                             In the
 United States Court of Appeals
               For the Seventh Circuit
                          ____________

No. 03-3875
AGNES N. CONDER, as trustee of the
Conder Living Trust, on behalf of
herself and all others similarly situated,
                                                 Plaintiff-Appellant,
                                 v.


UNION PLANTERS BANK, N.A.,
                                                Defendant-Appellee.

                          ____________
         Appeal from the United States District Court for the
         Southern District of Indiana, Indianapolis Division.
         No. IP 01-0086-C-T/K—John Daniel Tinder, Judge.
                          ____________
     ARGUED APRIL 13, 2004—DECIDED SEPTEMBER 14, 2004
                          ____________



  Before FLAUM, Chief Judge, and POSNER and WILLIAMS,
Circuit Judges.
  POSNER, Circuit Judge. This appeal from the dismissal of
a diversity suit (governed by Indiana law) for failure to state
a claim requires us to consider a bank’s liability to victims
of a Ponzi scheme for allowing checks made out to the
malefactors to be deposited without proper endorsements.
According to the complaint, which is our only source of
2                                                No. 03-3875

facts, Johann Smith and three other individuals used a
number of corporations and other business entities con-
trolled by them, collectively the “Heartland Financial
Group,” to extract money from the plaintiff and the mem-
bers of her class on the promise that the money would be
invested and yield a high rate of return. Instead of investing
the money, Smith and his associates rebated some of it to
the earliest investors as the promised high return on their
investment (the signature move in a Ponzi scheme, designed
both to delay discovery of the fraud and to attract addi-
tional investors) and used the rest to support an extravagant
lifestyle. Before being shut down by the SEC the scheme had
fleeced the investors of some $35 million.
  The plaintiff made out numerous checks, one for as much
as $150,000, to “Johann M. Smith Escrow Agent.” Smith, or
someone acting on his behalf, stamped each check
                 PAY TO THE ORDER OF
                UNION PLANTERS BANK
                   FOR DEPOSIT ONLY
       LINCOLN FIDELITY ESCROW ACCOUNT
                   074014213 0001266190
The number at the bottom is not Smith’s, the payee’s, bank
account number (anyway his account is in another bank),
but that of Lincoln Fidelity, one of the Heartland entities;
thus the check was not endorsed by the payee. Nevertheless,
Union Planters Bank, the defendant, accepted each of the
checks for deposit in Lincoln Fidelity’s escrow account in
the bank. The money was transferred to that account from
the plaintiff’s bank account when Union Planters Bank
presented the plaintiff’s check to her bank for payment, and
was then checked out from Lincoln Fidelity’s account to
various of the schemers.
No. 03-3875                                                     3

   The plaintiff’s theories of the bank’s liability are two:
conversion and negligence, and we begin with the former.
Obviously an endorsement signed not by the payee but in-
stead by the person to whom the check is endorsed is in-
effective to transfer rights over the check from the payee to
the endorsee and thus to the bank in which the endorsee
deposits the check. UCC § 3-201(b). So Union Planters Bank
was not a holder in due course of the money when it arrived
and was deposited in the bank, id., § 3-302(a); Hartford Fire Ins.
Co. v. Maryland Nat’l Bank, N.A., 671 A.2d 22, 26-27 (Md.
1996); FDIC v. Marine Nat’l Bank of Jacksonville, 431 F.2d 341,
344 (5th Cir. 1970), and therefore, the plaintiff argues, the
bank stood in the shoes of Lincoln Fidelity (part of Heart-
land, the Ponzi enterprise, remember) and has the same
liability to the plaintiff as Lincoln Fidelity would have. Since
she could have sued Lincoln Fidelity for conversion, she
can, she argues, sue Union Planters Bank for conversion.
Section 3-306 of the Uniform Commercial Code provides
that “a person taking an instrument, other than a person
having rights of a holder in due course, is subject to a claim
of a property or possessory right in the instrument or its
proceeds, including a claim to rescind a negotiation and to
recover the instrument or its proceeds.” The transferee of a
negotiable instrument who is not a holder in due course is
simply the assignee of a contract and has no greater rights
than any other assignee. UCC §§ 3-305(a), 3-306; Southern
Surety Co. v. Merchants’ & Farmers’ Bank of Avilla, 176 N.E.
846, 852 (Ind. 1931); Brown v. Indiana National Bank, 476 N.E.2d
888, 894 (Ind. App. 1985); In re Doctor’s Hospital of Hyde Park,
Inc., 337 F.3d 951, 956-57 (7th Cir. 2003); National City Bank,
Northwest v. Columbian Mutual Life Ins. Co., 282 F.3d 407, 409
(6th Cir. 2002). A thief cannot convey a good title, by
assignment or otherwise. Curme, Dunn & Co. v. Rauh, 100
Ind. 247 (1885). So the Ponzi schemers, by depositing
Conder’s check in Union Planters Bank, could not convey
good title to the bank.
4                                                   No. 03-3875

