Euro Motors, Inc. v. Southwest Financial Bank and Trust Co.

• Decision Date: 01 June 1998
• Docket Number: No. 1-97-1014,1-97-1014
• Citation: 297 Ill.App.3d 246,696 N.E.2d 711,231 Ill.Dec. 415
• Parties: , 231 Ill.Dec. 415, 38 UCC Rep.Serv.2d 167 EURO MOTORS, INC., Plaintiff-Appellant, v. SOUTHWEST FINANCIAL BANK AND TRUST COMPANY, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

Page 711

696 N.E.2d 711

297 Ill.App.3d 246, 231 Ill.Dec. 415,

38 UCC Rep.Serv.2d 167

EURO MOTORS, INC., Plaintiff-Appellant, v. SOUTHWEST FINANCIAL BANK AND TRUST COMPANY, Defendant-Appellee.

No. 1-97-1014.

Appellate Court of Illinois First District, First Division.

June 1, 1998.

[297 Ill.App.3d 247] [231 Ill.Dec. 416] Patricia A. Wrona, Chicago, for Plaintiff-Appellant.

Carroll, Hartigan, Farmer, Cerney & McGillen, Ltd., Chicago (John S. Carroll, of counsel), for Defendant-Appellee.

Justice FROSSARD delivered the opinion of the court:

In this action for breach of contract and conversion, plaintiff Euro Motors, Inc. (Euro Motors), filed a complaint against defendant Southwest Financial Bank and Trust Company (Southwest) following Southwest's wrongful payment of two checks having unauthorized signatures. Both parties filed motions for summary judgment in December of 1994. Southwest's motion asserted that Euro Motors did not timely notify Southwest of the unauthorized signatures as required by statute and that Euro Motors "ratified" the subject checks by accepting benefits therefrom. The trial court granted Southwest's motion, and Euro Motors appeals from this grant of summary judgment.

At the center of this appeal is whether section 4-406(f) of the Illinois Uniform Commercial Code (UCC) acts to bar Euro Motors' claim against Southwest. 810 ILCS 5/4-406(f) (West 1994). More specifically, the question is whether the one-year time limitation in section 4-406(f) ¹ acts as a statute of limitations, which can be tolled, or a statutory prerequisite to suit, which must be met before a claim based on an unauthorized or altered signature may proceed. This issue is a matter of first impression in Illinois.

FACTS

The facts in this case are basically undisputed. In December 1993, Euro Motors opened a commercial checking account at defendant bank, Southwest. The account required two signatures for any check drawn for an amount over $30,000. Three of the officers of Euro Motors, F. James Wolff (Wolff), Lillian Krilich and Aspasia Krilich, were the authorized signatories on the account.

In January 1994, Southwest paid check number 5010 in the amount of $36,300 drawn on Euro Motors' account. The check had only one signature, that of Euro Motors' acting president, Wolff. Southwest provided Euro Motors with the cancelled check and the account statement at the beginning of February, but Euro Motors did not notify Southwest of the missing signature or protest payment of the check.

In March 1994, Southwest paid check number 5182 in the amount of $30,500 drawn on Euro Motor's account, and again the check had only Wolff's signature. Though Southwest again provided Euro Motors with the cancelled check and account statement, the bank received no notification of any problems with the check.

Euro Motors asserts that in March of 1995, Wolff was removed from his position as president of Euro Motors after it was discovered he was "grossly mismanaging" the business. It was not until a subsequent review of the company's financial records was conducted that the wrongful payment of check numbers 5010 and 5182 were discovered. Euro Motors filed this suit on January 4, 1996, to recover the face value of the checks.

Euro Motors claims it could not have discovered the unauthorized signatures earlier, as Wolff had control of the financial documents that indicated the unauthorized payments. Euro Motors further argues that section 4-406(f) of the UCC is properly considered a statute of limitations and should not have begun to run until the unauthorized payments were discovered by the rest of the corporation. Southwest contends that Euro Motors' action is time barred by section 4-406(f), which is not a statute of limitations but, rather, a statute of repose that cannot be tolled. The trial court agreed that section 4-406(f) barred Euro Motors' claims for wrongful payment of check numbers 5010 and 5182, and granted summary judgment to Southwest on this basis. It is from this order that Euro Motors appeals.

ANALYSIS

I.

