United States District Court, N.D. Illinois, Eastern Division
August 9, 2005.
WACHOVIA BANK, N.A. Plaintiff,
FOSTER BANCSHARES, INC d/b/a, FOSTER BANK Defendant/Third Party Plaintiff, SUNJIN CHOI, Third Party Defendant.
The opinion of the court was delivered by: JAMES HOLDERMAN, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff Wachovia Bank, N.A. ("Wachovia"), a North Carolina
corporation with its principle place of business in North
Carolina, filed suit on June 9, 2004 invoking this court's
diversity jurisdiction pursuant to 28 U.S.C. § 1332, against
defendant Foster Bankshares, Inc., a Delaware corporation doing
business in Illinois as Foster Bank ("Foster"), seek a
declaratory judgment that Foster breached it warranty to
Wachovia. (Dkt. No. 1). Foster filed a third-party complaint on
July 12, 2004 against third-party defendant, Sunjin Choi Choi,
("Choi"), an Illinois resident. (Dkt. No. 3). Wachovia and Foster
have filed the present cross motions for summary judgment on
April 29, 2005 and May 2, 2005. (Dkt. Nos. 21, 24). For the
reasons set forth below, this court grants Wachovia's motion for
summary judgment and denies Foster's motion for summary judgment. BACKGROUND
This litigation is between the two primary banks involved in
the processing and payment of a fraudulent check. The issue
presented by the case is the responsibility to be borne between
A company called MediaEdge, which is not a party to this case,
issued check number 400-413142 on November 13, 2002 in the amount
of $133,026.00. (Dkt. No. 23 at ¶ 9). MediaEdge's check was drawn
on its account with Wachovia and was made payable to CMP Media
Inc. (Id.) That check was intercepted and the check, or a copy
of the check, was altered. The check's payee was changed from CMP
Media Inc to Sunjin Choi Choi. (Id.) The altered check, or a
copy of the check, was deposited into Choi's account at Foster
and then presented to Wachovia for payment. (Id. at ¶ 12-13).
Wachovia paid Foster from MediaEdge's account. (Id.) Wachovia
and Foster later learned of the alleged theft of the check when
CMP Media Inc., the intended payee of the check, failed to
receive the payment and notified MediaEdge in January 2003.
(Id. at 15).
MediaEdge has sued Wachovia in New York seeking reimbursement.
Wachovia, in turn, is suing Foster for reimbursement in light of
MediaEdge's suit. Wachovia seeks from this court a declaration
that Foster is liable for the original amount of the check of
$133,036.00 plus interest, costs and fees including the
attorney's fees incurred by Wachovia in defending in the New York
suit against MediaEdge. Foster argues that Wachovia must bear the
loss and filed a cross-motion for summary judgment on May 2,
2005. (Dkt. No. 24).
STANDARD OF REVIEW
Under Rule 56(c) of the Federal Rules of Civil Procedure,
summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that
the moving party is entitled to a judgment as a matter of law."
Fed.R.Civ.P. 56(c). In ruling on a motion for summary
judgment, the evidence of the nonmovant must be believed and all
justifiable inferences must be drawn in the nonmovant's favor.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). This
court's function is not to weigh the evidence and determine the
truth of the matter, but to determine whether there is a genuine
issue for trial. A party who bears the burden of proof on a
particular issue, however, may not rest on its pleadings, but
must affirmatively demonstrate, by specific factual allegations,
that there is a genuine issue of material fact that requires
trial. Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).
In considering a motion for summary judgment, this court is not
required to scour the record in search of evidence to defeat the
motion; the nonmoving party must identify with reasonable
particularity the evidence upon which the party relies. Johnson
v. Cambridge Indus., Inc., 325 F.3d 892, 898 (7th Cir. 2003).
Finally, the evidence relied upon must be competent evidence of a
type otherwise admissible at trial. Stinnett v. Iron Work
Gym/Exercise Health Spa, Inc., 301 F.3d 610, 613 (7th Cir.
