Opinion
Case No. 4:21-cv-00230-SMR-SBJ
2022-10-24
SOY, INC., d/b/a HealthyCoat, Plaintiff, v. WELLS FARGO BANK, N.A., Defendant.
Bruce H. Stoltze, Stoltze & Stoltze, PLC, Des Moines, IA, Bruce H. Stoltze, Jr., Stoltze Law Group, PLC, Des Moines, IA, for Plaintiff. Angela Morales Gray, Jesse Linebaugh, Faegre Drinker Biddle & Reath LLP, Des Moines, IA, for Defendant.
Bruce H. Stoltze, Stoltze & Stoltze, PLC, Des Moines, IA, Bruce H. Stoltze, Jr., Stoltze Law Group, PLC, Des Moines, IA, for Plaintiff. Angela Morales Gray, Jesse Linebaugh, Faegre Drinker Biddle & Reath LLP, Des Moines, IA, for Defendant. ORDER ON MOTIONS FOR SUMMARY JUDGMENT STEPHANIE M. ROSE, CHIEF JUDGE
On July 14, 2021, Plaintiff Soy Incorporated ("Soy"), which does business as HealthyCoat, filed this lawsuit against Defendant Wells Fargo Bank, N.A. ("Wells Fargo"). [ECF No. 1]. Plaintiff asserts two claims related to allegations Defendant improperly paid forged checks with money from its account. Id. at 11-12. Previously filed in the Iowa District Court for Polk County, Defendant removed the case and filed an answer. [ECF No. 5]. On July 1, 2022, both parties filed Motions for Summary Judgment. [ECF Nos. 28; 29]. For the reasons below, Plaintiff's Motion for Summary Judgment is GRANTED in part and DENIED in part, while Defendant's Motion for Summary Judgment is GRANTED in part and DENIED in part.
I. BACKGROUND
Unless otherwise noted, the following facts are not disputed by the parties.
A. Opening of HealthyCoat's Wells Fargo Account
On January 22, 2008, Scott Graham opened a business account at Wells Fargo to manage the finances of his business, HealthyCoat. [ECF No. 28-3 at 3-6 (Account Authorization Form)]. As part of this process, Graham signed an application providing that "[t]he Customer's use of any Bank deposit account, product, or service will confirm the Customer's receipt of, and agreement to be bound by, the Bank's applicable fee and information schedule and account agreement." [ECF Nos. 28-3 at 7]. Graham provided Wells Fargo with a replica signature in his application. [ECF Nos. 28-2 at 1 (Plaintiff's Statement of Fact); 46-1 at 3 (Defendant's Admission of Fact)].
B. Account Agreement
The contractual language places an affirmative obligation on the account holder to comply with Wells Fargo's Deposit Account Agreement ("the Agreement"). [ECF No. 28-3 at 7]. Under the contractual terms, the account holder agrees to engage in the following steps to prevent fraud:
1) Examine your account statement promptly and carefully.[ECF No. 46-3 at 87 (Deposit Account Agreement)]
2) Notify us promptly of any errors.
3) Notify us within 30 days after we have made your account statement available to you of any unauthorized transaction on your account. Note: if the same person has made two or more unauthorized transactions and you fail to notify us of the first one within this 30-day period, we will not be responsible for unauthorized transactions made by the same wrongdoer.
4) Notify us within six months after we have made your account statement available to you if you identify any unauthorized, missing, or altered endorsements on your items.
The Agreement clarifies what happens when an account holder does not comply with these provisions. [ECF No. 46-3 at 88]. It explains that "[i]f you fail to notify us of any unauthorized transaction, error, or claim for a credit or refund within the time frames specified above, your account statement will be considered correct." Id. Thus, Wells Fargo would "not [be] responsible for any unauthorized transaction, error, or claim" under these circumstances. Id.
The Agreement provides examples of what individuals and businesses should do to prevent fraud beyond these steps. [ECF No. 46-3 at 89]. For individuals, they can "[r]econcile statements for your account as you receive them" and "[s]ecure your supply of checks at all times." Id. Wells Fargo recommends businesses "[a]ssign responsibility for your business account to multiple individuals" and "[w]atch for checks cashed out of sequence or made out to cash." Id. When a business customer does not implement these fraud prevention steps, they "will be treated as having assumed the risk of any losses that could have been prevented or mitigated by correct use of the recommended service or best practice." Id. at 90.
