United States District Court, Southern District of New York
July 15, 1991
SIMCOE & ERIE GENERAL INSURANCE COMPANY AND THE GUARANTEE COMPANY OF NORTH AMERICA, AS SUBROGEE OF SIMCOE & ERIE GENERAL INSURANCE COMPANY, PLAINTIFFS,
CHEMICAL BANK, DEFENDANT.
The opinion of the court was delivered by: Sweet, District Judge.
Defendant Chemical Bank, New York Trust Company ("Chemical")
has moved pursuant to Rule 56, Fed.R.Civ.P., for summary
judgment dismissing the diversity action of plaintiffs Simcoe
& Erie General Insurance Company ("Simcoe") and its subrogee,
the Guarantee Insurance Company of North America
("Guarantee"). For the reasons set forth below, the motion is
granted in part and denied in part.
Simcoe is a Canadian corporation with its principal office
in Hamilton, Ontario, Canada. Simcoe is a customer of
Guarantee is a Canadian corporation with its principal
office located in Willowdale, Ontario, Canada. Guarantee is
Chemical is a New York corporation engaged in the business
of banking, with its principal offices located in New York
Simcoe and Guarantee commenced this action on December 14,
1988. On February 10, 1989, Chemical served its answer raising
several affirmative defenses including lack of complete
diversity and the bar of certain of the claims in the
complaint by the statute of limitations. On May 17, 1990,
Chemical moved pursuant to Rules 11 and 37, Fed.R.Civ.P., to
dismiss the complaint for Simcoe's and Guarantee's failure to
obey the pre-trial scheduling orders. On May 21, 1990 the
court dismissed the action sua sponte for failure to comply
with the scheduling orders. In a letter of June 1, 1990, Simcoe
and Guarantee asked the court to vacate the order of May 21.
The court treated the letter as a motion pursuant to Rule 60,
Fed.R.Civ.P., and scheduled oral argument. On June 27, the
court issued an order vacating the default.
On February 8, 1991 Chemical filed the instant summary
judgment motion. By consent of the parties, the return date of
the motion was adjourned until March 29, 1991, when oral
argument was heard. As Simcoe and Guarantee raised a legal
argument that had not been briefed by the parties, counsel for
both sides made additional submissions on that issue.
This action arises from a check forgery scheme perpetrated
by Lily Lee ("Lee"), Simcoe's employee, over the period March
14, 1985 through July 30, 1986.
Between March 1985 and August 1986, Simcoe maintained a
checking account (the "operating account") with Chemical.
Simcoe hired Lee in January 1985. On January 3, 1985, Simcoe
filed a Representative Card with Chemical. The card read, in
pertinent part, as follows:
Please cash any checks bearing my/our signature
(or endorsement) when presented by my/our
representative whose signature appears below.
These instructions remain in effect until written
revocation is received by you.
The card bore Lee's signature, identifying her as Simcoe's
representative, and was issued in the name of and signed by
J. Morton ("Morton"), Simcoe's vice president-secretary and
treasurer during the relevant period. The representative card
remained effective until July 31, 1985.
On June 22, 1982, Simcoe had executed a resolution (the
"Resolution") signed by Morton and Shang C. Lee, Simcoe's
assistant treasurer and Lee's mother, that stated:
that the Secretary or any Assistant Secretary . .
. is hereby authorized and directed to certify, .
. . to the Bank . . . the names of the officers
and other representatives of this Corporation . .
. and specimens of the respective signatures, and
that the Bank may conclusively assume that
persons at anytime certified it to be . . .
representatives of this Corporation continue as
such until receipt by the Bank of written notice
to the contrary.
Of the employees of Simcoe's New York office, Lee alone drew
the checks, made all the entries in Simcoe's books, and
reconciled the checks against the bank statements when they
were returned by Chemical.
At the beginning of the forgery scheme, Lee would present
the checks to the Chemical representative listing herself as
payee and containing Morton's signature forged by Lee. After
the checks were returned by Chemical, Lee would alter the
payee of the check to reflect the names of legitimate
companies with which Simcoe regularly did business. Lee also
altered the voucher copies in Simcoe's ledgers. Later in the
course of the scheme, Lee returned the checks to Simcoe's
files leaving her name as payee.
After the forgery scheme was uncovered, Morton upon
examining the checks was unable to discern which checks
contained his signature and which were forgeries.