A. Foster's Failure to Comply with Local Rule 56.1 and Case
Before proceeding to the substance of the motions, the court
must discuss Foster's failure to follow the requirements of Local
Rule 56.1 and this court's case management procedures. Both the
local rules and the court's case management procedures are
located on the court's website. See also Malec v. Sanford,
191 F.R.D. 581 (N.D. Ill. 2000) (discussing the requirements of Local Rule 56.1).
The court's case management procedure requires a motion for
summary judgment, memorandum, Rule 56.1 statement and exhibits to
be provided in separate documents filed separately from one
another. Foster's submissions are combined together and do not
comply with the court's requirements.
Foster's failure to follow Local Rule 56.1 is more significant.
"A district court is entitled to expect strict compliance with
[Local] Rule 56.1." Ammons v. Aramark Uniform Servs., Inc.,
368 F.3d 809, 817 (7th Cir. 2004). The result of a failure to follow
Local Rule 56.1 when responding to the opposing party's statement
of facts can be dramatic. The failure to properly respond results
in admission of other party's facts for the purposes of
evaluating summary judgment. Smith v. Lamz, 321 F.3d 680, 683
(7th Cir. 2003). "[I]mproper denials . . . and a mere
disagreement with the movant's asserted facts is inadequate if
made without reference to specific supporting material." Id.
(citations omitted). "A general denial is insufficient to rebut a
movant's factual allegations; the nonmovant must cite specific
evidentiary material justifying the denial." Malec,
191 F.R.D. at 584.
Foster's response to Wachovia's statement of facts of May 20,
2005 (Dkt. No. 29), does not comply with the requirements of
Local Rule 56.1. The statement contains general denials and does
not contain specific citations to documents in the record that
demonstrate a genuine issue of material fact. Foster does provide
a better effort of citing to evidence in the record when it
provides its own statement of undisputed facts in support of its
motion for summary judgment. (Dkt. No. 24). However, Foster's
statement of undisputed facts in support of its own motion for
summary judgment does not replace or supercede its required
effort under Local Rule 56.1 when responding to Wachovia's statement of facts.
Foster also engages in factual and legal argument in its Local
Rule 56.1 statement and response to Wachovia's Local Rule 56.1
statement. "The purpose of the 56.1 statement is to identify for
the court the evidence supporting a party's factual assertions in
an organized manner . . . it is not intended as a forum for
factual or legal argument. Malec, 191 F.R.D. at 585. The court
will, therefore, disregard the improperly presented legal and
factual arguments made by Foster in its Local Rule 56.1
B. The Parties' Substantive Arguments
As a preliminary matter, the court must consider the choice of
law question raised by this litigation because Wachovia is a
North Carolina bank and Foster is an Illinois bank. "When sitting
in diversity, a federal court must apply the conflict of laws
principles of the state in which it sits." Merrill Lynch,
Pierce, Fenner & Smith, Inc. v. Devon Bank, 702 F.Supp. 652, 656
n. 1 (N.D. Ill. 1988) (citing Klaxon Co. v. Stentor Elec. Mfr.
Co., 313 U.S. 487, 496 (1941); Travelers Ins. Co. v. Transp.
Ins. Co., 846 F.2d 1048, 1051 (7th Cir. 1988)). Under Illinois
choice of law rules, "the liability of a bank for action or
non-action with respect to an item handled by it for purpose of
presentment, payment or collection is governed by the law of the
place where the bank is located." 810 ILCS 5/4-102; see e.g.,
LifeUSA Ins. Co. v. Continental Bank, N.A., No. 93 C 0839, 1996
WL 18974, at *1 n. 1 (N.D. Ill. Jan. 18, 1996); Merrill Lynch,
Pierce, Fenner & Smith, Inc., 702 F.Supp. at 656 n. 1. The
alleged bad acting third party, Choi, presented the check at
issue in this case at Foster's branch in Niles, Illinois.
Consequently, Illinois substantive law governs this case.
The Illinois Uniform Commercial Code, ("Illinois Code"),
modeled after the Uniform Commercial Code, ("UCC"), regulates the obligations of the
parties in this case. This area of law is based on the rule first
announced in the English case of Price v. Neal. 3 Burr. 1354
(1762); see Clean World Eng'g, Ltd. v. MidAmerican Bank, FSB,
793 N.E.2d 110, 117 (Ill.App.Ct. 2003). The principle from
Price is that the party in the better position to identify the
fraud and prevent the loss is also the party who should bear the
risk of loss.
