Travelers Casualty v. Wells Fargo Bank ( 2004 )


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  •                             In the
    United States Court of Appeals
    For the Seventh Circuit
    ____________
    No. 03-1833
    TRAVELERS CASUALTY AND SURETY
    COMPANY OF AMERICA,
    Plaintiff-Appellant,
    v.
    WELLS FARGO BANK N.A. and
    CHARLES SCHWAB & CO., INC.,
    Defendants-Appellees.
    ____________
    Appeal from the United States District Court for the
    Northern District of Illinois, Eastern Division.
    No. 01 C 9716—Matthew F. Kennelly, Judge.
    ____________
    ARGUED MAY 17, 2004—DECIDED JULY 2, 2004
    ____________
    Before POSNER, EASTERBROOK, and MANION, Circuit Judges.
    POSNER, Circuit Judge. This diversity suit governed by
    Illinois law raises issues of banking and commercial law.
    Allianz Life Insurance Company had a checking account at
    Wells Fargo bank (actually a predecessor of Wells Fargo, but
    we can ignore that detail) for the payment of benefits to
    employees covered by Allianz’s employee health plan.
    2                                                No. 03-1833
    Charles Schwab, a securities brokerage firm that offers
    checking services to its customers, received a check for
    $287,651.23 made out to it and drawn on Allianz’s account
    at Wells Fargo. The check was presented to Schwab for
    deposit by a man who called himself James M. Carden and
    said he wanted to open a brokerage account in his name.
    Schwab opened an account in Carden’s name, credited the
    account with the face amount of the check, and deposited
    the check in a bank in which Schwab has an account. Two
    weeks later Carden faxed Schwab directions to wire various
    amounts of money in his Schwab account, adding up to
    almost all the money in it, to accounts (none in Carden’s
    name) in other financial institutions. Schwab made the
    transfers as instructed, though only after checking with
    Wells Fargo to make sure that Allianz’s check to Schwab
    had cleared so that the money that Carden wanted to
    withdraw would not come out of Schwab’s pocket. The
    check had cleared.
    Within a few days, however, Allianz discovered that
    Carden had never been employed by it. It believes that
    Carden, whom investigators have been unable to track
    down (“Carden” may not be the depositor’s real name), had
    forged the $287,651.23 check. Allianz asked Wells Fargo to
    make good the loss. Wells Fargo refused. Travelers had
    insured Allianz against such losses, so it paid off Allianz
    and then brought this suit, as Allianz’s subrogee, against
    both Wells Fargo and Schwab. Although the Uniform
    Commercial Code, in force in Illinois as in all states, con-
    tains elaborate provisions regulating commercial paper,
    including checks, Travelers invoked a common law duty of
    banks—a duty the UCC has not superseded—not to honor
    checks in the circumstances of this case. After a bench trial,
    the district judge ruled in favor of the defendants, and
    Travelers appeals.
    No. 03-1833                                                3
    Wells Fargo could not be held liable for honoring a forged
    or otherwise unauthorized check if, in fact, the check was
    not forged or unauthorized; and in ruling for Wells Fargo
    the judge ruled that Travelers had failed to prove that the
    check made out to Schwab and deposited by Carden had
    not been authorized by Allianz. Travelers had intended to
    present testimony by the only two employees of Allianz
    who were authorized to sign checks drawn on the account
    on which the $287,651.23 check was drawn that they had not
    authorized the check. But at trial, instead of putting these
    employees on the witness stand or, if they were unavailable,
    submitting their depositions, Travelers presented affidavits
    containing their testimony. The judge correctly ruled the
    affidavits inadmissible as hearsay. The affiants were not
    available for cross-examination, as they would have been
    had they testified live or given depositions earlier at which
    the defendants could have cross-examined them.
    It might seem to follow directly from this ruling that the
    case was properly dismissed. Yet the district judge, while
    convinced that without the affidavits Travelers could not
    prove that the check was unauthorized, dismissed only the
    claim against Wells Fargo on that ground. He distinguished
    the claim against Schwab on the ground that Schwab might
    have had a duty to Allianz to inquire whether the check was
    authorized. But even so, and even if Travelers proved that
    Schwab had violated its duty to Allianz, in order to obtain
    relief Travelers would have to show that Schwab, had it
    fulfilled its duty, would have discovered that Allianz had
    not authorized the check to Schwab, and having discovered
    this would not have let Carden transfer the money out of his
    Schwab account. The judge may have missed this elemen-
    tary point about causation because, despite ruling in favor
    of Wells Fargo, he may have believed that the check was
    unauthorized. For in a part of his oral opinion (and beware
    oral opinions in complex cases) in which he held that
    4                                                No. 03-1833
    Travelers was in any event barred from relief by contribu-
    tory negligence on the part of Allianz, the judge said that
