BANK OF AMERICA NT & SA v. Hubert

• Citation: 101 P.3d 409,153 Wash.2d 102
• Decision Date: 18 November 2004
• Docket Number: No. 73970-6.,73970-6.
• Court: Washington Supreme Court
• Parties: BANK OF AMERICA NT & SA f/k/a Seafirst Bank, a National Banking Institution, Petitioner, v. DAVID W. HUBERT, P.C., a Washington Corporation; David W. Hubert and Katharine Hubert, individually and the marital community, Respondents, and M. Gail Kurpgewiet a/k/a M. Gail Williams and John Doe Williams, individually and the marital community, Defendants.

101 P.3d 409

153 Wash.2d 102

BANK OF AMERICA NT & SA f/k/a Seafirst Bank, a National Banking Institution, Petitioner, v. DAVID W. HUBERT, P.C., a Washington Corporation; David W. Hubert and Katharine Hubert, individually and the marital community, Respondents, and M. Gail Kurpgewiet a/k/a M. Gail Williams and John Doe Williams, individually and the marital community, Defendants.

No. 73970-6.

Supreme Court of Washington, En Banc.

November 18, 2004.

Erika Balazs, Jed William Morris, Spokane, for Petitioner.

Patrick N. Rothwell, Davis Rothwell Mullin Earle & Xochihua, Seattle, for Respondents.

MADSEN, J.

Bank of America challenges the Court of Appeals decision reversing the trial court's summary judgment in its favor. The issues are (1) whether Key Bank or Sterling Savings Bank is the payor bank under RCW 62A.4-105; (2) whether failure by a payor bank to dishonor an NSF check under the "midnight deadline" rule renders a collecting bank accountable; and (3) whether David W. Hubert, P.C. (Hubert P.C.) may be liable for negligent supervision where a paralegal managing the Interest on Lawyers Trust Account (IOLTA account) engaged in a check-kiting scheme. We reverse the Court of Appeals and reinstate the summary judgment.

FACTS

At the time relevant to this review David Hubert was a director of David W. Hubert P.C. operating under the name of Law Clinic Northwest in Spokane. Gail Williams was a paralegal operating Washington Paralegal Services, Inc., in the same building. Hubert P.C. engaged Ms. Williams to manage real estate closings. Williams prepared all of Hubert P.C.'s real estate closings and David Hubert was responsible for reviewing them. Williams was also responsible for generating Hubert P.C.'s checks for its real estate closing transactions and for getting David Hubert to sign them.

Hubert P.C. opened two IOLTA accounts with Bank of America (known as Seafirst Bank at that time) for real estate closing funds. Because Williams managed real estate closings for Hubert P.C., she was listed as an authorized signer for the IOLTA account # XXXXXXXX, the account at issue here, along with David Hubert and Katharine Hubert, his wife. Under the customer agreement for the IOLTA account, Hubert P.C. was to cover any deficiency in the account upon notice from Bank of America. The general terms of the agreement provided that in receiving checks or other items for deposit or collection, Bank of America acted only as a collecting agent and "assumes no responsibility beyond the exercise of due care" and further provided "[i]f we've given you provisional credit for a check ... and it is not paid, you agree that we may charge the amount of the item back to your account." Customer Agreement at 2. Clerks Papers (CP) at 46. The wire and internal transfer section of the customer agreement also provided that a customer "shall be liable for any loss or damage to which your negligence contributed or which resulted from unauthorized, fraudulent, or dishonest acts by your current and/or former authorized representatives. Such liability includes instances when a current or former authorized representative effects one or more funds transfers to your detriment." Customer Agreement at 41. CP at 85.

For several months in 1998, Williams was operating a check-kiting scheme using the IOLTA account at Bank of America as well as her personal accounts at Key Bank under the name of Washington Paralegal Services, Inc. (WPSI). To avoid detection, Williams changed the address on the IOLTA account so that the monthly statements would come to her home. Williams did not tell Hubert that she was having any financial difficulties and Hubert never asked to review statements for his IOLTA account.

Key Bank sold Williams' personal account to Sterling Savings Bank on June 12, 1998. Key Bank notified its customers of the sale of its accounts and authorized them to use previously printed checks for these accounts. The sale of the account transferred Key Bank's rights and responsibilities under the account agreement to Sterling Savings Bank.