  Or so it might seem; but in fact this hallowed principle of
property law is no longer applied in cases in which a
transfer of money is effected by negotiation of an instrument
rather than by physical conveyance, even if as in this case
the recipient (the bank) is not a holder in due course. UCC
§ 3-420(a); compare Douglass v. Wones, 458 N.E.2d 514 (Ill.
App. 1983). The Uniform Commercial Code, as revised in
1990 to wipe out some earlier cases, including one from
Indiana, Insurance Co. of North America v. Purdue Nat’l Bank,
401 N.E.2d 708, 714 (Ind. App. 1980); see UCC § 3-417
comment 2; Cassello v. Allegiant Bank, 288 F.3d 339, 341 (8th
Cir. 2002), is explicit that a drawer (the plaintiff in this case)
cannot sue the depositary bank (the defendant, Union
Planters Bank) for conversion. UCC § 3-420(a)(i) and com-
ment 1; 2 James J. White & Robert S. Summers, Uniform
Commercial Code § 18-4 (4th ed. 1995 & Supp. 2004). As the
UCC comment explains, the plaintiff has an adequate
remedy by way of suit against her own bank, the bank that
paid the check even though it wasn’t properly endorsed. We
haven’t been told whether the plaintiff has sued her own
bank as well as Lincoln Fidelity’s bank. As we’ll see, such a
suit might fail for want of proof of causation; but a remedy
is not inadequate merely because it does not yield the
plaintiff a windfall.
   The plaintiff’s alternative theory is that Union Planters
Bank violated a duty of care to her in allowing her improp-
erly endorsed checks to be deposited in Lincoln Fidelity’s
account. In other words, she is accusing the bank of having
negligently failed to prevent the Ponzi schemers from de-
frauding her. As we noted recently in Travelers Casualty &
Surety Co. v. Wells Fargo Bank N.A., 374 F.3d 521, 527 (7th Cir.
2004), although the common law generally refuses to fasten
liability on someone who fails to be a “good Samaritan,”
among the numerous exceptions is the rule (a common law
rule, not a UCC rule, but coexisting with the UCC) that a
No. 03-3875                                                  5

bank which allows a person to deposit a check made pay-
able not to him but to the bank (to which the drawer owes
no money) in his own account is liable to the drawer if it
fails to make a reasonable effort to determine whether the
drawer really meant to authorize so suspect a transaction.
The rule isn’t applicable to this case, and, given the enor-
mous volume of check traffic moving through banks and the
remedies that a drawer has against his own bank should that
bank pay out the drawer’s money in violation of its contrac-
tual and UCC duties, we doubt that Indiana is about to
expand the rule into a general duty of care— especially in
the face of the many cases that refuse in other settings to
impose on banks a general duty of care toward persons who
are not their customers and to whom therefore they have no
contractual obligations. E.g., Frost Nat’l Bank v. Midwest
Autohaus, Inc., 241 F.3d 862, 873-74 (7th Cir. 2001); Bell
Brothers v. Bank One, Lafayette, N.A., 116 F.3d 1158, 1160 (7th
Cir. 1997); Eisenberg v. Wachovia Bank, N.A., 301 F.3d 220,
225-27 (4th Cir. 2002).
  Even if Indiana imposed such a duty of care, this suit
would fail for several reasons, including a lack of a showing
of negligence. There was nothing to arouse the suspicions of
Union Planters Bank when it was instructed to deposit
improperly endorsed checks in Lincoln Fidelity’s account.
Improper endorsements are common enough, and usually
innocent. Depositary banks can be holders in due course of
unendorsed checks if the payee is its customer, UCC § 4-
205(1); Lewis v. Telephone Employees Credit Union, 87 F.3d
1537, 1554-56 (9th Cir. 1996), while the “intended payee”
rule, as we shall see, provides a safe harbor for banks that
honor unendorsed or improperly endorsed checks.
  There is a little more in the way of suspicious circum-
stances here because remember that the plaintiff’s checks
were deposited in Lincoln Fidelity’s escrow account. The
6                                                  No. 03-3875