    the $287,651.23 check “had a similar appearance to the
    earlier check”—a check that the judge thought Allianz had
    been negligent in failing to investigate—“which essentially
    means that, on its face, it didn’t appear phony or altered in
    any way, but it is a reasonable inference that it was pre-
    pared by the same person, and it would have been a
    reasonable inference that it was prepared by the same
    person who prepared the earlier unauthorized check” (emphasis
    added).
    There had been two earlier suspicious checks drawn on
    Allianz’s account at Wells Fargo. The first, for $26,500, was
    payable to a Michelle R. Bryon. The second, for $46,651.23,
    was payable to an Allan M. Ferrao. Since the check to
    Carden was for $287,651.23, it is almost certain that whoever
    forged the check to Ferrao also forged the check to Schwab
    that Carden presented; at all events the inference seems
    inescapable that the $287,651.23 check was also unautho-
    rized. There was evidence of this apart from the affidavits
    (which were not good evidence, as we have said)—not only
    the identity of the last five digits in the second and third
    checks, but also that efforts to locate Carden failed, an
    experienced investigator for Allianz concluded that the
    check Carden had deposited had been forged or altered, and
    Schwab itself unguardedly argued that Travelers’ claim was
    barred by section 4-406(d)(2) of the Uniform Commercial
    Code.
    To explain the last point, section 4-406(d)(2) provides that
    the drawer of a check (Allianz, and thus Travelers as its
    subrogee) can’t complain about the check’s alteration “by
    the same wrongdoer” who had previously altered a check
    of the drawer, if the drawer would have discovered the
    alteration simply by comparing the bank’s statement (as-
    No. 03-1833                                                  5
    suming as in this case that the bank rendered a statement of
    account to its customer) with its own records. UCC § 4-406,
    comment 2; Marx v. Whitney National Bank, 
    713 So. 2d 1142
    ,
    1146-48 (La. 1998); Mercantile Bank of Arkansas v. Vowell, 
    117 S.W.3d 603
    , 612-13 (Ark. App. 2003); Espresso Roma Corp. v.
    Bank of America, N.A., 
    124 Cal. Rptr. 2d 549
    , 551-52 (App.
    2002). The implication is that Carden had altered at least
    one previous check and the check at issue in this case as
    well.
    The reason we term Schwab’s arguing section 4-406(d)(2)
    “unguarded” is that the section cannot provide a defense for
    Schwab, because Allianz was not a customer of Schwab.
    Mac v. Bank of America, 
    90 Cal. Rptr. 2d 476
    , 479-481 (App.
    1999); UnBank Co. v. Whittaker-Gomez, 
    438 N.W.2d 382
    , 384
    (Minn. App. 1989); 6C Lary Lawrence, Anderson on the
    Uniform Commercial Code § 4-406:10 (3d rev. ed. 2003). It may
    provide a defense to Wells Fargo, but the district judge,
    having decided that Wells Fargo had no prima facie liability
    to Allianz, didn’t consider any of the defenses that a bank
    might be able to interpose against a suit by a customer who
    had been negligent. See UCC §§ 3-406(a), 4-406(c), (d); Gulf
    States Section, PGA, Inc. v. Whitney National Bank, 
    689 So. 2d 638
    , 641-42 (La. App. 1997); 2 James J. White & Robert S.
    Summers, Uniform Commercial Code § 19-3 (4th ed. 1995).
    Maybe all the judge meant in the passage we quoted
    earlier was that since as he said the $287,651.23 check
    “didn’t appear phony or altered in any way,” it wouldn’t
    have put Wells Fargo on notice that something was fishy;
    and then Wells Fargo might be off the hook even if the
    check was unauthorized. For while ordinarily a bank is
    strictly liable for charging a customer’s account with an
    amount that the customer had not authorized the bank
    to pay (and Allianz was Wells Fargo’s customer), UCC § 4-
    401(a), a bank and its customer can contract out of that strict
    6                                                  No. 03-1833
    liability, §§ 4-401(a), 4-103(a), and Wells Fargo argues that
    it did so in its contract with Allianz. This was another of
    Wells Fargo’s defenses that the judge didn’t reach.
    We really don’t know what the judge was thinking. His
    findings on the question whether the check was authorized
    are in irreconcilable conflict. But probably the best interpre-
    tation is that he thought it didn’t matter. He clearly thought
    Schwab was off the hook even if the check was unautho-
    rized, and let us consider whether he was correct about that
    at least. The common law of Illinois as of other states
    requires a bank, if someone tries to deposit a check made
    out to it in his own account, to exercise due care to make
    sure that the drawer (the third party) intended the depositor
    to receive the drawer’s money. Mutual Service Casualty Ins.
    Co. v. Elizabeth State Bank, 
    265 F.3d 601
    , 613-14 (7th Cir. 2001)
    (Illinois law); Douglass v. Wones, 
    458 N.E.2d 514
    , 522 (Ill.
    App. 1983); Federal Ins. Co. v. NCNB National Bank of North
    Carolina, 
    958 F.2d 1544
    , 1549-50 (11th Cir. 1992); Master
    Chemical Corp. v. Inkrott, 
    563 N.E.2d 26
    , 28-29 (Ohio 1990);
    Allis Chalmers Leasing Services Corp. v. Byron Center State
    Bank, 
    341 N.W.2d 837
    , 839 (Mich. App. 1983) (per curiam);
