The opinion
FILED
Jul 24 2018, 8:42 am
CLERK
Indiana Supreme Court
Court of Appeals
and Tax Court
ATTORNEYS FOR APPELLANTS ATTORNEY FOR APPELLEE
Hamish S. Cohen Patrick J. Ruberry
Sean P. Burke Litchfield Cavo, LLP
Mattingly Burke Cohen & Chicago, Illinois
Biederman LLP
Indianapolis, Indiana
IN THE
COURT OF APPEALS OF INDIANA
EngineAir, Inc. and JMA Rail July 24, 2018
Products, Inc., Court of Appeals Case No.
Appellants-Plaintiffs, 36A01-1709-CT-2177
Appeal from the
v. Jackson Superior Court
The Honorable
Centra Credit Union, Bruce Markel III, Judge
Appellee-Defendant. Trial Court Cause No.
36D01-1704-CT-13
Kirsch, Judge.
[1] After Angela Kincaid (“Kincaid”), an employee working for both EngineAir,
Inc. (“EngineAir”) and JMA Rail Products, Inc. (“JMA”), was convicted of
having embezzled more than $500,000 from the companies’ bank accounts, the
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companies sued Kincaid’s depositary bank,1 Centra Credit Union (“Centra
Credit”). Citing to Indiana’s version of the Uniform Commercial Code
(“UCC” or “the Act”) and common law negligence, the companies argued that
Centra Credit “failed to act with ordinary care when it cashed over 105
fraudulent checks written by Kincaid on EngineAir’s, JMA’s, and other related
entities’ accounts.” Appellants’ App. Vol. 2 at 10. On Centra Credit’s motion,
the trial court dismissed the companies’ complaint for failure to state a claim
pursuant to Indiana Trial Rule 12(B)(6).
[2] The companies raise one issue on appeal, which we restate as: Whether the
trial court erred when it dismissed the companies’ complaint for failure to state
a claim under Indiana Trial Rule 12(B)(6) after concluding that (1) Centra
Credit, as the depositary bank, owed the companies, as drawers, no duty of care
as a matter of law for the loss the companies sustained when Kincaid deposited
checks that she had stolen from the companies, made out to herself as payee,
and, on which she had forged the signature of the companies’ president;2 (2) the
UCC warranties created no warranty or statutory obligation from Centra Credit
to the companies; and (3) Centra Credit’s failure to report Kincaid’s extreme
banking activity as suspicious did not constitute a breach of duty.
1
“Depositary bank” means “the first bank to take an item even though it is also the payor bank, unless the
item is presented for immediate payment over the counter.” Ind. Code § 26-1-4-105.
2
It is not clear whether the Companies had the same president; however, in their complaint, the Companies
refer to the “Plaintiffs’ president’s signature.” Appellants’ App. at 12.
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[3] We affirm.
Facts and Procedural History
[4] EngineAir and JMA (together, “the Companies”), acting as “sister”
corporations and located in Jackson County, Indiana, are small, family-owned
and-operated manufacturing and supply businesses, with similar ownership and
management structures. Appellants’ Br. at 6. In their complaint, the Companies
pleaded the following facts. In the first quarter of 2013, the Companies and
JMA Railroad Supply Company (“JMA Supply”), a related corporation,
collectively hired Kincaid as their bookkeeper and internal accountant. In that
position, Kincaid was responsible for billing, accounts payable, accounts
receivable, handling bank deposits, as well as other “related financial matters.”
Appellants’ App. Vol. 2 at 12.
[5] Within one month of being hired, Kincaid began embezzling money from the
Companies and from JMA Supply by “cut[ting] checks to herself while
fraudulently forging the [Companies’] president’s signature.” Id. Kincaid
would then deposit those checks into her personal bank account with Centra
Credit. “Kincaid started her fraudulent scheme slowly to evade detection.”
Appellants’ Br. at 7. For example, in September, October, and December 2013,
she fraudulently deposited a total of four checks drawn on JMA Supply’s
account, totaling $16,712. We note that any claims relating to these checks are
time barred, and therefore, JMA Supply is not a party to this action. Id.
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[6] Kincaid’s fraudulent activity increased rapidly, and in May 2014, she deposited
into her Centra Credit account seven checks totaling $13,950, all of which were
written against JMA’s account. Appellants’ App. Vol 2 at 12. Beginning in
August 2014, Kincaid began depositing numerous forged checks into her
Centra Credit account on an increasingly frequent basis. For instance, in
August 2014, Kincaid deposited seven checks, dated August 7, 8, 13, 20, 22,
26[,] and 26, totaling $25,300. Id. Thereafter, the rate and amount of
fraudulent checks continued to increase. Id.
[7] By April 2015, the last full month before Kincaid’s illegal activity was
discovered, she deposited one or more checks on April 1, 2, 7, 8, 13, 15, 16, 17,
21, 24, 27, 28, and 30. Together, these checks totaled $116,300. Id. at 12-13.
