Opinion
No. CV-00-89-HU
January 18, 2001
Bruce H. Cahn Justin M. Thorp BALL JANIK LLP Portland, Oregon 97204-3219, Attorneys for Plaintiff
Jan K. Kitchel Laura Maffei SCWABE, WILLIAMSON WYATT, P.C. Portland, Oregon 97204-3795, Attorneys for Defendant
OPINION ORDER
Plaintiff Bidwell Company brings this breach of contract action against defendant National Union Fire Insurance Company of Pittsburgh. Plaintiff, a national discount securities brokerage firm, secured a bond from defendant insuring plaintiff for certain losses, including those arising from certain forgeries and alterations. After plaintiff accepted three different checks from clients, negotiated those checks, and received payment on them, plaintiff's bank debited plaintiff's account in the amount of the checks because they had been allegedly forged or altered. Plaintiff then sought coverage for the losses under its bond with defendant. Defendant denied coverage and this suit followed.
Plaintiff and defendant each move for summary judgment. Defendant also moves to strike alleged hearsay evidence relied on by plaintiff. I grant plaintiff's motion for summary judgment in part, deny defendant's motion for summary judgment, and grant the motion to strike on grounds other than those raised by defendant.
BACKGROUND
Plaintiff purchased a one-year "Financial Institution Bond" from defendant with an inception date of November 1, 1997. The bond was renewed for the period November 1, 1998, to November 1, 1999. Both bonds provide identical coverage with the only material difference being the amount of the deductible. Because the parties refer to the two bonds together as "the bond," I will as well. As indicated in more detail below, the bond has agreements covering losses for forgery and alteration, including check forgery.
Plaintiff's clients establish individual user accounts with plaintiff. Deposits into those accounts are kept in a general account maintained by plaintiff with Wells Fargo Bank. On or about May 26, 1998, someone opened an account with plaintiff under the name of "Tauna J. Stewart."
On or about May 8, 1998, Nemco, Inc., a Grand Rapids, Michigan company, drew a check on its account with NBD Bank, N.A., in the amount of $52,669.66. The check was made payable to Tenneco Packaging. On June 11, 1998, the Nemco check was deposited into the Tauna J. Stewart account with plaintiff. The payee line of the check was not altered, but the back of the check was endorsed with the signature "Tauna J. Stewart" before being deposited. Plaintiff accepted the check and deposited it with Wells Fargo, crediting the Stewart account for the amount of the Nemco check. Wells Fargo accepted the check and presumably transferred the check to the payor, NBD Bank. On or about June 4, 1998, Walt Disney Pictures and Television drew a check on an account it had with Bank of America. The check was made payable to the order of Sony Pictures Studios, Inc., in the amount of $308,845.58. Sometime between June 4, 1998, and July 1, 1998, the Disney check was intercepted and the payee was altered from Sony to "Bidwell Investment Company, 317 North Broadway St., Chicago Illinois, 60657, Attn Tauna J. Stewart, Acct # 11767830." The back of the check was endorsed with the signature "Tauna J. Stewart." The check was deposited in the Stewart account with plaintiff.
Plaintiff then deposited the check with Wells Fargo and credited the Stewart account for the amount of the Disney check. Wells Fargo accepted the check and transferred it to the payor, Bank of America. Bank of America accepted the Disney check, credited Wells Fargo for the amount of the check, and debited Disney's account. Disney then informed Bank of America that the check had been altered.
Between June 18, 1998, and July 14, 1998, approximately $250,000 was wired out of the Stewart account maintained with plaintiff.
In late July 1998, the United States Attorney's office in Chicago advised plaintiff that it was investigating a "Tauna Stewart." Plaintiff immediately froze the Stewart account, after the $250,000 had been withdrawn.
On or about August 19, 1998, Bank of America presented an affidavit of alteration and forgery regarding the Disney check, to Wells Fargo. On or about September 2, 1998, Wells Fargo informed plaintiff that it had debited $308,845.58, the amount of the Disney check, from plaintiff's account with Wells Fargo based on the Bank of America affidavit. Plaintiff then filed a proof of loss with defendant. As previously indicated, defendant denied plaintiff's claim.
On or about January 18, 1999, an affidavit of alteration was made by Tenneco Packaging, the payee on the Nemco check, to NBD Bank. On or about January 26, 1999, NBD Bank made a reimbursement claim to Wells Fargo for the Nemco check. On or about February 11, 1999, Wells Fargo debited $52,669.66 from plaintiff's account, reflecting the amount of the Nemco check. After offsetting the amounts debited by Wells Fargo by the amounts remaining in the Stewart account and reducing the remainder by the applicable deductible on the bond, plaintiff suffered a net loss of $240,075 on the Stewart account.
On or before February 24, 1998, someone opened an account with plaintiff under the name "Michael Long." The "Michael Long" who opened the account used the social security number of a "Michael W. Long" without that Michael W. Long's knowledge or permission.
On or about December 3, 1998, Coca-Cola Bottling Company of New York drew a check on its Citibank Delaware account in the amount of $119,359.37. The check was made payable to P E Corp. Sometime between December 3, 1998, and December 22, 1998, the Coca-Cola check was intercepted and the payee was altered to "BIDWELL COMPANY FOR: MICHAEL LANG [sic]." The check was not endorsed with a signature, but someone did put the account number of the Michael Long account on the back of the check. The check was deposited in the Long account maintained with plaintiff. Plaintiff accepted the check and presumably, transferred it to the payor, Citibank Delaware.
Between December 30, 1998, and December 31, 1998, someone wrote three checks against the Long account maintained with plaintiff, totaling $110,101. The checks were signed in the name of Michael Long and they cleared the account.