The appellate review of a grant of summary judgment is de novo. USG Corp. v. Sterling Plumbing Group, Inc., 247 Ill.App.3d 316, 318, 186 Ill.Dec. 830, 617 N.E.2d 69 (1993). Summary judgment is proper only when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. 735 ILCS 5/2-1005(c) (West 1994). The function of the appellate court in reviewing the grant of summary judgment is not to decide disputed issues of fact but rather to determine whether a factual dispute exists. Kerr v. Illinois Central R.R. Co., 283 Ill.App.3d 574, 583, 219 Ill.Dec. 81, 670 N.E.2d 759 (1996). The court must construe the evidence strictly against the movant and liberally in favor of the opponent. Quality Lighting, Inc. v. Benjamin, 227 Ill.App.3d 880, 883, 169 Ill.Dec. 890, 592 N.E.2d 377 (1992); Zekman v. Direct American Marketers, Inc., 286 Ill.App.3d 462, 467, 221 Ill.Dec. 570, 675 N.E.2d 994 (1997).

The focus of this appeal is whether Euro Motors' cause of action against Southwest is time barred by section 4-406(f) of the Illinois UCC.

The relevant portions of section 4-406 read as follows:

§ 4-406. Customer's duty to discover and report unauthorized signature or alteration.

(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 to identify the items paid. * * *

* * *

(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." 810 ILCS 5/4-406 (West 1994).

The UCC also provides that if a signature of more than one person is required to constitute the authorized signature of an organization, the signature of the organization is unauthorized if one of the required signatures is missing. 810 ILCS 5/3-403 (West 1994). Thus the two checks at issue in the present case contain "unauthorized signatures" and fall under the time limitation discussed in section 4-406.

Euro Motors cites Watseka First National Bank v. Horney, 292 Ill.App.3d 933, 227 Ill.Dec. 19, 686 N.E.2d 1175 (1997), in support of its contention that section 4-406(f) is a statute of limitations and subject to tolling. Euro Motors bases this assertion on the fact that the Watseka court refers to the time limitation in section 4-406(f) as a "statute of limitations" throughout its opinion. Though the Watseka opinion uses the term "statute of limitations" in reference to section 4-406(f), it does not assert that section 4-406(f) provides a one-year time period in which a suit must be brought. Rather, Watseka states that "claims against the bank are precluded if the customer failed to discover and report unauthorized items within one year after the customer received the bank statements and accompanying items." (Emphasis added.) Watseka, 292 Ill.App.3d at 938, 227 Ill.Dec. 19, 686 N.E.2d 1175. The Watseka court seems to be interpreting section 4-406(f) as a condition that must be met before suit can be brought--not a time limit within which a suit must be filed or a statute of limitations.

The majority of other jurisdictions that have considered this issue have interpreted the one-year limitations period as a rule of substantive law that creates a statutory prerequisite of notice, not as a statute of limitations within which a suit must be filed.

The case of Wetherill v. Putnam Investments, 122 F.3d 554 (8th Cir.1997), dealt with a situation very similar to the case at bar. In Wetherill, an unscrupulous employee of the plaintiff corporation fraudulently signed and endorsed checks drawn on the corporate account during a three-year period from 1986 through 1989. These fraudulent activities were not discovered until late 1992 or early 1993, and the corporation president sent notice of the unauthorized activity to the defendant companies on May 11, 1993. The plaintiff contended that the time for giving notice did not begin to run until the corporation discovered or should have discovered the employee's unscrupulous activity. The eighth circuit disagreed and, in construing Massachusetts' UCC section 4-406(4), held that the time limit in the statute is "not a statute of limitations which might not start to run until the plaintiff knew or should have known of their employee's treachery; rather, it fixes the time within which the plaintiff must give notice to the defendant." Wetherill, 122 F.3d at 556-57. The court held UCC section 4-406(4) establishes a statute of repose under which the time for bringing suit expires one year following the availability of the relevant account statements. Wetherill, 122 F.3d at 556-57.

A similar result was reached in Brown v. Cash Management Trust of America, 963 F.Supp. 504 (D.Md.1997). In Brown, the plaintiff contended his mental incompetence excused his statutory duty to discover and report unauthorized checks under New York's version of section 4-406(f). The court held that New York law clearly regards the one-year notice provision as an unalterable condition precedent to suit. Brown, 963 F.Supp. at 506. The court held that the statute was not a statute of limitations fixing the time within which an action must be brought but rather a rule of substantive law that created a statutory prerequisite of notice. Brown, 963 F.Supp. at 506.

In Concrete Materials Corp. v. Bank of Danville & Trust Co., 938 S.W.2d 254 (Ky.1997), an employee of the plaintiff corporation charged with depositing checks embezzled funds from the corporation over a period of eight years. The...