plaintiff argues that the checks that the malefactors wrote on
the account should have alerted the bank that the money in
the account was being used for purposes that would not be
legitimate for an escrow agent. Statutes impose various mo-
nitoring duties on banks, such as the duty to report large
currency transactions, and depositors who are on terrorist
watch lists, 31 U.S.C. §§ 5313(a), 5318(l), but excuse banks
from knowing the terms of its escrow accounts. Ind. Code
§§ 30-2-4-5, -6, -7, -9; Kesselman v. National Bank of Arizona,
937 P.2d 341, 346 (Ariz. App. 1996); Henry J. Bailey &
Richard B. Hagedorn, Brady on Bank Checks: The Law of Bank
Checks § 13.14[1] (rev. ed. 2004); cf. Bell Brothers v. Bank One,
Lafayette, N.A., supra, 116 F.3d at 1160. Tasking banks to read
every check to make sure that the payee’s identity was
consistent with the character of the account would impose
an unreasonable burden, and so the failure to perform the
task would not be negligence even if banks did have a gen-
eral duty of care to noncustomers (which, to repeat, they do
not).
  Our recent decision in Kaskel v. Northern Trust Co., 328
F.3d 358 (7th Cir. 2003), provides still another defense to the
bank. Mrs. Kaskel had written a check to a company called
MLS, which had agreed to invest the money for her. MLS
mailed the check, without however endorsing it, to a Dr.
Shook, who was to make the actual investment. Shook
deposited the check in his personal account, and his bank
presented it for payment to the Northern Trust Company,
the bank on which Kaskel’s check had been drawn. North-
ern Trust paid despite the absence of an endorsement, with
the result that Kaskel’s money ended up in Shook’s account,
from which it subsequently disappeared. Kaskel sued
Northern Trust, claiming that it had broken its contract with
her, UCC § 4-401(a), because the contract authorized the
bank to disburse money in her account only to a payee or
endorsee of her checks, and Shook was neither. We held, so
No. 03-3875                                                   7

far as bears on the present case, that while there was indeed
a breach of contract, Mrs. Kaskel was not entitled to more
than nominal damages because there was no causal relation
between the breach and the loss of her money. For had the
bank noticed that the check was not endorsed, and therefore
returned it to MLS, MLS would have endorsed it to Shook,
Shook would have redeposited the check, this time North-
ern Trust would have paid, and so Kaskel would still have
lost her money. 328 F.3d at 360; see also Isaac v. American
Heritage Bank & Trust Co., 675 P.2d 742, 744-47 (Colo. 1984);
Richards v. Seattle Metropolitan Credit Union, 68 P.3d 1109,
1112-14 (Wash. App. 2003); Rizo v. U-Lane-O Credit Union, 37
P.3d 220, 221-22 (Ore. App. 2001); Sanwa Business Credit
Corp. v. Continental Illinois Nat’l Bank & Trust Co., 617 N.E.2d
253, 258-60 (Ill. App. 1993).
  Likewise had Union Planters Bank noticed the improper
endorsement, it would have returned the check to Johann
Smith, he would have endorsed it to Lincoln Fidelity, the
check would have been redeposited with the bank, and the
bank would have credited Lincoln Fidelity’s account with
the amount of the check. So the plaintiff would have lost her
money all the same, and is therefore no worse off because of
the bank’s mistake. She faults the district court for “absolv-
ing [the bank] of any accountability for looking the other
way and neglecting its duties under the UCC while millions
of dollars of stolen funds passed through its hands,” but fails
to see that the same millions of dollars would have passed
through the bank’s hands, with a delay of only a few days,
had the bank returned the checks either to Smith or to her.
  Imposing liability on someone who hasn’t actually caused
a harm (because the harm would have occurred anyway)
creates incentives to take excessive, and therefore socially
wasteful, precautions, Movitz v. First Nat’l Bank of Chicago,
148 F.3d 760, 762-63 (7th Cir. 1998); A. Mitchell Polinsky &
8                                                  No. 03-3875