All of those checks were drawn on EngineAir’s account and deposited into
Kincaid’s personal account at Centra Credit. In the ten months leading up to
May 2015, Kincaid deposited more than 100 fraudulent EngineAir checks. Id.
at 13. In total, Kincaid stole more than $540,450 from the Companies, all of
which was in the form of checks that Kincaid deposited into her personal
account with Centra Credit and then withdrew as cash immediately after each
check had cleared. Id. at 10, 13.
[8] On May 18, 2015, in the routine course of transferring funds to pay a vendor,
EngineAir’s president learned that EngineAir’s checking account had a balance
of only $2,000; the financial records prepared by Kincaid reflected a balance of
$178,000. Id. at 14. EngineAir evaluated the account and discovered that
Kincaid had been embezzling money from the Companies’ accounts. Kincaid
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was charged, pleaded guilty, and was sentenced to forty-one months in federal
prison.
[9] On April 11, 2017, the Companies filed their complaint seeking damages from
Centra Credit for the bank’s negligence in having accepted and deposited
dozens of fraudulent checks and allowing Kincaid to withdraw those funds
from her Centra Credit account.3 Appellants’ App. Vol. 2 at 11. The Companies
sought damages under the UCC and common law negligence. Id. at 10-17.
[10] On June 2, 2017, Centra Credit filed a Trial Rule 12(B)(6) motion to dismiss for
failure to state a claim. Centra Credit argued that: (1) the Companies could not
proceed, since under the general rule, a bank does not owe a non-customer a
duty of care; (2) negligence cases, generally, are preempted by the UCC; (3)
under the UCC, Centra Credit owes no duty to the Companies, and (4)
recovery of monetary damages by the Companies was precluded by the
economic loss doctrine.4 Id. at 23-32.
[11] The Companies responded, arguing that Centra Credit owed the Companies a
duty of care pursuant to the UCC, particularly, Indiana Code section 26-1-3.1-
3
The Companies seek to recover damages arising from a multitude of fraudulent checks, some of which may
be barred by the statute of limitations. Because this is a review of the grant of a motion to dismiss, we need
only determine whether the Companies’ complaint states a claim with respect to one of the checks.
4
During the August 2017 hearing on Centra Credit’s motion to dismiss, both parties addressed the question
of whether the economic loss doctrine prevented the Companies from bringing this suit. The trial court’s
Order, however, made no reference to the economic loss doctrine, and the parties have not raised that issue
on appeal. Furthermore, finding, as we do, that the Companies’ complaint was properly dismissed for failure
to state a claim, we need not address this issue.
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405, the UCC’s warranty provisions, and Indiana negligence law generally. Id.
at 63-77. The Companies argued that, even if Indiana were to adopt the general
rule that banks do not owe a non-customer a duty of care, “an award of
damages, is appropriate under the ‘exceptional circumstances’ of this case as
pled in the complaint because [Centra Credit] accepted numerous checks
totaling a large amount while not following its own internal policies or federal
regulations.” Id. at 64. The trial court heard argument on August 7, 2017, and
on August 23, 2017, it entered an Order (the “Order”) granting Centra Credit’s
motion to dismiss. The Companies now appeal.
Discussion and Decision
[12] We review de novo a trial court’s grant or denial of a motion to dismiss for
failure to state a claim, pursuant to Trial Rule 12(B)(6), giving no deference to
the trial court’s decision. Babes Showclub v. Lair, 918 N.E.2d 308, 310 (Ind.
2009). Such a motion tests the legal sufficiency of the plaintiff’s claim, not the
facts supporting it. Thornton v. State, 43 N.E.3d 585, 587 (Ind. 2015); Alford v.
Johnson Cnty. Comm’rs, 92 N.E.3d 653, 659 (Ind. Ct. App. 2017).
Inasmuch as motions to dismiss are not favored by the law, they
are properly granted only “when the allegations present no
possible set of facts upon which the complainant can recover.”
Mart v. Hess, 703 N.E.2d 190, 193 (Ind. Ct. App. 1998). Put
another way, a dismissal under Rule 12(B)(6) will not be affirmed
“unless it is apparent that the facts alleged in the challenged
pleading are incapable of supporting relief under any set of
circumstances.” Couch v. Hamilton Cnty., 609 N.E.2d 39, 41 (Ind.
Ct. App. 1993).
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Magic Circle Corp. v. Crowe Horwath, LLP, 72 N.E.3d 919, 922-23 (Ind. Ct. App.
2017) (quoting City of E. Chicago, Ind. v. E. Chicago Second Century, Inc., 908
N.E.2d 611, 617 (Ind. 2009)). “In reviewing the complaint, we take the alleged
facts to be true and consider the allegations in the light most favorable to the
nonmoving party, drawing every reasonable inference in that party’s favor.”
Hoosier Ins. Co. v. Riggs, 92 N.E.3d 685, 687 (Ind. Ct. App. 2018).
