Shearson Lehman Bros., Inc. v. Wasatch Bank, 90-C-814A.

Decision Date30 March 1992
Docket NumberNo. 90-C-814A.,90-C-814A.
Citation788 F. Supp. 1184
PartiesSHEARSON LEHMAN BROTHERS, INC., successor in interest to Shearson Lehman Hutton, Inc., Plaintiff, v. WASATCH BANK, a Utah banking corporation, Defendant.
CourtU.S. District Court — District of Utah


Linda J. Barclay, Howard, Lewis & Petersen, Provo, Utah, for plaintiff.

John T. Anderson, Parsons, Behle & Latimer, Salt Lake City, Utah, for defendant.


ALDON J. ANDERSON, Senior District Judge.

Before the court is Defendant's Motion for Summary Judgment. The core issue presented by the motion is whether and to what extent a collecting or depositary bank will be liable to the drawer or the unintended payee of a check when the drawer's faithless employee induces the drawer to issue checks, fraudulently indorses them in the name of the specified payee, and absconds with the funds. Because under the undisputed facts of the case, the "fictitious payee" defense as codified by section 3-405 of the Uniform Commercial Code affords the defendant an absolute defense to all claims, summary judgment for the defendant is hereby granted.

The present litigation between plaintiff Shearson Lehman Brothers, Inc., ("Shearson") and defendant Wasatch Bank ("Wasatch") arises out of the activities of a former employee of Shearson, Stanley A. Erb ("Erb"). Erb began working as a financial consultant or broker at Shearson's Provo, Utah, branch office in 1984. By 1987, because of the volume of his sales, Erb had been given the cognomen of vice president. In 1987, Erb was contacted by McKay Matthews, the controller for the Orem, Utah, based Wordperfect Corporation, and its sister corporation, Utah Softcopy. On Matthews' request, Erb coordinated the establishment of three separate investment accounts at Shearson. The accounts were for the benefit of Wordperfect and Utah Soft-copy as corporations and one account was established for the personal benefit of the Wordperfect principals, Allen C. Ashton, Bruce W. Bastian, and Willard E. Peterson. Thereafter, Erb assumed the responsibility for managing all three of the Wordperfect accounts at Shearson.

In March 1987, Erb personally accepted from Matthews a check drawn by Utah Softcopy and payable to the order of "ABP Investments."1 The amount of the check was $460,150.23. At that time, there was no ABP Investment account opened at Shearson, although the Wordperfect principals maintained accounts elsewhere in that name.2 Notwithstanding the absence of an account in the name of the payee, Erb accepted the check for deposit at Shearson. Matthews suggested that a substitute check be correctly drawn and submitted for deposit at Shearson. Erb responded by assuring Matthews that he would personally guarantee that the check was credited to the appropriate account. However, rather than depositing the check into one of the authorized Wordperfect accounts, Erb opened a new account at Shearson in the name of "ABP Investments." Erb apparently forged the signature of Bruce Bastian on the new account documents. No evidence in the record suggests that Bastian or any other Wordperfect or Utah Softcopy representative authorized or subsequently ratified the creation of the new account. Erb listed as the address of record for the ABP Investment account a post office box number in Orem, Utah, which was unknown to Wordperfect and its principals and was different from the record address for the other three Wordperfect accounts.

Over the course of the next eleven months, Erb induced Shearson to draft checks on the ABP Investment account, payable to ABP Investments. Erb manipulated Shearson's procedure for making payments to clients by submitting to the Shearson cashier falsified payment request forms. Checks were drawn by Shearson in the requested amounts and were mailed to the Orem post office box. Erb then obtained the checks from the post office box, indorsed them in the name of ABP Investments, and took them to Wasatch for deposit into his personal account. In the course of his scheme, Erb fraudulently procured and negotiated approximately thirty-seven checks, totalling $504,295.30.

