Opinion
C.A. No. 01C-06-235 SCD
Submitted: September 6, 2003.
Decided: September 29, 2003.
Upon consideration of Defendant PNC Bank's Motion for Summary Judgment GRANTED in Part, DENIED in Part.
Jos. Scott Shannon, Esquire, of Tighe, Cottrell Logan, P.A., Wilmington Delaware, for Plaintiff Mahaffy Associates; and
James J. Freebery, Esquire, of McCarter English, LLP, Wilmington Delaware, for Defendant PNC Bank, Delaware.
ORDER
For the reasons set forth in the Opinion attached hereto, Defendant PNC Bank's Motion for Summary Judgment is GRANTED in Part and DENIED in part.
IT IS SO ORDERED this 29th day of September, 2003.
OPINION
Introduction
This case considers the application of Article 4 of the Uniform Commercial Code ("UCC"), Bank Deposits and Collections. Over a period of several years, customer's employee forged checks which were paid by the bank. Customer seeks reimbursement. Customer's admits its failure after receipt of bank statements to exercise reasonable promptness in discovering the forgeries and notifying the bank. Customer's breach of its statutory duty limits its claim to forged items paid within one year after receipt of each statement if customer can prove that bank failed to exercise ordinary care in paying the item, which failure substantially contributed to loss. If such a showing is made, there is a comparative negligence allocation of responsibility for the loss between customer and the bank.
The UCC preempts common law theories of recovery for a loss of this nature.
Factual Background
Mahaffy Associates, Inc. ("Mahaffy") is a mechanical and electrical engineering consulting firm. The firm has been doing business in Wilmington, Delaware since 1958. Mahaffy has done its banking with PNC (f/k/a Bank of Delaware) for over 50 years. Between 1997 and 2001 Mahaffy had two accounts with PNC: its Business Checking Account and its Payroll Account. The Business Checking Account was opened by Mahaffy with the execution of PNC signature cards and the issuance of an Account Agreement setting forth various terms and conditions.
At all times relevant to this claim, PNC sent Mahaffy monthly account statements, which detailed account activity and enclosed cancelled checks for each account. The monthly statements included, among other information, balance summaries, lists of deposits and other additions, lists of checks and other deductions, and daily balances and activity detail regarding checks. The activity detail included the date each check was posted, the check number and amount, and a reference number for each check as well as a notation to indicate gaps in the check sequence. The statements were provided in order to permit Mahaffy to detect unauthorized checks or fraud by looking at the statements and the cancelled checks.
Victoria Long was employed by Mahaffy from 1990 through April 2001. Long's duties included general bookkeeping, accounts payable and accounts receivable. She also performed the functions of an office manager. Over time, Long's duties, responsibilities, and rights to access increased as she gained Mahaffy's trust.
By 1997, Long's responsibilities had grown to include preparation of financial reports for financial meetings of Mahaffy's principals, preparation of Mahaffy's corporate tax packages, preparation and submission of data and information used for doing Mahaffy's payroll, and review and submission for payment of Mahaffy's corporate American Express account.
Consistent with her status and authority, Long exercised broad powers with respect to Mahaffy's accounts with PNC. A letter written by Hugh Mahaffy on March 9, 1994, authorized Victoria Long to "make inquires [sic] regarding balances transactions for the companies [sic] Bank Accounts" at PNC. In addition to this authorization, Long was authorized to transfer funds from one account to the other.
Def's Opening Brief at 7.
Long also was in charge of maintaining Mahaffy's financial and banking records and reviewing the monthly banking statements that PNC provided. During Long's employment at Mahaffy, she had full and complete access to the corporate checkbook and to all of Mahaffy's records. She was Mahaffy's daily interface with PNC with respect to all its banking activities and needs. Commencing prior to 1997, Mahaffy almost always allowed Victoria Long to pick up the bank statements — the statements for the accounts from which she eventually made close to one half million dollars in unauthorized transactions over the next four years. Had review of these statements had been made, Long's fraudulent activities would have been immediately revealed. No such review was conducted.
Mahaffy gave Long broad authority to deal with it's finances despite failing to inquire into her criminal history, which would have uncovered two arrests for embezzlement/theft from her previous employers. Long was allowed to keep Mahaffy's bank statements, financial records and even her computer at her home, where the company's records could not be accessed or examined by anyone else.
