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Silver v. Wells Fargo Bank, N.A.

United States District Court, D. Maryland

June 30, 2017

WELLS FARGO BANK, N.A., Defendants


          Marvin J. Garbis, United States District Judge

         The Court has before it Wells Fargo Bank, N.A.'s Motion to Dismiss Claims Asserted Against It in the Amended Complaint [ECF No. 40], PNC Bank, National Association's Motion to Dismiss Plaintiff Jeffrey J. Silver's Amended Complaint [ECF No. 43], and the materials submitted relating thereto. The Court finds a hearing unnecessary.

         I. BACKGROUND

         From sometime in 2007 until about November 24, 2012, Plaintiff Jeffrey J. Silver (“Silver”) was the victim of a check fraud scheme perpetrated by Katherina Cheek (“Cheek”), one of his employees. Cheek stole, forged, and negotiated checks drawn on Silver's checking account at PNC Bank, National Association (“PNC”) and had the proceeds end up in her own account at Wells Fargo Bank, National Association (“Wells Fargo”) through a “double forgery” scheme.

         Silver asserts claims against PNC and Wells Fargo (“Defendants”) pursuant to the Maryland Uniform Commercial Code, Md. Code Ann., Com. Law § 1-101 et seq., [1] for lack of ordinary care and good faith, breach of presentment warranties, strict liability, and conversion. Silver also asserts common law claims of negligence, breach of contract, negligent hiring and/or retention of employees, constructive fraud, and civil conspiracy.

         By the instant motions, Defendants seek dismissal of all claims against them pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.[2]


         A motion to dismiss filed pursuant to Rule 12(b)(6) tests the legal sufficiency of a complaint. A complaint need only contain “‘a short and plain statement of the claim showing that the pleader is entitled to relief, ' in order to ‘give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.'” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (alteration in original) (citations omitted). When evaluating a 12(b)(6) motion to dismiss, a plaintiff's well-pleaded allegations are accepted as true and the complaint is viewed in the light most favorable to the plaintiff. However, conclusory statements or “a formulaic recitation of the elements of a cause of action will not [suffice].” Id. A complaint must allege sufficient facts “to cross ‘the line between possibility and plausibility of entitlement to relief.'” Francis v. Giacomelli, 588 F.3d 186, 193 (4th Cir. 2009) (quoting Twombly, 550 U.S. at 557).

         Inquiry into whether a complaint states a plausible claim is “‘a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.'” Id. (quoting Twombly, 550 U.S. at 557). Thus, if “the well-pleaded facts [contained within a complaint] do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged - but it has not ‘show[n]' - ‘that the pleader is entitled to relief.'” Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009) (alteration in original)).

         Generally, a motion to dismiss filed under Rule 12(b)(6) cannot reach the merits of an affirmative defense. Goodman v. Praxair, Inc., 494 F.3d 458, 464 (4th Cir. 2007). It is possible to evaluate such a motion, however, if all the facts necessary to the affirmative defense are clearly alleged on the face of the complaint. Id. But if the complaint does not clearly reveal the existence of a meritorious affirmative defense, it is inappropriate for the court to consider it under a Rule 12(b)(6) motion. Richmond, Fredericksburg & Potomac R.R. Co. v. Forst, 4 F.3d 244, 250 (4th Cir. 1993).


         A. Factual Allegations[3]

         At all times relevant hereto, Silver, a Baltimore City attorney, maintained several accounts (checking and other types) with PNC and Wells Fargo.[4]

         Silver employed Ms. Katherina Cheek[5] [“Cheek” or “Assistant”] as a legal assistant whose duties included matters related to Silver's checking accounts. Beginning at “some point in 2007, ”[6] Cheek began her scheme that continued until November 2012. In the scheme, Cheek stole hundreds of Silver's blank checks for one of Silver's PNC accounts and forged Silver's signature as the “drawer”[7] on the checks. In the scheme, Cheek created and negotiated three categories of forged checks:

(1) checks made payable to Cheek herself, which were negotiated using her genuine indorsement;
(2) checks made payable to local businesses as “fictitious payees, ” upon which Cheek forged the businesses' indorsements with scribbled signatures, not commercial stamps; and
(3) checks made payable to persons who were Cheek's friends and creditors, upon which Cheek forged the indorsements. ¶[8] 10.

         The last two categories of checks can be described as “double forgeries” because they contained forged drawee signatures and forged payee indorsements.

         Cheek often presented the checks to Wells Fargo two or three at a time and cashed or deposited the proceeds of the fraudulent checks into her personal bank account - not an account belonging to the fictitious payee - at Wells Fargo (the “depositary bank” or “collecting bank”[9]). ¶¶ 10, 17, 49. Some of these can be referred to as “third-party” checks, i.e., checks drawn to a person other than the holder of the account into which the proceeds are to be deposited. These “third-party” checks generally are considered high-risk by banks and require manager approval before depositing. ¶ 47. The Amended Complaint alleges that the tellers at Wells Fargo violated Wells Fargo requirements by accepting the stolen checks without manager approval and without verifying Silver's purported signature against his signature cards on file at Wells Fargo. ¶ 17.

         Wells Fargo presented the forged checks for payment to PNC (the “drawee” or “payor bank”[10]). PNC accepted and paid the forged checks without verifying Silver's signature.

         Cheek wrongfully negotiated at least 215 of the forged checks between January 1, 2011, and November of 2012, [11] obtaining at least $111, 302.15. ¶ 49. Silver did not owe money to any of the payees on these checks, and at no time did Silver authorize Cheek to sign Silver's name, draw, or indorse any of these checks.