C. Hiring of Bookkeeper
In September 2020, Graham spoke with HealthyCoat employee John Martin ("Martin") about hiring a bookkeeper to assist with administrative tasks. [ECF No. 28-3 at 64 (Graham Decl.)]. Martin recommended he consider hiring an individual named Jessica Samuelson ("Samuelson"). Id. Graham interviewed Samuelson, noting she "presented herself well and had an impressive resume." Id. In mid-October 2020, Graham offered Samuelson a contractor position with HealthyCoat to manage these tasks. Id.
The record demonstrates Graham did not contact Samuelson's previous employers before offering her a position. [ECF No. 46-3 at 25 (Graham Depo.)]. No background check was conducted. Id. at 27. Graham did not search the Iowa Courts system to review Samuelson's criminal records. If he had, he would have learned Samuelson had two charges of shoplifting from the summer of 2020 and pled guilty to shoplifting on October 5, 2020. Id. at 198-201.
D. Samuelson's Scope of Employment
Samuelson's duties during her employment with HealthyCoat varied widely, but almost all were financial. First, Samuelson maintained the balance on HealthyCoat's accounts with Wells Fargo. [ECF No. 46-3 at 13]. Graham allowed her to transfer funds from HealthyCoat's savings account into its business account, but she could only do it after receiving direct authorization from him. Id. She could move money between the Wells Fargo accounts, but never outside of them. Id. at 14. This structure allowed Graham to "be privy to any information" about the transfers. Id.
Second, Samuelson was responsible for managing HealthyCoat's customer invoices. [ECF No. 46-3 at 28]. She created and prepared invoices using a software called Peachtree. Id. at 33. Graham reviewed the invoices before Samuelson sent them to customers. Id. at 34. No customer ever told Graham something along the lines of "I paid that bill months ago. Why are you sending me a late notice?" Id. at 33.
Graham reviewed Peachtree records with Samuelson when in the office. [ECF No. 46-3 at 36, 39]. Alejandra Vidal Soler - who also owned a business that used Peachtree and is Graham's wife - supposedly examined HealthyCoat's records from time to time. Id. at 40.
Third, Samuelson was responsible for receiving and paying HealthyCoat's bills. [ECF No. 46-3 at 34]. Upon receipt of a bill, she was responsible for entering it in Peachtree. Id. Samuelson would use software to fill out the payable information on check stock in the office. Id. at 35-36. Graham would hand sign the checks only after reviewing the invoice. Id. at 37. Samuelson was responsible for submitting the payment and entering the record into Peachtree after Graham approved the checks. Id. There were no instances of creditors contacting Graham or HealthyCoat to discuss unpaid bills. Id. at 38.
E. Discovery of Fraud
Graham received monthly bank statements for HealthyCoat's accounts pursuant to Wells Fargo's standard process. [ECF No. 28-1 at 6]. This meant Graham received a statement covering the December 2020 transactions in January 2021. Id. Upon review, Graham discovered Wells Fargo paid thirty-five checks he did not recognize, which spread from October 23, 2020 through January 12, 2021. [ECF No. 51-1 at 5 (Plaintiff's Admission of Defendant's Material Fact)]. He reported the forged checks - paid to Martin and Samuelson - to Wells Fargo and requested reimbursement for the money paid from his account on January 21, 2021. [ECF No. 32 at 33 (Wells Fargo Case Notes - Sealed)]. He closed the account and replaced it with a new one. [ECF No. 46-3 at 157 (Closing Letter)]. A criminal investigation into Samuelson followed.
F. Claim Denials
On January 27, 2021, Wells Fargo denied Graham's claim for reimbursement. [ECF No. 46-3 at 151 (First Denial Letter)]. In the letter, Wells Fargo wrote, "too much time passed before you contacted us about this fraud," which meant they would not reimburse him. Id. Wells Fargo explained Graham had a duty to report the unauthorized charges within thirty days of his receipt of the monthly account statement reflecting those charges. Id. at 152. Graham failed to comply with the rule because the first disputed transaction occurred on October 23, 2020, but he did not report the matter to Wells Fargo until January 21, 2021. Id. The letter concluded, "the Bank will not be liable to you for any unauthorized transactions on your Account by the same person that could have been prevented if you had complied with your obligations under [the Account Agreement]." Id.
On January 29, 2021, accounting firm BerganKDV issued a report describing efforts to review and reconcile HealthyCoat's records. [ECF No. 28-3 at 11]. The letter, written by account manager Jacob A. Kotalik at BerganKDV, stated Samuelson forged thirty-two checks totaling $96,176.45, but only twenty-eight checks worth $86,741.45 were processed and paid from the account because Wells Fargo reversed the final four transactions. Id. It explained Samuelson recorded "the embezzled funds as payments to legitimate vendors and back-dated checks to avoid detection." Id. The report includes the list of checks that were unable to be reconciled, the dates they were written, and the dates they were cashed. Id. at 12 (Summary); 13-39 (Checks).
