The opinion
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF OHIO
EASTERN DIVISION
CDG ACQUISITION LLC., ) CASE NO. 1:19CV1198
)
Plaintiff, ) JUDGE CHRISTOPHER A. BOYKO
)
Vs. )
)
DOLLAR BANK, FEDERAL SAVINGS ) OPINION AND ORDER
BANK, ET AL., )
)
Defendants. )
CHRISTOPHER A. BOYKO, J:
This matter is before the Court on Plaintiff CDG Acquisition, LLC.’s (“CDG”)
Motion to Strike Defenses Based on Comparative Fault or Commercial Reasonableness.
(ECF # 22). For the following reasons, the Court denies Plaintiff’s Motion.
On May 24, 2019, CDG filed its Complaint with the Court, alleging that it owns
restaurants in several states that require it to issue a high volume of checks to multiple
vendors as well as governmental entities. CDG maintained a corporate bank deposit account
with Defendant JP Morgan Chase Bank, N.A. (“Chase”). At some point during the relevant
time period, CDG’s senior accountant, Angelo Kanaris, began writing fraudulent checks with
CDG’s authorized signature stamp to CDG vendors. Kanaris wrote or stamped on the back of
each fraudulent check the words “Dollar Bank Mobile Remote Deposit Only.” None of the
fraudulent checks were indorsed on behalf of any payee and Kanaris never signed the back of
the checks on his or anyone else’s behalf. Kanaris had a personal bank account with
Defendant Dollar Bank. Dollar Bank accepted the fraudulent checks and credited Kanaris’s
personal bank account despite the missing indorsements, the “deposit only” stamp and despite
the fact that the payee on the front of the check was an entity or individual other than Kanaris.
Furthermore, Defendant Chase paid the checks and charged them against CDG’s account
upon presentment.
CDG alleges Breach of Contract against Chase, Payments on Checks not Properly
Payable in violation of O.R.C. § 1304.30(A) against Chase, Failure to Exercise Ordinary
Care, in violation of O.R.C. §1303 and §1304 against both Defendants and Breach of Duty of
Good Faith, in violation of O.R.C. §1304 against both Defendants.
CDG’s Motion to Strike
According to its Motion, CDG contends Defendants’ defenses, based on comparative
negligence, fictitious payee rule, CDG’s duty to report and commercial reasonableness, must
be stricken because they are not available under applicable law. CDG moves to strike Dollar
Bank’s defenses at paragraphs 6,7,8,9,11,13,14,16 and 17 of its Answer and paragraphs
4,5,6,7,9,11,12,14, and 15 of Chase’s Answer.
CDG argues that the undisputed facts of the case bar any defenses asserting
comparative negligence or commercial reasonableness. CDG has produced the fraudulent
checks in this case. The checks have no indorsements, and are clearly marked “For Deposit
Only.” The checks were not made payable to Kanaris but were instead made payable to
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various purported vendors of CDG or governmental entities. The checks were deposited into
Kanaris’s account despite the above flaws and Chase paid the checks upon presentment from
CDG’s account.
Thus, under these facts, CDG contends the Uniform Commercial Code does not
permit comparative fault and commercial reasonableness defenses against CDG given the
obvious errors on the face of the checks.
Defendants’ Opposition
According to Defendants, CDG’s Motion to Strike is premature as no discovery has
taken place and the courts in cases cited by both CDG and Defendants had developed factual
records before ruling on the applicability of these defenses. Furthermore, Defendants argue
that the law allows comparative fault and commercial reasonableness defenses when the
drawer’s signature is forged even when there are indorsement deficiencies.
Standard of Review
Fed. R. Civ. P. 12(f) reads “ The court may strike from a pleading an insufficient
defense or any redundant, immaterial, impertinent, or scandalous matter.” In Brown &
Williamson Tobacco Corp. v. United States, 201 F.2d 819, 822 (6th Cir. 1953), the court
commented: “Partly because of the practical difficulty of deciding cases without a factual
record it is well established that the action of striking a pleading should be sparingly used by
the courts ... It is a drastic remedy to be resorted to only when required for the purposes of
justice ... The motion to strike should be granted only when the pleading to be stricken has no
possible relation to the controversy.” (internal citations omitted). “An affirmative defense
may be pleaded in general terms and will be held to be sufficient ... as long as it gives plaintiff
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fair notice of the nature of the defense.” Nexterra Sys. Corp. v. DeMaria Bldg. Co., Inc., No.
