Halifax Corp. v. First Union Nat. Bank, Record No. 001944.

• Decision Date: 08 June 2001
• Docket Number: Record No. 001944.
• Citation: 44 UCC Rep.2d 661,546 S.E.2d 696,262 Va. 91
• Parties: HALIFAX CORPORATION v. FIRST UNION NATIONAL BANK.
• Court: Virginia Supreme Court

546 S.E.2d 696

262 Va. 91

44 UCC Rep.2d 661

HALIFAX CORPORATION v. FIRST UNION NATIONAL BANK.

Record No. 001944.

Supreme Court of Virginia.

June 8, 2001.

Robert W. Ludwig, Jr., (John J. Vecchione; Edwin Y. Szeto; Henry St. John Fitzgerald; Ludwig & Robinson, on briefs), for appellant.

Grady C. Frank, Jr. (Thomas C. Junker; Rebecca E. Kuehn, Falls Church; Paige B. McThenia, Buena Vista; LeClair Ryan, on brief), for appellee. Present: CARRICO, C.J., HASSELL, KEENAN, KINSER, and LEMONS, JJ., POFF and STEPHENSON, Senior JJ.

HASSELL, Justice.

The primary issue that we consider in this appeal is whether a plaintiffs cause of action against a bank is precluded by Code § 8.4-406(f), which is a part of Virginia's Uniform Commercial Code.

II.

Halifax Corporation filed its motion for judgment against First Union National Bank and Wachovia Bank, N.A. In Count I of a multi-count motion for judgment, Halifax sought recovery from First Union under Code § 8.4-401, which is a part of Virginia's Uniform Commercial Code. In Count II, Halifax sought damages based upon First Union's alleged breach of its deposit agreement with Halifax. In Count III, Halifax sought to recover against First Union and Wachovia Bank for purported claims of negligence, gross negligence, and recklessness under Code §§ 8.3A-404, 8.3A-405, 8.3A-406, and 8.4-406, which are parts of Virginia's Uniform.Commercial Code.

First Union filed a motion for summary judgment alleging, among other things, that Halifax's claims were barred under Code § 8.4-406(f). The circuit court, in a written opinion, agreed with First Union and entered an order which granted the motion for summary judgment. Halifax nonsuited Wachovia Bank and appeals the circuit court's judgment in favor of First Union.

III.

Because this case was decided on a motion for summary judgment, we will state the facts pled in the plaintiff's motion for judgment and adopt inferences from those facts in the light most favorable to Halifax Corporation, the non-moving party, unless the inferences are strained, forced, or contrary to reason. Slone v. General Motors Corp., 249 Va. 520, 522, 457 S.E.2d 51, 52 (1995).

Halifax is a corporation organized and existing under the laws of Virginia. Between August 1995 and March 1999, Mary K. Adams served as Halifax's comptroller.¹ Between August 1995 and January 1997, she wrote at least 88 checks on Halifax's account at Signet Bank, which was subsequently acquired by First Union National Bank. Adams used facsimile signatures on the checks, and she made the checks payable to herself or cash. Adams deposited these checks in her personal account at the former Central Fidelity Bank, which is now Wachovia Bank, N.A. First Union, as drawee bank, "paid each of these checks and debited [Halifax's] account despite the forged and/or unauthorized drawer's signatures."

First Union paid each check and debited Halifax's account even though most of these corporate checks "were drawn in large amounts exceeding $10,000 and $20,000, of which approximately one quarter were drawn in exceptionally large amounts of between $50,000 and $100,000 each, and payable to `Mary Adams,' an individual who [First Union] knew to be an employee and Comptroller of [Halifax]." First Union paid these large checks "despite one, and in many instances, two levels of inspection of the individual checks for purposes of payment approval."

In January 1999, Halifax discovered accounting irregularities in certain cheek transactions and initiated an investigation. Subsequently, Halifax learned that Adams had embezzled at least $15,445,230.49 from its account. Halifax does not dispute that First Union sent Halifax monthly statements reflecting the unauthorized checks and that Halifax failed to notify First Union of the unauthorized signatures within one year after the statements were sent to Halifax.

IV.

A.

The following former and current statutes are relevant to our resolution of this appeal. Code § 8.4-401, a current statute, states in pertinent part:

"When bank may charge customer's account. — (a) A bank may charge against the account of a customer an item that is properly payable from that account even though the charge creates an overdraft. An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and the bank.

. . . .

"(d) A bank that in good faith makes payment to a holder may charge the indicated account of its customer according to:

"(1) the original terms of the altered item; or

"(2) the terms of the completed item, even though the bank knows the item has been completed unless the bank has notice that the completion was improper."

Former Code § 8A-406 stated in part:

"Customer's duty to discover and report unauthorized signature or alteration. — (1) When a bank sends to its customer a statement of account accompanied by items paid in good faith in support of the debit entries or holds the statement and items pursuant to a request or instruction of its customer or otherwise in a reasonable manner makes the statement and items available to the customer, the customer must exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and must notify the bank promptly after discovery thereof. The furnishing or making available to the customer of copies of such statement and items shall be deemed in compliance with this section.

"(2) If the bank establishes that the customer failed with respect to an item to comply with the duties imposed on the customer by subsection (1) the customer is precluded from asserting against the bank

"(a) his unauthorized signature or any alteration on the item if the bank also establishes that it suffered a loss by reason of such failure; and

"(b) an unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank after the first item and statement was available to the customer for a reasonable period not exceeding fourteen calendar days and before the bank receives notification from the customer of any such unauthorized signature or alteration.

"(3) The preclusion under subsection (2) does not apply if the customer establishes lack of ordinary care on the part of the bank in paying the item(s).

"(4) Without regard to care or lack of care of either the customer or the bank a customer who does not within one year from the time the statement and items are made available to the customer (subsection (1)) discover and report his unauthorized signature or any alteration on the face or back of the item or does not within three years from that time discover and report any unauthorized indorsement is precluded from asserting against the bank such unauthorized signature or indorsement or such alteration."

(Emphasis added).

The General Assembly amended Code § 8.4-406 and, effective January 1, 1993, the revised statute states:

"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 reasonably to identify the items paid. The statement of account provides sufficient information if the item is described by item number, amount, and date of payment.

. . . .

"(c) If a bank sends or makes available a statement of account or items pursuant to subsection (a), the customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration of an item or because a purported signature by or on behalf of the customer was not authorized. If, based on the statement or items provided, the customer should reasonably have discovered the unauthorized payment, the customer must promptly notify the bank of the relevant facts.

"(d) If the bank proves that the customer failed with respect to an item to comply with the duties imposed on the customer by subsection (c) the customer is precluded from asserting against the bank:

"(1) the customer's unauthorized signature or any alteration on the item, if the bank also proves that it suffered a loss by reason of the failure; and

"(2) the customer's unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank if the payment was made before the bank received notice from the customer of the unauthorized signature or alteration and after the customer had been afforded a reasonable period of time, not exceeding thirty days, in which to examine the item or statement of account and notify the bank.

"(e) If subsection (d) applies and the customer proves that the bank failed to exercise ordinary care in paying the item and that the failure substantially contributed to loss, the loss is allocated between the customer precluded and the bank asserting the preclusion according to the extent to which the failure of the customer to comply with subsection (c) and the failure of the bank to exercise ordinary care contributed to the loss. If the customer proves that the bank did not pay an item in good faith, the preclusion under subsection (d) does not apply.

"(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. If there is a preclusion under this subsection, the payor bank may not recover for breach of warranty under § 8.4-207.2 with respect to the unauthorized signature or alteration to which the preclusion applies."

Code § 8.1-203, a...