[13] The Companies filed their complaint seeking damages from Centra Credit “for
Centra’s negligence in accepting, cashing[,] and providing funds to [the
Companies’] employee and Centra’s customer[,] Angela Kincaid. [The
Companies] sought damages pursuant to common law negligence and [UCC]
provisions.” Appellants’ Br. at 5. The trial court, having heard the arguments of
counsel and having reviewed the law, dismissed the Companies’ complaint
pursuant to Trial Rule 12(B)(6) concluding:
1. Indiana has not established a duty of care between a mere
collecting bank and the customer of a payor bank;
2. There is no statutory law in Indiana that creates a warranty or
other statutory obligation from the Defendant collecting bank to
the Plaintiffs, individually or as customers of their bank, the
payor bank; and
3. Any failure of the Defendant bank to act in a commercially
reasonable manner or to report “Suspicious Activity” to federal
authorities is not a breach of any established duty to the
Plaintiffs.
Appellants’ App. Vol. 2 at 8.
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Duty of Care
[14] The Companies first contend that the trial court erred in dismissing their
complaint because, contrary to the trial court’s conclusion, a duty of care can
exist between a depositary bank and a non-customer drawer. The Companies
argue that “the question of whether a bank may owe a non-customer a duty has
been established,” and each court having addressed that issue “has found or
presumed that such a duty may exist.” Appellants’ Br. at 13 (citing Auto-Owners
Ins. Co. v. Bank One, 879 N.E.2d 1086 (Ind. 2008)).5 While a depositary bank
may, under certain circumstances, owe a duty of care to a non-customer,
because our review is de novo, the question before this court is whether Centra
Credit owed a duty of care to the Companies.
[15] In their complaint, the Companies asserted that pursuant to established Indiana
law and the UCC, Centra Credit owed the Companies “a duty to exercise
ordinary care in inspecting, negotiating and making a reasonable inquiry with
respect to the checks submitted by Kincaid.” Appellants’ App. at 14.
Specifically, the Companies claimed that: (1) Centra Credit failed to exercise
reasonable care in paying or taking the instruments at issue; (2) it was not
commercially reasonable for Centra Credit to take the checks at issue; (3)
Kincaid’s conduct should have raised red flags; (4) Kincaid’s activity was so
extreme, it should have triggered Centra Credit’s Suspicious Activity Reporting
5
We discuss Auto-Owners Ins. Co. v. Bank One, 879 N.E.2d 1086 (Ind. 2008) later in our decision.
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requirements under applicable federal law; (5) Centra Credit knew, suspected,
or should have known that the deposits and withdrawals were designed to
conceal unlawful activity; (6) Centra Credit violated its duty by failing to
exercise ordinary care when taking or paying the checks; and (7) the Companies
were injured by that breach of duty. Appellants’ App. at 14-16. The Companies
cited to no specific UCC sections in their complaint; however, in their response
to Centra Credit’s motion to dismiss, the Companies argued that Centra Credit
owed them a duty of care through Indiana Code section 26-1-3.1-405 and the
UCC’s warranty provisions. Appellants’ Br. at 5.
[16] The Companies suggest that common law negligence and the UCC operate
jointly and, therefore, the Companies can bring a common law negligence
action in addition to any UCC claim. Centra Credit counters that the UCC
“preempted negligence claims generally,” and, since the Companies’ claims fall
within the provisions of the UCC, any common law claim arising from Centra
Credit’s conduct is “displaced.” Appellee’s Br. at 8. Accordingly, we begin by
discussing the general applicability of the UCC and its interplay with common
law negligence.
[17] The Indiana General Assembly adopted the UCC with the intent that the Act
be “liberally construed and applied to promote its underlying purposes and
policies,” which include: (1) to simplify, clarify, and modernize the laws
governing commercial transactions; (2) to permit continued expansion of
commercial practices through custom, usage, and party agreements; and (3) to
make uniform the law among the various jurisdictions. Ind. Code § 26-1-1-
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102(1), (2).6 Comment 1 to UCC Section 1-102 explains that the Act “is drawn
to provide flexibility” so that it “will provide its own machinery for expansion
of commercial practices.” 7 In other words, the UCC “is intended to make it
possible for the law embodied in [that] Act to be developed by the courts in the
light of unforeseen and new circumstances and practices.” Ind. Code § 26-1-1-
102, cmt. 1.
[18] The drafters of the UCC determined that “Negotiable Instruments” and “Bank
Deposits and Collections” were proper subjects for commercial uniformity, and
the Indiana General Assembly adopted those laws into what are now Indiana
Code chapter 26-1-3.1 (“UCC Article 3.1”) and Indiana Code chapter 26-1-4
(“UCC Article 4”), respectively. A check is subject to provisions contained in
UCC Article 3.1. Ind. Code § 26-1-3.1-102(a), -104. Once deposited and
transferred through the banking system for payment, a check is also subject to
6
In this decision, all citations to the Indiana Code are found in Title 26 and Article 1. For ease of reference,
we will shorten any citation that appears in a sentence from Indiana Code section 26-1-1-102 to UCC Section
1-102.