The drawee bank (Wachovia), bears the risk of loss when the
drawer's (MediaEdge's) signature is forged. Id. at 117. The
drawer, because of its relationship with the drawee, should know
the drawee's authorized signature and is therefore in the best
position to identify and reject a check with a forged drawee's
On the other hand, the first payor (Foster), bears the risk of
loss when the payee's (CMP Media Inc's), signature is forged.
Id. The risk of loss is on the first payor because that
individual actually took the check from the bad acting
third-party and had the opportunity to challenge the forged
This case does not fall directly into either of these two
situations. The bad act was the alleged altering of the payee's
name from CMP Media Inc to Sunjin Choi Choi. The Illinois Code
and the UCC, however, contain additional provisions that address
this issue. Code §§ 3-417 and 4-208 detail the presentment
warranties for negotiable instruments and bank deposits and
collections. 810 ILCS 5/3-417; 810 ILCS 5/4-208. Under the
provisions, the warranties were made by Foster when it presented
the check to Wachovia.*fn1 The specific warranty made by Foster pursuant to the Illinois
Code is that the "draft (the check) has not been altered." §§
3-417(a)(2), 4-208(a)(2). Wachovia argues that Foster breached
this warranty because the check at issue was in fact altered to
make it payable to Choi instead of the proper payee of CMP Media
Inc. Foster argues that it cannot be held liable for breaching
the presentment warranty because Wachovia cannot prove that the
check was not a counterfeit or forged check.
This court agrees with Wachovia that the check was altered and
that Foster breached it presentment warranty under §§ 3-417(a)(2)
and 4-208(a)(2). "An alteration means an unauthorized change in
an instrument that purports to modify in any respect the
obligation of a party." 810 ILCS 5/3-407(a)(i). That happened in
this case. The check was altered when the payee's name was
changed from CMP Media Inc to Sunjin Choi Choi. The Illinois Code
and UCC have allocated the risk of loss to Foster in this
situation through the presentment warranties. Firststar Bank
N.A. v. Wells Fargo Bank, N.A., No. 02 C 186, 2004 WL 1323942,
at *8 n. 8 (N.D. Ill. June 14, 2004) (citing Wachovia Bank, N.A.
v. Fed. Reserve Bank of Richmond, 338 F.3d 318 (4th Cir. 2003)).
This is not a forgery case because Wachovia was not in a better
position to identify the fraud or prevent the loss. Therefore,
this court must enforce the allocation of liability established
in the presentment warranties under §§ 3-417(a)(2) and
4-208(a)(2) and hold Foster liable.
Foster makes a series of arguments against holding it liable
for the check under the presentment warranties in §§ 3-417(a)(2)
and 4-208(a)(2). The court is not persuaded by these arguments.
Foster first argues that it should not be held liable because
of Wachovia's contributing negligence. Under § 5/3-406(a), "a person whose failure to
exercise ordinary care substantially contributes to an alteration
of an instrument . . . is precluded from asserting the alteration
. . . against a person who, in good faith, pays the instrument."
810 ILCS 5/3-406. Foster argues that Wachovia was negligent
because Wachovia and MediaEdge entered into an agreement in which
Wachovia did not sight examine MediaEdge's checks. Foster
suggests that it was Wachovia's responsibility to identity the
alteration and Wachovia's omission is a failure to exercise
ordinary care under the Code.
However, if Wachovia was negligent for not catching the
alteration then Foster is also negligent because it should have
examined the face of the check with it processed the check.
Foster also fails to provide citation to a case or Code section
to support its position that Wachovia's actions fell below the
standard of care required under the Code. The presentment
warranties place the initial burden on Foster to catch any
alteration since it is Foster who is warranting to Wachovia that
there have been no alterations on the check. Foster's failure to
demonstrate that what Wachovia did was a failure to exercise
ordinary care means that Foster remains liable under the
Foster's next argument is that this court must assume that the
check was not altered but instead is a forgery. The finding of a
forgery would mean that Foster would not be liable for breaching
the presentment warranties because there was no alteration.