Wasatch accepted for deposit and subsequently allowed Erb to withdraw from his personal account all of the funds representing the thirty-seven checks Erb fraudulently procured from Shearson. Copies of those checks reveal that each was drawn payable to the order of ABP Investments and each was indorsed, in handwriting, in the name of ABP Investments and without Erb's personal indorsement or any other indication of Erb's authority to act on behalf of the payee. No ABP Investment account was maintained at Wasatch and therefore no signature card or other evidence on the premises of the bank could have been used to verify Erb's authority to deposit checks payable to ABP Investments. Nor is there any evidence identifying which teller accepted which check, that the tellers who accepted the checks for deposit independently verified Erb's authority to negotiate the checks, or that the checks were approved for deposit by the bank's officers or other managers. In fact, there are conflicting views of what procedures and policies were in effect during the relevant time periods and which would have governed the acceptance by Wasatch of checks for deposit. Leonel Castillo, a long-time management employee of Wasatch, stated in his deposition that there was a $1000 or $2000 teller limit on accepting checks for deposit and that any check exceeding that limit should have been accepted by the teller, but then set aside for subsequent officer review and approval of the transaction. Dep. of Leonel Castillo at 40. Castillo further stated that, prior to accepting a check drawn to a commercial payee into a personal account, the teller should have ascertained the authority of the individual to act for the commercial entity. Id. at 43-44.

To the contrary, Helen Cluff, the head teller at Wasatch during the relevant time period, stated in her deposition that there was no limit whatsoever on the amount of checks tellers could accept for deposit. Dep. of Helen Cluff, Vol. I., at 26, 46-47. Cluff admitted, however, that, in cases where the teller has no personal knowledge of the customer and the customer's circumstances, the teller should verify that the customer has the authority to deposit a check payable to a commercial entity into the customer's personal account. Id. at 27. In this respect, Cluff explained that she knew Erb during the relevant time period, that she knew he worked for Shearson, that he was a frequent customer of the bank whose transactions were historically legitimate, and that he was friendly and courteous to the tellers who helped him. Id. at 21-24. Although Cluff testified that she had no direct recollection of specific checks, she vaguely remembered several transactions with Erb and indicated that she did not and would not have inquired of Erb regarding his authority to negotiate checks drawn by Shearson and payable to ABP Investments. Id. at 25, 31, 39.

Erb's activities with respect to the ABP Investments account were not discovered until early 1989, by which time Erb had terminated his employment at Shearson. Lori Rogerson, the operations manager at the Provo Shearson office, testified that she had always been aware of the existence of the ABP Investment account, that she understood the initials "ABP" to represent the names of the Wordperfect principals, but that she also assumed the account was legitimately opened and managed by Erb. Dep. of Lori Rogerson at 51. At a meeting with Wordperfect representatives in early 1989, Rogerson peripherally mentioned the ABP Investment account whereupon a Wordperfect representative informed her that neither Wordperfect nor its principals maintained such an account at Shearson. Id. at 57-59. After this disclosure, Shearson requested an audit of the accounts managed by Erb and discovered the extent of his mishandling of the ABP Investment account as well as other unrelated mismanagement.

In June 1989, Shearson, Wordperfect and the Wordperfect principals entered a settlement agreement whereby all claims against Shearson arising out of Erb's mishandling of the Wordperfect and related accounts were settled for $1,208,903.3 Under the agreement, Shearson acquired by assignment or was subrogated to all legal rights of Wordperfect, Ashton, Bastian and Peterson.4 Shearson subsequently initiated the present suit against Wasatch. Shearson's complaint alleges the following causes of action: (1) common law negligence, specifically, that the deposits were suspicious, Wasatch knew Erb was employed by the drawer of the checks he deposited into his personal account, and Wasatch made no reasonable attempt to determine the authenticity of endorsements; (2) breach of warranty of good title and implied covenant of good faith and fair dealing in that Wasatch failed to follow reasonable commercial banking practices; (3) common law action for monies had and received; and (4) common law conversion.

Wasatch subsequently moved for summary judgment and asserts as the basis for that motion the following four arguments: (1) the "fictitious payee defense," U.C.C. § 3-405(1)(c), bars all of Shearson's claims; (2) Shearson's claims are barred by the applicable statutes of limitation; (3) Shearson lacks standing to bring claims against Wasatch; and (4) the U.C.C. precludes Shearson's common law causes of action for conversion, negligence, and monies had and received.

The court must grant Wasatch's motion for summary judgment if, based upon the pleadings, affidavits, depositions and other evidence heretofore presented, there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ. Pro. 56(c). "The moving party carries the burden of showing beyond a reasonable doubt that it is entitled to summary judgment." Ewing v. Amoco Oil, Co., 823 F.2d 1432, 1437 (10th Cir.1987) (citation...

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