Euro Motors Inc. v. Southwest Financial Bank & Trust Co.

FIRST DIVISION
JUNE 1, 1998

No. 97-1014

EURO MOTORS, INC.,

Plaintiff-Appellant,

v.

SOUTHWEST FINANCIAL BANK AND TRUST
COMPANY,

Defendant-Appellee.)
)
)
)
)
)
)
)
)
)Appeal from the
Circuit Court of
Cook County

97 L 127

Honorable
Sheldon Gardner,
Judge Presiding.


JUSTICE O'MARA FROSSARD delivered the opinion of the court:
In this action for breach of contract and conversion,
plaintiff Euro Motors, Inc. (Euro Motors), filed a complaint
against defendant Southwest Financial Bank and Trust Company
(Southwest) following Southwest's wrongful payment of two checks
having unauthorized signatures. Both parties filed motions for
summary judgment in December of 1994. Southwest's motion
asserted that Euro Motors did not timely notify Southwest of the
unauthorized signatures as required by statute and that Euro
Motors "ratified" the subject checks by accepting benefits
therefrom. The trial court granted Southwest's motion, and Euro
Motors appeals from this grant of summary judgment.
At the center of this appeal is whether section 4-406(f) of
the Illinois Uniform Commercial Code (UCC) acts to bar Euro
Motors' claim against Southwest. 810 ILCS 5/4-406(f)(West 1994).
More specifically, the question is whether the one-year time
limitation in section 4-406(f)[fn1] acts as a statute of
limitations, which can be tolled, or a statutory prerequisite to
suit, which must be met before a claim based on an unauthorized
or altered signature may proceed. This issue is a matter of
first impression in Illinois.

FACTS
The facts in this case are basically undisputed. In
December 1993, Euro Motors opened a commercial checking account
at defendant bank, Southwest. The account required two
signatures for any check drawn for an amount over $30,000. Three
of the officers of Euro Motors, F. James Wolff (Wolff), Lillian
Krilich and Aspasia Krilich, were the authorized signatories on
the account.
In January 1994, Southwest paid check number 5010 in the
amount of $36,300 drawn on Euro Motors' account. The check had
only one signature, that of Euro Motors' acting president, Wolff.
Southwest provided Euro Motors with the cancelled check and the
account statement at the beginning of February, but Euro Motors
did not notify Southwest of the missing signature or protest
payment of the check.
In March 1994, Southwest paid check number 5182 in the
amount of $30,500 drawn on Euro Motor's account, and again the
check had only Wolff's signature. Though Southwest again
provided Euro Motors with the cancelled check and account
statement, the bank received no notification of any problems with
the check.
Euro Motors asserts that in March of 1995, Wolff was removed
from his position as president of Euro Motors after it was
discovered he was "grossly mismanaging" the business. It was not
until a subsequent review of the company's financial records was
conducted that the wrongful payment of check numbers 5010 and
5182 were discovered. Euro Motors filed this suit on January 4,
1996, to recover the face value of the checks.
Euro Motors claims it could not have discovered the
unauthorized signatures earlier, as Wolff had control of the
financial documents that indicated the unauthorized payments.
Euro Motors further argues that section 4-406(f) of the UCC is
properly considered a statute of limitations and should not have
begun to run until the unauthorized payments were discovered by
the rest of the corporation. Southwest contends that Euro
Motors' action is time barred by section 4-406(f), which is not a
statute of limitations but, rather, a statute of repose that
cannot be tolled. The trial court agreed that section 4-406(f)
barred Euro Motors' claims for wrongful payment of check numbers
5010 and 5182, and granted summary judgment to Southwest on this
basis. It is from this order that Euro Motors appeals.

