JOHN PALAZZO V STANDARD FEDERAL BANK
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STATE OF MICHIGAN
COURT OF APPEALS
JOHN PALAZZO, d/b/a NEUROMETRICS and
d/b/a NEURO LABS,
UNPUBLISHED
August 1, 1997
Plaintiff-Appellant,
v
No. 185999
Oakland Circuit Court
LC No. 94-472231-CZ
STANDARD FEDERAL BANK,
Defendant-Appellee,
and
FIRST FEDERAL OF MICHIGAN,
Defendant,
and
JILL KABANUK,
Not participating.
Before: Young, P.J., and Taylor and R.C. Livo*, JJ.
PER CURIAM
Plaintiff appeals as of right the circuit court’s orders granting defendant summary disposition and
a protective order precluding discovery of defendant’s records concerning losses from forged
endorsements. Plaintiff has charged defendant Standard Federal Bank 1 with conversion for accepting
checks from 1989 to 1993, which were payable to plaintiff’s business, and depositing them into his
employee’s personal bank account. Plaintiff also alleged that defendant breached a warranty of good
title by accepting the checks. The trial court dismissed plaintiff’s claims and held that plaintiff’s negligent
supervision of his employee estopped him from maintaining a conversion claim against defendant and
* Circuit judge, sitting on the Court of Appeals by assignment.
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that defendant made no warranties, express or implied, to plaintiff. We reverse in part, affirm in part,
and remand.
I. BACKGROUND AND PROCEEDINGS
A. Plaintiff’s Business and Jill Kabanuk
Plaintiff is a physical therapist and sole proprietor doing business as Neurometrics and Neuro
Labs. His work requires him to be at remote locations and travel extensively. In September 1993, the
Internal Revenue Service notified plaintiff that there were disparities between the income declared on his
business tax return and records which indicated that he received payments in excess of his declared
income. After being notified, plaintiff discovered that the IRS possessed records of payments to his
business which his office had no record of receiving. Plaintiff’s employee Jill Kabanuk, now deceased,
confessed in October 1993 that she had deposited payments to plaintiff’s business into her personal
checking account. Further investigation revealed that from May 1989 to from May 1989 to October
1993, Kabanuk deposited almost $360,000 in checks payable to plaintiff’s business into her personal
account at defendant’s bank.
Plaintiff hired Kabanuk in 1987 as his office administrator and sole clerical support staff. In
June 1987, Kabanuk was arraigned on federal charges of bank fraud unrelated to plaintiff’s business.2
In September 1987, Kabanuk pleaded guilty to the charges and was sentenced to three years of
imprisonment on one count, and a concurrent sentence of five years of probation on the second count.
It is unclear whether plaintiff knew the nature of the charges against Kabanuk. In his deposition, plaintiff
testified that he had been informed by Kabanuk’s husband that these matters concerned trouble with
Kabanuk’s personal credit cards and a loan involving her personal credit or applications for credit.
Plaintiff also testified that he understood that these events had occurred sometime in the past and that
Kabanuk had been sentenced or was waiting to be sentenced by a judge. During this time, plaintiff
wrote a letter to the sentencing judge on behalf of Kabanuk, praising her skills as an employee and
requesting that the court treat Kabanuk with leniency.
After serving her prison term, in 1989 plaintiff accepted Kabanuk’s return to her former position
whereupon she resumed managing the office and handling bookkeeping matters. In conjunction with
these duties, plaintiff recorded payments received and prepared checks payable to plaintiffs’ business
for deposit. Kabanuk endorsed the checks with the business’ endorsement stamp and left them in an
envelope for plaintiff to deposit at his bank.
Because plaintiff’s work required that he be out of the office, his direct supervision of
Kabanuk’s work was infrequent. However, plaintiff testified that he supervised Kabanuk when he was
in the office and by reviewing her typewritten reports and his business records. Plaintiff made all the
deposits for his business and was the only one authorized to write checks for the business. On a
monthly basis, he reviewed his business records and reconciled his bank statements. Plaintiff also
submitted the deposition testimony of his accountant and an affidavit from another accountant, attesting
that plaintiff’s practices in monitoring his finances were reasonable. Plaintiff contends that he was
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completely unaware of Kabanuk’s scheme to embezzle from him by depositing his business checks into
her personal account.
To avoid plaintiff’s detection of her scheme, Kabanuk did not record in plaintiff’s business
records some checks that were received, but instead endorsed them and deposited them into her
personal account at defendant’s various branches. Kabanuk held herself out to defendant as the owner
of Neurometrics or Neuro Labs and on occasion discussed “her” business with defendant’s employees.