The documents were provided to the Urbandale Police Department on the same day. [ECF No. 46-3 at 185-189 (Email Exchange Between Jacob Kotalik and Detective Andy Morlan)].
Wells Fargo called Graham to discuss his case the same day. [ECF No. 32 at 30]. Graham informed Wells Fargo he initially reported every suspicious check under investigation but wanted to amend the complaint after BerganKDV's report. Id. He noted the October 23, 2020 check was valid according to the report and wished to withdraw it as well as other checks from consideration. Id. He submitted the detailed report, but Wells Fargo affirmed its denial for a new reason that it had not relied upon earlier: Samuelson was in a position of trust. Id. at 28. It mailed an official denial letter to Graham on February 17, 2021. [ECF No. 28-3 at 44].
II. PROCEDURAL BACKGROUND
On July 14, 2021, Soy Inc., which does business as HealthyCoat, filed this lawsuit against Wells Fargo. [ECF No. 1 (Original Notice)]. Plaintiff brings two claims. Id. First, Soy maintains Wells Fargo was negligent because it did not act in a commercially reasonable manner, which allowed Samuelson to cash checks with a forged signature. Id. at 10-11. Second, Soy contends Defendant breached the terms of the Wells Fargo Deposit Account Agreement, which provides for reimbursement of funds lost to an unauthorized transaction in certain circumstances. Id. at 11-12. Defendant removed the case from the Iowa District Court for Polk County to the United States District Court for the Southern District of Iowa and then filed an answer. [ECF Nos. 1; 5].
On July 1, 2022, Soy and Wells Fargo filed Motions for Summary Judgment. [ECF Nos. 28; 29; 32; 35]. They ask the Court to grant them summary judgment on Count I (Negligence) and Count II (Breach of Contract). Id. The parties filed resistances and replies. [ECF Nos. 42; 46; 49; 50; 51; 53; 54]. After review of the materials, the Court ordered Soy and Wells Fargo to submit additional briefing on three Iowa Supreme Court cases, which were filed. [ECF Nos. 58; 61; 62]. The Motion is ready for review. For the reasons below, Plaintiff's Motion for Summary Judgment is GRANTED in part and DENIED in part, while Defendant's Motion for Summary Judgment is GRANTED in part and DENIED in part.
III. LEGAL STANDARD
A. Summary Judgment
"The basic inquiry" on a motion for summary judgment "is whether the evidence presents a sufficient disagreement [as] to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Diesel Mach., Inc., v. B.R. Lee Indus., Inc., 418 F.3d 820, 832 (8th Cir. 2005) (quotation omitted). Summary judgment is proper when movant shows "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Paulino v. Chartis Claims, Inc., 774 F.3d 1161, 1163 (8th Cir. 2014) (citation omitted). "A dispute is genuine if the evidence is such that it could cause a reasonable jury to return a verdict for either party; a fact is material if its resolution affects the outcome of the case." Amini v. City of Minneapolis, 643 F.3d 1068, 1074 (8th Cir. 2011) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). "If the moving party has met this burden . . . the non-moving party must set forth specific facts showing that there are genuine issues for trial." Bankston v. Chertoff, 460 F. Supp. 2d 1074, 1085 (D. N.D. 2006) (citing Fed. R. Civ. P. 56(e)). To preclude the entry of summary judgment, the nonmovant must make a sufficient showing on every essential element of its case for which it has the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). "The evidence is viewed 'in the light most favorable to the nonmoving party' and all reasonable inferences that can be drawn from the record are construed in that party's favor." Pedersen v. Bio-Med. Applications of Minn., 775 F.3d 1049, 1053 (8th Cir. 2015) (quotation omitted). "Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions." Anderson, 477 U.S. at 255, 106 S.Ct. 2505.
B. Choice of Law
The governing law in a contractual dispute case is decided by "the intent of the parties or the most significant relationship." Cole v. State Auto. & Cas. Underwriters, 296 N.W.2d 779, 781 (Iowa 1980). "[C]ontracting parties can themselves determine the law which is to control," subject to restriction. Hussemann ex rel. Ritter v. Hussemann, 847 N.W.2d 219, 222 (Iowa 2014) (quoting Cole, 296 N.W.2d at 781). In essence, parties may "agree on the law to be applied to the contract in most cases so long as it does not override the public policy of a state having a materially greater interest in the transaction." Id. at 223 (quoting Joseph L. Wilmotte & Co. v. Rosenman Bros., 258 N.W.2d 317, 328 (Iowa 1977)). Soy and Wells Fargo contractually agreed Iowa law will govern their dispute. [ECF No. 46-3 at 85].
