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Deljack, Inc., An Idaho Corporation v. U.S. Bank National Association

September 26, 2012

DELJACK, INC., AN IDAHO CORPORATION, PLAINTIFF,
v.
U.S. BANK NATIONAL ASSOCIATION, A NATIONAL BANKING ASSOCIATION, DEFENDANT.



The opinion of the court was delivered by: Edward J. Lodge United States District Judge

MEMORANDUM DECISION AND ORDER

INTRODUCTION

Pending before the Court are the parties' cross-motions for summary judgment. (Dkts. 35, 37). Additionally, plaintiff has filed a motion for leave to file an amended complaint seeking punitive damages (Dkt. 36). The matter has been fully briefed and the Court has determined oral argument would not assist the decision-making process. The Court will therefore decide the motions without a hearing. For the reasons explained below, the Court will deny both motions.

FACTS

Plaintiff DelJack, Inc. operates a business in Boise, Idaho known as the Crescent "No Lawyers" Bar & Grill. A long-time DelJack employee, Kristi "Cookie" Hurles, embezzled large sums of money from the company during roughly 2006 through 2010.

Hurles' responsibilities at the Crescent included serving, bartending, and bookkeeping. She was often tasked with personally depositing DelJack's daily cash receipts, along with company checks, into DelJack's bank account at U.S. Bank.

The cash component of the daily deposit is easy to explain -- it came from the company's business operations. Explaining the company checks is somewhat more complicated, and the specific facts related to that issue are discussed below. The key fact that emerges, however, is that Hurles often went to the bank with DelJack company checks in hand. These checks were made out to cash and contained the very common restrictive endorsement -- "For Deposit Only" -- on the backside.

U.S. Bank did not honor the restrictive endorsement on many of these checks. Instead, the bank handed cash over the counter to the person who showed up with the checks. Within the three-year period before this action was filed, the bank violated the For-Deposit-Only endorsement on 127 separate checks, which total $86,500.*fn1 DelJack seeks to recover that $86,500 in this action.

A key factual dispute is the scope of authority DelJack granted to Hurles. The bank says DelJack entrusted Hurles to cash the For-Deposit-Only checks and bring the cash back to the bar. DelJack, however, says Hurles had no such authority, and that she was supposed to deposit the For-Deposit-Only checks -- not cash them.

THE LEGAL STANDARD

Motions for summary judgment are governed by Rule 56 of the Federal Rules of Civil Procedure. Rule 56 provides that "[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). "A party asserting that a fact cannot be or is genuinely disputed must support the assertion by: (A) citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials; or (B) showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact." Fed. R. Civ. P. 56(c)(1).

The party moving for summary judgment has the initial burden of showing there are no genuine issues of material fact and that it is entitled to judgment as a matter of law. See Anderson v. Liberty Lobby, 477 U.S. 242, 247-48 (1986). Material facts are those necessary to the proof or defense of a claim, and are determined by reference to substantive law. Id. at 248. A fact issue is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id.

Once the moving party has met its initial burden, the nonmoving party has the burden of presenting evidence to show that a genuine issue of fact remains. The party opposing the motion for summary judgment may not rest upon the mere allegations or denials of her pleading, but must set forth specific facts showing that there is a genuine issue for trial. Id. at 248. If the non-moving party "fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial" then summary judgment is proper as "there can be no 'genuine issue of material fact,' since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial." Celotex Corp. v. Catrett, 477 U.S. 317, 322--23 (1986).*fn2

In applying the above standard, the Court must view the evidence in the light most favorable to the non-moving party. Anderson, 477 U.S. at 255. Additionally, when parties cross-move for summary judgment, the Court will consider each motions on its own merits. Fair Housing Council v. Riverside Two, 249 F.3d 1132, 1136 (9th Cir. 2001). Nonetheless, in ruling on cross-motions, the Court will consider the entirety of each party's evidentiary submission, regardless of which motion (or opposition) the evidence accompanied. Id. at 1136-37.

U.S. BANK'S MOTION FOR SUMMARY JUDGMENT

DelJack alleges three claims against U.S. Bank -- negligence, conversion, and declaratory judgment. The parties agree that the statutory limitations period for each of these claims is three years. See Idaho Code § 28-3-118(7) (three-year statute for conversion of an instrument); id. § 28-4-111 (three-year statute for actions relative to bank deposits and collections). Here, DelJack is seeking to recover checks cashed within this three-year limitations period -- November 2, 2007 through November 2, 2010.

The bank contends that two separate provisions of its Deposit Account Agreement independently bar DelJack's lawsuit. The first provision comes under the heading "Your Duty to Examine Your Statement," and the other under the "Number of Signatures" heading. The Court will address each provision in turn.

A. Duty to Examine Bank Statements

The bank first argues DelJack is barred from suing because it failed to examine its account statements and, within 30 days of receiving those statements, notify the bank of its failure to deposit the "For Deposit Only" checks. The bank relies on the following provision of the Deposit Account Agreement:

Your Duty to Examine Your Statement. As used in this section, the term "problem" means any error, alteration or unauthorized transaction (including, but not limited to, forged or missing signatures and excluding consumer electronic banking transactions) related to your account. Because you are in the best position to discover any problem, you will promptly examine your statement and report to us any problem on or related to your statement. You agree that we will not be responsible for any problem that:

(1) you do not report to us in writing within a reasonable time not to exceed 30 calendar days after we mail the statement (or make the statement available) to you,

(2) results from a forgery, counterfeit or alteration so clever that a reasonable person cannot detect it (for example, unauthorized checks made with your facsimile or other mechanical signature device or that look to an average person as if they contain an authorized signature; or

(3) as otherwise provided by law or regulation. . . .