ANALYSIS
I.
The appellate review of a grant of summary judgment is de
novo. USG Corp v. Sterling Plumbing Group, Inc., 247 Ill. App.
3d 316, 318, 617 N.E.2d 69 (1993). Summary judgment is proper
only when there is no genuine issue of material fact and the
moving party is entitled to judgment as a matter of law. 735
ILCS 5/2-1005(c) (West 1994). The function of the appellate
court in reviewing the grant of summary judgment is not to decide
disputed issues of fact but rather to determine whether a factual
dispute exists. Kerr v. Illinois Central R.R. Co., 283 Ill. App.
3d 574, 583, 670 N.E.2d 759 (1996). The court must construe the
evidence strictly against the movant and liberally in favor of
the opponent. Quality Lighting, Inc. v. Benjamin, 227 Ill. App.
3d 880, 883, 592 N.E.2d 377 (1992); Zekman v. Direct American
Marketers, Inc., 286 Ill. App. 3d 462, 467, 675 N.E.2d 994
(1997).
The focus of this appeal is whether Euro Motors' cause of
action against Southwest is time barred by section 4-406(f) of
the Illinois UCC.
The relevant portions of section 4-406 read as follows:
"4-406. Customer's duty to discover and report
unauthorized signature or alteration.
(a) A bank that sends or makes available to a customer
a statement of account showing payment of items for the
account shall either return or make available to the
customer the items paid or provide information in the
statement of account sufficient to allow the customer to
identify the items paid. ***
***
(f) Without regard to care or lack of care of either
the customer or the bank, a customer who does not within
one year after the statement or items are made available to
the customer (subsection (a)) discover and report the
customer's unauthorized signature on or any alteration on
the item is precluded from asserting against the bank the
unauthorized signature or alteration." 810 ILCS 5/4- 406
(West 1994).
The UCC also provides that if a signature of more than one
person is required to constitute the authorized signature of an
organization, the signature of the organization is unauthorized
if one of the required signatures is missing. 810 ILCS 5/3-403
(West 1994). Thus the two checks at issue in the present case
contain "unauthorized signatures" and fall under the time
limitation discussed in section 4-406.
Euro Motors cites Watseka First National Bank v. Horney, 292
Ill. App. 3d 933, 686 N.E.2d 1175 (1997), in support of its
contention that section 4-406(f) is a statute of limitations and
subject to tolling. Euro Motors bases this assertion on the fact
that the Watseka court refers to the time limitation in section
4-406(f) as a "statute of limitations" throughout its opinion.
Though the Watseka opinion uses the term "statute of limitations"
in reference to section 4-406(f), it does not assert that section
4-406(f) provides a one-year time period in which a suit must be
brought. Rather, Watseka states that "claims against the bank
are precluded if the customer failed to discover and report
unauthorized items within one year after the customer received
the bank statements and accompanying items." (Emphasis added.)
Watseka, 292 Ill. App. 3d at 938. The Watseka court seems to be
interpreting section 4-406(f) as a condition that must be met
before suit can be brought - not a time limit within which a suit
must be filed or a statute of limitations.
The majority of other jurisdictions that have considered
this issue have interpreted the one-year limitations period as a
rule of substantive law that creates a statutory prerequisite of
notice, not as a statute of limitations within which a suit must
be filed.
The case of Wetherill v. Putnam Investments, 122 F.3d 554
(8th Cir. 1997), dealt with a situation very similar to the case
at bar. In Wetherill, an unscrupulous employee of the plaintiff
corporation fraudulently signed and endorsed checks drawn on the
corporate account during a three-year period from 1986 through
1989. These fraudulent activities were not discovered until late
1992 or early 1993, and the corporation president sent notice of
the unauthorized activity to the defendant companies on May 11,
1993. The plaintiff contended that the time for giving notice
did not begin to run until the corporation discovered or should
have discovered the employee's unscrupulous activity. The eighth
circuit disagreed and, in construing Massachusetts' UCC section
4-406(4), held that the time limit in the statute is "not a
statute of limitations which might not start to run until the
plaintiff knew or should have known of their employee's
treachery; rather, it fixes the time within which the plaintiff
must give notice to the defendant." Wetherill, 122 F.3d at 556-
57. The court held UCC section 4-406(4) establishes a statute of
repose under which the time for bringing suit expires one year
following the availability of the relevant account statements.
Wetherill, 122 F.3d at 556-57.
A similar result was reached in Brown v. Cash Management
Trust of America, 963 F. Supp. 504 (D. Md. 1997). In Brown, the
plaintiff contended his mental incompetence excused his statutory
duty to discover and report unauthorized checks under New York's
version of section 4-406(f). The court held that New York law
