Court Allows Common Law Negligence Claim to Survive UCC Preemption Challenge BOL Guru Sam Ott
The United State Court of Appeals for the Eight Circuit held in an opinion issued on May 1, 2002, in the case of Cassello, et al v. Allegiant Bank and Royal Banks of Missouri that not all common-law actions of negligence against a bank in connection with its handling of checks are preempted by the UCC.
Facts
The plaintiffs alleged that they were induced by third parties to write checks or transfer funds by cashier's checks totally over $2.5 million to the third parties or organizations controlled by them. The checks were deposited to accounts at the banks. The checks lacked proper endorsements or in some instances the checks were made payable to entities other than the ones into whose accounts they were deposited. The plaintiffs filed suit contending that the banks were negligent in allowing the third parties to deposit the checks.
The district court granted the respective bank motions to dismiss and for judgment on the pleadings and held that the UCC preempted any common-law claims for negligence against the depositary banks. In addition, the UCC itself did not provide a cause of action for the maker of a check or the purchaser of a cashier's check against a depositary bank that improperly deposits the check.
The plaintiffs then filed their appeal.
Discussion
The Court observed that the UCC creates warranties in favor of transferees or holders and the plaintiffs were neither. They were not holders because the relevant instruments were not payable to bearer or the plaintiffs and they were not transferees because they were not given possession of the instruments.
The Court noted that when interpreting state laws such as the UCC, it was bound to follow the decisions of the relevant state's highest court. However, in this instance, the Missouri Supreme Court had not addressed the issue. Even though a lower state court had held in a similar case that the UCC preempted the claims and defenses regulating negotiable instruments, bank deposits and collections, the Court held otherwise. The Court relied on the Missouri Supreme Court case of Dalton & Marberry v. NationsBank (see the Court Watch page for the Dalton description and link), which held that a common-law negligence action lay against a bank that failed in its duty of inquiry when an employee, who was not authorized to do so, repeatedly exchanged her employer's checks drawn on the bank for money orders or blank cashier's checks.
Decision
The Court held that the UCC provides that "principles of law and equity shall supplement its provisions" unless "displaced by its particular provisions." It found no particular provision that would displace a common-law claim of negligence and concluded that the Missouri Supreme Court would hold that a drawer of a check could have a common-law cause of action against a depositary bank for negligently handling the drawer's check.
Summary
Makers of checks or purchasers of cashier's checks can not assert the UCC warranties available to transferees or holders. However, even though the drawer of a check or the purchaser of a cashier's check has no relationship with the depositary bank that accepts the checks for deposit, the depositary bank may be liable under a common-law cause of action if the bank is negligent in the handling of the check.
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