Affirming the lower court's ruling, the Appellate Court of Illinois for the Third District recently upheld the dismissal of a depositor account customer's claim for common law negligence against the bank, where the deposit account customer drew on a counterfeit check before the final settlement of the check.
In so ruling, the Court held that because the account agreement and UCC set forth the bank's duties and defined ordinary care, the UCC and not the common law controlled. Because the account agreement placed risk of loss on the customer until the check finally settled, the customer's complaint failed to state a claim.
The Court further held dismissal of the negligence claim was appropriate because claims sounding in tort for purely economic damages are barred by the "economic loss" doctrine.
A copy of the opinion is available at: http://www.illinoiscourts.gov/Opinions/AppellateCourt/2013/3rdDistrict/3120832.pdf.
A bank and its deposit account customer entered into an account agreement. The customer deposited a $350,000 check, and then transferred $210,00 and $60,000 from the account. Several days later, the check was returned to bank uncollected. The bank notified the customer and charged back $350,000 to the account on the same day.
The customer filed suit against the bank, alleging negligence arising out of the bank's "duty to act with ordinary care by observing such reasonable commercial standards as prevail in the area where the [b]ank conducts business," and that the bank breached this duty by failing to inquire about the circumstances in which the customer obtained the check, did not recognize the check was counterfeit, and did not advise the customer that funds should not be drawn until final payment given the nature of the check and the account, and finally because bank did not notify the customer at the earliest time it knew or should have known that the subject check would not be paid.
The bank moved to dismiss, attaching the account agreement which provided that the customer agrees to be jointly and severally liable for any account shortage resulting from charges or overdrafts, and also attaching an affidavit of the bank's executive vice president/market president, which provided that there was nothing on the face of the check that gave any indication it may be dishonored.
The trial court dismissed the customer's complaint, finding that bank did not owe a duty under the common law because the UCC "provides a comprehensive remedy for check processing which places the risk of loss on the depositor until final collection," and that the complaint was barred under the economic loss doctrine. The customer appealed.
As you may recall, the UCC governs the relationship between a bank and its customer, and sets forth responsibilities of a collecting an bank, which include exercising ordinary care "in presenting an item or sending it for presentment," "sending notice of dishonor for nonpayment or returning an item," "settling for an item when the bank receives final settlement," and "notifying its transferor of any loss or delay in transit within reasonable time after discovery." 810 ILCS 5/4-202(a), (b).
First, the Appellate Court analyzed whether the bank owed a duty to the customer and whether the complaint stated a cause of action for negligence. The Court held that the duty owed to the customer was governed by the UCC and the account agreement based upon the facts set forth in the record and the amended complaint. The Court recognized that the account agreement placed risk of loss on the customer until final settlement of the check. Further, the terms of the agreement did not require the bank to investigate the genuineness of the check or to warn the customer not to rely on the funds until final settlement. Therefore, based upon the account agreement, the bank did not violate any duty owed to the customer.
Next, the Court held that the customer failed to allege bank breached any duties under the UCC. Under the UCC, a collecting bank exercises ordinary care when it "presents an item, sends notice of dishonor, finally settles an item, or timely notifies the transferor of any delay by performing such actions before midnight following receipt, notice or settlement of an item." And, the UCC displaces common law duties for a collecting bank.
Both the UCC and the account agreement placed risk of loss on the customer until final settlement, the bank's affidavit established the check on its face did not indicate it was counterfeit and the customer did not offer any facts disputing the affidavit or that the bank did not satisfy its responsibilities of a collecting bank under the UCC. Here, the bank processed the check under its standard procedures, received notice that the check was not collectable, and informed the customer on the same day. Therefore, because the customer failed to assert that the bank failed to timely perform any of its duties under the UCC, the customer failed to assert a claim for negligence.
The Appellate Court also examined whether the customer's claim for negligence was barred by the economic loss doctrine. As you may recall, under the economic loss doctrine, a plaintiff cannot recover for solely economic loss under a tort theory of negligence. There is an exception for service providers, such as attorneys or accountants, where the duty arises out of contract.
The Court held that the economic loss doctrine applied because the bank and the customer entered into a binding account contract, which defined the parties' responsibilities. The customer's reliance upon case law inferring that the implied duty of care owed in every contract may support an exception to the economic loss doctrine was unavailing. In Mutual Service Casualty Ins. Co. v. Elizabeth State Bank, the Seventh Circuit looked to extra-contractual duties owed by attorneys and accountants, which would preclude application of the economic loss doctrine. However, in the instant case, the account agreement and the UCC set forth the bank's duties and responsibilities, and recognized there was no extra-contractual relationship, distinguishing Mutual Service.
Accordingly, because the law customer's claim was based solely on economic loss, it was barred from pursuing a tort action.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Chicago, Illinois 60602
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