On or about January 26, 1999, a forgery affidavit was submitted by Coca-Cola to Citibank Delaware. A May 12, 1999 letter from Citibank Delaware to Wells Fargo requested reimbursement from Wells Fargo for the amount of the check. On or about June 14, 1999, Wells Fargo advised plaintiff that it had debited $119,359.37, the amount of the Coca-Cola check, from plaintiff's account with Wells Fargo due to the alteration of the Coca-Cola check. On June 15, 1999, plaintiff filed another proof of loss with defendant. Defendant has notified plaintiff that it does not intend to provide coverage for the loss on the Long account.
After offsetting the amount debited by Wells Fargo by the amounts remaining in the Long account and reducing the remainder by the applicable deductible on the bond, plaintiff has suffered a $48,095.45 loss on the Long account. Plaintiff's total claim for the losses, excluding interest and attorney's fees, from both the Stewart and Long accounts, is approximately $288,170.45.
STANDARDS
Summary judgment is appropriate if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The moving party bears the initial responsibility of informing the court of the basis of its motion, and identifying those portions of "`pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986) (quoting Fed.R.Civ.P. 56(c)).
"If the moving party meets its initial burden of showing `the absence of a material and triable issue of fact,' `the burden then moves to the opposing party, who must present significant probative evidence tending to support its claim or defense.'" Intel Corp. v. Hartford Accident Indem. Co., 952 F.2d 1551, 1558 (9th Cir. 1991) (quoting Richards v. Neilsen Freight Lines, 810 F.2d 898, 902 (9th Cir. 1987)). The nonmoving party must go beyond the pleadings and designate facts showing an issue for trial. Celotex, 477 U.S. at 322-23.
The substantive law governing a claim determines whether a fact is material. T.W. Elec. Serv. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987). All reasonable doubts as to the existence of a genuine issue of fact must be resolved against the moving party. Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 587 (1986). The court should view inferences drawn from the facts in the light most favorable to the nonmoving party. T.W. Elec. Serv., 809 F.2d at 630-31.
If the factual context makes the nonmoving party's claim as to the existence of a material issue of fact implausible, that party must come forward with more persuasive evidence to support his claim than would otherwise be necessary. Id.; In re Agricultural Research and Tech. Group, 916 F.2d 528, 534 (9th Cir. 1990); California Architectural Bldg. Prod., Inc. v. Franciscan Ceramics, Inc., 818 F.2d 1466, 1468 (9th Cir. 1987).
DISCUSSION
I. Pertinent Portions of the Bond
In pertinent part, the bond provides that [Defendant], in consideration of an agreed premium, and in reliance upon all statements made and information furnished to [defendant] by [plaintiff] in applying for this bond . . . agrees to indemnify [plaintiff] for:
. . .
(D) Loss resulting directly from
(1) Forgery or alteration of, on or in any Negotiable Instrument (except in Evidence of Debt), Acceptance, Withdrawal Order, receipt for the withdrawal of Property, Certificate of Deposit or Letter of Credit,
(2) transferring, paying or delivering any funds or Property or establishing any credit or giving any funds or Property or establishing any credit or giving any value on the faith of any written instructions or advices directed to [plaintiff] and authorizing or acknowledging the transfer, payment, delivery or receipt of funds or Property, which instructions or advices purport to have been signed or endorsed by any customer of [plaintiff] or by any financial institution but which instructions or advices either bear a signature which is a Forgery or have been altered without the knowledge and consent of such customer or financial institution.
A mechanically reproduced facsimile signature is treated the same as a handwritten signature.
Exh. A to Compl. at p. 2.
Additionally, the bond defines "forgery" as "the signing of the name of another person or organization with intent to deceive; it does not mean a signature which consists in whole or in part of one's own name signed with or without authority, in any capacity for any purpose." Id. at p. 4.
II. Nemco Check
Because the payees on both the Disney and Coca-Cola checks were changed, there is no question that those two checks were altered. Additionally, the Michael W. Long whose social security number was used to open the Michael Long account with plaintiff, did not endorse the Coca-Cola check. Michael W. Long Affid. at ¶ 6 (affiant never in possession of check number 105088 from Coca-Cola and never endorsed or otherwise negotiated the check). Thus, there is no dispute that in regard to the Disney and Coca-Cola checks, they were altered or forged, or both.
There was no alteration to the Nemco check, however. Additionally, there is no affidavit from the Tauna J. Stewart whose social security number was used to open the account, indicating that the "Tauna J. Stewart" endorsement on the Nemco check was a forgery. Plaintiff relies on affidavits of other persons, notes by defendant's claims investigator, and a letter by defendant's claim investigator, to support its argument that the endorsement on the Nemco check is a forgery. Defendant moves to strike much of that evidence as inadmissible hearsay. For the reasons explained below, I grant the motion to strike because even if the evidence is admissible as either non-hearsay or under a hearsay exception, it is insufficient evidence under Federal Rule of Civil Procedure 56.
A. Selzer's Notes
Steven Selzer, who investigated plaintiff's claim, maintained internal file notes which show that on October 9, 1988, he spoke with Assistant United States Attorney Lori Lightfoot about the Disney check. Exh. 18 to Cahn Affid. at p. 1; Exh. A to Maffei Affid. in Support of Deft's Reply at p. 1.
