Continental Finance Company, LLC v. TD Bank, N.A.

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
CONTINENTAL FINANCE
COMPANY, LLC,
Plaintiff, C.A. No. N17C-07-002 Ml\/IJ CCLD
V.
TD BANK, N.A.,
Defendant.
Submitted: November 14, 2018
Decided: December 10, 2018
Upon Defendant’s Motion to Dismiss Amended Complaint
GRANTED.
OPINION
Jamie L. Edmonson, Esq., Daniel A. O’Brien, Esq., Jessie F. Beeber, Esq., Patrick
J. Boyle, Esq. (Argued), Adam G. Possidente, Esq., Venable LLP, Attorneys for
Plaintiff Continental Finance Company, LLC
Alexander D. Bono, Esq., Ryan E. Bornernan, Esq. (Argued), Lynne E. Evans, Esq.,
Oderah C. Nwaeze, Esq., Mackenzie M. Wrobel, Esq., Duane Morris LLP,
Attorneys for Defendant TD Bank, N.A.
JOHNSTON, J.
FACTUAL AND PROCEDURAL CONTEXT
This case arises out of Roberta CZap’S conduct in her role as Vice President
of Accounting at Continental Finance Company (“Continental”). Czap embezzled
money from Continental. Czap repeatedly diverted money from Continental’s
business account, held With Defendant TD Bank. Czap utilized automated clearing
house (“ACH”) services to place the funds in her personal bank account, also With
TD Bank. Czap plead guilty in federal court. Continental brought this action
against TD Bank, seeking damages for TD Bank’s alleged failure to detect the
embezzlement scheme.
Continental and TD Bank had entered into a Cash Management Master
Agreement (“Master Agreement”) in 2011. The Master Agreement established
certain security procedures. An “additional security feature” allowed one
Authorized User to “create, edit, cancel, delete and restore ACH batches or Wire
transfer orders under his/her unique User ID, password and Token.” Czap Was the
Authorized User and followed this security procedure by using a User ID,
password, and Token.
The Master Agreement states: that the “Customer agrees that all security
procedures described in this Agreement and applicable Appendix are commercially
reasonable. . .”; that the “Customer agrees that it shall be solely responsible for
ensuring compliance With any security procedures established by Bank. . .”; and
that “Bank shall have no liability for any losses sustained by Customer as a result
of a breach of security procedures if Bank has substantially complied With the
security procedures.”
The Master Agreement excludes TD Bank’s liability for simple negligence,
but contemplates the possibility of TD Bank’s liability for “gross negligence,
willful misconduct, or bad fait .”
TD Bank argues that Continental has not shown that TD Bank owed any
duty separate from those created by the parties’ agreements and that the duties are
expressly and unambiguously established in those agreements The agreements
place the burden on Continental for preventing, monitoring, investigating, and
reporting any fraudulent conduct. TD Bank contends that Continental owed: a
duty to maintain procedures to safeguard against unauthorized transactions and to
ensure that all ACH transactions incorporated dual control; a duty to monitor
account activity; and a duty to be solely responsible for unauthorized ACH
transactions
By Opinion dated January 24, 2018,l the Court dismissed Continental’s
Complaint without prejudice. The Court held that Continental’s simple negligence
claims were barred by the clear and unambiguous language of the agreements
governing the parties’ relationship and were preempted by the UCC.2 The Court
also held that any negligence claims arising prior to 2011 are not barred by
l 2018 WL 565305 (Del. Super.).
2 Ia'. at *3.
c.ontract, but are displaced by 6 Del. C. §§ 4A-201-203.3 Claims grounded in
gross negligence, willful misconduct, or bad faith supported by particularized
factual allegations are not contractually excluded, but must be asserted pursuant to
any relevant UCC provisions4
Continental filed an amended complaint on April 30, 2018. In addition to
the original negligence claim, Continental alleges:
II. Gross negligence against TD Bank - failure to monitor ACH
transactions
III. Gross negligence against TD Bank - failure to provide adequate
account statements
IV. Gross negligence against TD Bank - failure to monitor the
Continental account.