C. Breach of Contract in Banking Matters
"A bank's relationship with its customers 'is based on contract.' " Muff v. Wells Fargo Bank, N.A., No. 21-CV-4003 CJW-MAR, 601 F.Supp.3d 424, 435 (N.D. Iowa May 2, 2022) (quoting Clinton Nat'l Bank v. Saucier, 580 N.W.2d 717, 719 (Iowa 1998)). Article 4 of the Uniform Commercial Code ("UCC"), which governs "bank deposits and collections," are "express provisions of the depositor's contract with the bank" unless parties agree otherwise. Clinton Nat'l Bank, 580 N.W.2d at 719 (citing Iowa Code § 554.4103(1)). Iowa is not bound "as a matter of law" by all UCC provisions because the "decision whether to adopt the UCC . . . is up to each particular state." Id. at 720 (citation omitted). The UCC provisions applying to Iowa are codified at Iowa Code §§ 554.4101-554.4504. Id.
D. Customer Duty to Discover Unauthorized Transactions
"A bank that sends or makes available to a customer a statement of account showing payment of items . . . shall . . . provide information in the statement of account sufficient to allow the customer . . . to identify the items paid." Iowa Code § 554.4406(1). "If a bank sends or makes available a statement of account or items pursuant to subsection 1, the customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration." Id. § 554.4406(3); Dow City Cemetery Ass'n v. Defiance State Bank, 596 N.W.2d 77, 82 (Iowa 1999). A customer may not relieve themselves of this duty by assigning it to another individual. Dow City, 596 N.W.2d at 82.
This statute creates a burden-shifting framework for assigning liability when unauthorized signatures or alterations result in loss. Iowa Code § 554.4406(4-5). Under this framework, a bank is required to "make good the amounts charged to a depositor's account because of forged checks." State v. Hennenfent, 490 N.W.2d 299, 300 (Iowa 1992). A bank may avoid liability if it can show "the depositor does not exercise reasonable care and promptness in examining bank statements and canceled checks for forgeries." Id. (citing Iowa Code § 554.4406(4)). A customer may rebut this presumption by showing "that the bank failed to exercise ordinary care in paying the item and that the failure substantially contributed to the loss." Iowa Code § 554.4406(5). Put simply, "[t]he statute merely places responsibility for a loss from a forged check on that party who is in the best position to avoid it." Hennenfent, 490 N.W.2d at 300.
E. Commercially Reasonable Manner
The UCC provides a second framework for assigning loss in the case of an unauthorized signature. Iowa Code § 554.3406. A person "whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection." Id. § 554.3406(1). "Negligence precludes recovery only against a . . . payor who acts in a commercially reasonable manner." Waukon Auto Supply v. Farmers & Merch. Sav. Bank, 440 N.W.2d 844, 851 (Iowa 1989). Determining when a bank acted in a commercially reasonable manner is a context-specific task. Id. A court analyzing the question may consider a bank's procedures to identify persons authorized to access an account, if the bank confirmed the authority of an individual, and whether "customer checks payable to a corporate payee were presented by an employee" for their benefit. Id. at 848-49. Commercially reasonable requires more than good faith. Farmers Co-op. Elevator, Inc., Duncombe v. State Bank, 236 N.W.2d 674, 678 (Iowa 1975) (noting "[w]here the Uniform Commercial Code requires for good faith more than 'honesty in fact' it explicitly so states" then citing to Iowa Code § 554.306).
IV. ANALYSIS
A. Soy's Negligence Claim
Soy contends Wells Fargo implemented too few safeguards to protect against unauthorized transactions, which caused its loss. [ECF No. 1 at 10]. Wells Fargo counters that Soy's negligence claim may not be raised when parties contracted about the specific issue in dispute. [ECF No. 35 at 18]. This purely legal dispute must be resolved in favor of Wells Fargo for the reasons below.
