Continental Cas. Co. v. AMERICAN NAT. BANK AND TRUST

• Decision Date: 29 March 2002
• Docket Number: No. 1-99-4471.,1-99-4471.
• Citation: 263 Ill.Dec. 592,329 Ill. App.3d 686,768 N.E.2d 352
• Parties: CONTINENTAL CASUALTY COMPANY, INC., assignee of General Automation, Inc., Plaintiff-Appellant, v. AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

768 N.E.2d 352

329 Ill. App.3d 686

263 Ill.Dec. 592

CONTINENTAL CASUALTY COMPANY, INC., assignee of General Automation, Inc., Plaintiff-Appellant, v. AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant-Appellee.

No. 1-99-4471.

Appellate Court of Illinois, First District, Third Division.

March 29, 2002.

Rehearing Denied May 16, 2002.

Steven H. Mora and Ellen L. Flannigan, both of Kovitz, Shifrin & Waitzman, P.C., of Chicago, for appellant.

Matthew S. Klepper and Mary S. Binder, both of Lord, Bissell & Brook, of Chicago, for appellee.

Presiding Justice HALL delivered the opinion of the court:

Plaintiff, General Automation, Inc. (GAI), appeals from the November 23, 1999, order denying its motion to reconsider. On April 30, 1997, GAI filed a twocount complaint against defendant, American National Bank (ANB). Count I sought damages for common law breach of contract, and count II sought damages for violation of section 9 of the Illinois Fiduciary Obligations Act (the Act) (760 ILCS 65/9 (West 1996)). GAI eventually assigned all of its causes of action, rights and claims it had against ANB to the Continental Casualty Insurance Company.

On June 2, 1999, ANB moved to dismiss GAI's seventh complaint pursuant to sections 2-615 and 2-619 of the Illinois Code of Civil Procedure (Code) (735 ILCS 5/2-615, 2-619 (West 1998)), on the grounds that the complaint was substantially insufficient at law and was time-barred by an applicable statute of limitations. The two motions were combined pursuant to section 2-619.1 of the Code (735 ILCS 5/2-619.1 (West 1998)).

On August 27, 1999, the trial court dismissed GAI's seventh complaint with prejudice based on the three-year limitations period found in section 4-111 of the Illinois Uniform Commercial Code (UCC) (810 ILCS 5/4-111 (West 1996)) and on the loss allocation rule in section 3-404(b) of the UCC (810 ILCS 5/3-404(b) (West 1994)). On November 23, 1999, the trial court denied GAI's motion to reconsider. On December 21, 1999, GAI filed a timely notice of appeal.

On appeal, GAI contends that: (1) the trial court erred in finding that its breach of contract claim was time-barred by the three-year limitations period found in section 4-111, which applies to an improper payment claim under UCC section 4-401(a) (810 ILCS 5/4-401(a) (West 1994)); (2) its breach of contract claim is not timebarred by the three-year limitations period found in section 3-118(g) (810 ILCS 5/3-118(g) (West 1996)), which applies to a conversion of an instrument claim under UCC section 3-120(a) (810 ILCS 5/3-420(a) (West 1994)); (3) the loss allocation rule in section 3-404(b) of the UCC (810 ILCS 5/3-04(b) (West 1994)) does not provide ANB with a defense to GAI's breach of contract claim; the material in this section is nonpublishable under Supreme Court Rule 23.(4) it has sufficiently pled a violation of section 9 of the Act (760 ILCS 65/9 (West 1996)); and (5) its claim under the Act is not time-barred by any UCC statute of limitations. For the reasons that follow, we reverse and remand.

FACTUAL BACKGROUND

In December 1982, the plaintiff, GAI opened a corporate checking account with defendant-bank, ANB. The account was governed by signature cards and a certified corporate resolution (Certified Resolution) defining the duties and obligations of ANB and GAI in relation to the corporate checking account.

The Certified Resolution provided in relevant part that ANB was:

"hereby authorized and directed to honor and pay all checks, drafts or orders so drawn, when so signed, whether such checks, drafts or orders be payable to the order of any officer or person signing said checks, drafts or orders or any of said officers or persons in their individual capacities or not, and whether such checks, drafts or orders are deposited to the individual credit of any officer or person signing said checks, drafts or orders or to the individual credit of any of the other officers or persons aforesaid or not."

