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Interior Crafts, Inc. v. Leparski

July 11, 2006


Appeal from the Circuit Court of the 12th Judicial Circuit Will County, Illinois No. 01-MR-187 Honorable Amy M. Bertani-Tomczak, Judge, presiding.

The opinion of the court was delivered by: Justice Holdridge

Corrected on 8/21/06

Interior Crafts, Inc. (Interior), hired Todd Leparski to be an assistant comptroller. Due to extremely lax accounting procedures at Interior, Leparski was allowed to both receive and deposit incoming checks from Interior's customers. Consequently, Leparski managed to steal approximately one-half million dollars from Interior during his employment from October 2000 to February 2001. Leparski accomplished his theft by taking several checks from the incoming mail which were made payable to Interior by customers. He would then endorse the checks - "Interior Crafts - For Deposit Only" - and place the checks into deposit envelopes. He then placed those envelopes into an automatic teller machine (ATM) owned by Pan American Bank, with instructions to deposit the checks into a bank account which he maintained in his own name at Marquette Bank. Following the instructions on the deposit slip, Pan American deposited funds to Leparski's account at Marquette Bank. Eventually, Marquette Bank alerted Interior to the fact that Leparski was depositing checks into his personal account which were payable to Interior. After Leparski's actions were discovered, Interior was able to recover in cash from Leparski approximately half of the money he had stolen. In addition, Interior had an insurance policy with American Insurance Company which included commercial crime coverage. American paid Interior $250,000 pursuant to that insurance policy. Interior then sued Leparski and both Pan American Bank and Marquette Bank for conversion seeking recovery of the money not recovered from Leparski. American Insurance joined in the suit as Interior's assignee and subrogee. The trial court granted summary judgment as to both liability for conversion and damages in favor of American Insurance against Pan American Bank. Pan American appeals to this court from the trial court's grant of summary judgment against it.

The only issue on appeal is whether summary judgment was properly entered against Pan American Bank as to liability for conversion and damages.

Interior alleged that Pan American was liable for damages in conversion. Interior's claim is based upon the theory that Pan American was obligated under the restrictive endorsement - "Interior Crafts - For Deposit Only" - to deposit the funds only in an Interior Crafts account. Interior maintains that Pan American's depositing the funds in Leparski's account constituted a conversion, for which Pan American was liable to Interior for damages.

The ATM into which Leparski placed the stolen checks was owned and serviced by Pan American. A bank that owns an ATM does not have any information that tells it the name of the owner of an account in another bank into which a check placed in the ATM is to be deposited. The bank that owns the ATM has access only to the check itself and the card number of the person who placed the check into the machine. Accordingly, the bank which owns an ATM has no way of knowing whether the name on the account at the depository bank matches the name of the payee on the check. In the instant case, the Marquette Bank deposit slips that Leparski used when he put the stolen checks into the ATM, did not state the name of the owner of the account.

Pan American employees removed the checks from the ATM and inspected the checks for the presence of an endorsement. Pan American maintained that, because the checks were not deposited into an account at Pan American Bank, its employees had no means to verify the authenticity of the endorsements on the checks, nor could they verify that the payee name matched the name on the account into which the checks were being deposited. The checks were physically transported to a Pan American Bank facility where Pan American wire transferred the amount of each check to Marquette Bank for deposit into Leparski's account at Marquette Bank, in accordance with the instructions on the deposit slip. Pan American then endorsed the checks and sent them through a series of collecting banks back to the various drawee banks on which the drawers, the customers of Interior Banks, had drawn the checks. Consistent with automated banking procedures, the actual checks were never physically in the possession of Marquette Bank. Plaintiffs moved for summary judgment against Pan American Bank asserting conversion under Uniform Commercial Code (UCC) section 3-206(c)(2), which imposes conversion liability on a depository bank for failure to honor a restrictive endorsement. Specifically:

"If an instrument bears an endorsement * * * in blank or to a particular bank using the words "for deposit," "for collection," or other words indicating a purpose of having the instrument collected by a bank for the indorser or for a particular account, the following rules apply: * * *

A depository bank that purchases the instrument or takes it for collection when so indorsed converts the instrument unless the amount paid by the bank with respect to the instrument is received by the indorser or applied consistently with the endorsement." 810 ILCS 5/3- 206(c)(2)(West 2000).

The trial court granted summary judgment, finding: (1) that Pan American Bank was a "depository bank" subject to section 3-206 of the Code; and (2) that Pan American Bank, as a depository bank was strictly liable to the payee of the checks. Pan American Bank now appeals.

This is an appeal from an order granting summary judgment. Therefore, the standard of review is de novo, meaning no deference is given to the judgment below. Gullen v. Potomac Insurance Co., 203 Ill. 2d 141 (2003). Under de novo review, the court considers the facts and law related to the case to determine whether the trial court was correct in its conclusion that there was no genuine issue of material fact and the movant was entitled to judgment as a matter of law. Bank One, Springfield v. Roscetti, 309 Ill. App. 3d 1048 (1999). Summary judgment is a drastic remedy to be granted only where the movant's right to it is so clear as to be free from doubt. Groshek v. Frainey, 274 Ill. App. 3d 566, 569 (1995).

The key issue in this matter is whether the trial court was correct in determining that Pan American Bank is a "depository bank" within the meaning of section 3-206 of the UCC. Pan American Bank maintains that it is not a "depository bank" and thus is not liable for conversion under section 3-206.

A discussion of what is a "depository bank" must begin with a definition. The UCC as codified in Illinois contains a definition of "depository bank." Under the Illinois Code, a "depository bank" is "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. 810 ILCS 5/4-105(2)(West 2000).

Thus, if we follow the Illinois Code definition of "depository bank" Pan American Bank clearly is a "depository bank." It was the first bank to take the checks when the checks were deposited in the ATM. Section 3-206 imposes conversion liability on the depository bank for failure to honor a restrictive endorsement. Pan American Bank maintains, however, that the statutory definition of "depository bank" is ...

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