"The essential elements of a tort claim for negligence generally include: (1) the existence of a duty on the part of the defendant to protect plaintiff from injury; (2) a failure to perform that duty; (3) a reasonably close causal connection, i.e., legal cause or proximate cause; and (4) damages." Garcia v. Iowa Interstate R.R., Ltd., 829 N.W.2d 589 (Table), 2013 WL 988635, at *4 (Iowa Ct. App. Mar. 13, 2013) (quoting Bockelman v. State, Dep't of Transp., 366 N.W.2d 550, 552 (Iowa 1985)). It is well established that "a plaintiff cannot recover in tort" for "purely economic damages." Des Moines Flying Serv., Inc. v. Aerial Servs. Inc., 880 N.W.2d 212, 218 (Iowa 2016) (citing Van Sickle Constr. Co. v. Wachovia Com. Mortg., Inc., 783 N.W.2d 684, 692-93 (Iowa 2010)); Annett Holdings, Inc. v. Kum & Go, L.C., 801 N.W. 2d 499, 503 (Iowa 2011). "[The] rationale for this limitation on recovery is that '[p]urely economic losses usually result from the breach of a contract and should ordinarily be compensable in contract actions, not tort actions.' " Pitts v. Farm Bureau Life Ins. Co., 818 N.W. 2d 91, 98 n.4 (Iowa 2012) (quoting Van Sickle Constr. Co., 783 N.W.2d at 693). If parties could "bring negligence claims whenever financial transactions went awry, there would be little need for the elaborate payment system rules set forth in . . . the [Uniform Commercial Code]." Annett Holdings, 801 N.W.2d at 506.
There are exceptions to the rule. St. Malachy Roman Cath. Congregation of Geneseo v. Ingram, 841 N.W.2d 338, 348 (Iowa 2013). "[P]urely economic losses are recoverable in actions asserting claims of professional negligence against attorneys and accountants." Id. at 351 (quoting Annett Holdings, 801 N.W.2d at 504). The economic loss rule does not prohibit recovery "where the loss involves a safety hazard or sudden [distinct] danger that results in the personal injury or harm to property" outside the scope of the contract. Banowetz v. LS Ray Farm Serv., LLC, No. 3:17-cv-00032-RGE-SBJ, 2018 WL 6380780, at *7 (S.D. Iowa Aug. 2, 2018) (collecting cases). Likewise, tort claims of fraud are not governed by the rule. Adrian Trucking, Inc. v. Navistar, Inc., No. C20-99-LTS, 609 F.Supp.3d 728, 744-45 (N.D. Iowa July 1, 2022) (citing Cunningham v. PFL Life Ins. Co., 42 F. Supp. 2d 872, 887 (N.D. Iowa 1999)).
Soy seeks to recover $86,741.45, which is the value of the twenty-eight checks cashed by Samuelson against its account. [ECF No. 28-1 at 3]. It seeks to recover economic loss. Determan v. Johnson, 613 N.W.2d 259, 263-64 (Iowa 2000) (where a homeowner discovered the roof of her newly purchased home could collapse, the repair costs were an economic harm). This loss cannot be recovered in tort because the parties contracted on the issue in the Agreement. Annett Holdings, 801 N.W.2d at 505. The avenue for recovery is a breach of contract claim, not a negligence claim. Van Sickle Constr. Co., 783 N.W.2d at 692. A negligence claim cannot be brought in lieu of a breach of contract claim. Annett Holdings, 801 N.W.2d at 507. Accordingly, Defendant's Motion for Summary Judgment on Count I is GRANTED.
B. Soy's Breach of Contract Claim
A bank is required to reimburse "the amounts charged to a depositor's account because of forged checks." Hennenfent, 490 N.W.2d at 300. This rule requires Wells Fargo to return funds to HealthyCoat unless it proves an applicable exception. Wells Fargo raises two exceptions: 1) that Graham reviewed statements and untimely reported the unauthorized charges; and 2) Graham's conduct substantially contributed to the loss and the bank's conduct was commercially reasonable. The Court addresses each below.
i. Timely Review and Report of Unauthorized Transactions
Wells Fargo's first affirmative defense is Graham did not timely report the unauthorized transactions because the first unauthorized transaction occurred on October 23, 2020 and he did not report them until January 21, 2021. [ECF No. 49 at 13-14]. Soy maintains that Graham timely reported the transaction because the first one completed by Samuelson occurred on December 1, 2020. [ECF No. 51 at 2]. As discussed in detail below, the dispute is not material and summary judgment must be granted to Soy on this affirmative defense.
a. The October 23, 2020 Check
Scott Graham reported thirty-five transactions that he did not recognize to Wells Fargo on January 21, 2021. [ECF No. 32 at 33]. Among the transactions was a potentially fraudulent check cashed on October 23, 2020. Id. Wells Fargo denied reimbursement because the thirty-day reporting window began on November 1, 2020, after Graham received the October 2020 bank statement, and his report occurred well past this date. [ECF No. 46-3 at 151]. Graham contends that he followed Wells Fargo's procedures, which required him to report all potentially fraudulent charges at the time of discovery and withdrew the claims after investigation. [ECF No. 51-1 at 6].