Foster argues that it is entitled to a presumption that the check
was forged because Wachovia has destroyed the original check.
Wachovia argues that it destroyed the original check as part of
its ordinary business practice of destroying checks within 30
days and retaining copies of the checks through computer imaging.
(Dkt. No. 23, ¶¶ 16-18). Foster argues the destruction of the
check requires a presumption from the court that Wachovia deliberately destroyed
A party can be entitled to a presumption that the opposing
party destroyed original evidence because that evidence was
harmful evidence. DirectTV, Inc. v. Borow, No. 03 C 2581, 2005
WL 43261, at *5 (N.D. Ill. Jan. 6, 2005). "The relevant issue is
`not that the evidence was destroyed, but rather, the reason for
the destruction.'" Id. (citing Park v. City of Chicago,
297 F.3d 606, 616 (7th Cir. 2002)).
There is no indication that Wachovia destroyed the original
check in order to eliminate unfavorable evidence. Wachovia
retained an imagined copy of the check. It also destroyed the
check as part of its ordinary business practice. There is no
evidence that Wachovia singled out this check and treated it any
differently from how it handles other checks under its document
retention policy. The replacement of paper copies of checks with
an imagined copy is not an uncommon practice in the banking
industry. See 12 U.S.C. § 5003. Wachovia also destroyed the
check before the dispute arose between Wachovia and Foster.
Foster is not entitled to a presumption that Wachovia
deliberately destroyed the check or that the check was a forgery.
Foster's last argument is that it cannot be held liable under
the "Midnight Deadline Rule." 810 ILCS 5/4-402. The Midnight
Deadline Rule is not applicable in this situation because it
deals with the time frame for a bank to reject a check. In this
case, Wachovia originally accepted the check within the Midnight
Deadline. Wachovia's claim is through the unrelated matter of the
breach of the presentment warranties.
The final issue for the court is the extent of Foster's
liability to Wachovia. Wachovia is able to recover the amount
that it paid on the check less the amount it received or the
amount that it is entitled to receive from MediaEdge, Inc.
810 ILCS 5/3-417(b); 810 ILCS 5/4-208(b). Wachovia is also "entitled to compensation for expenses and loss
of interest resulting from the breach." Id. Wachovia has a
right to receive the $133,026.00 it paid on the check plus
appropriate interest, less any reimbursement owed to it from
MediaEdge, from Foster.
Wachovia also wants its attorney's fees from this case and from
the related case in New York in which it is defending against
MediaEdge. The official comment to UCC § 3-417 states that there
is "no express provision for attorney's fees, but attorney's fees
are not meant to be necessarily excluded." U.C.C. § 3-417 cmt. 5
(2005); cf. First Nat. Bank in Harvey v. Colonial Bank,
898 F. Supp. 1220, 1237 (N.D. Ill. 1995) (citing Southern Provisions,
Inc. v. Harris Trust & Sav. Bank, 422 N.E.2d 33, 35
(Ill.App.Ct. 1981) ("In Illinois, it is within the trial court's
discretion to award attorney's fees as expenses" for a breach of
the Transfer Warranties under § 4-207(c)).
The court sees no reason to deviate from the traditional
presumption under the American Rule that each side should bear
its own attorney's fees. Furthermore, there was no reason for
Wachovia to defend against the suit brought by MediaEdge in New
York when Wachovia's theory was that Foster was liable under the
breach of the presentment warranties. Wachovia is entitled to the
$133,026.00 it paid on the check plus appropriate interest, less
any reimbursement owed to it from MediaEdge, and nothing more. CONCLUSION
Based on the reasoning set forth above, Wachovia's motion for
summary judgment of April 29, 2005 (Dkt. No. 21), is granted.
Foster's motion for summary judgment of May 2, 2005 (Dkt. No.
24), is denied. The court relinquishes jurisdiction over the
third-party complaint as there is no diversity of citizenship
between the third-party plaintiff and third-party defendant and
the third-party defendant remains unserved. Judgment is entered
in favor of plaintiff Wachovia against defendant Foster. All
pending motions are moot and all other previously set dates are