Williams was taking money from the IOLTA account at Bank of America for her own use. On September 15, Williams executed three wire transfers from the IOLTA account totaling $171,710.61. The next day, she deposited two checks totaling $193,866.44 into the IOLTA account. The checks were payable to Hubert P.C. and were written on Key Bank checks. Bank of America provisionally credited the IOLTA account and forwarded the checks to Key Bank for collection. Key Bank received them on September 17. On the same day, Williams gave Sterling Savings Bank a stop-payment order on a check of $94,413.94, one of the two checks. On September 18, both checks arrived at Fiserv, Sterling Savings Bank's check processing agent, and were processed. On September 19, Fiserv returned the checks to Bank of America without payment because of the stop-payment order for the one check and insufficient funds in Williams' account for the other.¹ Bank of America received the checks and sent a notice of dishonor for the checks to Hubert P.C. on September 22. On September 28, Bank of America withdrew provisional credit for the two checks deposited in the IOLTA account. After reconciliation of the IOLTA account, the negative balance was $63,853.46.

To recover the deficit, Bank of America filed suit in Spokane County Superior Court against Hubert P.C., pursuant to its contract with Hubert P.C., and against David and Katherine Hubert and Williams individually. Bank of America asserted a breach of contract and negligence in supervising Williams and failure to properly monitor the IOLTA account pursuant to the Rules of Professional Conduct (RPC).²

Among other affirmative defenses, Hubert P.C. and the Huberts alleged that Bank of America could not withdraw provisional credit for the checks deposited in the IOLTA account because Key Bank, the payor bank, did not dishonor the checks before the midnight deadline.³ They also counterclaimed for damages, alleging that Bank of America failed to timely notify Hubert P.C. of the dishonor by Key Bank. Finally, they also sought damages for wrongful wire transfers.⁴ As to the defense based on the midnight deadline, Bank of America countered that Sterling Savings Bank was the payor bank and that the payor bank met the midnight deadline. Alternatively, Bank of America argued that even if Key Bank was the payor bank, it would be excused from missing the midnight deadline because a fraud defense is available to the payor bank.

Both parties moved for summary judgment. The trial court granted summary judgment in favor of Bank of America on its contract claim. The court also granted summary judgment in the bank's favor on the negligence claim against Hubert P.C. However, the court denied summary judgment on the negligence claim against David Hubert in his individual capacity.⁵ While the court dismissed most of the defendants' affirmative defenses, it ruled that Hubert individually could assert that Bank of America breached a general duty of care in failing to detect the check-kiting scheme. Bank of America conceded that David and Katherine Hubert were not individually liable for the breach of contract and that claim was dismissed. The trial court then entered judgment against Hubert P.C. for $63,853.46 along with attorney fees and costs. Hubert P.C. appealed.

The Court of Appeals reversed as to both the contract and negligence claims. The court concluded that Key Bank was the payor bank, that Key Bank missed the midnight deadline, and that Bank of America was foreclosed from withdrawing provisional credit for the checks deposited in the IOLTA account. Bank of Am. NT & SA v. David W. Hubert, P.C., 115 Wash.App. 368, 380-81, 62 P.3d 904 (2003). The court rejected the fraud defense asserted by Bank of America, holding that Hubert was not a party to the check-kiting scheme. Id. at 381, 62 P.3d 904. As a result, the court held that Bank of America could not withdraw its provisional credit from the IOLTA account. Id. at 379-80, 62 P.3d 904.

As to the negligence claim, the Court of Appeals held that Hubert P.C. was not liable under the theory of respondeat superior.⁶ Id. at 382-83, 62 P.3d 904. The court also held that Hubert P.C. was not negligent in supervising Williams because a legal professional corporation cannot be liable for the losses of third parties absent a showing of negligence by the lawyers. Because the negligence claim against David Hubert was dismissed, the court concluded that Hubert P.C. could not be liable. Id. at 383, 62 P.3d 904. Finally, the court ruled that the RPC could not provide a basis for a negligence claim by Bank of America. Id. at 384, 62 P.3d 904.

After its motion for reconsideration was denied, Bank of America filed a petition for review.

DISCUSSION

We review the summary judgment granted by the trial court de novo. The appellate court engages in the same inquiry as the trial court. Citizens for Responsible Wildlife Mgmnt. v. State, 149 Wash.2d 622, 630, 71 P.3d 644 (2003); Herron v. Tribune Publ'g Co., 108 Wash.2d 162, 169, 736 P.2d 249 (1987). A motion for summary judgment is properly granted where there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. CR 56(c).

I. CONTRACT CLAIM

Under the contract between Bank of America and Hubert P.C., Hubert P.C. must cover any deficiency in its IOLTA account if Bank of America debits when Hubert P.C. does not have sufficient funds in its account. Hubert P.C. contends that in order for Bank of America to recover the deficit under the contract, Bank of America must have the right to withdraw provisional credit for the two checks that were deposited into the IOLTA account. Hubert P.C. argues, and the Court of Appeals held, that Bank of America did not have a right to withdraw provisional credit because the settlement became final on the checks when Key Bank, the payor bank, missed its...