clearly regards the one-year notice provision as an unalterable
condition precedent to suit. Brown, 963 F. Supp. at 506. The
court held that the statute was not a statute of limitations
fixing the time within which an action must be brought but rather
a rule of substantive law that created a statutory prerequisite
of notice. Brown, 963 F. Supp. at 506.
In Concrete Materials Corp. v. Bank of Danville & Trust Co.,
938 S.W.2d 254 (Ky. 1997), an employee of the plaintiff
corporation charged with depositing checks embezzled funds from
the corporation over a period of eight years. The corporation
made several claims against the bank, which the defendant bank
claimed were precluded as the unauthorized activity was not
discovered and reported within the one-year time period found in
Kentucky's UCC section 4-406(4). The court held that the failure
of the plaintiff corporation to examine its bank statements and
the failure to report the unauthorized withdrawals disclosed
therein precluded it from recovering its alleged losses against
defendant bank. Concrete Materials Corp., 938 S.W.2d at 256. In
coming to this conclusion, the court determined that cases from
the jurisdictions that have examined this issue have uniformly
held that section 4-406(4) requires dismissal of those claims
relating to alterations or unauthorized withdrawals where the
plaintiff failed to discover and report them within one year
after receiving the bank statements and related items. Concrete
Materials Corp., 929 S.W.2d at 258.
Many other jurisdictions have come to the same conclusion.
See Gerber v. City National Bank, 619 So. 2d 328 (Fla. Dist. Ct.
App. 1993) (holding that statute imposing duty on customer to
discover and report unauthorized signature on check was notice
requirement, not statute of limitations); Weiner v. Sprint
Mortgage Bankers' Corporation, 235 A.D.2d 472, 652 N.Y.S.2d 629,
(1997) (UCC section 4-406(4) is not a statute of limitations but
a rule of substantive law which creates a statutory prerequisite
of notice); Roy Supply, Inc. v. Wells Fargo Bank, 39 Ca. App. 4th
1051, 46 Cal. Rptr. 2d 309 (3d Dist. 1995) (the time limitation
of UCC section 4-406(4) is an issue preclusion statute rather
than a statute of limitations); Harvey v. First National Bank,
924 P.2d 83 (Wyo. 1996) (a customer who has failed to notify the
bank within the required period of time is subject to the bar of
the limitations of UCC section 4-406 without regard to whether
the customer sues the bank on theories of tort, contract, or
breach of fiduciary duty); Hartford Accident & Indemnity Co. v.
Dean's Shop-rite, Inc., 48 N.C. App. 615, 269 S.E.2d 282 (1980)
(UCC section 4-406(4) establishes a standard and reasonable time
that applies to notifying any payor that signatures were
unauthorized).
In addition to the overwhelming authority supporting the
construction of section 4-406(f) as a statutory prerequisite of
notice rather than a statute of limitations, there are strong
practical and public policy concerns which favor such an
interpretation.
First, employers generally have a comparative advantage over
financial institutions to prevent diversion of company funds by
their own employees. Menichini v. Grant, 995 F.2d 1224 (3d Cir.
1993). In Haddad's of Illinois, Inc. v. Credit Union 1 Credit
Union, 286 Ill. App. 3d 1069, 678 N.E.2d 322 (1997), the court
declined to apply the discovery rule to actions for conversion of
negotiable instruments, stating that the victim of the conversion
is in the best position to easily and quickly detect the loss and
take appropriate action. Haddad's, 286 Ill. App. 3d at 1075.
The court noted the public would be poorly served by a rule that
effectively shifted the responsibility for careful bookkeeping
away from those in the best position to monitor accounts and
employees. Haddad's, 286 Ill. App. at 1075, quoting Husker News
Co. v. Mahaska State Bank, 460 N.W.2d 476 (Iowa 1990). Likewise,
allowing the one-year time period in section 4-406(f) of the UCC
to be subject to a "discovery rule" would shift the burden of
reviewing accounts and monitoring employees away from the
customer and to the bank, which is less equipped to do so.
The Haddad's court also noted that the commercial policies
underlying the UCC require that liability on negotiable
instruments not be open-ended. Haddad's, 286 Ill. App. 3d at
1074. In the present case, plaintiff Euro Motors urges us to
make an exception to the one-year limitations period based on the
particular factual circumstances involving a dishonest employee.
However, in Brown v. Cash Management Trust of America, the court
noted that the commercial certainty that the UCC seeks to achieve
in respect to commercial transactions would quickly dissipate if
ad hoc exceptions to its commands were too eagerly crafted to
accommodate the occasional "hard case." Brown, 963 F. Supp. at
506. The court, quoting New York's highest court, stated the
following:
"[U]nlike tort law, the UCC has the objective of promoting
certainty and predictability in commercial transactions. By
prospectively establishing rules of liability that are
generally based not on actual fault but on allocating
responsibility to the party best able to prevent the loss by