Selzer was actually an employee of AIG Technical Services (AIGTS), which is the claims adjustment division of AIG, defendant's parent company. For purposes of this litigation,
Defendant's motion to strike states that defendant moves to strike hearsay evidence included in and attached to the Cahn Affidavit and the Peck Affidavit filed in support of plaintiff's motion for summary judgment. Cahn's affidavit has thirty exhibits attached to it, including Selzer's internal file notes. Exhs. 18 and 19 to Cahn Affid. The same internal file notes are submitted by defendant in support of its motion for summary judgment. Exh. A to Maffei Affid. in Support of Deft's Reply. I assume defendant does not wish to strike evidence which it has also submitted. I nonetheless conclude that I have an independent duty under Rule 56 to ensure that all evidence relied on in support of a motion for summary judgment is admissible. In the future, however, I request that defendant specifically identify which portions of which affidavits and which portions of which exhibits it moves to strike. A blanket motion to strike all hearsay evidence in affidavits and attachments to those affidavits creates an undue burden on the court to determine the object of defendant's motion.
His entry from that date states that "Lightfoot stated that the principal's name is an alias and the original identity is currently unknown. The principal used the social security name of a 10 year old girl." Id.
On October 21, 1998, Selzer noted that "[t]he Assistant United States Attorney discovered the customer is a fictitious names [sic] and whose social security number relates to a 10 year old girl, unrelated to the customer. The customer's real identity and whereabouts is currently unknown." Id. Also on that date, Selzer repeated portions of the October 9, 1998 file the parties appear to agree that AIGTS and defendant are part of he same enterprise and Selzer was defendant's agent. entry, and stated again that "Lightfoot stated that the principal's name is an alias and the original identity of the customer is currently unknown. The principal used the social security name of an unrelated 10 year old girl." Id. at pp. 1-2. In his deposition, Selzer had no independent recollection of his conversations with Lightfoot. See Exh. 24 to Cahn Affid. at pp. 15, 20-21.
Plaintiff argues that Selzer's notes are admissible non-hearsay statements under Federal Rule of Evidence 801(d)(2)(D) as statements by an agent of a party-opponent, acting within the scope of his agency, and made during the existence of the relationship. For the purposes of this motion, I agree with plaintiff that Selzer's notes may be admissible under Rule 801(d)(2)(D). Next, however, I must examine whether Lightfoot's statements to Selzer, contained within Selzer's notes, are admissible. Plaintiff argues that Lightfoot's statements are admissible under the residual hearsay exception found in Rule 807. For the purposes of this motion, I assume that Lightfoot's statements to Selzer may be admissible under this exception.
The problem, however, is that there is no suggestion that Lightfoot's statements are based on her personal knowledge. There is no indication, for example, that she has spoken with the ten-year old Tauna Stewart whose social security number was used on the account application. Without any evidence demonstrating that Lightfoot has personal knowledge of the information conveyed to Selzer, her statements, even if admissible as non-hearsay or as a hearsay exception, cannot support summary judgment for plaintiff on the Nemco check forgery issue. It is just as likely that Lightfoot's statements are based upon inadmissible hearsay statements made by unknown declarants to Lightfoot as that they were based on her personal knowledge.
B. Selzer's December 4, 1998 Letter
As with Selzer's internal file notes, this letter is also submitted by both parties. Exh. 17 to Maffei Affid. in Support of Deft's Mtn for Sum. Jgmt; Exh. 9 to Cahn Affid.
On December 4, 1998, Selzer wrote to Kevin Peck, plaintiff's compliance officer, denying plaintiff's claim for the Disney check. Exh. 17 to Maffei Affid. in Support of Deft's Mtn for Sum. Jgmt; Exh. 9 to Cahn Affid. In the second paragraph of the letter, Selzer recited the facts regarding that check and stated that "[t]he individual purporting to be Stewart mailed this check to the Insured for deposit into her account." Id. at p. 1.
Plaintiff again relies on Rule 801(d)(2)(D) for the admission of this statement in Selzer's letter. Plaintiff also argues that the statement demonstrates defendant's manifestation or belief in the truth of Lightfoot's statements regarding the Tauna J. Stewart endorsement on the Disney check and thus, Lightfoot's statements are admissible under Rule 801(d)(2)(B). Even assuming the validity of plaintiff's hearsay-related arguments, the evidence is inadmissible because of the lack of personal knowledge.
Here, while statements in Selzer's letter may come in under Rule 801(d)(2)(D), there is no evidence that Selzer has personal knowledge of whether the individual who endorsed the Disney check was purporting to be Tauna J. Stewart or was Tauna J. Stewart. Even if his statement manifests a belief in the truth of Lightfoot's statements, there is, as noted above, no evidence of Lightfoot's personal knowledge of the information. The adoption or belief of a fact is not equivalent to personal knowledge of the fact, and it is personal knowledge, among other things, that is required under Rule 56.
C. Cahn and Peck Affidavits and Bussing Deposition
Peck states in his affidavit that during the course of assisting the United States Attorney's Office with respect to its investigation of the Tauna J. Stewart account, he had conversations with Lightfoot during which Lightfoot advised him that the person or persons who opened the Tauna J. Stewart account with plaintiff was not Tauna J. Stewart and they did so without the knowledge of the real Tauna J. Stewart. Peck Affid. at § 15. He states that Lightfoot further advised him that Tauna J. Stewart was the name of a minor whose social security number was used without her authorization in order to open the account with plaintiff. Id.
In his deposition, Peck stated that Lightfoot was under the impression that the true Tauna Stewart was a minor. Exh. 23 to Cahn Affid. (Peck Depo.) at p. 4.