    cf. Murray v. Bank of America, N.A., 
    580 S.E.2d 194
    , 198
    (S.C. App. 2003); see also Boyd J. Peterson, Annotation,
    “Liability of Bank for Diversion to Benefit of Presenter or
    Third Party of Proceeds of Check Drawn to Bank’s Order by
    Drawer Not Indebted to Bank,” 
    69 A.L.R. 4th 778
    (1989)
    (collecting cases). The danger is great in such a case that the
    depositor merely found, stole, or forged the check. The risk
    of his getting away with such fraud is reduced if the bank
    has a duty to check with the drawer or take other steps to
    make reasonably sure that the deposit is authorized. The
    duty is imposed, it should be noted, as a matter of tort law
    rather than contract law or UCC law (which is mainly
    contract law); there was no contractual relation between
    Schwab and Allianz.
    No. 03-1833                                                    7
    As our reference in the preceding paragraph to finding or
    stealing a check implied, the duty is not limited to cases in
    which a check is unauthorized (which will usually mean
    forged). Suppose Allianz wrote a check payable to Schwab
    in order to transfer funds to Allianz’s own investment
    account with Schwab, and someone stole the check and
    presented it to Schwab, which credited the thief’s account,
    and the thief later drained the account. Schwab would have
    committed a tort by not checking with Allianz to learn the
    drawer’s instructions. However, there is no suggestion in
    this case that Allianz may have authorized the check to
    Schwab but that Carden then stole it and presented it to
    Schwab.
    The initial question concerning Schwab’s performance of
    its tort duty to Allianz is whether, not being a bank, it had
    such a duty. We cannot find any cases on whether the duty
    extends to any other commercial enterprises, though we
    point out for what it is worth that the term “bank” in the
    Uniform Commercial Code (e.g., UCC § 4-105(1)) has been
    interpreted to cover other financial institutions that perform
    bank-type services—including brokerage firms, as
    in Lichtenstein v. Kidder, Peabody & Co., 
    727 F. Supp. 975
    , 978-
    79 (1989), vacated on other grounds, 
    777 F. Supp. 423
    (W.D.
    Pa. 1991); Edward D. Jones & Co. v. Mishler, 
    983 P.2d 1086
    ,
    1093-97 (Ore. App. 1999); Pinasco v. Ara, 
    631 N.Y.S.2d 346
    ,
    348 (App. Div. 1995); Asian Int’l, Ltd. v. Merrill Lynch, Pierce,
    Fenner & Smith, Inc., 
    435 So. 2d 1058
    , 1062 (La. App. 1983);
    see also Woods v. MONY Legacy Life Ins. Co., 
    641 N.E.2d 1070
    , 1072 (N.Y. 1994) (life insurer that administered money
    market account). But certainly the common law duty should
    extend to enterprises such as Schwab that offer a checking
    service in competition with banks. To lift the duty of inquiry
    from Schwab’s shoulders would be to give it an arbitrary
    cost advantage in competing with banks for capital. Banks
    make their money by lending, and they obtain much of that
    8                                                  No. 03-1833
    money by offering checking services to people looking for
    a place to park their money. Schwab wants to obtain capital
    from the same source—people who can be induced to
    deposit their money with a financial institution in exchange
    for the convenience of being able to deposit and withdraw
    the money by check. Had Schwab no duty of inquiry, this
    would reduce its costs of liability insurance and of scrutiniz-
    ing checks submitted to it for payment and it could use its
    resulting cost advantage to lure customers from banks that,
    though they may be no less efficient than Schwab, cannot
    avoid those costs. There is no reason to confer such a
    windfall competitive advantage on the brokerage industry.
    The common law is flexible enough to permit the modifica-
    tion of one of its doctrines when necessary to avoid produc-
    ing an anomalous result because of a change in commercial
    practice.
    It is true but irrelevant that the common law’s imposition
    of a duty of care on a bank which receives a check made out
    to it by a drawer who owes the bank no money is unusual
    because it creates a form of “good Samaritan” liability,
    which the common law normally refuses to impose. See,
    e.g., Cuyler v. United States, 
    362 F.3d 949
    , 953 (7th Cir. 2004);
    Stockberger v. United States, 
    332 F.3d 479
    (7th Cir. 2003);
    Restatement (Second) of Torts § 314 (1965); W. Page Keeton et
    al., Prosser and Keeton on the Law of Torts § 56, pp. 375-76 (5th
    ed. 1984). The drawer in a case such as this, to repeat, is not
    a customer of the payee institution (Allianz drew the check
    on Wells Fargo, not on Schwab), or anyone else to whom the
    payee would owe a duty of care under normal tort princi-
    ples. Rather it’s a third party whom the payee is asked to
    “rescue” from a possible fraud. But unusual as the rule may
    be in our common law system, it is firmly established (as are
    many other exceptions to “no ‘good Samaritan’ liability”
    reviewed in the Stockberger opinion) and there is no justifica-
    tion for confining it to banks that offer checking services.
    No. 03-1833                                                  9
    The next question is whether Schwab fulfilled its tort duty
    of care to Allianz. The district judge thought it had