7
In the Indiana Practice Series, the Author’s Comments to UCC Section 1-101 provide,
Indiana did not adopt the Official Comments to the UCC as part of the 2007 revisions to its
version of the UCC. Nevertheless, some courts look to the Official Comments to the UCC for
guidance in applying and interpreting Indiana’s version of the UCC. See Collins v. Pfizer, 2009
WL 126913, *2 (S.D. Ind. Jan. 20, 2009). “In general, Indiana courts treat the official
comments as an authoritative guide to the UCC.” See also In re Scott, 427 B.R. 123, 71 U.C.C.
Rep. Serv. 2d 314 (Bankr. S.D. Ind. 2010) (discussing persuasive authority of Official
Comments to UCC notwithstanding that Indiana did not adopt them as part of its version of the
UCC).
7 Ind. Prac., UCC Forms Annotated § 26-1-1-101 (3d ed.))
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UCC Article 4. The legislature has determined that when the two chapters
conflict, Article 4 governs. Ind. Code § 26-1-3.1-102(b).
[19] Since UCC Article 3.1 and Article 4 address complicated relationships and
include specific terms of art, an introduction to the specific nomenclature is
helpful. A “negotiable instrument” is an unconditional promise to pay a fixed
amount of money, payable to bearer, on demand, and with no other promises
from the drawer. Ind. Code § 26-1-3.1-104(a). The definition of “check”
includes “a draft, other than a documentary draft, payable on demand and
drawn on a bank.” Ind. Code § 26-1-3.1-104(f). The checks at issue were
negotiable instruments. The “drawer” is a person identified in a check as the
one ordering the payment; Kincaid’s use of the Companies’ checks made the
Companies the drawers. Ind. Code § 26-1-3.1-103(a)(5). “Drawee” means a
person ordered in a draft to make a payment; here, the Companies’ bank was
the drawee or payor bank.8 Ind. Code § 26-1-3.1-103(a)(4). An “endorsement
is the signature, other than that of a signer as maker, drawer, or acceptor, that
alone or accompanied by other words is made on an instrument for the purpose
of negotiating the instrument.” Ind. Code § 26-1-3.1-204. “Endorser” means
the person who makes the endorsement. Ind. Code § 26-1-3.1-204(b). Kincaid
became the endorser when she endorsed the back of each fraudulent check to
8
“Payor bank” means “a bank that is the drawee of the draft.” Ind. Code § 26-1-4-105(3).
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deposit it into her Centra Credit account; and, once Kincaid deposited the
forged checks, Centra Credit became the depositary bank.
[20] A check typically involves three parties: the drawer, on whose account the
check is drawn; the payee, to whose order the check is made out; and the
drawee or payor bank, from which the drawer’s check is to be paid. In form, a
check is an order to the drawee bank to pay the face amount of the check to the
payee. After receiving the check, the payee typically endorses it on the back in
the payee’s own name and then deposits it into the payee’s account at the
depositary bank. The depositary bank credits the check to the payee’s account
and sends the check through the check clearing system to the drawee bank for
payment, and if it is properly paid, the drawee then deducts the payment from
the drawer’s account. Any bank through which the check passes in the clearing
process is an “intermediary bank.” Ind. Code § 26-1-4-105(4). Any bank
handling the check for collection, including the depositary bank, but excluding
the payor bank, is referred to as a “collecting bank.” Ind. Code § 26-1-4-105(5).
[21] Because (1) not every check or collection scenario falls within the coverage of
the UCC and (2) “the proper construction of the [UCC] requires that its
interpretation and application be limited to its reason,” UCC Section 1-102,
comment 1, the drafters included Section 1-103, which provides,
Unless displaced by the particular provisions of [the UCC], the
principles of law and equity, including the law merchant and the
law relative to capacity to contract, principal and agent, estoppel,
fraud, misrepresentation, duress, coercion, mistake, bankruptcy,
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or other validating or invalidating cause, shall supplement the
provisions of IC 26-1.
Ind. Code § 26-1-1-103. That being said, where the UCC addresses a specific
commercial practice, the UCC displaces the common law. Cf. Farmers Loan &
Tr. Co. v. Letsinger, 652 N.E.2d 63, 65 (Ind. 1995) (“Because no particular
provision of the UCC governs the bank’s claim on the guaranty, Indiana
common law and the Indiana law of equity control.”). To determine whether
the common law has been displaced in the instant case, we consider the UCC
scheme and common law duty as applied to the parties before us.
[22] The Companies’ complaint is premised primarily on a theory that Centra Credit
owed the Companies a duty of care and breached that duty when it did not alert
the Companies about Kincaid’s unusual deposits and withdrawals. To recover
under a theory of negligence, a plaintiff must prove three elements:
(1) a duty on the part of the defendant to conform his conduct to
a standard of care arising from his relationship with the plaintiff,
(2) a failure of the defendant to conform his conduct to the
requisite standard of care required by the relationship, and (3) an
injury to the plaintiff proximately caused by the breach.