Additionally, Cahn states that he has had several conversations with Lightfoot and that she has confirmed that persons other than Tauna J. Stewart, social security number 071-72-6066, opened an account with plaintiff without the knowledge or permission of Ms. Stewart. Cahn Affid. at § 34. Lightfoot acknowledged to Cahn that there is a pending grand jury investigation of which plaintiff's loss is only a minor problem. Id. Lightfoot will not provide an affidavit or otherwise assist in this matter however, because of the prohibitions in Federal Rule of Criminal Procedure 6(e)(2), which provides the general rule of secrecy for grand jury investigations. Id.
Finally, plaintiff's vice president of operations, Julie Bussing, testified in deposition that the information "passed along" to her "from the investigation taking place in Chicago," was that the real Tauna Stewart was an eleven year old girl and that her identification had been stolen. Exh. 22 to Cahn Affid. (Bussing Depo.) at p. 5.
Assuming again, for the purposes of this motion, that Lightfoot's statements can overcome the hearsay objections, they are still not admissible because of the lack of evidence as to Lightfoot's personal knowledge.
At oral argument, and then again in supplemental briefing, plaintiff argued that the admissibility of Lightfoot's statements should not be judged by the traditional rules of evidence, but should be examined in a different light. Plaintiff urges that the admissibility question should be governed by what defendant knew at the time it made the coverage decision. That is, based on the information known to it at the time, including Lightfoot's statements to Selzer, did defendant breach its contract by denying coverage when it did. Thus, if Selzer considered Lightfoot's statements to be true and denied coverage, then defendant breached its contractual obligations to plaintiff, even if the statements relied on by Selzer are inadmissible in court.
I reject plaintiff's argument. The cases cited by plaintiff in support of its argument, are, as plaintiff itself admits, not on point. Rather, they are bad faith or reasonable investigation cases and the relevant issues included what information was known to the insurer. See Fireman's Fund Ins. Cos. v. Alaskan Pride P'ship, 106 F.3d 1465 (9th Cir. 1997); City of Portland v. George D. Ward Assoc., Inc., 89 Or. App. 452, 750 P.2d 171 (1988).
This case does not involve questions regarding defendant's investigation of plaintiff's claim. Additionally, this is summary judgment which requires that evidence be based on personal knowledge and be admissible. Fed.R.Civ.P. 56(e). There is no authority supporting plaintiff's argument that "admissible" is anything other than admissible under the rules of evidence and procedure controlling on this court.
As a result, plaintiff's motion for summary judgment as to the Nemco check is denied. Similarly, however, defendant's motion as to the Nemco check is denied because defendant fails to establish that the Tauna J. Stewart endorsement on that check is not a forgery. Although I deny summary judgment to both parties on the Nemco check, I have included facts and discussion regarding the Nemco check in the following sections so that the only issue remaining for the jury is whether the Tauna J. Stewart endorsement on the Nemco check is a forgery.
III. Finally Paid
Defendant maintains that Wells Fargo's actions in debiting plaintiff's account for the three checks were performed under Oregon Revised Statute § (O.R.S.) 74.2140(1). This statute allows a bank to "charge-back" the amount of a dishonored item to its customer if the
collecting bank has made provisional settlement with its customer for an item and fails . . . to receive a settlement for the item which is or becomes final. . . . The rights to revoke, charge back and obtain refund terminate if and when a settlement for the item received by the bank is or becomes final.
O.R.S. 74.2140(1). Under the statute's plain language, Wells
Fargo could properly charge plaintiff's account under this provision only if the settlement of the checks had not yet been finalized.
Defendant argues that because Wells Fargo's actions in debiting plaintiff's account were taken pursuant to O.R.S. 74.2140(1), then such losses are not recoverable from defendant because exclusion (o) of the bond excludes losses which involve "items of deposit which are not finally paid for any reason, . . ." Exh. A to Compl. at p. 5. Thus, defendant argues, because Wells Fargo acted under O.R.S. 74.2140(1), the losses were not finally paid, and thus, they are not recoverable under the bond because of exclusion (o).
Under Oregon's commercial code, "final payment" of an item by a payor bank occurs when the payor bank has "paid the item in cash." O.R.S. 74.2150(1)(a). It also occurs if the payor bank provisionally accepts the item, and does not return it or give a notice of dishonor by midnight of the banking day of the receipt. O.R.S. 74.2150(1)(c); O.R.S. 74.3010(1). Plaintiff argues that each of the three checks at issue was honored and final payment occurred, and thus, as a result, exclusion (o) is inapplicable.
The payor bank is the bank on which the check was drawn. O.R.S. 74.1050(3). Here, NBD Bank was the payor bank on the Nemco check, Bank of America was the payor bank on the Disney check, and Citibank Delaware was the payor bank on the Coca-Cola check.
The evidence regarding the Nemco check shows that on January 26, 1999, NBD Bank made a reimbursement claim to Wells Fargo for $52,669.66, the amount of the Nemco check. Peck stated in deposition that Tenneco Packaging, the payee on the Nemco check, ultimately dishonored the check and "then it came back from the chain of banks to Wells Fargo[.]" Exh. 23 to Cahn Affid. (Peck Depo.) at p. 4. The only reasonable inference to be drawn from the evidence regarding the Nemco check is that it was finally paid by NBD Bank under O.R.S. 74.2150. If the check had not been finally paid, there would have been no reason for NBD Bank to later seek reimbursement from Wells Fargo. The only reasonable inference from the evidence establishes that NBD "finally paid" on the check, but when the check eventually made it back to the drawer, the drawer noted the Tauna J. Stewart signature, Tenneco then filed an affidavit of alteration, NBD Bank was alerted, and NBD Bank sought reimbursement from Wells Fargo for the item NBD Bank previously paid.