Steven Shavell, “Punitive Damages: An Economic Analysis,”
111 Harv. L. Rev. 869, 878-87 (1998), with the effect of im-
peding commerce. Bonded Financial Services, Inc. v. European
American Bank, 838 F.2d 890, 892-93 (7th Cir. 1988); Western
State Bank v. First Union Bank & Trust Co., 360 N.E.2d 254,
258 (Ind. App. 1977). Hence the “intended payee” rule, rec-
ognized in Indiana as elsewhere, e.g., Ambassador Financial
Services, Inc. v. Indiana National Bank, 605 N.E.2d 746 (Ind.
1992); Hall v. Mid-Century Ins. Co., 811 P.2d 855, 858-59 (Kan.
1991); Perini Corp. v. First Nat’l Bank, 553 F.2d 398, 412-14
(5th Cir. 1977), and a further obstacle to Conder’s claim,
unless the rule is considered, as probably it should be, as
just a restatement of the general tort requirement of proving
a causal relation between the tortious conduct and the
plaintiff’s injury.
   The rule provides that if a bank transfers a check without
a proper endorsement but the transfer is to a person whom
the drawer of the check wanted (or would if consulted have
wanted) to have the money, the bank is not liable for any
loss the drawer may have suffered as a result of the transfer,
since the transfer would have gone through even if the bank
had insisted that the check be properly endorsed. The
plaintiff’s criticism of the application of the rule to the facts
of Franklin v. Benock, 722 N.E.2d 874 (Ind. App. 2000), may
be well founded, but the rule itself is sound; there is no
liability in tort if the victim would have suffered the loss of
which he is complaining even if the defendant had not
violated its legal duty.
  The principle is equally applicable to a suit for fraud or
conversion—the plaintiff’s other claim, with which we
began. She argues that requiring proof of a causal relation
between the defendant’s conduct and the plaintiff’s loss is
strictly an aspect of tort law and section 3-306 is a rule of
property law. That is doubly wrong: Kaskel was a contract
No. 03-3875                                                   9

case, not a tort case; and all that section 3-306 does is, by
lifting the holder in due course defense, to open the way to
a tort suit. See UCC § 3-307 comment 2; Mutual Service
Casualty Ins. Co. v. Elizabeth State Bank, 265 F.3d 601, 620-21
(7th Cir. 2001); Chosnek v. Rolley, 688 N.E.2d 202 (Ind. App.
1997). It removes a defense, rather than altering the claim,
and the claim is governed by the principles of tort law,
which require proof of causation. As a final detail, we cor-
rect the plaintiff’s contention that a suit against an assignee
is based on different principles from a suit against the
assignor: if you are defrauded by the assignor and sue him,
that is a suit for fraud, and hence a tort suit; if instead you
sue the assignee, that is still a suit for fraud and hence still
a tort suit. UCC § 3-307 comment 2; see, e.g., Douglass v.
Wones, supra.
                                                    AFFIRMED.

A true Copy:
        Teste:

                           _____________________________
                            Clerk of the United States Court of
                              Appeals for the Seventh Circuit




                     USCA-02-C-0072—9-14-04