The only persons authorized to sign checks for this account were Max Starr, Irene Starr, and Bernard Cohn. Lawrence Cohn (Cohn) was GAI's comptroller but was not a signatory to the account. Between June 14, 1992, and May 7, 1993, Cohn instructed GAI to issue nine checks, all of which were signed by Max Starr and made payable to the order of ANB and drawn on GAI's corporate checking account at ANB for the ostensible purpose of paying GAI's payroll taxes. Over this 11 month period Cohn deposited the nine unaltered, nonforged checks ranging in amounts from $40,000 to $50,000 each into an automatic teller machine (ATM), with deposit slips attached for deposit into his own personal account. ANB did not pay itself on any of the checks but rather allowed the checks to be deposited into Cohn's personal account. On May 28, 1996, agents from the Internal Revenue Service (IRS) informed GAI that they had uncovered Cohn's embezzlement scheme. Cohn absconded with all of the funds and GAI sustained losses in excess of $370,000. On April 30, 1997, GAI filed a two-count complaint against ANB. Count I sought damages for common law breach of contract, and count II sought damages for violation of section 9 of the Act (760 ILCS 65/9 (West 1992)).

ANALYSIS

Standard of Review

Where a trial court dismisses a complaint under either section 2-615 or section 2-619 of the Code (735 ILCS 5/2-615, 2-619 (West 1998)), this court applies a de novo standard of review. R-Five, Inc. v. Shadeco, Inc., 305 Ill.App.3d 635, 639, 238 Ill.Dec. 809, 712 N.E.2d 913 (1999).

I. Breach of Contract Claim

GAI first contends that its complaint sufficiently alleged facts establishing a cause of action for common law breach of a written contract. In response, ANB contends that GAI failed to plead a breach of contract because the Certified Resolution did not obligate ANB to refuse to accept checks payable to itself into an ANB account, and because the breach of contract claim failed to allege the formation and terms of any tax-payment agreement. We cannot agree with ANB's contentions.

The relationship between a bank and its depositor is contractual in nature. National Bank of Monticello v. Quinn, 126 Ill.2d 129, 134, 127 Ill.Dec. 764, 533 N.E.2d 846 (1988). A binding contract between a bank and its depositor is created by signature cards and a deposit agreement. See, e.g., Your Style Publications, Inc. v. Mid Town Bank & Trust Co., 150 Ill.App.3d 421, 427-28, 103 Ill.Dec. 488, 501 N.E.2d 805 (1986)

(noting that signature card and fee schedule constitute a contract between a bank and its customer); Ohio Casualty Insurance Company v. Bank One, No. 95 C 6613, 1997 WL 428515 (N.D.I1L1997) (stating that signature cards and deposit agreements for accounts at issue formed a contract between bank and its customer); Sanwa Business Credit Corporation v. Continental Illinois National Bank & Trust Company of Chicago, 247 Ill.App.3d 155, 160, 187 Ill.Dec. 45, 617 N.E.2d 253 (1993) (stating that checking account creates a contractual, debtor-creditor relationship between a bank and its customer). When money is deposited with a bank, title to it passes and the bank becomes a debtor to the extent of the deposit and, to that extent, the depositor becomes a creditor. Selby v. DuQuoin State Bank, 223 Ill.App.3d 104, 108, 165 Ill.Dec. 621, 584 N.E.2d 1055 (1991). In the instant case, GAI's corporate checking account with ANB, along with the signature cards and the Certified Resolution, created a contractual relationship between GAI and ANB.

Implicit in such contracts is the common-law duty of the bank to use ordinary care in disbursing the depositor's funds. National Bank of Monticello, 126 Ill.2d at 135, 127 Ill.Dec. 764, 533 N.E.2d 846. This duty of care is based on the well-established common-law rule:

"Where a check drawn to the order of a bank is presented to such bank, and the drawer owes no [debt] to the bank, the bank must see that the proceeds are not misapplied, and cannot without justification divert the proceeds to the use of one other than the drawer, and is authorized to pay the proceeds only to persons specified by the drawer. The bank takes a risk in treating the check as being payable to the bearer, and is placed on inquiry as to the authority of the drawer's agent to receive payment. The duty to inquire of the drawer is not satisfied by making inquiry of the bearer. If the bank assumes without investigation that the instructions of the presenter are those of the drawer, it takes a risk. Where the drawer's agent or one representing himself or herself to be such is not in fact authorized, the bank is liable to the drawer for paying the check to such person...." 9 C.J.S. Banks and Banking § 327, at 316-17 (1996).

See also 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).

In essence, when a drawer who owes no debt to the bank writes a check payable to the bank's order, the drawer places that check in the bank's custody with the expectation that the bank will negotiate the check according to the drawer's wishes. Therefore, a bank may not treat the check as bearer paper and blindly disburse the proceeds according to the instructions of any individual who happens to present the check to the bank. Mutual Service Casualty Ins. v. Elizabeth State Bank, 265 F.3d 601, 613-14 (7th Cir.2001)¹.

In the present case, ANB's liability rests on the duty of care that it owed to GAI by virtue of their contractual relationship. The common law imposed on ANB a duty of care to its depositor, GAI, and that implied duty included the obligation to see that the proceeds of checks payable to ANB were not misapplied.

GAI alleges that ANB breached its contractual duty of care, when over an 11 month period it allowed Cohn to deposit into his personal account at ANB nine nonforged, unaltered checks ranging in amounts of $40,000 to $50,000...