Harper v. Hippensteel, 994 N.E.2d 1233, 1237 (Ind. Ct. App. 2013) (quoting Webb
v. Jarvis, 575 N.E.2d 992, 995 (Ind. 1991)). Before reaching the questions of
breach and injury, we must consider the threshold matter of whether Centra
Credit owed a duty to the Companies. Absent a duty, there can be no breach
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and, therefore, no recovery in negligence. Williams v. Cingular Wireless, 809
N.E.2d 473, 476 (Ind. Ct. App. 2004), trans. denied.
[23] Whether a defendant owes a duty of care to a plaintiff is a question of law for
the court to decide. N. Ind. Pub. Serv. Co. v. Sharp, 790 N.E.2d 462, 466 (Ind.
2003); Williams, 809 N.E.2d at 476. In their brief, the Companies, claiming that
Centra Credit owes them a common law duty, focus on the “three-part
balancing test developed by [our Supreme Court].” Yost v. Wabash Coll., 3
N.E.3d 509, 515 (Ind. 2014). Those factors are: (1) the relationship between
the parties; (2) the reasonable foreseeability of the harm to the person injured;
and (3) public policy concerns. Id.; Williams, 809 N.E.2d at 476.
Relationship between the Centra Credit and the Companies
[24] The Companies’ entire argument regarding the relationship between the parties
is as follows: “[T]he parties relationship[,] that of the drawer of a check and the
depository bank, justifies a finding of duty, especially where, as here, the
dismissed complaint alleges Centra Credit knew or should have known of the
misconduct at issue and where special circumstances existed.” Appellants’ Br. at
23. Our court has said, “A duty of reasonable care is ‘not, of course, owed to
the world at large,’ but arises out of a relationship between the parties.” 9 Id.
9
We note that a duty can arise from a contractual relationship; however, here, the parties make no claim that
a contractual relationship exists. See Harper v. Hippensteel, 994 N.E.2d 1233, 1237 (Ind. Ct. App. 2013) (“duty
arises from the contractual relationship entered into between the doctor and patient”).
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[25] Indiana courts “have a long and continuous history of recognizing negligence
actions for statutory violations.” Kho v. Pennington, 875 N.E.2d 208, 212 (Ind.
2007). Citing to Section 3.1-405, the Companies claim that this section creates
a duty, which allows them to sue Centra Credit. In support of that claim, the
Companies cite to Auto-Owners Insurance Co. v. Bank One, 879 N.E.2d 1086,
1089-90 (Ind. 2008), in which our Supreme Court, analyzing UCC Section 3.1-
405, accepted that an employer could bring a cause of action, but found
negligence in account opening was insufficient, by itself, to state a claim
pursuant to UCC Section 3.1-405. Appellants’ App. at 5.
[26] Section 3.1-405(b) provides:
For the purpose of determining the rights and liabilities of a
person who, in good faith, pays an instrument or takes it for
value or for collection, if an employer entrusted an employee
with responsibility with respect to the instrument and the
employee or a person acting in concert with the employee makes a
fraudulent endorsement of the instrument, the endorsement is
effective as the endorsement of the person to whom the
instrument is payable if it is made in the name of that person. If
the person paying the instrument or taking it for value or for
collection fails to exercise ordinary care in paying or taking the
instrument and that failure substantially contributes to loss
resulting from the fraud, the person bearing the loss may recover
from the person failing to exercise ordinary care to the extent the
person bearing the loss proves that the failure to exercise ordinary
care substantially contributed to the loss.
Ind. Code § 26-1-3.1-405 (emphasis added). The plain meaning of Section 3.1-
405 is that it applies only to forged endorsements and not, like here, to forged
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signatures. This interpretation is supported by Comment 1 UCC Section 3.1-
405, which states:
Section 3-405 is addressed to fraudulent indorsements[10] made by
an employee with respect to instruments with respect to which
the employer has given responsibility to the employee. . . . This
section applies to instruments generally but normally the
instrument will be a check. Section 3-405 adopts the principle
that the risk of loss for fraudulent indorsements by employees who
are entrusted with responsibility with respect to checks should fall
on the employer rather than the bank that takes the check or pays
it, if the bank was not negligent in the transaction. Section 3-405
is based on the belief that the employer is in a far better position
to avoid the loss by care in choosing employees, in supervising
them, and in adopting other measures . . . .
We find that Centra Credit owes no duty to the Companies arising under
Section 3.1-405, and therefore no cause of action against Centra Credit arises
under that section.