The dispute, while genuine, is not relevant to whether Graham can recover the funds paid due to the unauthorized checks submitted by Samuelson. This is because John Martin cashed the October 23, 2020 check according to its internal notes. [ECF No. 32 at 31-32 (repeatedly noting that "John Martin cashed the first disputed check on 10/23/2020 against his checking account.")]. Under the contract's terms, Graham may not recover against Wells Fargo for "any unauthorized transactions on your account by the same person." [ECF No. 46-3 at 152] (emphasis added). This language prohibits Graham from recovering against Wells Fargo for Martin's transactions. Id. at 87 ("if the same person has made two or more unauthorized transactions and you fail to notify us of the first one within this 30 day period, we will not be responsible for the unauthorized transactions made by the same wrongdoer.") (emphasis added). Thus, this dispute is not relevant to Graham's recovery for the unauthorized checks cashed by Samuelson.
Wells Fargo does not state an allegation that Martin and Samuelson worked in concert.
b. The Remaining Checks
There is evidence Samuelson did not cash checks until December 2020. For example, the electronic images of the checks show the first check Samuelson cashed at Wells Fargo was dated December 1, 2020. [ECF No. 28-3 at 13-16 (Electronic Images of Checks)]. None of the forged checks were cleared by Wells Fargo until December 10, 2020. Id. at 11-12 (BerganKDV Audit). This conclusion is supported by the stamp Wells Fargo applies to the back of each check, which shows the time and date on which it was processed. Id. at 13-40. From this, a reasonable jury could conclude Samuelson's conduct of cashing forged checks officially began in December 2020.
In response, Wells Fargo asserts that there is a genuine dispute of material fact whether Samuelson forged and cashed checks in October and November 2020. [ECF No. 49 at 14-15]. It does not provide information in support of this contention. Wells Fargo did not submit any checks forged and cashed by Samuelson during the period. [ECF Nos. 32; 46-3]. To the extent it provided evidence, it is silent on Samuelson and only supports the conclusion Martin potentially submitted an unauthorized transaction. [ECF No. 32 at 31-32]. Although the dispute is material, the Court cannot say Wells Fargo provided sufficient evidence for a jury to conclude Samuelson's forgery began prior to December 2020. Reed v. City of St. Charles, 561 F.3d 788, 790-91 (8th Cir. 2009) ("[U]nsupported self-serving allegations" are not sufficient absent "probative evidence that would permit a finding in defendant's favor.").
The Court turns to examine the impact of this conclusion. Under the Agreement, if Wells Fargo makes available a bank statement for an account, the customer "must exercise reasonable promptness in examining the statement . . . to determine whether any payment was not authorized because of an alteration of an item." [ECF No. 46-3 at 151]. This language requires the customer to review and notify Wells Fargo "of any claim for credit or refund due . . . to an . . . unauthorized signature . . . within thirty days after the Bank mails or otherwise makes the statement for your Account . . . available to you." Id. at 152. The record only supports the conclusion that Samuelson began to submit forged checks in December 2020. [ECF No. 28-3 at 11-40]. Graham received the December 2020 statement in early January 2021 and reported the charges on January 21, 2021. [ECF No. 42-1]. There were twenty-one days maximum between receipt of the statement and Graham's report, which means the report was timely under Wells Fargo's thirty-day policy.
c. Conclusion
A bank is required to reimburse a customer for forged checks cashed from their account barring an exception. Hennenfent, 490 N.W.2d at 300. One exception is a bank may avoid liability if it can show "the depositor does not exercise reasonable care and promptness in examining bank statements and canceled checks for forgeries." Id. (citing Iowa Code § 554.4406(4)). Wells Fargo has not demonstrated it is entitled to this defense, a burden it carries, as the record shows Graham timely reported. Plaintiff is entitled to summary judgment on this affirmative defense.
ii. Negligence
Wells Fargo's second defense is HealthyCoat was negligent by hiring Samuelson without a background check and its lack of internal processes to avoid forgery meant that it substantially contributed to the loss. [ECF No. 49 at 17-18]. Soy maintains its processes were not negligent and Wells Fargo did not follow commercially reasonable standards. [ECF No. 51 at 2]. The record before the Court shows a jury could easily reach different conclusions on each issue, which means both Motions for Summary Judgment are DENIED.
a. Ordinary Care in Hiring Samuelson
The parties contest whether Graham used sufficient care when hiring Samuelson. Graham did not conduct many basic pre-employment steps prior to hiring her. [ECF No. 46-3 at 27-32]. There is some support for Graham's contention he engaged in reasonable hiring practices. The issue of whether Graham's conduct in hiring Samuelson constituted a lack of ordinary care that substantially contributed to forgery must be resolved by the jury.
