Travelers Cas. and Sur. v. Wells Fargo Bank N.A.

• Decision Date: 02 July 2004
• Docket Number: No. 03-1833.,03-1833.
• Citation: 374 F.3d 521
• Parties: TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, Plaintiff-Appellant, v. WELLS FARGO BANK N.A. and Charles Schwab & Co., Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

374 F.3d 521

TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, Plaintiff-Appellant, v. WELLS FARGO BANK N.A. and Charles Schwab & Co., Inc., Defendants-Appellees.

No. 03-1833.

United States Court of Appeals, Seventh Circuit.

Argued May 17, 2004.

Decided July 2, 2004.

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Mark E. Wilson (argued), Kerns, Pitrof, Frost & Pearlman, Chicago, IL, for Plaintiff-Appellant.

George R. Dougherty (argued), Grippo & Elden, Ronald P. Kane (argued), Chicago, IL, for Defendants-Appellees.

Before POSNER, EASTERBROOK, and MANION, Circuit Judges.

POSNER, Circuit Judge.

This diversity suit governed by Illinois law raises issues of banking and commercial law. Allianz Life Insurance Company had a checking account at Wells Fargo bank (actually a predecessor of Wells Fargo, but we can ignore that detail) for the payment of benefits to employees covered by Allianz's employee health plan. Charles Schwab, a securities brokerage firm that offers checking services to its customers, received a check for $287,651.23 made out to it and drawn on Allianz's account at Wells Fargo. The check was presented to Schwab for deposit by a man who called himself James M. Carden and said he wanted to open a brokerage account in his name. Schwab opened an account in Carden's name, credited the account with the face amount of the check, and deposited the check in a bank in which Schwab has an account. Two weeks later Carden faxed Schwab directions to wire various amounts of money in his Schwab account, adding up to almost all the money in it, to accounts (none in Carden's name) in other financial institutions. Schwab made the transfers as instructed, though only after checking with Wells Fargo to make sure that Allianz's check to Schwab had cleared so that the money that Carden wanted to withdraw would not come out of Schwab's pocket. The check had cleared.

Within a few days, however, Allianz discovered that Carden had never been employed by it. It believes that Carden, whom investigators have been unable to track down ("Carden" may not be the depositor's real name), had forged the $287,651.23 check. Allianz asked Wells Fargo to make good the loss. Wells Fargo refused. Travelers had insured Allianz against such losses, so it paid off Allianz and then brought this suit, as Allianz's subrogee, against both Wells Fargo and Schwab. Although the Uniform Commercial Code, in force in Illinois as in all states, contains elaborate provisions regulating commercial paper, including checks, Travelers invoked a common law duty of banks — a duty the UCC has not superseded — not to honor checks in the circumstances of this case. After a bench trial, the district judge ruled in favor of the defendants, and Travelers appeals.

Wells Fargo could not be held liable for honoring a forged or otherwise unauthorized check if, in fact, the check was not forged or unauthorized; and in ruling for Wells Fargo the judge ruled that Travelers had failed to prove that the check made out to Schwab and deposited by Carden had not been authorized by Allianz. Travelers had intended to present testimony by the only two employees of Allianz who were authorized to sign checks drawn on the account on which the $287,651.23 check was drawn that they had not authorized the check. But at trial, instead of putting these employees on the witness stand or, if they were unavailable, submitting their depositions, Travelers presented affidavits containing their testimony. The judge correctly ruled the affidavits inadmissible as hearsay. The affiants were not available for cross-examination, as they would have been had they testified live or given depositions earlier at which the defendants could have cross-examined them.

It might seem to follow directly from this ruling that the case was properly dismissed. Yet the district judge, while convinced that without the affidavits Travelers could not prove that the check was unauthorized, dismissed only the claim against Wells Fargo on that ground. He distinguished the claim against Schwab on the ground that Schwab might have had a duty to Allianz to inquire whether the check was authorized. But even so, and even if Travelers proved that Schwab had violated its duty to Allianz, in order to obtain relief Travelers would have to show that Schwab, had it fulfilled its duty, would have discovered that Allianz had not authorized the check to Schwab, and having discovered this would not have let Carden transfer the money out of his Schwab account. The judge may have missed this elementary point about causation because, despite ruling in favor of Wells Fargo, he may have believed that the check was unauthorized. For in a part of his oral opinion (and beware oral opinions in complex cases) in which he held that Travelers was in any event barred from relief by contributory negligence on the part of Allianz, the judge said that the $287,651.23 check "had a similar appearance to the earlier check" — a check that the judge thought Allianz had been negligent in failing to investigate — "which essentially means that, on its face, it didn't appear phony or altered in any way, but it is a reasonable inference that it was prepared by the same person, and it would have been a reasonable inference that it was prepared by the same person who prepared the earlier unauthorized check" (emphasis added).