In 1985, Simcoe's actual expenses exceeded its budgeted
expenses by $82,392. The amount of forged checks for 1985
The Coopers & Lybrand audit of Simcoe's books during the
period 1985-86 did not reveal the forgeries. During the
relevant period Coopers & Lybrand did not perform a full audit
for Simcoe, which would have included an audit of Simcoe's
Chemical sent Simcoe monthly statements of its operating
account and returned to Simcoe the checks drawn on the
account. The statement for the period March 6 through April 3,
1985 was received by Simcoe on April 11, 1985.
All Chemical statements bore the warning: "Please examine at
once. Except for electronic transfers, account will be
considered correct if no report is received within 14 days."
Simcoe failed to notify Chemical within 14 days of April 11,
On July 30, 1986, upon checking the signatures on a check
drawn on Simcoe's operating account, Chemical called Simcoe
and asked Morton to verify his signature on the check. Simcoe
& Erie first notified Chemical of the forgeries on August 13,
1986 based on the statement received for the period ending
July 31, 1986.
Chemical refunded $862.59 to Simcoe. This amount represented
the four forged checks paid by Chemical in March 1985 before
Simcoe had an opportunity to review its first statement.
Guarantee paid Simcoe $109,585.76 ($152,202.54 Canadian
dollars). In exchange for such payment, Simcoe assigned its
claim to Guarantee, and fully released all rights it had
against any party for compensation in connection with Lee's
I. Summary Judgment Standard
Summary judgment is authorized if "there is no genuine issue
as to any material fact and . . . the moving party is entitled
to a judgment as a matter of law." Fed. R.Civ.P. 56(c).
Summary judgment is appropriate only in the circumstances
where "the evidence is such that a reasonable jury could not
return a verdict for the nonmoving party." Anderson v. Liberty
Lobby, Inc., 477 U.S. 242
, 248, 106 S.Ct. 2505, 2510, 91
L.Ed.2d 202 (1986). The moving party has the burden of
demonstrating the absence of any genuine issue as to all the
material facts, and the non-moving party is entitled to all
favorable inferences that may be drawn from the evidence.
Quinn v. Syracuse Model Neighborhood Corp., 613 F.2d 438
444-45 (2d Cir. 1980).
II. Duty to Discover Unauthorized Signatures
Section 4-406 of the Uniform Commercial Code, "Customer's
Duty to Discover and Report Unauthorized Signature and
Alteration," (McKinney's 1990) ("§ 4-406"), which both parties
agree governs the instant dispute, provides, in pertinent part:
(1) When a bank sends to is customer a statement
of account accompanied by items paid in good
faith in support of the debit entries or holds
the statement and items pursuant to a request or
instructions of its customer or otherwise in a
reasonable manner makes the statement and items
available to the customer, the customer must
exercise reasonable care and promptness to
examine the statement and items to discover his
unauthorized signature or any alteration on an
item and must notify the bank promptly after
(2) If the bank establishes that the customer
failed with respect to an item to comply with the
duties imposed on the customer by subsection (1)
the customer is precluded from asserting against
(a) his unauthorized signature or any
alteration on the item if the bank also
establishes that it suffered a loss by reason
of such failure; and
(b) an unauthorized signature or alteration by
the same wrongdoer on any other item paid in
good faith by the bank after the first item and
statement was available to the customer for a
reasonable period not exceeding fourteen
calendar days and before the bank receives
notification from the customer for any such
unauthorized signature or alteration.
(3) The preclusion under subsection (2) does not
apply if the customer establishes lack of
ordinary care on the part of the bank in paying
(4) Without regard to care or lack of care of
either the customer or the bank a customer who
does not within one year from the time the
statement and items are made available to the
customer (subsection (1)) discover and report his
unauthorized signature or any alteration on the
face or back of an item or does not within three
years from that time discover and report any
unauthorized indorsement is precluded from
asserting against the bank such unauthorized
signature or indorsement or such alteration.
Thus, if Chemical can establish, to the exclusion of any
genuine issue of material fact, that Simcoe, either through
its own negligence or through its failure to notify within the
time prescribed by the statute, is precluded from asserting a
claim against the bank with respect to each of the checks at
issue, then Chemical should be granted summary judgment as a
matter of law. If, however, Simcoe raises an issue of fact
with respect to the above or with respect to Chemical's
standard of care in paying the checks, then summary judgment
will be denied.
A. Simcoe's Exercise of Due Care
In support of its position that Simcoe failed to use due
care in examining the returned checks for unauthorized
signatures, Chemical points to Simcoe's failure to notify the
bank of any unauthorized signatures within fourteen days of
the receipt of the statement relating to the checks until its
notification of Chemical on August 13, 1986.