A person "whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value." Iowa Code § 554.3406(1). "Ordinary care is the care which a reasonably careful person would use under similar circumstances." Mulhern v. Cath. Health Initiatives, 799 N.W.2d 104, 114 (Iowa 2011) (citation omitted). Failure to conduct a background check prior to hiring is not negligent as a matter of law. Injection Tech. Diesel Serv., Inc. v. Spherion Corp., 780 N.W.2d 249 (Table), 2010 WL 447106, at *3 (Iowa Ct. App. Feb. 10, 2010).
Wells Fargo maintains that Graham negligently hired Samuelson. It highlights Graham's deposition testimony that he did not conduct a background check on Samuelson, did not complete an internet search on her, and did not check for criminal records before offering her a position. [ECF No. 46-3 at 27]. A brief search would have revealed she pled guilty to shoplifting from Target in early October 2020. Id. Wells Fargo also points to the fact Graham did not contact her previous employers to serve as references. Id. at 25. A jury could conclude Graham negligently hired Samuelson based on this specific conduct or lack thereof.
Graham responds that he did not negligently hire Samuelson. In support of this contention, he notes Martin recommended her, he reviewed her resume, and interviewed her in-person before hiring her. [ECF No. 28-3 at 64]. He explained he had followed these practices for several years before Samuelson because he trusted his employees' recommendations. Id. In an instance where a company has consistently not conducted background checks and they are not industry standard, it is not per se negligent if one is not performed. Spherion Corp., 2010 WL 447106, at *3 (stating that a business was not negligent when it did not conduct background checks because it never promised to do so and there was no information suggesting they were an industry standard). Put simply, a jury could conclude Graham did not negligently hire Samuelson.
Because different reasonable conclusions can be drawn from the evidence, the dispute must be submitted to a jury. This case is not among the exceptional where judgment as a matter of law is appropriate. Virden v. Betts and Beer Constr. Co., Inc., 656 N.W.2d 805, 807 (Iowa 2003).
b. Ordinary Care in Establishing Internal Processes
The parties dispute if Graham had sufficient processes to prevent Samuelson's fraud. There is significant evidence Graham did not implement basic protections that businesses typically use to prevent fraud. [ECF No. 46-3 at 13-14, 33-38]. There is evidence Graham implemented some protections. [ECF No. 46-3 at 33-36]. Whether Graham's de minimis controls constituted a lack of ordinary care that substantially contributed to the forgery should be decided by a jury.
Only in extraordinary circumstances may a court decide the issue of ordinary care based on a company's lack of internal controls. Husker News Co. v. S. Ottumwa Savs. Bank, 482 N.W.2d 404, 408 (Iowa 1992). In Husker News, the Iowa Supreme Court found the bank established this defense by showing Husker News placed an employee "in complete and exclusive control of the customers' accounts" and authorized him "to deposit its cash . . . in his personal bank account." Id. Husker News never inspected the employee's checking account to determine how its money was managed. Id. It did not respond to "customer complaints" that an employee "was manipulating the records of Husker's credits." The facts, taken together, established Husker's internal controls were negligent and substantially contributed to its loss. Id. at 409.
Wells Fargo submitted considerable evidence suggesting that Graham lacked basic internal protections to avoid fraud. He left check stock in an empty, unlocked drawer in the office. [ECF No. 46-3 at 46]. Samuelson could access financial records and had the ability to make online transfers. Id. at 37-38. She had full control of Peachtree and Graham did not independently review those records. Id. at 39-40, 41. Graham never reconciled the billing statements of HealthyCoat's business account. Id. at 48. BerganKDV did not review the records. Id. at 181 (Kotalik Depo.). This led the firm to describe HealthyCoat's internal controls as "lax." Id. at 188. This information is enough for a jury to conclude Graham was negligent and this negligence contributed to the loss.
However, HealthyCoat has submitted evidence suggesting Graham had relevant internal controls for a small business. In his deposition, Kotalik suggested small businesses should have checks signed by a person, typically the owner, who is separate from the finance employee. [ECF No. 46-3 at 182]. Graham stated he only signed checks after reviewing the relevant invoices with Samuelson. Id. at 34. Kotalik recommends small businesses regularly review account statements, the cleared checks, and information posted to the account software. Id. at 182. Graham took time to review his statements, which is how he discovered the discrepancies reported to Wells Fargo. Id. He spent time reviewing Peachtree with Samuelson in the office. Id. at 36, 39. The steps may be enough for a jury to find Graham was not negligent and the negligence did not substantially contribute to the forgeries. In short, this dispute must be resolved by the jury.
c. Wells Fargo's Commercial Standards
The parties dispute whether Wells Fargo acted in a "commercially reasonable manner" with the fraud protections it implemented to avoid the cashing of unauthorized checks. [ECF Nos. 49 at 18; 51 at 2]. There is evidence Wells Fargo followed standard commercial practices and the practices were insufficient or unreasonable in this context.