Between January 1997 and April 2001, Victoria Long embezzled assets from Mahaffy in numerous ways. Long wrote checks to cash which she then endorsed with forged signatures. She wrote checks to herself which she also endorsed with forged signatures. She used the company's American Express card for personal, unauthorized purposes. She overstated the hours she worked when calling in the payroll. She called in vacation hours for herself in addition to regular hours during the same pay period. Mahaffy, however, failed to discover any of Long's unauthorized activities for more than four years.
With respect to the PNC accounts, in February 1997, Long first forged Hugh Mahaffy's signature on a corporate check. Her forgeries and thefts then continued unabated through April, 2001. Long concealed her forgeries by altering the "One-Write" carbon-copy record for the forged check. She then either cashed the checks at a PNC branch office, or she deposited the funds into her PNC accounts. Long's final tally includes approximately 386 forged checks accounting for over $335,000 on Mahaffy's Business Checking Account with PNC. It also includes an additional 159 checks on Mahaffy's Payroll Account totaling over $144,000.
"One-Write" is a system that records check writing activity in an account through use of carbon copies of all checks written. It can also be used — and was used by Mahaffy — to obtain financial information about the company.
The unraveling of Long's wrongdoing began in April 2001 when the accounting books that Long kept at her house were brought into Mahaffy's office, and Cynthia Lanier was hired to review them. Lanier was able to discover evidence of Long's thefts on the first day of her examination. Long was then asked to bring in additional bank records; she left to get them, and never returned. After Long's abrupt departure, the April bank statement from PNC was received and checked. Mahaffy's employees were able to detect a number of unauthorized checks made out to Long with Mahaffy's forged signature, as well as other checks signed by Mahaffy for which the check and "OneWrite" description of the payee did not match.
Victoria Long's forgeries of Hugh Mahaffy's signatures were not readily detectable. In fact, Hugh Mahaffy himself stated that Long "did a better job than [he] did at signing them." Edward Fayda, Hugh Mahaffy's long-time partner and co-worker, also could not distinguish Mr. Mahaffy's true signature from the forgeries.
Deposition of Hugh Mahaffy, April 28, 2003, at 87/12-14.
PNC Bank policies and procedures, issued to its branches and employees, spell out check signature verification and other check cashing and check fraud prevention procedures. These policies and procedures are "guidelines" to be implemented with employee discretion. Signature verification was triggered if the check was large, if the client didn't have the funds, if there were changes to the check, or if there was concern about the payee on the check. There was no signature verification performed by any PNC employee if the check was regular on its face, if the check was not unusual in any way, and if the funds were available in the account. Checks payable to "Cash" were to be presented by the Maker.
"PNC Bank Branch Operations Policies and Procedures Manual: Types of Endorsements" at 1.
Mahaffy first notified PNC of Long's thefts in June 2001. Long was subsequently charged with and convicted of numerous Theft (Felony) offenses. In 2002, Mahaffy filed suit against Long in civil court for forging checks and conversion, among other allegations. After a March 14, 2002 hearing before the Court, a default judgment was issued against Long, Harry Long and his company, Century, in the amount of $536,609.26, a large portion of which relates to check forgeries.
Two notifications were given to PNC by Mahaffy. First, in April 2001, Mahaffy stopped by the Bank to tell it "there was a problem with Vicki and that she was not to conduct any company business." Second, in June 2001, Mahaffy told the Bank "the theft had occurred." Deposition of Edward Fayda, April 29, 2003, at 87/8-89/15.
Standard of Review
Superior Court Rule 56(c) mandates the entry of summary judgment where the moving party has demonstrated that there are no material issues of fact and that the moving party is entitled to judgment as a matter of law. The facts must be viewed in the light most favorable to the non-moving party. In order for a party to survive a motion for summary judgment, it must adequately establish existence of all elements essential to its case upon which it will have the burden at trial. If the nonmoving party cannot satisfy its burden, there can be no "genuine issue of material fact," since a "complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial." The moving party is thus entitled to a judgment as a matter of law.
Burkhart v. Davies, 602 A.2d 56, 59 (Del.Super. 1991); Celotex Corp. v. Catrett, 477 U.S. 317 (1986).
Moore v. Sizemore, 405 A.2d 679 (Del.Super. 1979).
Burkhart, 602 A.2d at 59 (Del.Super. 1991); Celotex Corp., 477 U.S. at 322-23 (1986).
Id.
