Dean v. Commonwealth Bank, 2012–SC–000267–DG.

• Decision Date: 19 June 2014
• Docket Number: No. 2012–SC–000267–DG.,2012–SC–000267–DG.
• Citation: 434 S.W.3d 489
• Parties: MARK D. DEAN, P.S.C., Appellant v. COMMONWEALTH BANK & TRUST COMPANY, Appellee.
• Court: United States State Supreme Court — District of Kentucky

434 S.W.3d 489

MARK D. DEAN, P.S.C., Appellant

v.COMMONWEALTH BANK & TRUST COMPANY, Appellee.

No. 2012–SC–000267–DG.

Supreme Court of Kentucky.

June 19, 2014.

Laurence John Zielke, Nancy Jane Schook, Karen Denise Campion, Zielke Law Firm, PLLC, Louisville, KY, Counsel for Appellant.

John T. McGarvey Eric Michael Jensen Bradley Scott Salyer Morgan & Pottinger, P.S.C. Louisville, KY, Counsel for Appellee.

William Hickman III, Jones & Hickman, P.S.C., Pikeville, KY, Debra Kaye Stamper, Kentucky Bankers Association General Counsel, Louisville, KY, Counsel for Amicus Curiae, Kentucky Bankers Association.

Opinion of the Court by Justice NOBLE.

The Appellant, Mark D. Dean, P.S.C, had an escrow account with the Appellee, Commonwealth Bank & Trust Company, and had authorized an employee to sign checks on the account by herself and had proclaimed to the bank that she was acting on the firm's behalf. The employee then engaged in a fraudulent scheme by which she would write checks on the account and then deposit them in another of the firm's accounts at another bank. More than three years after the last activity on the account, the firm filed Uniform Commercial Code and common-law claims against the bank. The questions presented by this case are whether those claims are barred either by the one-year repose period of KRS 355.4–406, as determined by the Court of Appeals, or alternatively by the three-year statute of limitations under KRS 355.4–111. This Court concludes that the claims are barred by the statute of limitations and thus affirms the Court of Appeals albeit for different reasons.

I. Background

Mark D. Dean, P.S.C. is a law firm in Shelbyville, Kentucky. The firm's sole owner is Mark Dean, a lawyer, whose primary area of practice is real estate law, including real estate closings. The firm maintained escrow accounts at multiple banks.

In 1998, Dean opened a business checking account for the firm with Commonwealth Bank to be used as an escrow account. Dean and Jody Wills, the firm's bookkeeper and secretary until May 2005, were authorized signatories on the account. Specifically, “Authorized Signature” is printed above each of their signatures on the bank's signature card. The signature card states that the “undersigned is (are) acting on behalf of the business entity.” Only one signature was required for any transaction on the account.

In September 2003, Jody Wills began embezzling money from the firm's various escrow accounts. She furthered her thefts with a method known as check-kiting, ¹which involved her writing and depositing checks between the Commonwealth Bank account and Dean's account at Citizens Union Bank. Wills used both preprinted checks and blank counter checks (i.e., blank checks on which the teller writes the account number) provided directly to her by the tellers at Commonwealth Bank. She made these checks payable to Mark D. Dean P.S.C and then deposited them into the Citizen Union account. She also deposited checks from Citizens Union Bank into the Commonwealth Bank account, usually just before drawing the checks on the Commonwealth Bank account.

The exact scheme Wills then used to divert the firm's funds to herself is not described in the briefs, nor is it apparent from the record.² The briefs claim only that she used check-kiting. This explains how she artificially inflated and maintained illusory balances in the Commonwealth Bank account and the Citizens Union Bank account. But an additional step, such as writing checks to herself or to fictitious payees, or withdrawing cash, must have been taken to siphon money from one of the artificially inflated accounts. The only checks complained of in this case are those drawn on the Commonwealth Bank account and made payable to Mark Dean P.S.C., which were then deposited in the Citizens Union account. There is no allegation that Wills wrote checks to herself or a fictitious payee on, or withdrew cash from, the Commonwealth Bank account. Thus, again presumably, she must have taken money from the Citizens Union account somehow.³ Whatever the exact method, over the course of several years, she stole over $800,000 from Dean's accounts using this method.

Each month, Commonwealth Bank sent detailed statements of the account's activity, along with copies of all checks, counter checks, and deposit slips, to the address listed on the signature card. Many of the checks were signed by Wills, and several were for large amounts. Wills intercepted the monthly statements to prevent the kiting scheme from being discovered; Commonwealth Bank does not dispute this.