Wells Fargo uses a system called FraudOne to review if check signatures are legitimate. [ECF No. 46-3 at 215]. The software compares a signature on a check with a check stock signature possessed by the bank. Id. at 214. It also pulls approved signatures from a "rolling sample period" for comparison. [ECF No. 28-3 at 50 (Gillespie Depo.)]. It calculates a Combined Risk Score ("CRS") from zero to one hundred based on this and labels the check as pay or no pay. [ECF Nos. 32 at 35-36 (FraudOne Scores of Checks); 46-3 at 214]. Wells Fargo maintains FraudOne is a "nationally recognized and well-accepted" platform to detect and prevent fraud. [ECF Nos. 28-3 at 50]. Wells Fargo's usage of this software and the fact it appears to be standard practice provides an adequate basis for a jury to find that Wells Fargo acted in a commercially reasonable manner.
However, the record presents two reasons why a jury could find that Wells Fargo's conduct fell below this requirement. First, the record suggests Wells Fargo may have had a duty to inquire into the checks but did not. Graham stated that he took the checks and deposited them personally, which he has done since starting HealthyCoat. [ECF No. 28-3 at 64 (Graham Affidavit)]. In other words, Graham deposited checks at Wells Fargo for more than a decade before Samuelson came to Wells Fargo to cash company checks made out to herself. Samuelson cashed thirty checks made out to herself from a company whose owner had personally managed every check for years. This behavior may be sufficient to give rise to a duty to inquire.
There is no evidence to suggest Wells Fargo inquired about Samuelson's authority to cash these checks. Its representative suggests it allows a person with "actual or apparent authority" to access the account but does not have a process to acquire this information beyond a cursory review of the approved list of signers. [ECF No. 28-3 at 51]. Wells Fargo put the forged checks into FraudOne without conducting any inquiry into whether Samuelson had authority to cash them. A jury could conclude Wells Fargo did not conduct itself in a commercially reasonable manner by off-loading the entirety of its responsibility onto a single machine.
Second, a jury could conclude Wells Fargo's FraudOne system is insufficient because it did not catch Samuelson's egregious behavior. The records show that Wells Fargo received fifty-five checks related to the HealthyCoat account between December 1, 2020 and January 21, 2021. [ECF No. 32 at 35-36]. Of the fifty-five checks cashed during the relevant time, thirty-two were fraudulent. Id. The FraudOne score for each check was high enough for Wells Fargo to approve payment. Id. In other words, FraudOne did not detect a single forgery among a group of checks where more than half were fraudulent.
This issue is concerning because untrained individuals could detect these forgeries with a cursory examination. For example, Kotalik noticed, "[t]he [checks] that appeared to be forged did seem to be a little bit uneven compared to the one that [Graham] verified was his actual signature." [ECF No. 28-3 at 67]. Graham noticed differences between his signature and the one forged by Samuelson. Id. Likewise, a brief comparison between the check stock signature and the forged signatures shows they are dissimilar enough to raise questions. See [ECF No. 28-3 at 4 (Graham Stock Signature)] and [ECF No. 28-3 at 13, 21 (Copies of Forged Checks)].
The evidence provides sufficient grounds for a jury to return a verdict for either party. A jury could reasonably conclude Wells Fargo's usage of FraudOne, a nationally recognized fraud detection system, is sufficient under Iowa law. A jury could also conclude Wells Fargo's lack of inquiry into a person's authority as well as FraudOne's failure to catch a large volume of fraudulent checks is not enough to satisfy Iowa law. As a result, this dispute must be resolved by a jury.
d. Summary
The record provides a factual basis for a jury to return a verdict on two separate components of this framework. Thus, the appropriate resolution is submission of the dispute to a jury.
V. CONCLUSION
Plaintiff's Motion for Summary Judgment is GRANTED in part and DENIED in part. The Motion is GRANTED on Defendant's first affirmative defense, which is the issue of timely review and reporting. The Motion is DENIED with respect to the remainder. Defendant's Motion for Summary Judgment is GRANTED in part and DENIED in part. The Motion is GRANTED with respect to Count I of the Complaint, but DENIED with respect to Count II.
The Court could resolve the Motions for Summary Judgment in the same manner without consideration of the affidavit challenged by Soy's Motion to Strike, [ECF No. 43], which means the Motion is DENIED as moot.
IT IS SO ORDERED.