Interior Crafts, Inc v. Leparski

Opinion

No. 3--05--0102 Filed July 11, 2006.

IN THE

APPELLATE COURT OF ILLINOIS

THIRD DISTRICT

A.D., 2006

INTERIOR CRAFTS, INC. ) Appeal from the Circuit Court ) of the 12th Judicial Circuit Plaintiff, ) Will County, Illinois ) and AMERICAN INSURANCE CO. ) as assignee/subrogee of ) INTERIOR CRAFTS, INC. ) ) Plaintiff-Appellee, ) ) v. ) No. 01--MR--187 ) TODD LEPARSKI, a/k/a Todd ) Joseph Leparski, MARLENE ) LEPARSKI, and MARQUETTE ) NATIONAL BANK. ) ) Defendants, ) ) and ) ) PAN AMERICAN BANK, ) Honorable ) Amy M. Bertani-Tomczak, Defendant-Appellant., ) Judge, presiding

JUSTICE HOLDRIDGE delivered the opinion of the court:

Interior Crafts, Inc. (Interior), hired Todd Leparski to be an assistant comptroller.

Due to extremely lax accounting procedures at Interior, Leparski was allowed to both

receive and deposit incoming checks from Interior=s customers. Consequently, Leparski

managed to steal approximately one-half million dollars from Interior during his employment from October 2000 to February 2001. Leparski accomplished his theft by

taking several checks from the incoming mail which were made payable to Interior by

customers. He would then endorse the checks - "Interior Crafts - For Deposit Only" -

and place the checks into deposit envelopes. He then placed those envelopes into an

automatic teller machine (ATM) owned by Pan American Bank, with instructions to

deposit the checks into a bank account which he maintained in his own name at

Marquette Bank. Following the instructions on the deposit slip, Pan American deposited

funds to Leparski=s account at Marquette Bank. Eventually, Marquette Bank alerted

Interior to the fact that Leparski was depositing checks into his personal account which

were payable to Interior. After Leparski=s actions were discovered, Interior was able to

recover in cash from Leparski approximately half of the money he had stolen. In

addition, Interior had an insurance policy with American Insurance Company which

included commercial crime coverage. American paid Interior $250,000 pursuant to that

insurance policy. Interior then sued Leparski and both Pan American Bank and

Marquette Bank for conversion seeking recovery of the money not recovered from

Leparski. American Insurance joined in the suit as Interior=s assignee and subrogee.

The trial court granted summary judgment as to both liability for conversion and

damages in favor of American Insurance against Pan American Bank. Pan American

appeals to this court from the trial court=s grant of summary judgment against it.

The only issue on appeal is whether summary judgment was properly entered

against Pan American Bank as to liability for conversion and damages.

Interior alleged that Pan American was liable for damages in conversion.

Interior=s claim is based upon the theory that Pan American was obligated under the

2 restrictive endorsement - "Interior Crafts - For Deposit Only" - to deposit the funds only

in an Interior Crafts account. Interior maintains that Pan American=s depositing the

funds in Leparski=s account constituted a conversion, for which Pan American was liable

to Interior for damages.

The ATM into which Leparski placed the stolen checks was owned and serviced

by Pan American. A bank that owns an ATM does not have any information that tells it

the name of the owner of an account in another bank into which a check placed in the

ATM is to be deposited. The bank that owns the ATM has access only to the check

itself and the card number of the person who placed the check into the machine.

Accordingly, the bank which owns an ATM has no way of knowing whether the name on

the account at the depository bank matches the name of the payee on the check. In the

instant case, the Marquette Bank deposit slips that Leparski used when he put the

stolen checks into the ATM, did not state the name of the owner of the account.

Pan American employees removed the checks from the ATM and inspected the

checks for the presence of an endorsement. Pan American maintained that, because

the checks were not deposited into an account at Pan American Bank, its employees

had no means to verify the authenticity of the endorsements on the checks, nor could

they verify that the payee name matched the name on the account into which the

checks were being deposited. The checks were physically transported to a Pan

American Bank facility where Pan American wire transferred the amount of each check

to Marquette Bank for deposit into Leparski=s account at Marquette Bank, in accordance

with the instructions on the deposit slip. Pan American then endorsed the checks and

sent them through a series of collecting banks back to the various drawee banks on

3 which the drawers, the customers of Interior Banks, had drawn the checks. Consistent

with automated banking procedures, the actual checks were never physically in the

possession of Marquette Bank. Plaintiffs moved for summary judgment against Pan

American Bank asserting conversion under Uniform Commercial Code (UCC) section 3-

206(c)(2), which imposes conversion liability on a depository bank for failure to honor a

restrictive endorsement. Specifically:

"If an instrument bears an indorsement * * * in blank or to a

particular bank using the words "for deposit," "for collection,"

or other words indicating a purpose of having the instrument

collected by a bank for the indorser or for a particular

account, the following rules apply: * * *

A depository bank that purchases the instrument or

takes it for collection when so indorsed converts the

instrument unless the amount paid by the bank with respect

to the instrument is received by the indorser or applied

consistently with the indorsement." 810 ILCS 5/3-

206(c)(2)(West 2000).

The trial court granted summary judgment, finding: (1) that Pan American Bank

was a "depository bank" subject to section 3-206 of the Code; and (2) that Pan

American Bank, as a depository bank was strictly liable to the payee of the checks. Pan

American Bank now appeals.

This is an appeal from an order granting summary judgment. Therefore, the

standard of review is de novo, meaning no deference is given to the judgment below.