    by verifying with Wells Fargo that Allianz had enough
    money in its account to cover the check. But in doing this
    Schwab was protecting itself, not the drawer, Allianz. It
    should have tried to find out from Allianz whether the
    check had been authorized. Although Allianz’s check listed
    no address or phone number, only a P.O. box number in
    Milwaukee, it would have taken no more than a minute to
    look up Allianz’s phone number and place a call. If having
    done so Schwab had found itself entangled in an endless
    automated phone menu or otherwise unable to get through
    to a responsible employee of the company in a reasonable
    amount of time and get a prompt answer to its query, its
    duty of care might have been satisfied. Alternatively, it
    could have warned Wells Fargo of the unusual deposit; the
    warning doubtless would have impelled Wells Fargo to
    check the matter with its customer, in order to avoid lia-
    bility. Schwab did nothing and there is no evidence that,
    had it made a reasonable effort to protect the drawer, even
    a minimum effort, the effort would have been fruitless.
    Schwab violated its duty of care to Allianz.
    The judge committed two further errors with regard to the
    claim against Schwab. The first was to rule that Schwab was
    a holder in due course of the $287,653.21 check and there-
    fore took free from all defenses that the drawer might have
    against other recipients. A payee can, it is true, be a holder
    in due course. UCC § 3-302(a)(2), comment 4. And while,
    like other holders in due course, it must take in good faith,
    it is reasonably clear that “good faith,” as the term connotes,
    does not include due care, UCC § 3-103, comment 4; 6B
    Anderson on the Uniform Commercial Code, supra, § 3-302:16R,
    though some cases say it does. First Federal Savings & Loan
    Ass’n of South Carolina v. Chrysler Credit Corp., 
    981 F.2d 127
    ,
    132-33 (4th Cir. 1992); Maine Family Federal Credit Union v.
    10                                                  No. 03-1833
    Sun Life Assurance Co., 
    727 A.2d 335
    , 342-44 (Me. 1999); First
    City Federal Savings Bank v. Bhogaonker, 
    715 F. Supp. 1216
    ,
    1220 (S.D.N.Y. 1989). Yet implicit in the common law rule
    governing banks’ liability to drawers is the proposition that
    a bank presented with a check made out to it by someone
    who owes it no money, for deposit in the presenter’s
    account, does not take the check in due course. Mutual
    Service Casualty Ins. Co. v. Elizabeth State 
    Bank, supra
    , 265 F.3d
    at 621-22; Douglass v. 
    Wones, supra
    , 458 N.E.2d at 522-23;
    Dalton & Marberry, P.C. v. NationsBank, N.A., 
    982 S.W.2d 231
    ,
    235 (Mo. 1998). Otherwise section 3-302(a)(2) would dis-
    solve the common law rule, which no one contends it does.
    Second, the judge held that by failing to discover that two
    previous checks drawn in its name had been unauthorized,
    Allianz was guilty of contributory negligence in also failing
    to discover, before Schwab permitted Carden to withdraw
    the proceeds of the check, that the third check, the one at
    issue in this case, was unauthorized. It is good practice for
    a bank to close an account (of course with notice to the
    customer, see J. Bailey & Richard B. Hagedorn, Brady on
    Bank Checks: The Law of Bank Checks ¶ 22.08 (2004)) as soon
    as it discovers that an unauthorized check has been written
    on the account. The bank may indeed be required to do so
    in the exercise of its duty of ordinary care to the customer.
    UCC § 3-103(9). But the customer has a correlative duty, as
    we know, under section § 4-406(d) to notify the bank that
    unauthorized checks are being written on its account, if
    such notification is feasible because the bank has given the
    customer a statement of his account that the customer can
    compare with his own records and by doing so readily
    discover the fraud. The violation of this duty gives the
    customer’s bank a defense; does it also give a defense to a
    bank, in this case Schwab, that is not the customer’s bank
    but instead a bank to which another unauthorized check
    drawn on the customer’s bank is presented? It could not be
    No. 03-1833                                                  11
    a defense under section 4-406(d), but would have to be a
    common law defense created by analogy to the defense
    created by that section.
    There is some support in case law for such a defense.
    Federal Ins. Co. v. Groveland State Bank, 
    333 N.E.2d 334
    , 336-
    37 and n. 2 (N.Y. 1975); Robbins v. Passaic National Bank &
    Trust Co., 
    160 A. 418
    , 420 (N.J. 1932); cf. Sun ‘n Sand, Inc. v.
    United California Bank, 
    582 P.2d 920
    , 940-41 (Cal. 1978). We
    do not know whether Illinois courts would recognize the
    defense but we do know that if they did it would not be a
    complete defense because Illinois like most states has re-
    placed contributory with comparative negligence. Alvis v.
    Ribar, 
    421 N.E.2d 886
    (Ill. 1981); Williams Electronics Games,
    Inc. v. Garrity, 
    366 F.3d 569
    , 573 (7th Cir. 2004); Spinozzi v.
    ITT Sheraton Corp., 
    174 F.3d 842
    , 847 (7th Cir. 1999). Neither
    contributory nor comparative negligence is any defense to
    an intentional tort, e.g., Williams Electronics Games, Inc. v.
    
