86 F. Supp. 3d 1148
E.D. Wash.2015Background
- Travelers insured Skils’Kin and Skils’Kin served as a Social Security–appointed representative payee for about 1,000 clients and charged monthly fees.
- Shannon Patterson, a Skils’Kin officer, embezzled funds by cashing checks payable to clients and signing the back with her name; the checks were not indorsed to Patterson.
- Bank employees reportedly approved Patterson’s handling of such checks under an alleged oral agreement and/or an accommodation; no written agreement is shown.
- Patterson’s fraud went undetected from 2008 until February 2013; Skils’Kin learned of it after Patterson’s suicide and subsequently reported it to Bank.
- Travelers paid Skils’Kin’s claim under its fidelity policy and then sued Bank as subrogee, seeking, among other things, to avoid improper payments under UCC 4-406 and related provisions.
- Bank moved for summary judgment arguing 4-406 and the customer agreement bar Travelers’ claims; Travelers cross-moved for partial summary judgment on several defenses, including ordinary care and good-faith defenses.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does RCW 62A.4-406 bar Travelers’ claims? | Travelers argues 4-406 does not preclude claims here. | Bank argues 4-406 bars claims given mispayments not timely reported and lack of ordinary care. | Question of fact; 4-406 applicability cannot be resolved on summary judgment. |
| Was Patterson authorized to cash checks for Skils’Kin clients? | Patterson lacked authority; no written/oral authorization evidenced. | Patterson acted within an oral/intent-based agency under a corporate resolution; authorization existed. | There are material facts about whether an oral authorization existed; not ripe for summary ruling. |
| Did Bank make the items reasonably available and did Skils’Kin have a duty to discover/notify under 4-406(a) and (c)? | Bank’s statements only front copies; 4-406 requires provision of item details and access to back images. | Electronic access and front-and-back online images satisfied 4-406(a); prompt notice was not timely. | Questions of fact remain about availability and promptness; not decided on summary judgment. |
| Is there a duty to allocate loss under 4-406(e) and/or whether Bank acted with ordinary care? | Bank failed to exercise ordinary care; loss should be allocated to Bank. | Bank acted reasonably; ordinary care question for the jury. | A material dispute exists regarding ordinary care and possible allocation; not resolvable on summary judgment. |
| Does 4-406(f) bar Travelers’ claims or does the 60-day/customer agreement shortening period apply? | 4-406(f) provides one-year bar; agreement cannot shorten that period reasonably. | Customer agreement attempts to shorten period to 60 days and may be enforceable under certain jurisdictions. | Court reserves ruling; factual and contractual questions remain; not resolved on summary judgment. |
Key Cases Cited
- Govoni & Sons v. Mechanics Bank, 51 Mass.App.Ct. 35, 742 N.E.2d 1094 (Mass. App. Ct. 2001) (recognizes reasonable ordinary-care standards in 4-406 context)
- Seaman Corp. v. Binghamton Savings Bank, 220 A.D.2d 62, 643 N.Y.S.2d 767 (N.Y. App. Div. 1996) (4-406 does not apply to missing indorsements)
- Fackrell v. American Nat. Bank, 116 P.3d 201 (Ok. App. 2005) (illustrates reasonable-care/indorsement issues in 4-406 context)
- Security State Bank v. Visiting Nurses Assoc., 256 Ga.App. 374, 568 S.E.2d 491 (Ga. App. 2002) (discusses 4-406 application in missing indorsement cases)
- Absolute Drug Detection Serv. v. Regions Bank, 116 So.3d 1162 (Ala. App. 2012) (upholds bank-depositor contract adjustments to 4-406 bar)