Analysis and Discussion
PNC Bank seeks dismissal of the action filed by Mahaffy in its second amended complaint. The causes of action asserted against PNC are conversion, breach of contract, negligence, and violation of banking regulations. Mahaffy abandoned at argument the claim for conversion.The relationship between the parties is governed by Article 4 of the Uniform Commercial Code ("UCC"), § 4-406 which provides in pertinent part:
U.C.C. § 4-406 has been adopted in DEL. CODE. ANN. tit. 6 Del. C. § 4-406 (1999).
(a) A bank that sends or makes available to a customer a statement of account showing payment of items for the account shall either return or make available to the customer the items paid or provide information in the statement of account sufficient to allow the customer reasonably to identify the items paid. The statement of account provides sufficient information if the item is described by item number, amount, and date of payment.
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(c) If a bank sends or makes available a statement of account or items pursuant to subsection (a), the customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration of an item or because a purported signature by or on behalf of the customer was not authorized. If, based on the statement or items provided, the customer should reasonably have discovered the unauthorized payment, the customer must promptly notify the bank of the relevant facts.
(d) If the bank proves that the customer failed, with respect to an item, to comply with the duties imposed on the customer by subsection (c), the customer is precluded from asserting against the bank:
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(2) the customer's unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank if the payment was made before the bank received notice from the customer of the unauthorized signature or alteration and after the customer had been afforded a reasonable period of time, not exceeding 30 days, in which to examine the item or statement of account and notify the bank.
(e) If subsection (d) applies and the customer proves that the bank failed to exercise ordinary care in paying the item and that the failure substantially contributed to loss, the loss is allocated between the customer precluded and the bank asserting the preclusion according to the extent to which the failure of the customer to comply with subsection (c) and the failure of the bank to exercise ordinary care contributed to the loss. If the customer proves that the bank did not pay the item in good faith, the preclusion under subsection (d) does not apply.
(f) Without regard to care or lack of care of either the customer or the bank, a customer who does not within one year after the statement or items are made available to the customer (subsection (a)) discover and report the customer's unauthorized signature on or any alteration on the item is precluded from asserting against the bank the unauthorized signature or alteration. If there is a preclusion under this subsection, the payor bank may not recover for breach of warranty under Section 4-208 with respect to the unauthorized signature or alteration to which the preclusion applies.
The purpose of 4-406 was recently discussed by the Texas Supreme Court:
This statutory scheme reflects an underlying policy decision that furthers the UCC's "objective of promoting certainty and predictability in commercial transactions." The UCC facilitates financial transactions, benefiting both consumers and financial institutions, by allocating responsibility among the parties according to whoever is best able to prevent a loss. Because the customer is more familiar with his own signature, and should know whether or not he authorized a particular withdrawal or check, he can prevent further unauthorized activity better than a financial institution which may process thousands of transactions in a single day. Section 4.406 acknowledges that the customer is best situated to detect unauthorized transactions on his own account by placing the burden on the customer to exercise reasonable care to discover and report such transactions. The customer's duty to exercise this care is triggered when the bank satisfies its burden to provide sufficient information to the customer. As a result, if the bank provides sufficient information, the customer bears the loss when he fails to detect and notify the bank about unauthorized transactions." (emphasis added) (citations omitted).
American Airlines Employees Fed. Credit Union v. Martin, 29 S.W.3d 86, 92 (Tex. 2000); see also Halifax Corp. v. First Union Nat'l Bank, 262 Va. 91 (Va. 2001); Watseka First Nat'l Bank v. Horney, 292 Ill. App.3d 933 (Ill.App.Ct. 1997).
Mahaffy first notified PNC of Long's forgeries in June 2001. Mahaffy concedes that PNC complied with (a) by sending Mahaffy a statement of account which provided sufficient information to allow it reasonably to identify the items paid. The one-year period in subsection (f) is not a statute of limitations but is a rule of substantive law absolutely barring a customer's right to make a claim against a bank without regard to care or lack of care of either the customer or the bank. Acknowledging the one year preclusion in (f), Mahaffy concedes that the checks paid prior to June 2000 are barred, but not those paid between July 2000 and June 2001. Mahaffy argues that though the preclusion of (d) applies — it having failed to exercise reasonable promptness in examining the statement, a duty imposed by (c) — a question of fact remains as to (e), the comparative negligence of PNC for the checks paid within one year prior to notification. It reasons that the preclusion of (d) does not bar a recovery because PNC failed to exercise ordinary care in paying the item and that the failure substantially contributed to loss as stated in subsection (e).
