United States District Court, Northern District of Illinois, Eastern Division
June 3, 2002
TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, AS ASSIGNEE AND SUBROGEE OF ALLIANZ LIFE INSURANCE OF NORTH AMERICA, PLAINTIFF,
WELLS FARGO BANK N.A., AND CHARLES SCHWAB & CO., INC., DEFENDANTS.
The opinion of the court was delivered by: Matthew F. Kennelly, United States District Judge.
MEMORANDUM OPINION AND ORDER
Plaintiff Travelers Casualty and Surety Company of America, assignee
and subrogee of Allianz Life Insurance of North America, has sued Wells
Fargo Bank and Charles Schwab & Company, Inc. for improper payment of a
forged and counterfeit check. The case is before us on Schwab's motion to
dismiss count 2 of the complaint, the only count directed against it. For
the reasons stated below, we deny Schwab's motion.
In mid-July, 2000, a man using the name James Carden successfully
absconded with approximately $271,O00 from a checking account set up in
the name of the Allianz Employees' Medical Plan. Allianz had established
this checking account with Wells Fargo in order to reimburse its
employees for covered medical expenses. The account was managed by a
third party administrator, First Health Strategies, Inc., and the only
authorized signatories on the account were Mary Anne Carpenter and Jerry
Seiler, employees of First Health.
On July 18, 2000, "James Carden" opened a personal brokerage account
with Schwab using a forged and counterfeit check drawn on the Allianz
account. The check was made payable to Schwab in the amount of $287,651.23.
Although the check contained the purported signatures of
Carpenter and Seiler, these signatures were not genuine. Additionally,
the check was missing an imbedded watermark and
magnetic ink containing
check-processing information, both of which the genuine Allianz checks
contained. That same day, Schwab presented the check to Wells Fargo for
payment; Wells Fargo paid the check and debited the Allianz account.
Sometime after that date, Carden withdrew $271,238.22 from the Schwab
account he opened with the check.
In August 2000, Wells Fargo learned from Allianz that the Schwab check
was unauthorized. Schwab was also notified of the fraud and it
accordingly returned to Wells Fargo the balance remaining in Carden's
account at that time $16, 413.01. Wells Fargo credited Allianz's account
with that sum, but refused to credit the remaining $271, 000. Allianz
subsequently recovered the remaining $271, 000 from its insurer,
Travelers Casualty, which had insured Allianz against losses resulting
from forgery or alteration of negotiable instruments. Travelers, as
assignee and subrogee of Allianz, brings this lawsuit against Wells Fargo
and Schwab to recover the $271, 000 it paid to Allianz.
On a motion to dismiss, the Court reads the complaint liberally,
granting the motion only "if it appears beyond doubt that the plaintiff
can prove no set of facts in support of his claim which entitles him to
relief." Conley v. Gibson, 355 U.S. 41, 45 (1957).
Although count 2 of the complaint does not specify a legal theory,*fn1
in its brief, Travelers clarifies that it asserts a claim against Schwab
under § 3-306 of the Illinois version of the Uniform Commercial
Code. Section 3-306 provides: "A person taking an instrument, other than
a person having rights of a holder in due course, is subject to a claim
of a property or possessory right in the instrument or its proceeds. . . ."
810 ILCS 5/3-306.
Schwab argues that when it accepted the forged check without notice of
the fraud, it took the instrument as a "holder in due course" and is
therefore shielded from liability for the loss. Under the Code, a "holder
in due course" is one who takes an instrument for value, in good faith,
and without notice of any claim to the instrument. Id. Moreover, "[a]
person having rights of a holder in due course takes free of the claim to
the instrument." Id.
As an initial matter, the complaint does not allege that Schwab had any
actual notice that the check was fraudulent. That, however, is not the
end of the story. The Seventh Circuit recently reaffirmed the common law
principle that a payee bank owes to the drawer of a check made payable to
the bank a duty of care beyond that owed by an ordinary payee. In Mutual
Service Casualty Insurance Company v. Elizabeth State Bank, 265 F.3d 601
(7th Cir. 2001), the Court stated:
[W]hen a drawer owes nothing to a bank but writes a
check payable to the bank's order, the drawer places
that check in the bank's custody, with the
expectation that the bank will negotiate the check
according to the drawer's wishes; the bank may not,
therefore, treat the check as bearer paper and
blindly disburse the proceeds according to the
instructions of any individual who happens to
present the check to the bank.