As for the Disney check, in its Concise Statement of Material Facts, plaintiff asserts that sometime between July 1, 1998, and August 13, 1998, Wells Fargo presented the Disney check to Bank of America with Bank of America then accepting the check and crediting Wells Fargo for the amount of the check. Pltf's Concise Stmt of Mat. Facts at ¶ 17. Because defendant accepts these assertions, I accept them as true. Deft's Resp. to Pltf's Concise Stmt of Facts at ¶ 4 (accepting facts contained in plaintiff's paragraphs 10-36); Loc.R. 56.1(f) (moving party's material facts deemed admitted unless specifically denied or otherwise controverted). In addition, an August 7, 1998 letter from Disney's assistant general counsel to Bank of America states that the Disney check was honored by Wells Fargo and then by Bank of America which debited Disney's account. Exh. 31 to Supp'l Cahn. Affid. Furthermore, as indicated above, Bank of America made a claim against Wells Fargo on August 19, 1998. The evidence establishes only one reasonable inference: the Disney check was "finally paid" under O.R.S. 74.2150.
As for the Coca-Cola check, as noted above, Citibank Delaware sought reimbursement from Wells Fargo for the Coca-Cola check in a May 12, 1999 letter. Exh. 32 to Supp'l Cahn Affid. at p. 1. The letter states that an "[i]ndemnified photostat of paid and cancelled check" was enclosed. Id. (emphasis added). Again, the evidence is reasonably capable of only one inference: the Coca-Cola check was "finally paid" under O.R.S. 74.2150 and then later, when the alteration was discovered by the drawer and the payor bank was alerted, Citibank Delaware sought reimbursement from Wells Fargo. Citibank Delaware's letter indicates the check was paid and there would have been no need for Citibank Delaware to have sought reimbursement from Wells Fargo if it had not "finally paid" the check.
There is no dispute that exclusion (o) applies only when the losses are not finally paid. Because each of the checks at issue in this case was finally paid under O.R.S. 74.2150, exclusion (o) does not apply to deny plaintiff's claim.
IV. Intervening Cause
As indicated above in the quoted portions of the bond, a covered loss is one "resulting directly from" forgery, alteration, or other occurrences. Exh. A to Compl. at p. 2. Defendant argues that if the losses were final and exclusion (o) is inapplicable, then Wells Fargo acted improperly in debiting plaintiff's account under O.R.S. 74.2140(1). Accordingly, defendant contends, Wells Fargo's improper action is an intervening, superseding cause of the loss and the loss is not "directly from" the forgery or alteration of a negotiable instrument as required for coverage under the bond.
Plaintiff contends that Wells Fargo's actions were not taken pursuant to O.R.S. 74.2140(1) and thus, they were not improper under that statute. Rather, plaintiff argues, Wells Fargo's debiting of plaintiff's account was based on Wells Fargo's common law right to set off.
Generally, the bond's requirement that a loss "result directly from" an event, requires a standard of proximate causation. See, e.g., Resolution Trust Corp. v. Fidelity Deposit Co. of Md., 205 F.3d 615, 654-56 (3d Cir. 2000) (language in bond covering losses "directly resulting from . . ." construed under New Jersey law as equivalent to traditional proximate causation standard); Jefferson Bank v. Progressive Cas. Ins. Co., 965 F.2d 1274, 1281-82 (3d Cir. 1992) ("loss resulting directly . . . from" language in bond was equivalent, under Pennsylvania law, to proximate causation; rejecting argument that a "but-for" causation standard applied and noting that commentators have demonstrated the "nearly universal rejection and unworkability" of an immediacy, rather than a substantiality, standard); Mid-America Bank of Chaska v. American Cas. Co. of Reading, Pa., 745 F. Supp. 1480, 1485 (D. Minn. 1990) (applying proximate cause analysis to policy language covering losses "resulting directly" from the fraudulent or dishonest acts of employees); Hanson PLC v. National Union Fire Ins. Co. of Pittsburgh, Pa., 58 Wn. App. 561, 573, 794 P.2d 66, 73 (1990) ("courts apply a proximate cause analysis when confronted with the term `resulting directly' in an insurance policy."); Nash v. Prudential Ins. Co. of Am., 114 Cal.Rptr. 299, 302, 303, 39 Cal.App.3d 594, 598 (Ct.App. 1974) (deeming the question whether an injury is a "direct result" under an insurance policy to be one of proximate causation).
Neither party cites any Oregon cases interpreting the "resulting directly from" standard and I have found none. Defendant argues that because Oregon rejects a proximate cause analysis in traditional negligence cases, the proximate cause standard should not be used here. I disagree. The question here is not what Oregon courts use in negligence cases, but what the policy drafters meant by the words "resulting directly from." The overwhelming, if not universal, authority from other jurisdictions is that the words represent a traditional proximate cause analysis.
Plaintiff contends that Wells Fargo's actions in debiting plaintiff's account for the three checks was based on Wells Fargo's common law right to set off as a remedy for plaintiff's actions in breaching its transfer warranties. Plaintiff's unavoidable breach of its transfer warranties occurred when it negotiated the checks. Because the breach proximately caused Wells Fargo's right to set off, and thus plaintiff's loss, the loss results directly from the forgery or alteration.
Under O.R.S. 74.2140(5), a "failure to charge back or claim refund [under this section] does not affect other rights of the bank against the customer or any other party." Thus, plaintiff argues, when a bank does not rely on O.R.S. 74.2140(1) for a charge back against a customer's account, subsection (5) suggests that the bank may still rely on other rights against its customer or any other party. I agree with plaintiff that under subsection (5), O.R.S. 74.2140 does not provide the exclusive authority by which a bank may debit a customer's account.