16 13454, 2017 WL 345682, at *1 (E.D. Mich. Jan. 24, 2017) quoting Lawrence v. Chabot,
182 Fed. Appx. 442, 456-57 (6th Cir. 2006). A motion to strike should be granted only if “it
appears to a certainty that plaintiffs would succeed despite any state of the facts which could
be proved in support of the defense and are inferable from the pleadings.” Operating Eng'rs
Local 324 Health Care Plan v. G & W Const. Co., 783 F.3d 1045, 1050 (6th Cir. 2015)
The decision whether to strike an affirmative defense lies within the Court’s
discretion. Conocophillips Co. v. Shaffer, No. 3:05CV7131, 2005 WL 2280393, at *2 (N.D.
Ohio 2005) (“Rule 12(f) permits the Court to act with its discretion in that it may strike
irrelevant and superfluous defenses or let them stand. There is absolutely no harm in letting
them remain in the pleadings if, as the Plaintiff contends, they are inapplicable.”).
At this stage of the proceedings the Court relies on the allegations in the Complaint.
In CDG’s Complaint, it alleges Kanaris, as CDG’s senior accountant, was responsible for
CDG’s accounts payable. Kanaris had the authority to enter invoices and issue checks to
vendors with CDG’s signature stamp. He issued several hundred fraudulent checks to
vendors which he then had deposited into his own personal account causing loss to CDG.
The Uniform Commercial Code (“UCC”) governs the contractual relationship
between a bank and its customer. Ed Stinn Chevrolet, Inc. v. Nat'l City Bank, 28 Ohio St. 3d
221, 226, 503 N.E.2d 524, 530 (1986), on reh'g, 31 Ohio St. 3d 150, 509 N.E.2d 945 (1987).
The UCC “is a delicately balanced statutory scheme designed, in principle, to ultimately shift
the loss occasioned by negotiation of a forged instrument to the party bearing the
responsibility for the loss. Ideally, the thief is held accountable. The unfortunate reality is
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that the loss is often shifted to the innocent party whose conduct or relationship with the
forger most facilitated the risk of loss.” Id. “In general, the drawee bank is strictly liable to
its customer drawer for payment of either a forged check or a check containing a forged
indorsement. In the case of a forged indorsement, the drawee generally may pass liability
back through the collection chain to the party who took from the forger and, of course, to the
forger himself if available. In the case of a forged check, however, liability generally rests
with the drawee.” Perini Corp. v. First Nat. Bank of Habersham Cty., Georgia, 553 F.2d 398,
403 (5th Cir. 1977).
The UCC imposes certain responsibilities on all parties to a banking transaction and
apportions liability accordingly. UCC 3-406 reads “Any person who by his negligence
substantially contributes to a material alteration of the instrument or to the making of an
unauthorized signature is precluded from asserting the alteration or lack of authority against a
holder in due course or against a drawee or other payor who pays the instrument in good faith
and in accordance with the reasonable commercial standards of the drawee's or payor's
business. § 3-406. Negligence Contributing to Alteration or Unauthorized Signature.,
Unif.Commercial Code § 3-406.
O.R.C. § 1304.35(C) places responsibility on a banking customer to review the
statements from the bank to ensure each check was properly authorized. Section (D) reads:
(D) If the bank proves that the customer failed with respect to an item to
comply with the duties imposed on the customer by division (C) of this
section, the customer is precluded from asserting either of the following
against the bank:
(1) The customer's unauthorized signature or any alteration on
the item if the bank also proves that it suffered a loss by reason
of that failure;
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(2) The customer's unauthorized signature or alteration by the
same wrongdoer on any other item paid in good faith by the
bank if the payment was made before the bank received notice
from the customer of the unauthorized signature or alteration
and after the customer had been afforded a reasonable period of
time, not exceeding thirty days, in which to examine the item or
statement of account and notify the bank.
However, if the negligent customer “proves” that the bank failed to exercise ordinary
care in paying on the check the loss is apportioned between the two. There is one caveat
though. “If the customer proves that the bank did not pay the item in good faith, the
preclusion under division (D) of this section does not apply.” Id.
Unlike the cases cited by both parties, the facts of this case contain some unique
aspects. Here, Kanaris had authority to write checks and use the CDG signature stamp to pay
vendors. However, it is unclear if the payee/vendors named in the checks were legitimate or
fictitious vendors. Furthermore, Kanaris appears to have added to the checks the “For deposit
only” restriction. There was no forged indorsement, as in some cases cited by Defendants,
rather, there was no indorsement at all. Lastly, the checks were deposited into Kanaris’s
personal account even though he was not the named payee on the checks
“A bank has a duty to examine a restrictive endorsement, follow its directions, and
therefore refuse to deposit funds into a particular account—or at least investigate the
matter—if the restrictive endorsement so requires.” Cont'l Cas. Co. v. Fifth/Third Bank, 418
F. Supp. 2d 964, 977 (N.D. Ohio 2006). “Comparative fault does not apply to the checks with
restrictive, missing, or illegible endorsements.” Id at 979. The district court in Continental
held that comparative fault under UCC 3-404 and 3-405 is not in play because these sections
only apply to forged endorsements and, as is the case here, a missing or illegible endorsement
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is not a forgery.