         Silver first discovered Cheek's check fraud scheme on November 24, 2012, several years after the scheme had started in 2007. Silver immediately met with a PNC branch manager[12] (“the Manager”), who reviewed Silver's accounts and the alleged unauthorized checks for the three to four months prior. The Manager was “surprised and shocked that the instruments were honored” by PNC and accepted by Wells Fargo. ¶ 33. The Manager called his wife, who currently worked, or had just left her employment, for Wells Fargo, and the Manager determined that “the fraudulent check deposits had been made in violation of several of Wells Fargo's banking procedures.” Id.

         The Manager referred the matter to Robert Smetzer (“Mr. Smetzer”), Assistant Vice President/Senior Fraud Investigator for PNC. The Manager told Silver that PNC would do as much as it could to help Silver recoup his losses. However, on January 11, 2013, Mr. Smetzer sent Silver a letter indicating that PNC was not going to take action on the alleged fraudulent activity or try to recoup any money from Wells Fargo.

         Neither PNC nor Wells Fargo have paid or credited Silver the amounts charged against his account due to the check fraud scheme.

         B. Procedural Posture

         Silver filed this lawsuit in the Circuit Court for Baltimore County, Maryland on November 23, 2015. A Notice of Removal was filed properly on February 10, 2016. [ECF No. 1].

         On November 29, 2016, this Court dismissed the Complaint by the November Order [ECF No. 34]. However, in its Memorandum and Order the Court stated that “Plaintiff may, by January 15, 2017 file an Amended Complaint. Id. at 23. Plaintiff filed the Amended Complaint [ECF No. 35] on January 17, 2017.[13]

         In the Amended Complaint, Silver asserts claims against the Defendants in ten Counts:

Count I: Lack of Ordinary Care and Good Faith - Violation of Md. Code Ann., Com. Law §§ 3-404, 3-405, 3-406
Count II: Breach of Presentment Warranties - Violation of Md. Code Ann., Com. Law §§ 3-417, 4-208
Count III: Breach of Contract
Count IV: Negligence as to PNC
Count V: Negligence as to Wells Fargo
Count VI: Strict Liability - Violation of Md. Code Ann., Com. Law §§ 3-403, 4-401
Count VII: Negligent Hiring and/or Retention of Employees
Count VIII: Constructive Fraud
Count IX: Civil Conspiracy
Count X: Conversion - Violation of Md. Code Ann., Com. Law § 3-420.

[ECF No. 35].

         C. Maryland Uniform Commercial Code Claims

         The Amended Complaint presents statutory (UCC) claims[14] for lack of ordinary care (Count I), breach of presentment warranties (Count II), strict liability for wrongful payment (Count VI), and conversion (Count X) under Titles 3 and 4 of the Maryland UCC.

         In the Motions to Dismiss, Defendants contend that (1) Silver's allegations fail to plead plausible claims, (2) no cause of action exists against one or both banks for breach of presentment warranty, conversion, violation of UCC § 4-401, and common law negligence, and (3) the UCC statute of limitations, the § 3-406 “twelve-month rule, ” and/or the PNC Account Agreement bar recovery on Silver's UCC claims that accrued prior to November 24, 2015.

         1. Lack of Ordinary Care and Good Faith - §§ 3-404 to 3-406 (Count I)

         In Count I, the Amended Complaint presents claims under UCC §§ 3-404, 3-405, and 3-406. Sections 3-404 and 3-405 provide that a victim of check fraud caused by an “impostor” or an employee may recover from a bank that failed to exercise “ordinary care” when paying or taking the fraudulent check. §[15] 3-404 (“[T]he person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.”). Section 3-405 contains almost identical language.

         a. The Impostors Provision - § 3-404

         The “impostors” provision, § 3-404, applies when “an instrument is payable to a fictitious or nonexisting person and to cases in which the payee is a real person but the drawer or maker does not intend the payee to have any interest in the instrument.” Official Comment 2 to Md. Code Ann., Com. Law § 3-404.

         This provision is relevant to checks made out by Cheek to payees other than herself because neither Cheek nor Silver intended the payees to have an interest in the check.

         b. Employee Fraud Provision - § 3-405

         Section 3-405, the “employee fraud” provision, states:

if an employer entrusted an employee with responsibility with respect to the instrument and the employee . . . makes a fraudulent indorsement of the instrument, the indorsement is effective as the indorsement of the person to whom the instrument is payable if it is made in the name of that person.

Id. § 3-405(b).

         Section 3-405 covers cases where an account owner's employee makes a fraudulent indorsement, either in the employer's name, if the employer is the payee, or “in the name of payees of instruments issued by the employer.” Official Comment 1 to Md. Code Ann., Com. Law § 3-405.

         Here, § 3-405 could apply if Cheek had “responsibility”[16]with regard to Silver's checks. The Amended Complaint does not present factual allegations adequate to support a plausible claim of the requisite “responsibility.”

         c. Loss Allocation Provision - § 3-406

         Section 3-406 establishes a comparative negligence scheme allocating loss between the bank and the customer if both parties failed to exercise ordinary care that contributed to a fraudulent instrument.

         d. Analysis

         Using these three provisions, [17] Silver claims that the Defendants failed to exercise ordinary care and good faith when accepting and paying the forged checks. Defendants assert that Silver does not adequately plead facts in the Amended Complaint to present plausible claims and that his allegations are conclusory.

         Under the UCC, “ordinary care” means “observance of reasonable commercial standards.” § 3-103. “Failure to exercise ordinary care is to be determined in the context of all the facts relating to the bank's conduct with respect to the bank's collection of the check, ” including the names on the account, amount of ...

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