Engineair, Inc. v. Centra Credit Union

• Decision Date: 24 July 2018
• Docket Number: Court of Appeals Case No. 36A01-1709-CT-2177
• Citation: 107 N.E.3d 1061
• Parties: ENGINEAIR, INC. and JMA Rail Products, Inc., Appellants-Plaintiffs, v. CENTRA CREDIT UNION, Appellee-Defendant.
• Court: Indiana Appellate Court

107 N.E.3d 1061

ENGINEAIR, INC. and JMA Rail Products, Inc., Appellants-Plaintiffs,

v.CENTRA CREDIT UNION, Appellee-Defendant.

Court of Appeals Case No. 36A01-1709-CT-2177

Court of Appeals of Indiana.

Filed July 24, 2018

Attorneys for Appellants: Hamish S. Cohen, Sean P. Burke, Mattingly Burke Cohen & Biederman LLP, Indianapolis, Indiana

Attorney for Appellee: Patrick J. Ruberry, Litchfield Cavo, LLP, Chicago, Illinois

Kirsch, Judge.

[1] After Angela Kincaid ("Kincaid"), an employee working for both EngineAir, Inc. ("EngineAir") and JMA Rail Products, Inc. ("JMA"), was convicted of having embezzled more than $500,000 from the companies' bank accounts, the companies sued Kincaid's depositary bank,¹ Centra Credit Union ("Centra Credit"). Citing to Indiana's version of the Uniform Commercial Code ("UCC" or "the Act") and common law negligence, the companies argued that Centra Credit "failed to act with ordinary care when it cashed over 105 fraudulent checks written by Kincaid on EngineAir's, JMA's, and other related entities' accounts." Appellants' App. Vol. 2 at 10. On Centra Credit's motion, the trial court dismissed the companies' complaint for failure to state a claim pursuant to Indiana Trial Rule 12(B)(6).

[2] The companies raise one issue on appeal, which we restate as: Whether the trial court erred when it dismissed the companies' complaint for failure to state a claim under Indiana Trial Rule 12(B)(6) after concluding that (1) Centra Credit, as the depositary bank, owed the companies, as drawers, no duty of care as a matter of law for the loss the companies sustained when Kincaid deposited checks that she had stolen from the companies, made out to herself as payee, and, on which she had forged the signature of the companies' president;² (2) the UCC warranties created no warranty or statutory obligation from Centra Credit to the companies; and (3) Centra Credit's failure to report Kincaid's extreme banking activity as suspicious did not constitute a breach of duty.

[3] We affirm.

Facts and Procedural History

[4] EngineAir and JMA (together, "the Companies"), acting as "sister" corporations and located in Jackson County, Indiana, are small, family-owned and-operated manufacturing and supply businesses, with similar ownership and management structures. Appellants' Br. at 6. In their complaint, the Companies pleaded the following facts. In the first quarter of 2013, the Companies and JMA Railroad Supply Company ("JMA Supply"), a related corporation, collectively hired Kincaid as their bookkeeper and internal accountant. In that position, Kincaid was responsible for billing, accounts payable, accounts receivable, handling bank deposits, as well as other "related financial matters." Appellants' App. Vol. 2 at 12.

[5] Within one month of being hired, Kincaid began embezzling money from the Companies and from JMA Supply by "cut[ting] checks to herself while fraudulently forging the [Companies'] president's signature." Id. Kincaid would then deposit those checks into her personal bank account with Centra Credit. "Kincaid started her fraudulent scheme slowly to evade detection." Appellants' Br. at 7. For example, in September, October, and December 2013, she fraudulently deposited a total of four checks drawn on JMA Supply's account, totaling $16,712. We note that any claims relating to these checks are time barred, and therefore, JMA Supply is not a party to this action. Id.

[6] Kincaid's fraudulent activity increased rapidly, and in May 2014, she deposited into her Centra Credit account seven checks totaling $13,950, all of which were written against JMA's account. Appellants' App. Vol 2 at 12. Beginning in August 2014, Kincaid began depositing numerous forged checks into her Centra Credit account on an increasingly frequent basis. For instance, in August 2014, Kincaid deposited seven checks, dated August 7, 8, 13, 20, 22, 26[,] and 26, totaling $25,300. Id. Thereafter, the rate and amount of fraudulent checks continued to increase. Id.

[7] By April 2015, the last full month before Kincaid's illegal activity was discovered, she deposited one or more checks on April 1, 2, 7, 8, 13, 15, 16, 17, 21, 24, 27, 28, and 30. Together, these checks totaled $116,300. Id. at 12-13. All of those checks were drawn on EngineAir's account and deposited into Kincaid's personal account at Centra Credit. In the ten months leading up to May 2015, Kincaid deposited more than 100 fraudulent EngineAir checks. Id. at 13. In total, Kincaid stole more than $540,450 from the Companies, all of which was in the form of checks that Kincaid deposited into her personal account with Centra Credit and then withdrew as cash immediately after each check had cleared. Id. at 10, 13.

