Halifax Corp. v. Wachovia Bank

• Decision Date: 05 November 2004
• Docket Number: Record No. 032444.
• Citation: 268 Va. 641,604 S.E.2d 403
• Court: Virginia Supreme Court
• Parties: HALIFAX CORPORATION v. WACHOVIA BANK.

604 S.E.2d 403

268 Va. 641

HALIFAX CORPORATION v. WACHOVIA BANK.

Record No. 032444.

Supreme Court of Virginia.

November 5, 2004.

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

Thomas C. Junker (Grady C. Frank, Jr.; LeClair Ryan, on brief), Alexandria, for appellee.

Amici Curiae: Virginia Bankers Association (Joseph E. Spruill, III, General Counsel, on brief), in support of appellee.

Present: HASSELL, C.J., KINSER and LEMONS, JJ., and CARRICO and RUSSELL, S.JJ.

OPINION BY Senior Justice HARRY L. CARRICO.

Introduction

In the period from August 1995 to February 1999, Mary K. Adams embezzled approximately $15.4 million while serving as comptroller for companies that are now known as Halifax Corporation (Halifax).¹ Adams accomplished the embezzlement by writing more than 300 checks on Halifax's account with Signet Bank and its successor, First Union National Bank (collectively, First Union). Adams used a stamp bearing the facsimile signature of Halifax's president and, in her own handwriting, made the checks payable to herself, to companies she had formed, or to cash. She deposited the checks in several accounts she maintained with Central Fidelity Bank and its successor, Wachovia Bank (collectively, Wachovia), receiving cash from some of the checks.

Procedural Background

Upon discovery of the embezzlement, Halifax brought an action against First Union as the drawee bank and Wachovia as the depositary bank. (Halifax I.) The trial court granted summary judgment in favor of First Union. Halifax then took a nonsuit of the action against Wachovia and appealed to this Court from the order dismissing First Union. We affirmed the dismissal, holding that Halifax's claim was barred pursuant to Code § 8.4-406(f), part of the Uniform Commercial Code (hereinafter, UCC), for Halifax's failure to notify First Union of the unauthorized signatures within one year after the bank's statement covering the checks in question was made available to Halifax. Halifax Corp. v. First Union Nat'l Bank, 262 Va. 91, 104, 546 S.E.2d 696, 704 (2001).

While the appeal to this Court was pending, Halifax filed in the court below a three-count motion for judgment asserting that Wachovia and First Union were liable to Halifax for the amounts embezzled by Adams. (Halifax II.) Count I alleged negligence, gross negligence, and bad faith on the part of Wachovia in violation of Code §§ 8.3A-404, -405, and -406. Count II alleged common law conversion by Wachovia and First Union. Count III alleged that Wachovia and First Union aided and abetted Adams' breach of fiduciary duty.

The trial court dismissed the claims against First Union on the ground of res judicata. This Court refused Halifax's petition for appeal from that dismissal. Halifax Corp. v. First Union Nat'l Bank, March 5, 2002 (Record No. 012582).

Wachovia moved for summary judgment on Halifax's claims against it. The trial court granted the motion, holding, contrary to Halifax's contention, that Code § 8.3A-406 does not create an affirmative cause of action, that Halifax's common law claim for conversion had been displaced by Code § 8.3A-420(a), and that Halifax had failed to allege sufficient facts to state a cause of action for aiding and abetting Adams' breach of fiduciary duty, assuming such an action exists. From the final order embodying these holdings and granting final judgment in favor of Wachovia, we awarded Halifax this appeal.

Factual Background

Since the trial court disposed of the case by granting Wachovia's motion for summary judgment, we will adopt those inferences from the facts that are most favorable to Halifax, the nonmoving party, unless the inferences are strained, forced, or contrary to reason. Carson v. LeBlanc, 245 Va. 135, 139-40, 427 S.E.2d 189, 192 (1993). The facts as alleged in Halifax's motion for judgment show that Mary Adams, also known as Mary Collins, became comptroller at Halifax's Richmond office in August 1995 and continued in that position until March 1999. She maintained four personal and two commercial accounts with Wachovia. One of the commercial accounts was styled "Collins Racing, Inc." and the other "Collins Ostrich Ranch."

