIG; it also had the job of managing the premium
trust account into which the premiums were deposited.
In 2002, Underwriters discovered that one of its vice
presidents, Robert Carter, had been intercepting
premium checks, altering the payee line to make them
payable to himself or his company “Sherman Imports,” and
depositing them in a Citibank account over which he
had control. Citibank accepted 44 altered checks, from
five different drawers, for a total face value of
$15,813,964.84.
  Underwriters filed suit against Citibank for con-
version of the checks under 810 ILCS 5/3-420, the Illinois
version of Uniform Commercial Code § 3-420, which
provides the rule for dealing with the conversion of
negotiable instruments. Citibank then filed a third-party
No. 07-3746                                                3

complaint against Carter and other people involved with
his scheme. ANICO moved to intervene in 2003, eventually
filing a complaint against Citibank also based on § 3-420.
Carter pleaded guilty to criminal charges of mail and tax
fraud in 2004; as part of his plea, he forfeited $5.2 million
in property to Underwriters. At that point, Underwriters
assigned its interests in this property to ANICO. In 2006,
Underwriters and Citibank settled, and all claims
arising from that suit were dismissed with prejudice.
  This left the litigation between ANICO and Citibank
unresolved. In August 2007, the district court granted
Citibank’s motion for summary judgment against ANICO
on all of its claims. Citibank still had unresolved claims
pending against Carter and others, and so ANICO asked
the district court to direct entry of a partial final judg-
ment on its suit against Citibank, on the ground that
there was no just reason to delay resolution. See F ED . R.
C IV . P. 54(b). The court did so, and the appeal is now
before us. We review the court’s decision to grant sum-
mary judgment de novo. APS Sports Collectibles, Inc. v.
Sport Time, Inc., 

, 628 (7th Cir. 2002).
  We begin with the language of UCC § 3-420, as adopted
by Illinois:
    (a) The law applicable to conversion of personal
    property applies to instruments. An instrument is
    also converted if it is taken by transfer, other than a
    negotiation, from a person not entitled to enforce the
    instrument or a bank makes or obtains payment with
    respect to the instrument for a person not entitled to
    enforce the instrument or receive payment. An action
4                                                No. 07-3746

    for conversion of an instrument may not be brought
    by (i) the issuer or acceptor of the instrument or (ii) a
    payee or indorsee who did not receive delivery of the
    instrument either directly or through delivery to an
    agent or a co-payee.
    (b) In an action under subsection (a), the measure of
    liability is presumed to be the amount payable on
    the instrument, but recovery may not exceed the
    amount of the plaintiff’s interest in the instrument.
    (c) A representative, other than a depositary bank, that
    has in good faith dealt with an instrument or its
    proceeds on behalf of one who was not the person
    entitled to enforce the instrument is not liable in
    conversion to that person beyond the amount of any
    proceeds that it has not paid out.
810 ILCS 5/3-420. In order to establish that a financial
institution is liable for conversion of a negotiable instru-
ment in Illinois, a plaintiff must prove (1) her ownership of,
interest in or right to possession of the check; (2) the
fact that her apparent endorsement of the check was
forged or unauthorized; and (3) the fact that the defendant
bank was not authorized to cash the check. Continental
Casualty Co. v. American National Bank and Trust Co. of
Chicago, 

, 361 (Ill. App. Ct. 2002); see also
Rodrigue v. Olin Employees Credit Union, 

, 439
(7th Cir. 2005) (describing Illinois law). Our case turns
on the first of these three elements: whether ANICO had
any property interest in the checks. If not, then ANICO
may not bring a suit for conversion. (Otherwise, the final
clause of § 3-420(b) would make little sense, as it limits
No. 07-3746                                              5

recovery to “the amount of the plaintiff’s interest in the
instrument.” See, e.g., Edwards v. Allied Home Mortgage
Capital Corp., 