V. Gross negligence against TD Bank ~ failure to monitor the Czap
account.
VI. Breach of the U.C.C. against TD Bank - failure to employ
commercially reasonable security procedures
TD Bank filed its Motion to Dismiss. Oral argument was heard on
November 14, 2018.
3 Id.
4 ld.
MOTION TO DISMISS STANDARD
In a Rule 12(b)(6) motion to dismiss, the Court must determine whether the
claimant “may recover under any reasonably conceivable set of circumstances
susceptible ofproof.”5 The Court must accept as true all well-pleaded allegations6
Every reasonable factual inference will be drawn in the non-moving party’s favor.7
lf the claimant may recover under that standard of review, the Court must deny the
motion to dismiss8
ANALYSIS
In Continental’s opposition to TD Bank’s Motion to Dismiss, Continental
argues that the relationship among Continental, Czap, and TD Bank presents a
“unique situation” not covered by the UCC.9 However, in addition to there being
no UCC provision to govern the “unique situation,” Continental has not identified
case law that would support this proposition. Continental argues that TD Bank
breached its duty of care, but fails to identify any specific duties assumed by
contract beyond those established by the UCC. Though Continental asserts that the
contracts “varied” and added to UCC duties, Continental has not provided any
5 Spence v. Funk, 396 A.2d 967, 968 (Del.l978).
6 Id.7 Wilmington Sav. Funa'. Soc ’v, F.S.B. v. Anderson, 2009 WL 597268, at *2 (Del. Super.) (citing
Doe v. Cahill, 884 A.2d 451, 458 (Del.zoos)).
8 Spence, 396 A.2d at 968.
9 Ans. Br. at 23.
specific support for this bare assertion. Though Continental provided an example
of an allegedly inadequate bank statement issued by TD Bank,l° Continental did
not specifically identify any relevant UCC provision that TD Bank violated by
allegedly failing to provide an adequate bank statement
Article 4A of the UCC governs ACH transfers The duties Continental
alleges are expressly covered by the UCC. The UCC displaces the common law
claimsll As decided in the January 24, 2018 Opinion, Continental’s claim must be
dismissed because Continental has not supported the proposition that the
agreements between Continental and TD Bank add to, vary, or otherwise
supplement the duties provided expressly in the UCC.12 Further, the account
statements that TD Bank provided are sufficient under Section 406 of Article 4
because the statements contain a description, item, and date of payment.13
10 Ans. Br. at 14.
11 6 Del. C. §§ 1-103(b), cmt. 2 (“The Uniform Commercial Code was drafted against the
backdrop of existing bodies of law, including the common law and equity, and relies on those
bodies of law to supplement it provisions in many important ways At the same time, the
Uniform Commercial Code is the primary source of commercial law rules in areas that it
governs, and its rules represent choices made by its drafters and the enacting legislatures about
the appropriate policies to be furthered in the transactions it covers Therefore, while principles
of common law and equity may supplement provisions of the Uniform Commercial Code, they
may not be used to supplant its provisions, or the purposes and policies those provisions reflect,
unless a specific provision of the Uniform Commercial Code provides otherwise. In the absence
of such a provision, the Uniform Commercial Code preempts principles of common law and
equity that are inconsistent with either its provisions or its purposes and policies.”).
12 2018 WL 565305 (Del. Super.).
13 6Del.C. § 4-406(a).
Continental argues that this suit arises from TD Bank’s failure to act
reasonably considering TD Bank’s knowledge of the relationship among
Continental, Czap, and TD Bank. Specifically, Continental asserts that the
relationship presented a “unique situation” and thus imposed on TD Bank a duty to
investigate and report suspicious transactions However, in the absence of a
fiduciary relationship, contractual duty, or “special relationship” as defined by
common law,14 no duty arises from the relationship among Continental, TD Bank,
and Czap.15 ln this case, the UCC governs and establishes the duties owed by TD
Bank to Continental,
Continental contends that the UCC should not displace the negligence claim
against TD Bank. Continental offers case law to support its argument that
common law claims may supplement the UCC.16 Plaintiff also proffers Gilson v.