This conclusion is further supported by O.R.S. 71.1030 which preserves common law principles unless they are displaced by a particular provision of the Uniform Commercial Code (U.C.C.). See also U.C.C. § 4-210(a), Official Comment 1 (U.C.C. § 4-210(a) (codified in Oregon at O.R.S. 74.2100), providing for security interests of collecting banks, "does not derogate from the banker's general common law lien or right of setoff against indebtedness owing in deposit accounts."). Based on these provisions, I agree with plaintiff that Oregon's commercial code does not prevent Wells Fargo from seeking common law set off remedies against plaintiff.
Oregon courts recognize a common law right of a bank to "set off a general deposit against a mature indebtedness." Keller v. Commercial Credit Co., 149 Or. 372, 377-78, 40 P.2d 1018, 1021 (1935); see also Studley v. Boylston Nat'l Bank of Boston, 229 U.S. 523, 528, 33 S.Ct. 806, 808 (1913) (bank can enforce right of set-off on date customer's note became due by applying customer's money on deposit to debt). As explained by the Oregon Supreme Court in a 1922 case: "As a general rule, a bank may look to deposits in its hands for the repayment of any indebtedness to it on the part of the depositor, and may apply the debtor's deposits on his debts to the bank as they become due." Mahon v. Harney County Nat'l Bank of Burns, 104 Or. 323, 330, 206 Or. 224, 227 (1922) (internal quotation omitted) (noting that "[t]his principle is supported by authorities too numerous to cite.").
Defendant argues that while the principle of set off is commonly applied to matured debts such as loans, there is no authority that an alleged breach of warranty creates a "matured indebtedness" entitling Wells Fargo to a set off. Although there appears to be no express authority as to whether a breach of transfer warranty represents a mature debt capable of supporting a right to set off, there is no contrary authority either. The cases suggest that a bank may look to the customer's deposits for "any indebtedness" of the customer. The hallmarks of a mature debt include that it be presently due, be non-contingent, and be of a fixed amount. See, e.g., Bank of Chicago-Garfield Ridge v. Park Nat'l Bank, 237 Ill. App.3d 1085, 1093, 606 N.E.2d 72, 77, 179 Ill. Dec. 240, 245 (1992) (debt matures when it is due); Behring Int'l, Inc. v. Greater Houston Bank, 662 S.W.2d 642, 652 (Tex.Ct.App. 1983) (offset by bank against depositor not authorized if debt is contingent).
Here, if a breach of warranty occurred, the debt is not contingent and the amount, the total of the three checks, was fixed. The debt was due as of the occurrence of the breach.
I agree with plaintiff that if plaintiff breached its transfer warranty to Wells Fargo when it transferred each of the checks to Wells Fargo, Wells Fargo could properly rely on its common law right to set off to recover the sums from plaintiff's account. Thus, Wells Fargo did not improperly debit plaintiff's account under O.R.S. 74.2140(1), and its actions were not an intervening, superseding cause of plaintiff's loss. Rather, because plaintiff breached its warranty when it transferred the forged or altered checks to Wells Fargo, the actions by Wells Fargo in collecting the debt from plaintiff's account resulted directly from the forged or altered checks.
V. Breach of Warranty
Under Oregon's commercial code, parties that transfer a check for value warrant to all subsequent takers, except the payor, that "[a]ll signatures on the instrument are authentic and authorized" and that "[t]he instrument has not been altered[.]" O.R.S. 73.0416(1)(b), (c); see also O.R.S. 74. 2070 (same warranties made by bank customer to a collecting bank and any subsequent collecting banks). However, to the payor, a transferring party only warrants that "the warrantor has no knowledge that the signature of the drawer of the draft is unauthorized." O.R.S. 73.0417(1)(c). Thus, in a typical "forged check" case, a transferring party warrants to all subsequent takers of the check except for the payor bank, that the drawer's signature on the check is not forged.
The reason the warranty under O.R.S. 73.0416(1)(b) is not made to the payor is based on an Eighteenth Century decision entitled Price v. Neal, 3 Burr. 1354 (K.B. 1762), which held that a payor who pays on a note with a forged drawer's signature may not normally recover the payment. The rationale behind the rule is that the payor bank is in the best position to detect forgery of a drawer's signature, because the payor bank should have the drawer's signature on file. See U.C.C. § 3-404, Official Comment 3.
"Forged endorsement" cases are treated differently, however. A forged endorsement occurs when a validly drawn check is fraudulently endorsed. Generally, alteration cases, where the drawer's signature is valid, but where there has been some alteration to the check, are treated as forged endorsement cases rather than forged check cases. See 2 White, James Robert S. Summers, Uniform Commercial Code § 18-7, p. 235 (4th ed. 1995).
In forged endorsement cases, there is no "payor exception" to the transfer warranty made regarding the authenticity and authorization of all signatures. Thus, liability generally flows to the party that took the check from the forger. See Wymore St. Bank v. Johnson Int'l Co., 873 F.2d 1082, 1085 (8th Cir. 1989) (because, under the Uniform Commercial Code, one who takes an instrument with a forged endorsement has converted the instrument, the person upon whom the loss usually falls, in absence of the forger, is the first person to deal with the forger); Western Cas. Sur. Co. v. Citizens Bank of Las Cruces, 676 F.2d 1344, 1345 (10th Cir. 1982) (loss on instrument with forged endorsement shifted to previous endorsers by way of an action for breach of warranty; ultimately the loss is generally borne by person who forged the endorsement or the party who took the instrument from the forger).