Mutual Service, 265 F.3d at 613-14 (emphasis in original). See also
Douglass v. Wones, 120 Ill. App.3d 36, 46,
458 N.E.2d 514, 523 (1983) (a
banking institution "is required to hold the proceeds of the instrument
subject to the order of the drawer, and not the presenter, and [the bank]
generally cannot be a holder in due course as against the drawer"). In
these circumstances, the bank's "notice" of potential claims to the
check's proceeds is presumed, and the bank cannot be a holder in due
course. Mutual Service, 265 F.3d at 621. Indeed, the "check itself poses
an unanswered question as to whom the bank is to pay." Id.*fn2
Schwab attempts to distinguish Mutual Service on the grounds that it
involved a bank that had an existing contractual relationship with the
drawer, arguing that the heightened duty of care discussed in that case
was contingent on that relationship. However, a careful reading of Mutual
Service indicates that a contractual relationship is not necessary to
give rise to this duty. Id. at 621-22. Indeed, no such relationship
existed in Douglass or other Illinois cases relied upon in Mutual
Service. See, e.g., People ex rel. Nelson v. Peoples Bank and Trust, 271
Ill. App.? 41, 1933 WL 4479 (1933); Milano v. Sheridan Trust & Savings
Bank, 242 Ill. App. 362, 1926 WL 3944 (1926).
Schwab additionally argues that it is not a "bank" and therefore has no
more obligation to the drawer than a garden-variety payee. In Douglass,
the court, quoting Milano, described some of the distinctions between a
banking institution and a individual: "[t]he latter does not ordinarily
receive checks payable to his order from persons not indebted to him; he
is not the custodian of funds in which he has no interest; nor is he a
depositary for such members of the public as wish to avail themselves of
his services. On the other hand, a bank is all of these." Douglass, 120
Ill. App.3d at 46, 458 N.E.2d at 522. The Code itself broadly defines a
"bank" to include any entity "engaged in the business of banking,
including a savings bank, savings and loan association, credit union, or
trust company." See 810 ILCS 5/4-105(1). It not a foregone conclusion, as
Schwab suggests, that it performs no "banking" services. The complaint
alleges that Schwab is "engaged in the business of providing securities
brokerage and related financial services." Complaint, ¶ 28 (emphasis
added). This description is somewhat vague, but it certainly does not
rule out the possibility that Schwab performs functions like those of a
traditional bank and thus should be held to the same standard. In any
event, at this point we cannot conclude that Travelers can prove no set
of facts which would entitle it to relief. Conley, 355 U.S. at 45.
Schwab's motion also fails for another reason. An instrument that is
taken by a "holder in due course" must also be free from "such apparent
evidence of forgery or alteration or is not otherwise so irregular or
incomplete as to call into question its authenticity." 810 ILCS
513-302(a)(1). Travelers alleges that Schwab should have been alerted to
the fraud because the check did not contain the "usual and customary
magnetic ink containing check-processing information" nor the "usual and
customary anti-forgery and anti-copying measures, including but not
limited to an imbedded artificial watermark." Complaint, ¶ 40(b),
(c). It is not clear the extent to which Schwab should have been looking
for these alleged "usual" signs of
authenticity; at this point, however, Travelers has alleged enough to
survive dismissal of its claim against Schwab.
Schwab finally argues that Wells Fargo should bear full responsibility
for the loss under the so-called "finality rule" of Section 3-418 of the
Code; the finality rule provides that a drawee (here, Wells Fargo) who
pays on a forged instrument is bound by that payment. See 810 ILCS
5/3-418. It is entirely possible that Wells Fargo will ultimately bear
responsibility for the loss vis-a vis Schwab. However, this argument is
premature as neither Wells Fargo nor Schwab have made any claims against
For the foregoing reasons, defendant Charles Schwab and Company, Inc.'s
motion to dismiss count 2 [item # 4-1] is denied. Schwab is ordered to
answer Count 2 on or before June 14, 2002.