TD Bank'7 to persuade the Court to reject Defendant’s argument that Article 4A
preempts Plaintiffs negligence claim. The Court finds Gilson distinguishable
from this case in two important ways. First, in Gilson, the misconduct was
committed by a person who did not have authority to open and access the accounts
14 See Restatement (Second) of Torts § 314A (listing common carriers, innkeepers, possessors of
land subject to public use, and those required by law to take or who voluntarily take the custody
of another as special relationships requiring a heightened duty to act).
15 Unitea' Jersey Bank v. Kensey, 704 A.2d 38, 44-45 (N.J. Super. Ct. App. Div. 1997); See also
Mengele v. Christl'ana Federal Savings & Loan Association of Wilmington, 287 A.2d 395, 397-
98 (Del. 1972).
16 See Travelers Cas. & Sur. C0. of Am. v. Bancorp Bank, 691 F. Supp. 2d 531 (D. Del. 2009).
17 2011 WL 294447 (s.D. Fla.).
The court in Gz'lson found that had the bank followed its security procedures “the
Bank would have known that Stein was not authorized to open the subject bank
accounts, much less wire transfer money in and out of them”18 (emphasis added).
In contrast, Czap was an Authorized User within the definition of the Master
Agreement and, as such, committed her theft within the security procedures set
forth in the Master Agreement.
Second, the plaintiffs in Gilson alleged that defendants were negligent in
opening the account. The Gilson court found that the plaintiffs’ negligence claim
was not preempted by the UCC because the plaintiffs’ negligence claim centered
around the defendant’s negligent conduct with regard to opening the accounts
Plaintiffs have not made this allegation here.
Continental’s claims are grounded in gross negligence. Continental
essentially argues that there was so much stolen from Continental that TD Bank
must have failed in its duties as a result of gross negligence. Gross negligence
signifies “more than ordinary inadvertence or inattention.”19 lt is a “higher level of
negligence representing ‘an extreme departure from the ordinary standard of
care.”’20 The Delaware Supreme Court has compared gross negligence with
18 Id. at *9.
19 Jardel C0., Inc. v. Hughes, 523 A.2d 518, 530 (Del. 1987).
20 Morales v. Family Foundalions Acaa'emy, Inc. School, 2013 WL 3337798, at *2 (Del.
Super.)(citing Browne v. Robb, 583 A.2d 949, 953 (Del. 1990), quoting W. Prosser, Handbook of
the Law of Torts 150 (2d ed. 1955)).
criminal negligence as defined in ll Del. C. § 231(a).21 Gross negligence exists
when a “person fails to perceive a risk. . .of such a nature and degree that failure to
perceive it constitutes a gross deviation from the standard of conduct that a
reasonable person would observe in the situation.”22 Simply put, gross negligence
is a higher degree of simple negligence.
Continental concedes that the factual underpinning of the Amended
Complaint is not different from the original Complaint. The Court previously has
held that the claims for simple negligence are barred by the clear and unambiguous
language of the agreements between the parties23 A finding of gross negligence
would require facts amounting to more than simple negligence. Therefore, without
any additional facts, the Court cannot find that Continental has established a prima
facie case that TD Bank violated its duties as a result of gross negligence.
21 Ia'. at *2 (citing Jardel C0., Inc.).
22 ld. (citing 11 Del. C. § 231(3)).
23 2018 WL 565305 (Del. super.).
CONCLUSION
The Court finds that the Amended Complaint repackages simple negligence
claims as gross negligence without additional or qualitatively different factual
allegations The Court previously held that the simple negligence claims are
barred by the parties’ contracts, and gross negligence claims must be asserted
pursuant to relevant UCC provisions
The Court finds that Plaintiff has failed to assert claims establishing a prima
facie case of gross negligence. Article 4A of the UCC governs ACH transactions
and displaces the common law claims alleged in this matter. Further, the UCC
one-year statute of repose applies.24
Therefore, Defendant TD Bank’s Motion to Dismiss Amended Complaint is
hereby GRANTED.
IT IS SO ORDERED.
Th onorabl aiy M. Johnston
24 6 Del. C. § 4A-505.
10