Monreal v. Fleet Bank, 735 N.E.2d 880, 883 (N.Y. 2000).
Had Mahaffy not conceded its failure to exercise reasonable promptness in examining the statements provided by PNC, such a finding would have been made as a matter of law. The well-documented factual record presented by PNC, only part of which has been recited in this decision, permits no doubt.
The comparative negligence analysis of subsection (e) is not available if Mahaffy can show that the bank did not act in good faith. The UCC defines good faith as "honesty in fact and the observance of reasonable commercial standards of fair dealing." 6 DEL. CODE ANN. tit. § 3-103(a)(4). The connotation of this standard is fairness and not negligence or lack of ordinary care. U.C.C. § 4-406, cmt. 4 (1990). There is no evidence that PNC failed to act in good faith.
The banking log provided by Mahaffy lists all the checks presented during the years when the forgeries were occurring. During the period not precluded, there are numerous checks which were payable to Victoria Long and payable to cash.
The Account Agreement provides: "Our responsibility to you is limited to our exercise of ordinary care in performing the services covered by this Agreement. Substantial compliance with our standard procedures shall be deemed to be the exercise of ordinary care."
Parties may contractually modify their relationship under the UCC. Mahaffy points to a standard procedure of PNC regarding checks payable to cash. It provides:
American Airlines Employees Fed. Credit Union, 29 S.W.3d at 95 (Tex. 2000); National Title Ins. Corp. Agency v. First Union National Bank, 559 S.E.2d 668, 671 (Va. 2002); Lema v. Bank of America, 826 A.2d 504, 510 (Md. 2003); Regatos v. North Fork Bank, 257 F. Supp.2d 632, 640 (S.D.N.Y. 2003).
Checks payable to Cash should be cashed only by the maker, and the maker must sign the back of the check during the check cashing to acknowledge receipt of the cash. Encourage clients who present checks for cash to make future checks for cash payable to themselves.
"PNC Bank Branch Operations Policies and Procedures Manual: Types of Endorsements" at 1.
The cash provision is sufficient to raise a question of fact regarding PNC's compliance with it's obligation to exercise ordinary care. Under the comparative negligence provision of the UCC as set forth in subsection (e), it is the jury's task to determine whether there was a failure of ordinary care and to allocate responsibility between the conduct of the customer and that of the bank.
Negligence and Breach of Contract
Mahaffy asserts a claim of common law negligence and breach of contract. Section 1-103 of the UCC sets forth a general provision which is applicable in this case.
"Unless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principle and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake bankruptcy, or other validating or invalidating cause shall supplement its provisions."
DEL. CODE ANN. tit. 6 Del. C. § 1-103 (1999).
As a general rule, the UCC does not displace the common law remedies except as insofar as their reliance on the common law would thwart the purposes of the code. Common Law claims as they apply to the duties of a depository bank are displaced only to he extent that the UCC contains particular provisions regarding those duties.
New Jersey Bank, N.A. v. Bradford Securities Operations, Inc., 690 F.2d 339, 346 (3rd Cir. 1982).
Beneficial Mortgage Corp. v. Wilmington Trust Co., 1992 Del. Super. LEXIS 566 at * 15; see also Martin v. Ryder Truck Rental Inc., 353 A.2d 581 (Del. 1976); Cline v. Prowler Industries of Maryland, Inc., 418 A.2d 968 (Del. 1978); Karmin Door Co. v. BankBoston, N.A., 2000 Mass. Super. Lexis 94 at * 15, Roy Supply, Inc. v. Wells Fargo Bank, N.A., 46 Cal.Rptr.2d 309, 312-18 (Cal.App. 1995).
Title 6 Del. C. § 4-406 provides highly particularized provisions which set forth, as the title makes clear, a [c]ustomer's duty to discover and report unauthorized signature or alteration." The particularity of the provision sets forth in detail the obligations of the bank's customer, and the preclusions associated with the failure to comply with statutory duties. It also establishes a statute of limitations. V/here the legislature has preempted the field by enacting a provision in the UCC which establishes the rights of the parties, competing theories of liability are not permitted. The Code preempts common law duties; an action in negligence or breach of contract cannot stand.
The motion for summary judgment is GRANTED as to checks presented before July 2000 and DENIED as to check presented thereafter.
IT IS SO ORDERED.