The customer's duty to notify the bank within fourteen days
is set forth in § 4-406(2)(b) of the statute as well as on each
statement. Courts have upheld the failure to meet the fourteen
day notification requirement imposed under § 4-406 as a basis
for a grant of summary judgment in favor of the bank. J.
Sussman, Inc. v. Manufacturers Hanover Trust Co., 140 A.D.2d 668,
529 N.Y.S.2d 327 (2d Dep't 1988).
In addition to this undisputed failure to notify, Simcoe did
not maintain vigilance over the accounts after the statements
been returned. Simcoe neither detected Lee's tampering with
the payee line of the checks to reflect legitimate vendors
before placing them in the file nor her alteration of the
voucher copies in its ledgers.
Simcoe also allowed the same person to be responsible for
drawing the checks, keeping the books, and reconciling
statements with the book entries. Chemical shows that such
practices were not standard at Simcoe by adducing Morton's
deposition testimony as well as a memorandum from E.H.
Swindall ("Swindall"), Simcoe's chief financial officer,
showing that immediately after the discoveries of the
forgeries, headquarters in Canada directed the use of new
procedures relating to the reconciliation of the account and
the reporting of budget variances.
Simcoe and Guarantee for their part adduce no evidence
showing Simcoe's exercise of due care in reviewing the checks
in question, asserting merely that its use of due care is a
question of fact. Chemical has therefore established to the
exclusion of any question of fact that Simcoe failed to use
due care to examine the statements and to discover any
unauthorized signatures as required by § 4-406(1).
B. Chemical's Exercise of Due Care
1. Before the Expiration of the Authorization Card
Simcoe's representative card authorizing Lee to present
checks for cashing bearing Morton's signature, which Chemical
had on file, was in effect from January 1985 until its
expiration on July 31, 1985.
Chemical adduces further evidence relevant to the period the
representative card was in effect in support of its position
that it was not negligent in failing to recognize that
Morton's signatures as presented by Lee were forgeries.
Morton's deposition testimony shows that a person exercising
reasonable care could believe the signatures were Morton's,
since even Morton could not later distinguish the checks he
had signed from the forgeries.
In support of its position that Chemical was negligent in
cashing the checks on which Morton's signatures were forged,
Simcoe and Guarantee adduce testimony that cards bearing a
sample of Morton's signature, as well as those of other
officers of Simcoe, were on file at the branch at which the
operating account was maintained, a few feet away from the
teller. However no evidence has established that it is routine
practice for tellers at Chemical, or at other banks, to pull
the signature specimen from the file each time a check bearing
that signature was presented.
2. After the Expiration of the Representative Card
With respect to the forgeries that occurred after the
expiration of Lee's representative card on July 31, 1985, an
issue of fact remains as to Chemical's negligence, where
Chemical has adduced no evidence that establishes that it is
customary for banks to cash checks presented by employees of
customers after the expiration of the representative card.
Morton's deposition testimony establishes that it is not
Chemical's practice to require tellers ask for a
representative card after the representative employee became
familiar to the teller at the branch at which the account was
maintained. Such evidence does not address directly the issue
of the expired representative card.
C. The March 6 — April 3, 1985 Forgeries
Given that Chemical has established to the preclusion of any
genuine issue of material fact Simcoe's lack of due care,
§ 4-406 may preclude Simcoe's and Guarantee's claims as a
matter of law. With respect to those checks forged from March 6
through April 3, 1985 — the subject of the statement received
by Simcoe on April 11, 1985 — § 4-406(2)(a) provides that
Simcoe and Guarantee are precluded from asserting a claim if
Chemical establishes Simcoe's lack of due care; its own
exercise of due care; and that Chemical suffered a loss by
reason of Simcoe's failure to exercise due care.
There is no dispute that Chemical reimbursed Simcoe in the
amount of $862.59, the sum of the checks containing
signatures paid by Chemical from March 6 through April 3,
Based on the undisputed facts and on the lack of an issue of
fact as to Simcoe's failure to use due care and as to
Chemical's use of due care with respect to these checks,
Simcoe is precluded under § 4-406(2)(a) from asserting a claim
against Chemical based on the checks paid from March 6 through
April 3, 1985. Therefore, summary judgment is granted
dismissing those claims based on the checks forged during this
D. The Checks Presented from April 3, 1985 — July
Chemical's showing, to the preclusion of any genuine issue
of material fact, that Simcoe failed to use ordinary care and
promptness in examining the statements and that Chemical
itself exercised ordinary care in cashing the checks as long
as the representative card was in effect requires summary
judgment, pursuant to § 4-406(2)(b), dismissing the claims
based on forgeries subsequent to April, 1985, and up to and
including July 31, 1985.