Foreseeability and Public Policy
[27] The Companies also contend that Centra Credit owed them a common law
duty of care because it was foreseeable that a fraudulent transaction could result
in loss for the Companies and because public policy demands it. Appellants’ Br.
at 15-23. “The general stance of Articles 3 and 4 is to place losses for forged
drawer’s signatures initially on the payor bank and for forged indorsements or
10
We note that the Indiana Code uses “endorsement,” and the comments use “indorsement.” We use these
spellings interchangeably.
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alterations on the first party to take the instrument after the theft.” A. Brooke
Overby, Check Fraud in the Courts after the Revisions to U.C.C. Articles 3 and 4, 57
Ala. L. Rev. 351, 361 (2005). Naturally, a person who commits forgery by
means of a negotiable instrument should be responsible for any loss; however,
“when the curtain rises on the last act, the wrongdoer will either be off the
scene or insolvent.” 2 James J. White, Robert S. Summers, & Robert A.
Hillman, Uniform Commercial Code § 19:10 (6th ed. 2013). Recognizing this
principle, the drafters of the UCC contemplated the allocation of this loss.
“The U.C.C. accomplishes this allocation through a rather complicated series
of causes of action.” Overby, supra, at 361-62. “These actions are founded
upon contract-based, warranty-based, and property-based provisions scattered
throughout the Code.” Id. at 362.
[28] As pertinent to this appeal, that allocation takes into consideration: (1) whether
the fraudulent transaction involved an unauthorized signature, Ind. Code §§ 26-
1-3.1-401, 3.1-402, Ind. Code § 26-1-3.1-403, or a fraudulent endorsement, Ind.
Code § 26-1-3.1-405; (2) whether the loss occurred as the result of a transfer to a
collecting bank, Ind. Code §§ 26-1-3.1-416, 4-207, or a presentment to a payor
bank, Ind. Code §§ 26-1-3.1-417, 4-208; (3) whether a fraudulent endorsement
was committed at the hand of the drawer’s employee who had access to the
drawer’s checks, Ind. Code § 26-1-3.1-405, and (4) whether the drawer was
negligent in duties owed, Ind. Code § 26-1-4-406. This complex scheme reveals
that the drafters of the UCC considered both foreseeability and public policy
when they drafted the Act.
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[29] As a general rule, under the UCC a drawer is not liable on a negotiable
instrument unless the person or his agent signed the instrument. Ind. Code §
26-1-3.1-401, -402. The corollary to that rule is that a bank has the authority to
“charge against the account of a customer an item that is properly payable from
that account . . . .” Ind. Code § 26-1-4-401(a). “By implication, the section also
tells when a bank ‘may not’ charge the account.” White & Summers, supra, §
19.3. “An item is properly payable if it is authorized by the customer and is in
accordance with any agreement between the customer and the bank.” Id. A
bank does not “properly pay” over a forgery. Id. If, like here, a drawee bank
does not discover the forged signature, but makes a final payment on the check,
the drawee, in the absence of a drawer’s negligence, may not charge the
drawer’s account and, therefore, will bear the loss. Kincaid forged the signature
of the Companies’ president, and the Companies did not authorize the payment
of the forged checks, so without more, the Companies would not have been
liable for their losses.
[30] Under circumstances, like here, where the drawee pays over a forged signature
and withdraws the money from the drawer’s account, the UCC contemplates
that the drawer will have an action against the drawee bank for breach of the
customer’s contract with the bank or a statutory claim under UCC Section 4-
401.11 Id. Even so, the UCC “hold[s] each negligent party liable for its
11
Prior to the UCC’s 1990 amendments, “some courts found drawers of stolen checks to be proper plaintiffs
in conversion actions”; however, “[w]ith the 1990 addition of section 3-420, the conversion action is no
longer available to drawers of stolen checks or to payees who never had actual or constructive possession of
Court of Appeals of Indiana | Opinion 36A01-1709-CT-2177 | July 24, 2018 Page 18 of 25
substantial contribution to the loss.” White & Summers, supra, §19.14. “This
allocation of liability based on comparative negligence was incorporated into
the [Act] as part of the 1990 amendments to Articles 3[.1] and 4.” Id.
[31] That allocation occurs, in part, through UCC Section 4-406, which requires a
bank to make “available to a customer a statement of account showing payment
of items for the account available to a customer” sufficient for the customer to
identify the items paid. Ind. Code § 26-1-4-406(a). Under UCC Section 4-
406(c), the customer must then
exercise reasonable promptness in examining the statement or
the items to determine whether any payment was not authorized
because of an alteration of an item or because a purported
signature by or on behalf of the customer was not authorized. If,
based on the statement or items provided, the customer should
reasonably have discovered the unauthorized payment, the
customer must promptly notify the bank of the relevant facts.
Ind. Code § 26-1-4-406(c). If the bank proves that the customer failed, with
respect to an item, to comply with the duties imposed on the customer by
subsection (c), “the customer is precluded from asserting against the bank: . . .
the customer’s unauthorized signature . . . 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 . . . and after
stolen instruments bearing their names.” UCC Section 3.1-420(a), in pertinent part provides, “An action for
conversion of an instrument may not be brought by: (1) the issuer or acceptor of the instrument; or (2) a
payee or endorsee who did not receive delivery of the instrument either directly or through delivery to an
agent or a co-payee.” Ind. Code § 26-1-3.1-420.