Because in the instant case there are forged endorsements, or alterations, or both, plaintiff argues that it breached its transfer warranty to Wells Fargo and thus, Wells Fargo was entitled to set off plaintiff's account. O.R.S. 73.0416(2) (person to whom warranties under subsection (1) are made and who took instrument in good faith may recover as damages for breach of warranty an amount equal to the loss suffered as a result of the breach); O.R.S. 74. 2070(3) (same).
Defendant argues that Wells Fargo cannot assert a breach of warranty claim against plaintiff because the notice of the breach was untimely. The relevant statutes provide:
unless notice of a claim for breach of warranty is given to the warrantor within 30 days after the claimant has reason to know of the breach and the identity of the warrantor, the liability of the warrantor . . . is discharged to the extent of any loss caused by the delay in giving notice of the claim.
O.R.S. 73.0416(3); see also O.R.S. 74. 2070(4) (same).
Defendant's argument focuses only on the Disney check, making no mention of the Nemco or Coca-Cola checks. As to the Disney check, defendant contends that Bank of America was aware that the Disney check was probably altered on or about July 8, 1998, and yet did not present its claim to Wells Fargo until August 19, 1998, more than one month after it had reason to know that the Disney check had been altered. Defendant argues that Bank of America's delay in notifying plaintiff of an alleged breach of warranty violates the U.C.C. policy of rapid notification and alleviates plaintiff's alleged responsibility under the U.C.C. provisions for transfer warranties.
I disagree. Assuming for the purposes of this motion that Bank of America's telephone discussion with Disney on July 8, 1998, constitutes knowledge of the breach and the identity of the warrantor, the thirty-day notice period expired on August 8, 1998. The undisputed evidence is that money was wired out of the Stewart account between June 18, 1998, and July 14, 1998, and that the Stewart account was frozen on July 20, 1998. The loss occurred before the expiration of the thirty-day period. Thus, assuming that Bank of America possessed the requisite knowledge on July 8, 1998, and did not notify Wells Fargo until August 19, 1998, more than thirty days later, no loss was caused by the delay in giving notice of the claim because the loss occurred before August 8, 1998, the end of the thirty-day period.
Even if the relationship examined is that between plaintiff as warrantor and Wells Fargo as warrantee, or "claimant" as labeled in the statute, the result is the same. Wells Fargo debited plaintiff's account for the Disney check on September 2, 1998. Bank of America made its claim against Wells Fargo for the Disney check on August 19, 1998. The record reveals no evidence that Wells Fargo, the claimant, had any prior information concerning the validity of the Disney check and thus, had any reason to know of the breach of transfer warranty before the August 19, 1998 date. Thus, Wells Fargo gave "notice" to plaintiff, in the form of debiting its account, within thirty days of learning of the breach.
The same conclusion is reached in regard to the Nemco and Coca-Cola checks. The only evidence in the record regarding when NBD Bank learned of the problem with the Nemco check is the affidavit of alteration made by Tenneco Packaging, to NBD Bank on January 18, 1999. NBD Bank then sought reimbursement from Wells Fargo on or about January 26, 1999, a period of eight days, well within the thirty-day window.
Additionally, there is no evidence in the record to suggest that Wells Fargo had any information concerning the validity of that check before the January 26, 1999 date. Wells Fargo debited the money from plaintiff's account on or about February 11, 1999. Thus, Wells Fargo gave "notice" to plaintiff, in the form of debiting its account, within thirty days of learning of the breach.
As for the Coca-Cola check, Coca-Cola filed an affidavit of forgery with Citibank Delaware on January 26, 1999. No evidence in record suggests that Citibank Delaware had any prior notice of problems with the check. Citibank Delaware did not present its claim to Wells Fargo until May 12, 1999, a period more than thirty days after it had notice. But, monies were withdrawn from the Long account on December 30 and 31, 1998. Thus, the loss occurred before the start of the thirty-day time period and any delay in notification did not cause the loss. As noted, on May 12, 1999, Citibank Delaware wrote a letter seeking reimbursement from Wells Fargo. Allowing three days for mail to reach Wells Fargo, it is reasonable to assume that Wells Fargo received the letter on or about May 15, 1999. No evidence in the record suggests that Wells Fargo had any prior notice regarding the validity of the Coca-Cola check. Wells Fargo debited plaintiff's account on June 14, 1999. Thus, Wells Fargo gave "notice" to plaintiff, in the form of debiting its account, within thirty days of learning of the breach.
Because notice from the payor banks to Wells Fargo was timely, or because any delay in notice to Wells Fargo from the payor banks did not cause the loss, plaintiff's liability as warrantor was not discharged under O.R.S. 73.0416(3) and O.R.S. 74. 2070(4). Additionally, because Wells Fargo's notice to plaintiff occurred within thirty days of Wells Fargo possessing the requisite information regarding each check, plaintiff's liability as warrantor was not discharged under O.R.S. 73.0416(3) and O.R.S. 74. 2070(4).
Defendant also makes an alternate timeliness argument. In addition to arguing that notice was untimely under O.R.S. 73.0416(3) and 74. 2070(4) and thus discharged plaintiff's liability as a warrantor, defendant contends that Wells Fargo's alleged untimely notice to plaintiff regarding the dishonored checks was the direct cause of plaintiff's losses because had plaintiff known earlier, plaintiff could have frozen the Stewart and Long accounts, preventing plaintiff's injury. Thus, defendant asserts, Wells Fargo's allegedly tardy notice, not the forged or altered checks themselves, was the proximate cause of the loss.