the exercise of care, the UCC not only guides commercial
behavior but also increases certainty in the marketplace and
efficiency in dispute resolution." Brown, 963 F. Supp. at
506 n.4, quoting Putnam Rolling Ladder Co. v. Manufacturers
Hanover Trust Co., 74 N.Y.2d 340, 349, 546 N.E.2d 904, 908,
547 N.Y.S.2d 611, 615 (1989).
If we were to interpret section 4-406(f) as plaintiff Euro
Motors suggests, it would be in complete disregard for the
principle of commercial certainty and for the underlying
rationale of the UCC. Permitting Euro Motors' claim to go
forward based on corporate officers' delayed discovery of
unauthorized checks would open a Pandora's box. Under this
scenario, a claim against an unauthorized transaction could be
made at any time, even 50 years from the date of payment, if a
bank customer neglected to review and monitor his or her bank
statements.
Section 4-406(f) clearly places upon a bank's customer the
duty of bringing to the bank's attention any item containing an
unauthorized signature which has been debited to the customer's
account. It evidences a public policy in favor of imposing on
customers the duty of prompt examination of their bank statements
and the notification of banks of forgeries and alterations and in
favor of reasonable time limitations on the responsibility of
banks for payment of forged, altered or unauthorized items.
Knight Communications, Inc. v. Boatmen's National Bank, 805 S.W.2d 199, 202 (Mo. App. 1991).
We agree with the majority of jurisdictions that section 4-
406(f) is a rule of substantive law that creates a statutory
prerequisite to filing suit. Failure to "discover and report" an
unauthorized signature within one year from the time the bank
makes available to the customer a statement of account and
accompanying items precludes the customer's assertion of a claim
against the bank. First Place Computers, Inc. v. Security
National Bank, 251 Neb. 485, 558 N.W.2d 57 (1997). This creates
a time limit on the right of a customer to make a claim for
payment, without regard to care or lack of care of either the
customer or the bank. See 7 R. Anderson, Anderson on the Uniform
Commercial Code, Official Code Comment, 4-406:1, at 451 (3d ed.
1995).
The absolute nature of the time limit distinguishes it from
a statute of limitations. The statute establishes a precedent to
an action which, unlike a statute of limitations, cannot be
tolled. First Place Computers, 251 Neb. at 489, 558 N.W.2d at
60. If a customer makes a claim against a bank for payment on an
unauthorized signature or alteration within the one-year period
specified in section 4-406(f), that customer may commence an
action as long as it is filed within the applicable statute of
limitations. If the action is based on a UCC violation, the
statute of limitations is three years. 810 ILCS 5/4-111 (West
1994). A claimant asserting a common law action, such as
conversion or breach of contract, must comply with the
appropriate statute of limitations as well.
The one-year time period at issue in section 4-406(f) is not
a statute of limitations; it does not give a customer a year to
bring suit. Rather, it simply requires the customer to notify
the bank of an unauthorized signature or alteration within a year
in order to preserve the right to bring suit.
This interpretation of the statute is consistent with case
law in the majority of other jurisdictions in which section 4-
406(f) of the UCC has been considered. In addition, our analysis
of the issue is consistent with the plain language of the statute
and is clearly supported by public policy and practical concerns.
Because section 4-406(f) bars Euro Motors' claim for
recovery, we need not address whether the checks in question were
ratified.
II.
Both the breach of contract claim and the conversion claim
asserted in Euro Motors' complaint are time barred by section 4-
406(f). This provision bars any untimely claims, whether under
the UCC or under the common law. Wetherill, 122 F.3d at 558.
The time limit imposed by UCC section 4-406 is applicable without
regard to the theory on which the customer brings his or her
action. Siecinski v. First State Bank, 209 Mich. App. 459, 531 N.W.2d 768 (1995); Jensen v. Essexbank, 396 Mass. 65, 483 N.E.2d 821 (1985). See also 7 R. Anderson, Anderson on the Commercial
Code, 4-406:24, at 466 (3d ed. 1995). Moreover, the commercial
certainty doctrine and the purposes of the UCC are compelling
regardless of the theory underlying the lawsuit.

CONCLUSION
We hold that the one-year time limitation in section 4-
406(f) of the UCC is not a statute of limitations, but a
statutory prerequisite to suit. It simply requires the customer
to notify the bank of an unauthorized signature or alteration
within a year in order to preserve the right to bring suit.
Accordingly, we find Euro Motors' claim is time barred under the
statute. As there exists no genuine issue of material fact,
Southwest is entitled to judgment as a matter of law, and the
decision of the trial court is affirmed.
Affirmed.
O'BRIEN and GALLAGHER, JJ., concur.
[fn1]Note that section 4-406(f) of the Illinois UCC
contains language identical to section 4-406(4) of the UCC in
other jurisdictions.