When Adams first began embezzling money from Halifax in August 1995, she deposited in her personal accounts with Wachovia several checks each month for over $5,000.00. The amounts of the checks soon increased to between $10,000.00 and $15,000.00 each and before long to amounts ranging from $50,000.00 to $150,000.00 each, and deposits were made multiple times a day or week. For example, in July 1997, Adams deposited on July 9 a check for $95,550.00, on July 14, one check for $55,000.00 and another for $99,300.00, on July 16, a check for $93,500.00, on July 21, a check for $80,600.00, and, on July 30, a check for $149,305.00, totaling $573,255.00. In all, Adams drew 328 checks totaling $15,429,665.42 on Halifax's account with First Union.

Adams was "one of the best and largest individual customers" of Wachovia's branch where she did business. Managers and tellers saw Adams "`a lot,' and she stood out because of her large checks and banking activity." The entire branch was curious about her "because of her large checks," the likes of which "none of the tellers had ever seen ... before." Some tellers claimed "to have believed or assumed that Adams `was at least part owner' of the corporate drawer."

Wachovia "repeatedly accepted such huge handwritten checks drawn on the account of Adams' employer despite the gross disparity with Adams payroll amount [of about $1,000.00 per pay period] shown on each teller and manager screen." The tellers "had concerns about individual checks or the check activity, or both." Bank officials knew Adams was Halifax's comptroller and understood that "such transactions by a financial officer, or even a part owner, present[ed] a serious potential for fraud." Yet, branch "[m]anagers and supervisors told the tellers to do whatever Adams wanted."

Discussion

Negligence, Gross Negligence, and Bad Faith

Halifax contends that Code § 8.3A-406, when read in light of Code §§ 8.3A-404 and -405, gives rise to an affirmative cause of action for the negligence of a depositary bank with respect to the alteration of an instrument or the making of a forged signature. These sections were part of the General Assembly's 1992 revision of the UCC.1992 Acts Ch. 693.

It should be noted at this point, however, that the trial court stated in a footnote to its order granting Wachovia's motion for summary judgment that Halifax did "not contest Wachovia's motion as to Halifax's claims under Va.Code 8.3A-404 and 405," and Halifax does not now press those claims. Hence, we will consider Code §§ 8.3A-404 and -405 only in the context of Halifax's argument that they are pertinent to the question whether Code § 8.3A-406 creates an affirmative cause of action for the negligence of a depositary bank under the circumstances of this case.

Code § 8.3A-406 provides as follows:

Negligence, contributing to forged signature or alteration of instrument. — (a) A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection.

(b) Under subsection (a), if the person asserting the preclusion fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss, the loss is allocated between the person precluded and the person asserting the preclusion according to the extent to which the failure of each to exercise ordinary care contributed to the loss.

(c) Under subsection (a), the burden of proving failure to exercise ordinary care is on the person asserting the preclusion. Under subsection (b), the burden of proving failure to exercise ordinary care is on the person precluded.

Code § 8.3A-404(a) deals with an instrument issued to an impostor or to a person acting in concert with the impostor. Subsection (b) deals with an instrument whose payee is fictitious or not the person intended to have an interest in the instrument by the person determining to whom the instrument is payable. Both subsections provide that the indorsement of such an instrument by any person in the name of the payee is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.

Code § 8.3A-405 deals with the situation where an employer entrusts an employee with responsibility with respect to an instrument and the employee or a person acting in concert with the employee makes a fraudulent indorsement of the instrument. For a person who, in good faith, pays an instrument or takes it for value or for collection, the indorsement is effective as the indorsement of the person to whom the instrument is payable if it is made in the name of that person.

Both Code § 8.3A-404 and Code § 8.3A-405 contain an important provision. In Code § 8.3A-404, the provision is expressed in this language:

[I]f a person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from payment of the instrument, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.

(Emphasis added.) The language of Code § 8.3A-405 is identical, except that the words "the fraud" are substituted for the words "payment of the instrument" following the words "loss resulting from" in the foregoing quotation.

In support of its contention that Code § 8.3A-406 creates an affirmative cause of action, Halifax cites...