Whitaker v. Wedbush Sec., Inc.

• Decision Date: 19 March 2020
• Docket Number: Docket No. 124792
• Citation: 162 N.E.3d 269,443 Ill.Dec. 635,2020 IL 124792
• Parties: James Q. WHITAKER et al., Appellants, v. WEDBUSH SECURITIES, INC., Appellee.
• Court: Illinois Supreme Court

2020 IL 124792

162 N.E.3d 269

443 Ill.Dec. 635

James Q. WHITAKER et al., Appellants,

v.WEDBUSH SECURITIES, INC., Appellee.

Docket No. 124792

Supreme Court of Illinois.

Opinion filed March 19, 2020.

Steven H. Lavin, Jennifer J. Gedville, and Lindsey Z. Lampros, of Lavin & Gedville, P.C., of Highland Park, for appellants.

Jeffry M. Henderson, Robert B. Christie, Todd E. Pentecost, and Brian C. Miller, of Greenberg Traurig, LLP, of Chicago, for appellee.

JUSTICE KILBRIDE delivered the judgment of the court, with opinion.

¶ 1 In this case, we construe article 4A of the Illinois Uniform Commercial Code (UCC) ( 810 ILCS 5/4A-101 et seq. (West 2014)), to determine whether it applies to the defendant futures commission merchant. The appellate court held the defendant does not fall within the scope of article 4A because it does not meet the statute's definition of a "bank" ( 810 ILCS 5/4A-105(a)(2) (West 2014)). Accordingly, the appellate court affirmed the trial court's judgment denying plaintiffs a refund under article 4A for amounts lost due to unauthorized funds transfers. 2019 IL App (1st) 181455-U, 2019 WL 1319858. For the following reasons, we reverse the appellate court's judgment and remand to the trial court for further proceedings.

¶ 2 BACKGROUND

¶ 3 Plaintiff James Q. Whitaker¹ was a physician residing in Georgia. He owned and controlled plaintiff Pathology Institute of Middle Georgia, P.C. In 1987, plaintiffs opened commodity futures trading accounts with Goldenberg, Hehmeyer & Company. Whitaker signed a customer agreement at that time. The plaintiffs’ trading accounts were transferred to different companies over the years, first to Penson Worldwide and then to KCG Futures. Finally, in December 2014, the two trading accounts were assigned to defendant Wedbush Securities, Inc., when KCG Futures sold its futures commission merchant business to defendant.

¶ 4 Plaintiffs did not enter into a new customer or security agreement with defendant. Defendant held plaintiffs’ funds in customer segregated accounts at BMO Harris Bank (BMO Harris). BMO Harris provided an online portal for defendant to process wire transfers for its customers.

¶ 5 Shortly after defendant purchased plaintiffs’ trading accounts, it received several wire transfer requests by e-mail purporting to be from plaintiffs. The e-mails, however, were actually sent by a third party who had hacked Whitaker's e-mail account. After assuming control of Whitaker's e-mail account, the hacker could send wire transfer requests to defendant and intercept defendant's e-mail replies.

¶ 6 Between December 17 and December 29, 2014, the hacker sent several unauthorized e-mail requests to wire transfer funds from plaintiffs’ trading accounts. Defendant rejected an initial request because it sought the transmission of funds to a third party. Later that afternoon, defendant received another e-mail requesting wire transfer of funds to an account purportedly held by plaintiff the Pathology Institute of Middle Georgia at a bank in Poland. Defendant completed that wire transfer the next day. Defendant subsequently completed three other wire transfers to the bank in Poland after receiving requests from Whitaker's e-mail account. Defendant used the online portal to transmit each of the four wire transfer requests to BMO Harris for execution. The unauthorized wire transfers totaled $374,960.

¶ 7 On each occasion, defendant sent an e-mail to Whitaker's e-mail account acknowledging its receipt of the wire transfer request and a subsequent e-mail confirming the completed wire transfer. Defendant also e-mailed Whitaker account statements on each of the days it sent a wire transfer, but the hacker apparently intercepted those statements. On December 29, 2014, Whitaker contacted defendant after he received an account statement containing an incorrect balance. On January 12, 2015, Whitaker received account statements from defendant reflecting the unauthorized transfers that occurred in December 2014.

¶ 8 After defendant refused plaintiffs’ demand for return of the transferred funds, plaintiffs filed suit in the circuit court of Cook County asserting claims of fraudulent concealment and seeking a refund of the transferred funds under article 4A of the UCC ( 810 ILCS 5/4A-101 et seq. (West 2014)). The trial court granted defendant's motion for summary judgment on the fraudulent concealment counts, leaving only plaintiffs’ claims under article 4A.

¶ 9 The claims based on article 4A proceeded to a bench trial. During the bench trial, the circuit court excluded plaintiffs’ exhibit No. 11, consisting of printouts of a website purporting to show that defendant's services included personal checking, savings, and lending. Following the bench trial, the circuit court entered judgment for defendant on the UCC counts, stating the evidence did not establish that defendant operated as a "bank" under the definition of that term in article 4A ( 810 ILCS 5/4A-105(a)(2) (West 2014)). The circuit court found it was unnecessary to consider whether defendant's actions were commercially reasonable given that defendant did not meet the definition of a bank and, therefore, was not subject to the provisions of article 4A.

