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Continental Casualty Company, Inc. v. American National Bank and Trust Company of Chicago

Illinois Appellate Court


March 29, 2002

CONTINENTAL CASUALTY COMPANY, INC., ASSIGNEE OF GENERAL AUTOMATION, INC., PLAINTIFF-APPELLANT,
v.
AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, DEFENDANT-APPELLEE.

Appeal from the Circuit Court of Cook County. No. 97 L 5050 Honorable David G. Lichtenstein, Judge Presiding

The opinion of the court was delivered by: Presiding Justice Hall

UNPUBLISHED

Plaintiff, General Automation, Inc. (GAI), appeals from the November 23, 1999, order denying its motion to reconsider. On April 30, 1997, GAI filed a two-count complaint against defendant, American National Bank (ANB). Count I sought damages for common law breach of contract, and count II sought damages for violation of section 9 of the Illinois Uniform Fiduciaries Act (the Act) (760 ILCS 65/9 (West 1996)). GAI eventually assigned all of its causes of action, rights and claims it had against ANB to the Continental Casualty Insurance Company.

On June 2, 1999, ANB moved to dismiss GAI's seventh complaint pursuant to sections 2-615 and 2-619 of the Illinois Code of Civil Procedure (Code) (735 ILCS 5/2-615, 2-619 (West 1998)), on the grounds that the complaint was substantially insufficient at law and was time-barred by an applicable statute of limitations. The two motions were combined pursuant to section 2-619.1 of the Code (735 ILCS 5/2-619.1 (West 1998)).

On August 27, 1999, the trial court dismissed GAI's seventh complaint with prejudice based on the three-year limitations period found in section 4-111 of the Illinois Uniform Commercial Code (UCC) (810 ILCS 5/4-111 (West 1996)) and on the loss allocation rule in section 3-404(b) of the UCC (810 ILCS 5/3-404(b) (West 1994)). On November 23, 1999, the trial court denied GAI's motion to reconsider. On December 21, 1999, GAI filed a timely notice of appeal.

On appeal, GAI contends that: (1) the trial court erred in finding that its breach of contract claim was time-barred by the three-year limitations period found in section 4-111, which applies to an improper payment claim under UCC section 4-401(a) (810 ILCS 5/4-401(a) (West 1994)); (2) its breach of contract claim is not time-barred by the three-year limitations period found in section 3-118(g) (810 ILCS 5/3-118(g) (West 1996)), which applies to a conversion of an instrument claim under UCC section 3-420(a) (810 ILCS 5/3-420(a) (West 1994)); (3) the loss allocation rule in section 3-404(b) of the UCC (810 ILCS 5/3-404(b) (West 1994)) does not provide ANB with a defense to GAI's breach of contract claim; the material in this section is nonpublishable under Supreme Court Rule 23.

[Nonpublishable material under Supreme Court Rule 23 omitted here].

IV. Illinois Uniform Fiduciaries Act

GAI finally contends that its claim under the Act was sufficient enough to avoid dismissal for failure to state a cause of action, where the claim alleged that ANB acted in bad faith by allowing Cohn to randomly deposit the checks into his own personal account. In response, ANB contends that the trial court properly dismissed GAI's claim because the Act does not create an affirmative cause of action, but rather, provides a defense to a negligence claim. ANB further asserts that even if the Act creates a cause of action, the Act provides ANB with a complete defense because GAI failed to allege sufficient facts which indicated that ANB had actual knowledge of Cohn's embezzlement or that ANB's actions in paying the checks amounted to bad faith.

The Act was enacted to "'facilitate the fiduciary's performance of his responsibilities by limiting the liability of those who deal with him,' and 'to cover situations which arise when one person honestly deals with another knowing him to be a fiduciary." Appley v. West, 832 F.2d 1021, 1031 (7th Cir. 1987). The Act relieves the bank of liability for negligence and acts as a defense to allegations that the bank acted negligently. Appley, 832 F.2d at 1031. However, a party can recover under the Act if it can prove that the bank had actual knowledge of the fiduciary's misappropriation of the principal's funds or that the bank had knowledge of sufficient facts that its action in paying over the funds amounted to bad faith. Appley, 832 F.2d at 1031.