    Garrity, supra
    , 366 F.3d at 573 (Illinois law), but here it
    would be asserted against Schwab’s unintentional tort of
    negligence.
    Since the case must be remanded, however, we need not
    decide whether Schwab has preserved a defense of compar-
    ative negligence and if so whether such a defense may,
    under Illinois law, be asserted in a case such as this.
    The judgment in favor of the defendants must be re-
    versed. All that is certain at this stage is that Schwab vio-
    lated its tort duty of care to Allianz and hence to Travelers.
    The case must be remanded for a new trial at which the
    main issues will be whether the check was authorized and
    if not whether Wells Fargo is liable to Travelers for paying
    the check and whether Schwab has any (partial) defenses to
    its prima facie liability to Travelers. If the trial determines
    that the check was authorized, neither defendant is liable to
    Travelers, for remember that Travelers does not contend
    12                                                No. 03-1833
    that the check might have been authorized but stolen or
    otherwise misdirected. Whether Travelers should be given
    another chance to present admissible evidence that the
    check was (as it strongly appears to be) unauthorized is
    another issue for resolution by the district judge in the first
    instance.
    REVERSED AND REMANDED.
    A true Copy:
    Teste:
    _____________________________
    Clerk of the United States Court of
    Appeals for the Seventh Circuit
    USCA-02-C-0072—7-2-04
    