¶ 10 On appeal, plaintiffs contended, in pertinent part, that the circuit court erred in denying admission of exhibit No. 11 and in holding plaintiffs were not entitled to relief under article 4A of the UCC. The appellate court held the circuit court did not abuse its discretion in excluding exhibit No. 11 because plaintiffs failed to provide proper authentication for that exhibit. 2019 IL App (1st) 181455-U, ¶ 46.

¶ 11 On the merits of the article 4A claim, the appellate court held plaintiffs failed to prove by a preponderance of the evidence that defendant was a bank, as required to establish their claim under article 4A. 2019 IL App (1st) 181455-U, ¶ 56. The appellate court observed that, in cases under articles 3 and 4 of the UCC, courts have held that offering checking services is a key factor in determining whether an entity is a bank. 2019 IL App (1st) 181455-U, ¶ 68. The admissible evidence did not indicate that defendant offered checking services to its futures commission customers. 2019 IL App (1st) 181455-U, ¶ 70. Based on the language of the UCC, its official comments, and the case law interpreting articles 3, 4, and 4A, the appellate court held it could not conclude that defendant was engaged in the business of banking. 2019 IL App (1st) 181455-U, ¶ 70. The circuit court's judgment in favor of defendant on the article 4A claims was, therefore, affirmed. 2019 IL App (1st) 181455-U, ¶ 71.

¶ 12 We allowed plaintiffs’ petition for leave to appeal ( Ill. S. Ct. R. 315 (eff. July 1, 2018)).

¶ 13 II. ANALYSIS

¶ 14 On appeal to this court, plaintiffs contend article 4A applies to this case because defendant acted as a bank within the meaning of that term in the statute. Plaintiffs argue the appellate court construed the term "bank" much too narrowly. According to plaintiffs, defendant falls within the scope of article 4A because it is a financial institution acting on behalf of its customers in funds transfers. Plaintiffs maintain that the plain language of article 4A and the official comments establish that defendant is a bank within the meaning of the statute.

¶ 15 Defendant responds that article 4A does not apply here because it was not engaged in the business of banking. Plaintiffs failed to present any admissible evidence showing defendant offered checking services, deposit accounts, loan services, or other traditional services constituting the business of banking. Defendant argues it only acted as plaintiffs’ agent by receiving wire transfer requests and forwarding them to BMO Harris Bank for processing.

¶ 16 In this appeal, we must construe article 4A to determine whether defendant qualifies as a bank within the meaning of the statute. The construction of a statute is a question of law reviewed de novo . Bank of New York Mellon v. Laskowski , 2018 IL 121995, ¶ 12, 423 Ill.Dec. 56, 104 N.E.3d 1145. When construing a statute, our primary objective is to ascertain and give effect to the legislature's intent. Accettura v. Vacationland, Inc. , 2019 IL 124285, ¶ 11, 440 Ill.Dec. 636, 155 N.E.3d 406. The most reliable indicator of legislative intent is the statutory language, given its plain and ordinary meaning. In re Marriage of Goesel , 2017 IL 122046, ¶ 13, 421 Ill.Dec. 949, 102 N.E.3d 230. When the language of a statute is clear and unambiguous, we must apply it as written, without resort to extrinsic sources to determine legislative intent. Raab v. Frank , 2019 IL 124641, ¶ 18, 441 Ill.Dec. 549, 157 N.E.3d 470. We may not depart from the plain language of a statute by reading in exceptions, limitations, or conditions conflicting with the expressed legislative intent. Metropolitan Life Insurance Co. v. Hamer , 2013 IL 114234, ¶ 18, 371 Ill.Dec. 766, 990 N.E.2d 1144. In construing the UCC, this court has also looked to the UCC official comments to discern the legislature's intent. MidAmerica Bank, FSB v. Charter One Bank, FSB , 232 Ill. 2d 560, 570, 329 Ill.Dec. 1, 905 N.E.2d 839 (2009).

¶ 17 Article 4A of the UCC was drafted in 1989 to address a dramatic increase in wholesale wire transfers between financial institutions and other commercial entities. Choice Escrow & Land Title, LLC v. BancorpSouth Bank , 754 F.3d 611, 616 (8th Cir. 2014). The drafters sought to create a legal framework to balance the rights and obligations between a bank and its institutional customers when completing funds transfers. Choice Escrow & Land Title , 754 F.3d at 616.

¶ 18 Relevant to this appeal, article 4A balances the risk involved if a third party steals a customer's identity and issues a fraudulent payment order to a bank. Choice Escrow & Land Title , 754 F.3d at 616. A bank is generally required to refund amounts lost through unauthorized payment orders. See 810 ILCS 5/4A-204(a) (West 2014) (requiring bank...