However, according to Defendants, the facts in this case implicate the “double
forgery” rule because the checks at issue contain both an unauthorized signature of the drawer
CDG and flawed indorsements. The Sixth Circuit described the rule as follows:
in single forgery situation in which only the indorsement is forged, the
drawer will have validly drawn the check intending the named payee to receive
the proceeds in exchange for some consideration given by the payee. When a
thief steals the check and forges the payee's indorsement, the payee of course
does not receive the proceeds. The thief passes the check to a collecting bank,
which forwards it to the drawee, which in turn pays it and debits the drawer's
account. At the time the theft is discovered, all parties except the payee are in a
neutral position: The collecting bank has paid the forger, but has been paid in
turn by the drawee; the drawee has paid the collecting bank, but has in turn
debited the drawer's account; and the drawer has lost the amount from his
account, but has received the consideration from the payee. Only the payee,
who has given consideration but has not received the proceeds, is in a negative
position. The payee has the ability to make himself whole either by recovering
against the drawer on the underlying transaction or by recovering against the
drawee for conversion. Thus, the loss suffered by the drawer or drawee can be
attributed to the forged indorsement, in the sense that the theft and forgery
resulted in the appearance of a payee with a rightful claim.
By contrast, in double forgery situations the drawer's signature, as well
as the indorsement, is forged, meaning that the check was never validly drawn
to a payee entitled to payment. Hence no true payee can appear with a claim
against the drawer or drawee, and neither of the latter parties can be said to
suffer a loss attributable to the forged indorsement. Rather, the loss results
from the drawee's making payment over a forged drawer's signature where
none was intended by the drawer.
Although the drawee is negligent in paying a check that lacks the
indorsement of a named payee, the drawer's loss is caused by the forged
drawer's signatures. The drawer did not intend payment to any payee, so no
payee can appear and demand payment. The danger guarded against by the
requirement of a proper indorsement is absent. It is irrelevant whether the
payee is real or fictitious and whether the indorsement is forged, missing, or
otherwise defective.
Nat'l Credit Union Admin. v. Michigan Nat. Bank of Detroit, 771 F.2d 154, 160 (6th Cir.
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1985).
CDG responds that this is not a double forgery scenario because there was no forged
indorsement, rather, there was no indorsement at all. Thus, CDG contends the doctrine does
not apply and commercial reasonableness and comparative fault defenses are not applicable.
Defendants point out, in the cases relied on by both parties, relevant facts concerning
the status of the payees, whether fictitious or legitimate, the authority of drawer signatory to
write the checks and how the signature was obtained, and whether the fraudulent check
writer acted alone were all fleshed out before the courts made their rulings, on summary
judgment. Thus, Defendants argue it is too early to determine whether these defenses have
“no possible relation to the controversy.”
The Court agrees that at this stage of the proceedings it cannot say that Defendants’
defenses have no possible relation to the controversy. Particularly in light of the proofs the
UCC requires of both sides in order to claim or disclaim particular defenses such as
comparative fault and commercial reasonableness.
Given the fact that the law disfavors motions to strike and that the courts that have
considered the applicability of the defenses raised by Defendants did so on summary
judgment and not on a motion to strike, the Court denies CDG’s Motion. The Court will
consider them on summary judgment after discovery fleshes out the facts further. This is the
best method for ensuring neither side is prejudiced in putting on or defending the case. As the
Sixth Circuit stated in Nat'l Credit Union “As we have indicated, however, an alternative
rationale for treating double forgeries as if they bore only forged drawer's signatures is that
the forged indorsement does not cause the drawer's loss. 771 F.2d at 159. “Regardless of the
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degree of the drawer's negligence in accepting a check with a defective
indorsement—regardless of whether the indorsement is forged, fails to show representative
capacity, or is altogether missing—the defect does not cause the drawer's loss. Causation, not
negligence, is the lynchpin of the Perini rule. “ Id.
Therefore, for the foregoing reasons, the Court denies CDG’s Motion.
IT IS SO ORDERED.
Date: May 7, 2020 /s/Christopher A. Boyko
CHRISTOPHER A. BOYKO
Senior United States District Judge
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