Document Info

Docket Number: 03-1833

Judges: Per Curiam

Filed Date: 7/2/2004

Precedential Status: Precedential

Modified Date: 9/24/2015

Authorities (22)

UnBank Co. v. Whittaker-Gomez , 1989 Minn. App. LEXIS 399 ( 1989 )

Douglass v. Wones , 120 Ill. App. 3d 36 ( 1983 )

Mutual Service Casualty Insurance Company, as Subrogee of ... , 265 F.3d 601 ( 2001 )

Alvis v. Ribar , 85 Ill. 2d 1 ( 1981 )

williams-electronics-games-inc-v-james-m-garrity-milgray-electronics , 366 F.3d 569 ( 2004 )

Marx v. Whitney Nat. Bank , 713 So. 2d 1142 ( 1998 )

Robbins v. Passaic Nat. Bank and Trust Co. , 109 N.J.L. 250 ( 1932 )

Lichtenstein v. Kidder, Peabody & Co., Inc. , 777 F. Supp. 423 ( 1991 )

Dalton & Marberry, P.C. v. Nationsbank, N.A. , 1998 Mo. LEXIS 80 ( 1998 )

Federal Insurance Company, Cross-Appellee v. Ncnb National ... , 958 F.2d 1544 ( 1992 )

First City Federal Savings Bank v. Bhogaonker , 715 F. Supp. 1216 ( 1989 )

Allis Chalmers Leasing Services Corp. v. Byron Center State ... , 129 Mich. App. 602 ( 1983 )

Gulf States Section v. Whitney Nat. Bank , 689 So. 2d 638 ( 1997 )

Murray v. Bank of America, N.A. , 354 S.C. 337 ( 2003 )

Espresso Roma Corp. v. Bank of America, N.A. , 100 Cal. App. 4th 525 ( 2002 )

Thomas Spinozzi and Linda Spinozzi v. Itt Sheraton ... , 174 F.3d 842 ( 1999 )

Mac v. Bank of America , 76 Cal. App. 4th 562 ( 1999 )

Lynne Stockberger, Both Personally and as the ... , 332 F.3d 479 ( 2003 )

Lichtenstein v. Kidder, Peabody & Co., Inc. , 727 F. Supp. 975 ( 1989 )

Gretchen D. Cuyler, Special Administrator of the Estate of ... , 362 F.3d 949 ( 2004 )

View All Authorities »