There is no dispute that (1) Chemical paid the checks in
good faith;*fn1 (2) Simcoe received a statement on April 11,
1985; (3) Simcoe failed to notify Chemical of the unauthorized
signatures within 14 days of the receipt of such statement.
Nor does Simcoe's and Guarantee's contention, in the face of
a showing by Chemical to the contrary, that regardless of its
own use of due care in examining the checks, Chemical failed
to exercise due care in allowing them to be cashed require a
contrary holding. Sussman, 140 A.D.2d at 668, 529 N.Y.S.2d at
327. In Sussman, the Appellate Division affirmed the trial
court's grant of summary judgment in favor of the bank where
plaintiff had failed to notify the bank within the fourteen
days required pursuant to § 4-406 where the court found that
the bank had exercised reasonable care. Id., 529 N.Y.S.2d at
Therefore, given Simcoe's undisputed failure to report
unauthorized signatures within fourteen days, it is precluded
from bringing any claims against Chemical based on checks paid
subsequent to its receipt of the first statement relating to
checks forged by Lee and up to and including the date of the
expiration of the representative card. Therefore, summary
judgment dismissing these claims is required as a matter of
E. The Checks Paid After July 31, 1985
As stated above, a factual issue remains as to Chemical's
exercise of due care with respect to those checks paid after
the expiration of Lee's representative card. Chemical,
however, argues in the alternative that the claims based on
these checks are time barred.
1. Applicable Statute of Limitations
The parties dispute the applicable statute of limitations
governing the instant action. New York Civil Practice Law and
Rules § 214 (McKinney's 1990) ("CPLR § 214" or "§ 214"),
governing negligence claims, provides for a three-year
limitations period. CPLR § 213 applies to actions for breach of
contract and allows a six-year limitations period.
Chemical contends that, because Simcoe and Guarantee did not
assert the application of the six-year statute until oral
argument on the instant motion, Simcoe and Guarantee are
therefore precluded from relying on the six-year rule.
However, the complaint states a breach of contract claim
sufficient to provide Chemical with notice of Simcoe's and
Guarantee's theory of the action:
As a result of [Chemical's] breach of its
agreement with Simcoe & Erie and of its lack of
ordinary care in paying said forged checks and in
failing to discover that the purported signatures
of those officers of Simcoe & Erie who were
authorized to sign checks on the operating
account were forgeries and in failing to recredit
Simcoe & Erie's operating account
as aforesaid, plaintiff Simcoe & Erie has been
damaged. . . .".Complaint at ¶ 17.
Moreover, even if the complaint was defective in this
respect, pleadings may be conformed to the proof presented,
and parties are not necessarily bound by technical
inaccuracies in their pleadings. Moore v. Richmond Hill Savings
Bank, 117 A.D.2d 27, 502 N.Y.S.2d 202, 204 (2d Dep't 1986)
(plaintiff in action based on bank's payment of forged checks
not precluded from asserting conversion and breach of contract
claims though such claims not specifically pleaded). See
Hechter v. New York Life Ins., 46 N.Y.2d 34, 38-39, 412
N YS.2d 812, 814-815, 385 N.E.2d 551, 553-555, (1978)
(enactment of UCC, including § 4-406, does not disturb
plaintiff's right to elect a contract rather than a tort
remedy). Therefore, the six-year period set forth in CPLR § 213
governs this action.
2. Accrual of the Claim
New York courts treating other actions based on a bank's
payment of forged checks as breach of contract actions have
held that such claims accrue upon the bank's payment of the
check. See Hechter, 46 N.Y.2d 34, 36, 412 N.Y.S.2d 812, 813,
385 N.E.2d 551, 552; American Home Assur. Co. v. Scarsdale
Nat'l Bank & Trust Co., 96 Misc.2d 715, 409 N.Y.S.2d 608
(Westchester Cty. Ct., Special Term 1978).
Simcoe and Guarantee commenced this action on December 14,
1988. Therefore, under the six-year limitations period, any
claims based on checks forged before December 14, 1982 would
be time barred. There are no such claims, as the first forgery
occurred in March, 1985. Therefore, of the claims about which
there is still an issue of fact — i.e., the forged checks paid
after the expiration of the representative card that have not
been dismissed pursuant to the grant of summary judgment based
on § 4-406(2)(b) — none is time barred.
For the reasons set forth above, Chemical's motion for
summary judgment is granted with respect to the checks paid
before the expiration of the representative card on July 31,
1985. With respect to the claims based on checks paid after
that date, the motion for summary judgment is denied.
It is so ordered.