There had been two earlier suspicious checks drawn on Allianz's account at Wells Fargo. The first, for $26,500, was payable to a Michelle R. Bryon. The second, for $46,651.23, was payable to an Allan M. Ferrao. Since the check to Carden was for $287,651.23, it is almost certain that whoever forged the check to Ferrao also forged the check to Schwab that Carden presented; at all events the inference seems inescapable that the $287,651.23 check was also unauthorized. There was evidence of this apart from the affidavits (which were not good evidence, as we have said) — not only the identity of the last five digits in the second and third checks, but also that efforts to locate Carden failed, an experienced investigator for Allianz concluded that the check Carden had deposited had been forged or altered, and Schwab itself unguardedly argued that Travelers' claim was barred by section 4-406(d)(2) of the Uniform Commercial Code.

To explain the last point, section 4-406(d)(2) provides that the drawer of a check (Allianz, and thus Travelers as its subrogee) can't complain about the check's alteration "by the same wrongdoer" who had previously altered a check of the drawer, if the drawer would have discovered the alteration simply by comparing the bank's statement (assuming as in this case that the bank rendered a statement of account to its customer) with its own records. UCC § 4-406, comment 2; Marx v. Whitney National Bank, 713 So.2d 1142, 1146-48 (La.1998); Mercantile Bank of Arkansas v. Vowell, 82 Ark.App. 421, 117 S.W.3d 603, 612-13 (2003); Espresso Roma Corp. v. Bank of America, N.A., 100 Cal.App.4th 525, 124 Cal.Rptr.2d 549, 551-52 (2002). The implication is that Carden had altered at least one previous check and the check at issue in this case as well.

The reason we term Schwab's arguing section 4-406(d)(2) "unguarded" is that the section cannot provide a defense for Schwab, because Allianz was not a customer of Schwab. Mac v. Bank of America, 76 Cal.App.4th 562, 90 Cal.Rptr.2d 476, 479-481 (1999); UnBank Co. v. Whittaker-Gomez, 438 N.W.2d 382, 384 (Minn.App.1989); 6C Lary Lawrence, Anderson on the Uniform Commercial Code § 4-406:10 (3d rev. ed.2003). It may provide a defense to Wells Fargo, but the district judge, having decided that Wells Fargo had no prima facie liability to Allianz, didn't consider any of the defenses that a bank might be able to interpose against a suit by a customer who had been negligent. See UCC §§ 3-406(a), 4-406(c), (d); Gulf States Section, PGA, Inc. v. Whitney National Bank, 689 So.2d 638, 641-42 (La.App.1997); 2 James J. White & Robert S. Summers, Uniform Commercial Code § 19-3 (4th ed.1995).

Maybe all the judge meant in the passage we quoted earlier was that since as he said the $287,651.23 check "didn't appear phony or altered in any way," it wouldn't have put Wells Fargo on notice that something was fishy; and then Wells Fargo might be off the hook even if the check was unauthorized. For while ordinarily a bank is strictly liable for charging a customer's account with an amount that the customer had not authorized the bank to pay (and Allianz was Wells Fargo's customer), UCC § 4-401(a), a bank and its customer can contract out of that strict liability, §§ 4-401(a), 4-103(a), and Wells Fargo argues that it did so in its contract with Allianz. This was another of Wells Fargo's defenses that the judge didn't reach.

We really don't know what the judge was thinking. His findings on the question whether the check was authorized are in irreconcilable conflict. But probably the best interpretation is that he thought it didn't matter. He clearly thought Schwab was off the hook even if the check was unauthorized, and let us consider whether he was correct about that at least. The common law of Illinois as of other states requires a bank, if someone tries to deposit a check made out to it in his own account, to exercise due care to make sure that the drawer (the third party) intended the depositor to receive the drawer's money. Mutual Service Casualty Ins. Co. v. Elizabeth State Bank, 265 F.3d 601, 613-14 (7th Cir.2001) (Illinois law); Douglass v. Wones, 120 Ill.App.3d 36, 76 Ill.Dec. 114, 458 N.E.2d 514, 522 (1983); Federal Ins. Co. v. NCNB National Bank of North Carolina, 958 F.2d 1544, 1549-50 (11th Cir.1992); Master Chemical Corp. v. Inkrott, 55 Ohio St.3d 23, 563 N.E.2d 26, 28-29 (1990); Allis Chalmers Leasing Services Corp. v. Byron Center State Bank, 129 Mich.App. 602, 341 N.W.2d 837, 839 (1983) (per curiam); cf. Murray v. Bank of America, N.A., 354 S.C. 337, 580 S.E.2d 194, 198 (2003); see also Boyd J. Peterson,...