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the customer had been afforded a reasonable period of time, not exceeding
thirty (30) days, in which to examine the item or statement of account and
notify the bank.” Ind. Code § 26-1-4-406(d)(2).
[32] As Centra Credit correctly notes, imposing a duty of reasonable care on Centra
Credit, as a depositary bank, to monitor checks with forged signatures, would
place Centra Credit in the position of being an insurer for non-customers
unfortunate enough to hire thieves and embezzlers. Appellee’s Br. at 13.
Furthermore, to recognize this putative duty between Centra Credit and the
Companies “would ultimately undermine UCC Section 4-406, which places a
duty on the account holder to “promptly report any unauthorized signature on
a check or other financial instrument.” Appellee’s Br. at 13-14. The drafters of
the UCC determined that the loss should be placed on the party best able to
avoid it. The UCC’s provisions reflect that Centra Credit, as the depositary
bank, was not in the best position to avoid this loss when the loss arose from the
forged signature of the Companies’ president, a signature with which Centra
Credit had no familiarity.
[33] With the goal to simplify, clarify, and modernize the laws governing
commercial transactions and allow continued expansion of commercial
practices through custom and usage, the drafters of the UCC intended to bring
this foreseeable fraudulent commercial transaction under the UCC.
Accordingly, we conclude that the Companies have no claim of negligence at
common law. Instead, as non-customers, their remedy, if any, must arise from
the UCC.
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Transfer and Presentment Warranties
[34] Without citation to a specific UCC section, the Companies also argue that they
can pursue a claim against Centra Credit for breach of “the UCC’s warranty
provisions.” Appellants’ Br. at 5. Chapter 3.1 and Chapter 4 include two types
of warranties: “transfer” warranties and “presentment” warranties. The UCC
addresses “transfer warranties” in Indiana Code sections 3.1-416 and 4-207 and
“presentment warranties” in Indiana Code sections 3.1-417 and 4-208.12 These
warranties “allow banks to shift all or part of the losses from forgery . . . to each
other or to customers.” Melissa Waite, Check Fraud and the Common Law: At the
Intersection of Negligence and the Uniform Commercial Code, 54 B.C. L. Rev. 2205,
2214 (2013).
[35] The Companies claim that Insurance Company of North America Insurance v.
Purdue National Bank of Lafayette, 401 N.E.2d 708 (Ind. Ct. App. 1980)
(hereafter, “N.A. Insurance”) is the “leading case on point” to support their
claim that a depositary bank may owe a non-customer a duty of care.
Appellants’ Br. at 13. Of importance to the Companies is the N.A. Insurance
court’s reliance on the reasoning and holding set forth by the California
Supreme Court in Sun ‘n Sand, Inc. v. United California Bank, 582 P.2d 920
12
Prior to the UCC’s 1990 amendments, the transfer warranties and presentment warranties were contained
in one section, Section 3-417 for negotiable instruments and Section 4-207 for bank deposits and collection. 2
James J. White, Robert S. Summers, & Robert A. Hillman, Uniform Commercial Code § 19:10 (6th ed. 2013).
As part of the amendment, and to help clarify what warranties were granted, the UCC drafters “divided
‘transfer’ warranties from ‘presentment’ warranties and [gave] each of them its own section in Article 3 and
Article 4.” Id.
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(1978). Appellants’ Br. at 14. Sun ‘n Sand held that a drawer whose account was
debited by his bank is a “payor” entitled to claim the benefits under the
warranties of Sections 3-417 and 4-207, which at that time extended to “the
payor bank or other payor who in good faith pays or accepts the item.” Ins. Co.
of N. Am., 401 N.E.2d at 712 (citing Sun ‘n Sand, 582 P.2d at 928). Under the
holdings in N.A. Insurance and Sun ‘n Sand, a drawer could maintain an action,
under Sections 3-417 and 4-207, for breach of warranty against a collecting
bank. Sun ‘n Sand, 582 P.2d at 928-29.
[36] In 1990, however, the drafters of the UCC amended Sections 3-417 and 4-207,
removing the “payor” language upon which the California Supreme Court
relied and, in so doing, expressly rejected the reasoning and holding of Sun ‘n
Sand.13 Comment 2 to Section 3.1-417 clearly states,
There is no warranty made to the drawer under subsection (a)
when presentment is made to the drawee. Warranty to the
drawer is governed by subsection (d) and that applies only when
presentment for payment is made to the drawer with respect to a
dishonored draft. In Sun ‘n Sand . . . , the court held that under
former Section 3-417(1) a warranty was made to the drawer of a
check when the check was presented to the drawee for payment.
The result in that case is rejected.