"'Actual knowledge' has been defined as the awareness at the moment of the transaction that the fiduciary is defrauding the principal. 'It means express factual information that the funds are being used for private purposes in violation of fiduciary relationship.'" Master Chemical Corporation v. Inkrott, 55 Ohio St. 3d 23, 28, 563 N.E.2d 26 (1990). In determining whether a bank has acted in bad faith, "courts have asked whether it was 'commercially' unjustifiable for the payee to disregard and refuse to learn facts readily available. [Citation]. At some point, obvious circumstances become so cogent that it is 'bad faith' to remain passive." Appley 832 F.2d at 1031.

In regard to "actual knowledge" and "bad faith," the case of Master Chemical Corporation v. Inkrott, 55 Ohio St. 3d 23, 28, 563 N.E.2d 26 (1990), is instructive. In Inkrott, a company's comptroller embezzled corporate funds by driving to the bank's drive-in window and depositing corporate checks payable to the order of the bank and intended as payment of the corporation's taxes, into his own personal account rather than into the designated tax deposit account. The Ohio Supreme Court decided to address the issue of whether the bank could use the Ohio Uniform Fiduciaries Act (Ohio Act) *fn1 as a defense to allegations of wrongful payment. Inkrott, 55 Ohio St. 3d at 26.

In applying the Ohio Act to the facts in the case, the Ohio Supreme Court determined that the bank did not have actual knowledge that the comptroller was defrauding his company, at the time of the transactions. Inkrott, 55 Ohio St. 3d at 28. However, the court did find that the bank acted in bad faith in paying the checks where the bank had "established a procedure where a transfer from one corporate account to another would be presumed correct and would not be questioned." Inkrott, 55 Ohio St. 3d at 28. The Ohio Supreme Court determined that it was commercially unjustifiable for the bank to institute a procedure that permitted this type of theft to occur. The court noted:

"In an age of white-collar crime, it is more than negligent for a bank to make such a presumption in the development of its policies when dealing with fiduciaries presenting checks payable to the bank." Inkrott, 55 Ohio St. 3d at 28.

The Ohio Supreme Court also noted that the bank could not avoid the directives of the Uniform Commercial Code and Uniform Fiduciaries Act by contending that it would be economically unfeasible to institute changes that would more closely scrutinize the transactions at issue. Inkrott, 55 Ohio St. 3d at 28.

In the instant case, GAI contends that it stated a cause of action under section 9 of the Act *fn2 , when it alleged that ANB acted in bad faith by permitting Cohn to randomly deposit nine unaltered checks ranging in amounts from $40,000 to $50,000 each, payable to ANB for the purpose of paying GAI's payroll taxes, into his own personal account. In response, ANB contends that the trial court properly dismissed GAI's Act claim pursuant to section 2-615 of the Code, because GAI failed to allege that the individuals handling the checks had actual notice that Cohn was breaching his fiduciary duty, or had knowledge of such facts that their actions in paying the checks amounted to bad faith.

In the present case, GAI's allegations do not establish that ANB had actual knowledge at the time of the transactions that Cohn was defrauding GAI, because Cohn deposited the checks into an ATM and did not present the checks to a clerk who could visually inspect the checks to determine whether they were being deposited into an account other than that of the named payee. However, GAI's seventh complaint includes enough facts and allegations to support its claim that ANB acted in bad faith when it paid the checks to Cohn.

Applying the analysis given in Inkrott to the facts in the present case, reveals that it was commercially unreasonable for ANB to establish and maintain an ATM deposit procedure that allowed Cohn to randomly deposit nine unaltered, nonforged checks in the amounts of $40,000 to $50,000 each into his personal account, where he was not a signator to the account, and where the checks were payable to the order of ANB and drawn on GAI's corporate account at ANB. Bank employees eventually examine checks that are deposited into an ATM just as if they were presented to a bank teller. Therefore ANB's failure to examine GAI's checks is not excused by the fact that Cohn deposited the checks into an ATM.

GAI's seventh complaint includes enough facts and allegations to support its claim that ANB acted in bad faith when it paid the checks to Cohn. Therefore, GAI's bad faith claim under the Act provides it with a viable legal theory on which it can possibly recover. Moreover, pursuant to the previously discussed discovery rule, section 4-111's three-year limitations period does not time-bar GAI's bad faith claim under the Act.

Accordingly, for the reasons set forth above, we reverse the circuit court's dismissal of count I (breach of contract) and count II (Act claim) in GAI's seventh complaint.

Reversed and remanded.

CERDA and WOLFSON, JJ., concur.


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