[8] On May 18, 2015, in the routine course of transferring funds to pay a vendor, EngineAir's president learned that EngineAir's checking account had a balance of only $2,000; the financial records prepared by Kincaid reflected a balance of $178,000. Id. at 14. EngineAir evaluated the account and discovered that Kincaid had been embezzling money from the Companies' accounts. Kincaid was charged, pleaded guilty, and was sentenced to forty-one months in federal prison.

[9] On April 11, 2017, the Companies filed their complaint seeking damages from Centra Credit for the bank's negligence in having accepted and deposited dozens of fraudulent checks and allowing Kincaid to withdraw those funds from her Centra Credit account.³ Appellants' App. Vol. 2 at 11. The Companies sought damages under the UCC and common law negligence. Id. at 10-17.

[10] On June 2, 2017, Centra Credit filed a Trial Rule 12(B)(6) motion to dismiss for failure to state a claim. Centra Credit argued that: (1) the Companies could not proceed, since under the general rule, a bank does not owe a non-customer a duty of care; (2) negligence cases, generally, are preempted by the UCC; (3) under the UCC, Centra Credit owes no duty to the Companies, and (4) recovery of monetary damages by the Companies was precluded by the economic loss doctrine.⁴ Id. at 23-32.

[11] The Companies responded, arguing that Centra Credit owed the Companies a duty of care pursuant to the UCC, particularly, Indiana Code section 26-1-3.1-405, the UCC's warranty provisions, and Indiana negligence law generally. Id. at 63-77. The Companies argued that, even if Indiana were to adopt the general rule that banks do not owe a non-customer a duty of care, "an award of damages, is appropriate under the ‘exceptional circumstances’ of this case as pled in the complaint because [Centra Credit] accepted numerous checks totaling a large amount while not following its own internal policies or federal regulations." Id. at 64. The trial court heard argument on August 7, 2017, and on August 23, 2017, it entered an Order (the "Order") granting Centra Credit's motion to dismiss. The Companies now appeal.

Discussion and Decision

[12] We review de novo a trial court's grant or denial of a motion to dismiss for failure to state a claim, pursuant to Trial Rule 12(B)(6), giving no deference to the trial court's decision. Babes Showclub v. Lair , 918 N.E.2d 308, 310 (Ind. 2009). Such a motion tests the legal sufficiency of the plaintiff's claim, not the facts supporting it. Thornton v. State , 43 N.E.3d 585, 587 (Ind. 2015) ; Alford v. Johnson Cnty. Comm'rs , 92 N.E.3d 653, 659 (Ind. Ct. App. 2017).

Inasmuch as motions to dismiss are not favored by the law, they are properly granted only "when the allegations present no possible set of facts upon which the complainant can recover." Mart v. Hess , 703 N.E.2d 190, 193 (Ind. Ct. App. 1998). Put another way, a dismissal under Rule 12(B)(6) will not be affirmed "unless it is apparent that the facts alleged in the challenged pleading are incapable of supporting relief under any set of circumstances." Couch v. Hamilton Cnty. , 609 N.E.2d 39, 41 (Ind. Ct. App. 1993).

Magic Circle Corp. v. Crowe Horwath, LLP , 72 N.E.3d 919, 922-23 (Ind. Ct. App. 2017) (quoting City of E. Chicago, Ind. v. E. Chicago Second Century, Inc. , 908 N.E.2d 611, 617 (Ind. 2009) ). "In reviewing the complaint, we take the alleged facts to be true and consider the allegations in the light most favorable to the nonmoving party, drawing every reasonable inference in that party's favor." Hoosier Ins. Co. v. Riggs , 92 N.E.3d 685, 687 (Ind. Ct. App. 2018).

[13] The Companies filed their complaint seeking damages from Centra Credit "for Centra's negligence in accepting, cashing[,] and providing funds to [the Companies'] employee and Centra's customer[,] Angela Kincaid. [The Companies] sought damages pursuant to common law negligence and [UCC] provisions." Appellants' Br. at 5. The trial court, having heard the arguments of counsel and having reviewed the law, dismissed the Companies' complaint pursuant to Trial Rule 12(B)(6) concluding:

1. Indiana has not established a duty of care between a mere collecting bank and the customer of a payor bank;

2. There is no statutory law in Indiana that creates a warranty or other statutory obligation from the Defendant collecting bank to the Plaintiffs, individually or as customers of their bank, the payor bank; and

3. Any failure of the Defendant bank to act in a commercially reasonable manner or to report "Suspicious Activity" to federal authorities is not a breach of any established duty to the Plaintiffs.

Appellants' App. Vol. 2 at 8.

Duty of Care

[14] The Companies first contend that the trial court erred in dismissing their complaint because, contrary to the trial court's conclusion, a duty of care can exist between a depositary bank and a non-customer drawer. The Companies argue that "the question of whether a bank may owe a non-customer a duty has been established," and each court having addressed that issue "has found or presumed that such a duty may exist." Appellants' Br. at 13 (citing Auto-Owners Ins. Co. v. Bank One , 879 N.E.2d 1086 (Ind. 2008) ).⁵ While a depositary bank may, under certain circumstances, owe a duty of...