(Ala. 2007) (construing Ala-
bama’s version of § 3-420).)
   ANICO asserts that it is the “true owner” of the checks,
and thus that it has enough of an ownership interest to
permit it to pursue this suit. Underwriters managed and
administered the premium trust account. The checks
were made out to Underwriters or NAIG; ANICO
admits that the checks were never made out to it, nor was
it ever an indorsee. ANICO had no signatory or drawing
rights on the account and could not touch the funds.
Instead, Underwriters wrote a check to ANICO each
month based on the fees it had collected and deposited
into the account. ANICO argues nevertheless that it is the
“true owner” of the checks, relying on some kind of quasi-
trust theory. Underwriters, it reasons, acted as ANICO’s
agent, and ultimately all of the funds in the premium trust
account (minus Underwriters’ fees) belonged to ANICO;
Underwriters simply administered the premium trust
account for ANICO’s benefit. Thus, ANICO contends, it
has at least an equitable interest in the checks, no matter
what the “Pay To the Order Of” line might have said.
  This novel interpretation of the familiar drawer-drawee-
indorsee-payee relationship is unprecedented, and for
good reason: it betrays the fundamental axiom of negotia-
ble instruments that banks must pay the payee. ANICO
cites a case from a trial-level court in New York to sup-
port its argument that this rule has its exceptions, but
we do not find it persuasive. See Clients’ Security Fund of
6                                               No. 07-3746

N.Y. v. Goldome, 

(N.Y. Sup. Ct. 1990).
ANICO seems oblivious to the burden that its theory
would put on every bank that was presented with a
check for negotiation. Instead of being able to look at the
payee line and to verify that the person presenting the
check was indeed entitled to do so, banks in ANICO’s
world would need to conduct a full-blown investigation
every time to make sure that a party with an equitable
interest in the check was not lurking in the background.
Such a system would bring commercial transactions to
a grinding halt.
  The payee on the 44 checks at issue here, before Carter
unlawfully altered them, was Underwriters or NAIG, never
ANICO. Not surprisingly, Underwriters sued Citibank
and secured a settlement; it also assigned the $5.2 million
that was recovered from Carter to ANICO.
  ANICO appears to be confusing an interest in the funds
backing the checks with an interest in the checks them-
selves. Perhaps it is the ultimate beneficiary of the funds.
Once Underwriters received the checks, it owed ANICO
most of the money, according to the terms of a separate
contract. The terms of this debt, however, are tied to this
ancillary contract, not the negotiable instruments in
question. We considered a similar situation in Kentuckiana
Healthcare, Inc. v. Fourth Street Solutions, LLC, 

(7th Cir. 2008), where we held that a party to whom
a debt was owed was not entitled to sue for conversion.
See 

  Illinois courts do not recognize an action for conversion
of intangible rights. Janes v. First Federal Savings & Loan
No. 07-3746                                                7

Ass’n., 

, 260 (Ill. App. Ct. 1973). The
rights involved with commercial paper merge into the
document, a tangible thing, and thus conversion of the
document is possible. Hayes v. Massachusetts Mutual Life
Ins. Co., 

, 325 (Ill. 1888). The rights associated
with Underwriters’ separate contract with ANICO, on the
other hand, are intangible and do not merge into the
negotiable instruments. Unless ANICO can show a
possessory interest in the checks, it cannot sue for con-
version, because its only interest is a derivative claim to
the funds, not a claim to the instruments themselves.
   The payee does have a property interest in checks made
out to her, as does the indorsee. ANICO is neither and has
not succeeded in showing how the “true owner” entity
it posits fits into the real world of payees, drawers,
drawees, and indorsees. These roles carry specific and
well established meanings: for the reasons we have
already mentioned, banks cannot be asked to go beyond
the name on the payee line except where due care
demands it. If banks were required to look behind the
names on the check itself and delve into the contractual
relationships of named payees and other, unnamed
entities, writing checks would become an impossibility.
It is precisely in order to maintain a workable financial
system that the UCC does not resort to generalities like
the “true owner” and instead insists on terms of art
like “payee.”
  To summarize, ANICO has no property interest in the
checks at issue here: it is not a payee, indorsee, or any
other entity recognized upon the instruments themselves.
8                                               No. 07-3746

To the extent that it has any relevant property interest, it
is in the funds backing the checks, and its interest in
those funds is determined by a separate contract. That
contract is not merged into the checks, however, and
therefore at most gives rise to an intangible right. While
Illinois permits suits for conversion of negotiable instru-
ments by those with a possessory interest, it does not
recognize causes of action on intangible rights.
  Underwriters does have a clear property interest: it is
the named payee. Banks must pay the payee, and if there
is a question in a particular case about that obligation,
the payee may sue. Underwriters did and reached a
settlement. If ANICO has any dispute, it is with Under-
writers, under the terms of the agreements that govern
their relationship. ANICO has no dispute with Citibank,
and so the district court’s grant of summary judgment
against ANICO and in favor of Citibank is A FFIRMED.




                           9-11-08