In January 2005, Commonwealth Bank learned of suspicious activity on the account suggesting check-kiting. Belinda Nichols, the bank's market president for Shelbyville, claims that she met with Dean on February 1, 2005 to discuss the suspicious activity. (Dean claims he did not learn of any suspicious activity until several years later, implying either that this meeting did not occur or that it concerned some other subject.) Shortly after, a hold was placed on the account, and the last activity on the account was in March 2005.

At some point, the FBI began investigating the suspected check-kiting scheme. Dean claims that he first learned of the suspicious activity on his account when informed of it by the FBI in September 2008. Until that point, he claims, he was not even aware that any funds were missing from any of the accounts, much less that Wills had stolen them.⁴

Dean, as the sole owner of the law firm, believed Commonwealth Bank had breached its duty to protect the account from theft. Thus, on January 23, 2009, the firm sued the bank, raising four claims. The first claim was that the bank had violated Articles 3 and 4 of the Uniform Commercial Code. The other three claims raised common-law causes of action: (1) “Aiding and Abetting Fraud and Illegal Activity and Breach of Duty of Ordinary Care”; (2) “Common Law Negligence”; and (3) “Breach of Contract and Breach of Duty of Good Faith and Fair Dealing.” The firm also sought punitive damages in a separate count.

Commonwealth Bank moved for summary judgment on all claims, arguing that the UCC claim was barred by the three-year statute of limitations, KRS 355.4–111, and that the common-law claims were displaced by the UCC. The circuit court granted the motion as to the UCC claim, reasoning that the discovery rule did not apply to UCC claims absent fraudulent concealment and thus the claim was filed outside the three-year limitations period.

The court initially declined to enter summary judgment as to the common-law claims. The bank soon renewed its motion as to them, making more specific arguments. The court was finally convinced and entered summary judgment as to the remaining claims, concluding that the firm had failed to identify the violation of any law, regulation, or banking practice that would show the bank had aided or abetted Wills or had been negligent, and that the firm had failed to identify the breach of any provision of the deposit agreement or any other wrongdoing that would support claims for breach of contract and breach of the duty of good faith and fair dealing.

The Court of Appeals affirmed the trial court on slightly different grounds. Specifically, the court concluded that KRS 355.4–406 and the deposit agreement imposed a duty on the firm to “examine the[ ] bank statements in a prompt and reasonable fashion” for unauthorized signatures, including those exceeding actual or apparent authority. Failure to bring unauthorized signatures to the bank's attention within one year is a substantive bar on claims related to those signatures, reasoned the court. The court also concluded that KRS 355.4–406 was applicable to all causes of action related to the checks, whether they were based on the UCC or common law. Because the firm had not complied with KRS 355.4–406 by examining the statements and bringing the allegedly unauthorized signatures to the bank's attention within one year, the court concluded that “KRS 355.4–406 is a dispositive bar to all claims asserted by [the law firm] against Commonwealth [Bank], whether based on the Code or based on common law.”

The firm sought discretionary review, which this Court granted.

II. Analysis

The firm claims the Court of Appeals erred in deciding the appeal based on KRS 355.4–406, claiming that the issue was raised sua sponte and was not within the scope of the appeal because it was not raised at or decided by the trial court. The firm also argues that its claims are not barred by KRS 355.4–406 because the statute is inapplicable, the Court of Appeals improperly weighed the facts and construed them against the firm, and, even if the statute does apply, it does not bar common-law claims. The firm also argues that the circuit court improperly weighed the evidence and decided disputed issues of fact in granting summary judgment on the statute of limitations, and improperly applied the UCC statute of limitations to common-law claims. We address these claims in turn as needed.

A. The Court of Appeals properly considered KRS 355.4–406.

The firm first argues that the Court of Appeals should not have decided the appeal on the basis of KRS 355.4–406 because that issue was never presented to or decided by the trial court. This, the firm claims, barred consideration of that statute by the Court of Appeals. The firm's argument, however, is premised on a misunderstanding of the law related to when an appellate court may address an issue not decided by the trial court.

Admittedly, this Court has stated that “[t]he Court of Appeals is without authority to review issues not raised in or decided by the trial court.” Regional Jail Authority v. Tackett, 770 S.W.2d 225, 228 (Ky.1989). But this Court has also stated that “it is ... the rule in this jurisdiction that the judgment of a lower court can be affirmed for any reason in the record.” Fischer v. Fischer, 348 S.W.3d 582, 591 (Ky.2011). ⁵

In Fisch...