4 Gullen v. Potomac Insurance Co., 203 Ill. 2d 141 (2003). Under de novo review, the

court considers the facts and law related to the case to determine whether the trial court

was correct in its conclusion that there was no genuine issue of material fact and the

movant was entitled to judgment as a matter of law. Bank One, Springfield v. Roscetti,

309 Ill. App. 3d 1048 (1999). Summary judgment is a drastic remedy to be granted only

where the movant=s right to it is so clear as to be free from doubt. Groshek v. Frainey,

274 Ill. App. 3d 566, 569 (1995).

The key issue in this matter is whether the trial court was correct in determining

that Pan American Bank is a "depository bank" within the meaning of section 3-206 of

the UCC. Pan American Bank maintains that it is not a "depository bank" and thus is

not liable for conversion under section 3-206.

A discussion of what is a "depository bank" must begin with a definition. The

UCC as codified in Illinois contains a definition of "depository bank." Under the Illinois

Code, a "depository bank" is "the first bank to take an item even though it is also the

payor bank, unless the item is presented for immediate payment over the counter. 810

ILCS 5/4-105(2)(West 2000).

Thus, if we follow the Illinois Code definition of "depository bank" Pan American

Bank clearly is a "depository bank." It was the first bank to take the checks when the

checks were deposited in the ATM. Section 3-206 imposes conversion liability on the

depository bank for failure to honor a restrictive endorsement. Pan American Bank

maintains, however, that the statutory definition of "depository bank" is erroneous in that

the definition of "depository bank" as been preempted by a federal regulatory definition.

5 Pan American notes that under federal bank regulations at 12 C.F.R section

229.2(o):

"Depository bank means the first bank to which a check is

transferred even though it is also the paying bank or the

payee. A check deposited in an account is deemed to be

transferred to the bank holding the account into which the

check is deposited, even though the check is physically

received and indorsed first by another bank." 12 C.F.R.

section 229.2 (2006).

Under this definition, in the instant matter, Marquette Bank, not Pan American

Bank, was the depository bank. Leparski used Pan American=s ATM machine to

deposit the checks into his account at Marquette Bank. Thus, under the federal

regulation, Marquette Bank, not Pan American would have been solely liable for

conversion as a "depository bank."

We are faced with two conflicting definitions of "depository bank" and the

definition which applies will determine the outcome. Pan American argues that the

federal code has preempted the statutory definition. We disagree.

Pan American cites no authority for the proposition that the

UCC definition of "depository bank" has been pre-empted by the

federal regulatory definition. We note that while the federal

regulatory definition dates back to at least 1988 (see 53 FR

31290-01) Illinois courts have continued to rely upon the UCC

definition. See, Continental Casualty Co., Inc. v. American

6 National Bank and Trust Co. of Chicago, 329 Ill. App. 3d 686

(2002). Preemption cannot occur by accident, but only by the

manifest intent of the federal government acting within its

jurisdiction. Fifth Third Bank ex rel. Trust Officers v. CSX

Corp., 415 F.3d 741 (7th Cir. 2005).

Moreover, in reading the federal regulatory scheme in its

entirety, it is clear that the definition of "depository bank"

contained in the cited federal regulations, was intended to be

limited in scope and was not intended to preempt the UCC law of

negotiable instruments. We therefore find that the trial court

was correct as a matter of law in finding that Pan-American Bank

was a depository bank.

Pan-American next maintains that the trial court erred in

determining that it strictly liable for failure to honor the

restrictive endorsement "Interior Crafts - For Deposit Only." We

disagree.

Article 3 of the UCC imposes certain duties and

responsibilities on the depository bank. With respect to

restrictive endorsements, the depository bank is liable in

conversion for failing to honor a restrictive endorsement.

Section 3-206(c)(2) of the Code provides:

"If an instrument bears an indorsement * * *

in blank or to a particular bank using the

words "for deposit," "for collection," or

other words indicating a purpose of having

the instrument collected by a bank for the

7 indorser or for a particular account, the

following rules apply: * * *

A depository bank that purchases the

instrument or takes it for collection when so

indorsed converts the instrument unless the

amount paid by the bank with respect to the

instrument is received by the indorser or

applied consistently with the indorsement."

810 ILCS 5/3-206(c)(2)(West 2000).

Under section 3-206 a depository bank is liable in conversion

unless the payee under a restrictive endorsement receives the

amount of the check or unless the amount of the check is

deposited in the endorser=s account. It is undisputed that

neither occurred in the instant matter.

However, Pan-American maintains that it can escape liability

for conversion because Leparski, not Interior Designs was the

restrictive endorser. We disagree. The Code provides for

liability if payment is made inconsistent with the restrictive

endorsement. There is no requirement that the restrictive

endorsement be made only by an by authorized agent. Pan-American

suggests that Western Assurance Co., Inc. v. Star Financial Bank of Indianapolis, 3 F.3d 1129 (7th Cir. 1993), provides support for

its proposition. However, Western Assurance is distinguishable

in one salient detail: Western Assurance dealt with the question

of apparent authority to negotiate checks, not whether the

8 depository bank was liable for failure to honor a restrictive

endorsement. Western Assurance, 3 F.3d at 1131-32.

Pan-American lastly maintains that the trial court erred in

not allowing it to assert certain affirmative defenses.

Specifically, Pan-American maintains that it should be able to

asset Interior Crafts= alleged comparative negligence available

to a depository bank against strict liability for conversion for

paying an instrument over a forged endorsement. 810 ILCS 5/3-405

and 3-406 (West 2000). We disagree. The affirmative defense of comparative

negligence is available where the indorsement is forged, not, as in the instant matter,

where the depository bank simply fails to honor the restrictive endorsement.

For the foregoing reasons, we find that the trial court did not err in granting

summary judgment. The judgment of the circuit court of Will County is affirmed.

Affirmed.

LYTTON and BARRY, JJ., concur.