13
N.A. Insurance was superseded by statute as stated in Conder v. Union Planters Bank, N.A., 384 F.3d 397, 399
(7th Cir. 2004). Likewise, Sun ‘n Sand was superseded by statute as stated in Bhaskar v. Farmers & Merchants
Bank, 2017 WL 3381390, at *1 (Cal. Ct. App. Aug. 7, 2017).
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[37] Because the Sun ‘n Sand holding was rejected by the 1990 amendment, so too
was the result in N.A. Insurance. The Companies have no causes of action
against Centra Credit for breach of warranty under the now superseded
reasoning in N.A. Insurance.
Bank Secrecy Act and Suspicious Activity Report
[38] The Companies contend that Centra Credit’s failure to comply with the
reporting requirements of the Bank Secrecy Act (“the BSA”), 31 U.S.C. §§
5311-5330 and 31 C.F.R. Chapter X, and Suspicious Activity Reports (“SARs)14
resulted in loss to the Companies because, had those reports been filed, the
Companies could have stopped Kincaid’s embezzlement sooner. Appellants’ Br.
at 10-11, 22. Underlying this argument is the Companies’ assumption that the
Companies are parties who should benefit from those federally mandated
requirements of the BSA and, therefore, had a claim against Centra Credit for
breaching its duty to the Companies when Centra Credit did not file the SARs
to report Kincaid’s “extreme” banking activity. Appellants’ Br. at 10.
[39] While we find no discussion of this issue in Indiana law, courts that have
considered the question have found that the BSA does not create or authorize a
private right of action. B.E.L.T., Inc. v. Wachovia Corp., 403 F.3d 474, 476 (7th
Cir. 2005) (regulation requiring banks to notify Treasury Department of known
or suspected criminal violation does not create private action for damages);
14
The Companies did not provide a specific citation for the SARs.
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AmSouth. Bank v. Dale, 386 F.3d 763, 777 (6th Cir. 2004) (the BSA does not
create a private right of action); Ventura v. Cent. Bank, 515 S.W.3d 680, 682-83
(Ky. Ct. App. 2017) (“[T]he BSA provides financial institutions . . . immunity
under its safe harbor provision from lawsuits based on the financial institutions’
report or disclosure of suspicious activity. 31 U.S.C. § 5318(g)(3)(A).”);
Marchak v. JPMorgan Chase & Co., 2016 WL 3911926, at *3 (E.D.N.Y. July 15,
2016)15 (“The BSA does not authorize a private right of action.”); Grad v.
Associated Bank N.A., 801 N.W.2d 349, 2011 WL 2184335 (Wis. Ct. App. 2011)
(no private right of action created by BSA); El Camino Res., Ltd. v. Huntington
Nat’l Bank, 722 F. Supp. 2d 875, 923 (W.D. Mich. 2010) (BSA does not create
private cause of action), aff’d by, El Camino Res. Ltd. v. Huntington Nat. Bank, 712
F.3d 917, 919 (6th Cir. 2013) (BSA does not create private cause of action);
Hannien v. Fedoravitch, 583 F.Supp.2d 322, 326 (D. Conn. 2008) (holding that
neither the Patriot Act nor the BSA authorizes a private right of action).
Because there can be no private right of action for a violation of the BSA and its
SARs reporting requirements, Centra Credit’s failure, if any, to file such reports
would not support the Companies’ cause of action.
[40] We find that under the facts of this case, the UCC has displaced any cause of
action that the Companies may have against Centra Credit. Because the
Companies have alleged no theory under which Centra Credit could be liable
15
“While not binding on Indiana courts, we observe that the Federal Rules of Appellate Procedure permit
citation to unpublished opinions issued after January 1, 2007. FRAP 32.1(a).” Triplett v. USX Corp., 893
N.E.2d 1107, 1121 n.8 (Ind. Ct. App. 2008), trans. denied.
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for the loss the Companies sustained from Kincaid’s forged checks, we affirm
the trial court’s grant of Centra Credit’s motion to dismiss for failure to state a
claim.16
[41] Affirmed.
Baker, J., and Bradford, J., concur.
16
In their Reply Brief, the Companies raise for the first time the argument that the “UCC does not bar
Plaintiffs’ right to seek relief for Centra [Credit]’s aiding and abetting of intentional torts, fraudulent
conduct[,] and breaches of fiduciary duty.” Appellants’ Reply Br. at 4. “No new issues shall be raised in the
reply brief.” Ind. Appellate Rule 46(C). “The law is well settled that grounds for error may only be framed
in an appellant’s initial brief and if addressed for the first time in the reply brief, they are waived.” Monroe
Guar. Ins. Co. v. Magwerks Corp., 829 N.E.2d 968, 977 (Ind. 2005); see Crossmann Cmty., Inc. v. Dean, 767
N.E.2d 1035, 1044 (Ind. Ct. App. 2002) (issues raised for the first time in a reply brief are deemed waived)).
Accordingly, this issue is waived.
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