The facts recited above regarding when Wells Fargo received notice from the payor banks as to problems with the checks, and when Wells Fargo then acted to recoup the funds from plaintiff, demonstrate that defendant's argument is unavailing. In each instance, Wells Fargo acted vis a vis plaintiff within thirty days of receiving notice from the payor bank. In each instance, by the time Wells Fargo received notice from the payor bank, the monies in the Stewart and Long accounts had been withdrawn.
Defendant's argument that there was a lag by Wells Fargo in reporting the problems with the checks to plaintiff and that this alleged lag was the proximate cause of plaintiff's loss, is without merit.
Plaintiff argues that the provisions of O.R.S. 73.0406(1) (providing that a person whose negligence contributes to an alteration or forgery of an instrument cannot assert the alteration or forgery against a person who pays it), and O.R.S. 73.0404(2) (providing additional exclusion for liability of breach of transfer warranty), do not defeat plaintiff's claim.
Apparently, defendant raised these statutes at some point during its investigation and denial of plaintiff's claim. Defendant, however, does not raise them here on summary judgment. Therefore, I treat them as abandoned arguments by defendant and do not consider them.
In summary, the checks were finally paid and exclusion (o) does not apply. Wells Fargo did not act pursuant to O.R.S. 74.2140(1) and thus, its debiting of plaintiff's account was not improper and was not an intervening, superseding cause of plaintiff's loss. Additionally, plaintiff breached its transfer warranty to Wells Fargo as a result of transferring each forged or altered check to Wells Fargo. This breach established Wells Fargo's right to a common law set off of the amount of each check, from plaintiff's account. The forged or altered checks were the proximate cause of plaintiff's loss, coverage for which is provided under the bond.
VI. Affirmative Defenses
In its motion for summary judgment, plaintiff contends that none of defendant's affirmative defenses asserted in defendant's Answer have merit. Defendant has not addressed the affirmative defenses in any of the summary judgment materials.
Defendant raises three affirmative defenses: failure to state a claim, claims barred by contract, and failure to perform conditions precedent. I agree with plaintiff that these defenses lack merit.
First, given the discussion thus far, plaintiff has clearly stated a breach of contract claim. Second, I see no provisions of the contract that bar plaintiff's claim.
Third, as to the conditions precedent argument, plaintiff states that when asked to expand on the grounds for this defense, defendant replied that "`Bidwell failed to cooperate fully with Defendant investigating the claims prior [to] filing suit, and Bidwell failed to provide information to Defendant that would enable Defendant to investigate the claims adequately.'" Pltf's Memo in Support of Mtn. for Sum. Jdgmt at p. 24 (quoting Deft's Response to Pltf's First Set of Interrogatories, Interrogatory No. 14).
Relying on deposition testimony of Jonathan Weber, director of management liability claims at AIG, plaintiff indicates that defendant alleges that plaintiff failed to pursue claims against Wells Fargo for improperly removing funds from its account without authorization and that plaintiff allegedly failed to provide information necessary for defendant to complete its investigation. Pltf's Memo in Support of Mtn. for Sum. Jdgmt at p. 24 (citing Weber Depo. at pp. 72-74).
Plaintiff argues that defendant has failed to produce any evidence to support these allegations. Defendant has not responded to plaintiff's argument that there is no merit to the affirmative defenses and has submitted no evidence on summary judgment in support of its affirmative defenses or in opposition to plaintiff's argument. Parties opposing summary judgment cannot rest only on their pleadings. Celotex, 477 U.S. at 322-23. Such parties must support their opposition as required by Rule 56.
In terms of providing information to defendant, the evidence shows that plaintiff provided some information to defendant, including account activity spreadsheets which identified the deposits into the Stewart account, the withdrawals from the account, and the remainder in the account before the debit by Wells Fargo. Exh. 8 to Cahn Affid; see also Exh. 18 to Cahn Affid. (Selzer notes indicating documentation reviewed). Additionally, defendant inquired of plaintiff if plaintiff had a separate agreement with Wells Fargo allowing Wells Fargo to withdraw funds from its account. Plaintiff thought it responded to defendant's inquiry in an October 12, 1998 letter in which plaintiff advised defendant that "[w]e do not have an agreement with our bank that they cover all fraudulent checks deposited." Exh. 8 to Cahn Affid. Given this evidence in the record, defendant's assertion that plaintiff failed to provide information to defendant or cooperate with the investigation, cannot be sustained.
Finally, plaintiff argues, there is no requirement under the bond that plaintiff exhaust all other avenues of recovery against third parties responsible for the loss before submitting a claim to defendant. Thus, that plaintiff failed to take any action directly against Wells Fargo did not violate any condition precedent provisions of the bond. Plaintiff argues that it took no action to impair or prejudice defendant's subrogation rights against Wells Fargo. The record supports plaintiff's assertions in this regard.
VII. Attorney's Fees
Plaintiff contends that it is entitled to reasonable attorney's fees and costs under O.R.S. 742.061 and to prejudgment interest from the date it tendered its claim under O.R.S. 82.010(1). While plaintiff is likely entitled to fees, costs, and prejudgment interest for the claims on which it has prevailed, I defer resolution of this issue until the conclusion of entire case. At that point, plaintiff may file an appropriate fee request in accordance with Federal Rule of Civil Procedure 54(d)(2) and Local Rule 54.
CONCLUSION
Plaintiff's motion for summary judgment (#29) is granted as to the claims for the Disney and Coca-Cola checks and is denied as to the claim for the Nemco check. Defendant's motion for summary judgment (#37) is denied. Defendant's motion to strike hearsay evidence (#45) is granted on other grounds.
IT IS SO ORDERED.