You may not start a legal action against us because of any problem unless:

(a) you have given us the above notice and (b) the legal action begins within 1 year after we send or make your statement available to you.

See Sept. 15, 2009 Deposit Account Agreement, Ex. D-7 to Leonard Aff., Dkt. 35-13, at 20-21.*fn3

1. The Meaning of the Contractual Provision

The Court cannot find that this provision is susceptible to the meaning the bank gives it. That is, this section does not obligate DelJack to notify the bank of the bank's own failure to comply with restrictive endorsements. The provision does not even mention restrictive endorsements, much less the consequences of a bank's failure to comply with such an endorsement. Rather, when the section is viewed in context, it is apparent that the bank has just shortened the one-year statutory period for customers to alert banks of forged or unauthorized signatures. See Idaho Code § 28-4-406. The relevant UCC provision obligates customers to examine their statements for unauthorized signatures or alterations, and allows customer up to one year to notify the bank of such issues. Id. The agreement here shortens that notice period to 30 days.

The bank correctly points out that numerous courts have upheld deposit agreements that significantly shorten the statutory one-year period; in fact, one court upheld an agreement that shrunk the notice period to just 14 days. See Parent Teacher Ass'n v. Mfrs. Hanover Trust Co., 524 N.Y.S. 2d 336, 340 (N.Y. Civ. Ct. 1988) ("PTA was under a contractual duty to notify MHT in writing of any forgery or signature not in accordance with the signature card within fourteen days"); see also, e.g., Tatis v. U.S. Bancorp, 473 F.3d 672, 674-77 (6th Cir. 2007); Peters v. Riggs Nat'l Bank, 942 A.2d 1163, 1166-68 (D.C. 2008) (citing cases). But these cases typically deal with the customer's duty to alert the bank of forgeries. None held that a bank had imposed a duty on its customer to alert the bank of the bank's own failure to comply with a restrictive endorsement. The cases cited by the bank are thus inapposite.

The bank insists that because the term "problem" is defined in the agreement to include "any error" or "unauthorized transaction" "related to your account," DelJack's duty to report "problems" necessarily included a duty to report the bank's own failure to comply with the restrictive endorsement. But in making this argument, the bank is ignoring the central part of the provision, which states, "Because you [the customer] are in the best position to discover any problem, you agree to promptly examine your statement and report to us any problem . . . ." Id. at 20.

The UCC drafters realize that customers -- not the banks -- are in the best position to discover forgeries and altered signatures. See, e.g., Idaho Code § 28-4-406, cmt. 5 ("there is little excuse for a customer not detecting an alteration of his own check or a forgery of his own signature"). That is why § 4-406 obligates customers to notify the bank of unauthorized signatures or alterations. See, e.g., Garnac Grain Co. v. Boatmen's Bank & Trust Co. , 694 F. Supp. 1389, 1400 (W.D. Mo. 1988) ("section 4-406 was intended to encourage bank customers to promptly and diligently examine their bank statements in order to discover forgeries and alterations."). But the opposite is true for restrictive endorsements. In this situation, it is the bankthat is in the first and best position to discover the problem. As one court explains, when a depositary bank disregards a for-deposit-only endorsement, it not only subjects itself to liability for any losses resulting from its actions, but it also passes up what may well be the best opportunity to prevent the fraud. The presentation of a check in violation of a restrictive endorsement for deposit in the account of someone other than the restrictive indorser is an obvious warning sign, and the depositary bank is required to investigate the situation rather than blindly accept the check.

Underpinning & Found. Constructors, Inc. v. Chase Manhattan Bank, 386 N.E. 2d 1319, 1324 (N.Y. 1979). And so it is here. In this case, the problem presented itself right at the bank counter, when a non-signatory on the account showed up with checks marked "For Deposit Only," and requested cash instead.

Additionally, the contractual provision at issue here expressly mentions forgeries and obligates customers who make a claim against the bank to complete an affidavit of forgery.*fn4 Deposit Account Agmt., at 21. It states:

Within 30 days of mailing you agree to complete and return an affidavit of forgery on the form we provide you along with other information we may request. You further agree to file a police report if we request.

Deposit Agmt., at 21 (emphasis added). The requirement to submit an affidavit of forgerybolsters the Court's conclusion that this section is intended to deal with forgeries and similar issues (again, issues that the customer is in the best position to detect). An affidavit of "forgery" would have little bearing on the bank's failure to comply with a restrictive endorsement.

The Eighth Circuit addressed a somewhat similar issue in Douglas Companies v. Commercial National Bank of Texarkana, 419 F.3d 812 (8th Cir. 2005). In that case, the plaintiff deposited a $240,000 check, but the bank dropped a zero when it coded the check, thus crediting the plaintiff with a $24,000 deposit. The plaintiff sued to get a credit for the missing $216,000. The bank, however denied liability. It argued that plaintiff was barred from suing based on the parties' account agreement, which required plaintiff to review its bank statement and timely notify the bank of "'any unauthorized signatures, alterations, forgeries or any other errors in your account within 60 days of when we [the bank] make the statement available . . . .'" Id. at 817.

The court disagreed, upholding the district court's conclusion that the agreement related "only to alterations or forgeries resulting in unauthorized payments from the ...


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