One of defendant’s employees testified in her deposition that Kabanuk gave her brochures concerning
the business. Kabanuk also produced to defendant’s employees a forged copy of plaintiff’s Certificate
of Persons Conducting Business Under Assumed Name (“d/b/a” certificate) 3 which identified Kabanuk
as the proprietor of the business.4 The date when Kabanuk produced the certificate to defendant’s
employees is disputed by the parties.
B. Defendant’s Policy for Accepting Checks Payable To A Business
According to its written policy, before defendant would accept checks made payable to a
business for deposit into a personal account, the presenter of the check was required to provide the
bank with a certified copy of a “d/b/a” certificate. Defendant required its customers to produce such a
certificate as evidence that the customer had authority to conduct business under the assumed name and
to negotiate checks payable to the business. Defendant maintained a copy of such certificates on file.
Some of defendant’s employees testified in their depositions that it was their understanding that
a d/b/a certificate allowing Kabanuk to deposit the checks was in the bank’s files as early as 1990.
However, none of them could testify that they had personally seen the certificate in 1990. There was
also deposition testimony that in April 1993, defendant’s employees at one branch could not locate a
copy of any d/b/a certificate in their files, and that they requested a certificate from Kabanuk before they
would accept her deposits. They testified that Kabanuk produced a photocopied d/b/a certificate
several days later. That copy is in evidence and was Kabanuk’s forgery of plaintiff’s d/b/a certificate.
Another of defendant’s employees, who accepted deposits from Kabanuk at another branch, testified
that when defendant’s loss prevention department contacted her one year later in April 1994, she was
unable to locate a copy of any d/b/a certificate in her branch’s files.
C. Proceedings
Plaintiff filed this conversion action on March 11, 1994, alleging wrongful conversion and
breach of implied warranty. In October 1994, the circuit court granted partial summary disposition to
defendant and held that any checks cashed before March 11, 1991 were outside the statute of
limitations for plaintiffs’ conversion action. The court also dismissed plaintiff’s breach of warranty claim
against defendant and held that defendant made no warranties, express or implied, to plaintiff. The
circuit court also granted defendant’s motion for a protective order to preclude discovery of defendant’s
documentation concerning the bank’s losses due to forged endorsements.
In February 1995, the circuit court dismissed plaintiff’s conversion claim in its entirety. The
court held that there were no disputed questions of fact that plaintiff was negligent in supervising his
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employee, and consequently, plaintiff was estopped from pursuing his conversion action. This appeal
ensued.
On appeal, plaintiff challenges the court’s dismissal of his conversion claim on equitable estoppel
grounds and also argues that checks paid three years prior to this action were not time barred. Plaintiff
also challenges dismissal of his breach of warranty claim, and lastly, the order granting defendant’s
protective order and precluding discovery of documentation concerning defendant’s losses due to
forged endorsements.
II. EQUITABLE ESTOPPEL
Plaintiff first challenges the circuit court’s dismissal of his conversion claim based on equitable
estoppel. The court held that there were no questions of fact regarding plaintiff’s negligent supervision
of Kabanuk, and therefore, he was estopped from recovering against defendant. On appeal, plaintiff
contends that there is a genuine factual dispute regarding whether his supervision of Kabanuk was
negligent and whether defendant’s conduct in accepting the forged endorsements in contravention of its
policy defeats its equitable estoppel defense. We agree.
We review the circuit court’s order granting summary disposition de novo to determine whether
the moving party was entitled to judgment as a matter of law. Stehlik v Johnson (On Rehearing), 206
Mich App 83, 85; 520 NW2d 633 (1994). A motion pursuant to MCR 2.116(C)(10) tests the factual
basis underlying the plaintiff’s claim. Radtke v Everett, 442 Mich 368, 374; 501 NW2d 155 (1993).
In ruling on the motion, the trial court must consider the affidavits, pleadings, depositions, admissions,
and other admissible documentary evidence submitted by the parties. MCR 2.116(G)(5); SSC
Associates Ltd Partnership v General Retirement System of City of Detroit, 192 Mich App 360,
364, 366; 480 NW2d 275 (1991). Giving the benefit of all reasonable doubt to the opposing party, the
trial court must determine whether a record might be developed that would leave open an issue of
material fact upon which reasonable minds could differ. SSC Associates, supra at 364. Summary
disposition is appropriate only if there is no genuine issue of material fact and the moving party is entitled
to judgment as a matter of law. Mitchell v Dahlberg, 215 Mich App 718, 725; 547 NW2d 74
(1996).
The parties primarily dispute whose conduct should be evaluated under the doctrine of equitable
estoppel. Defendant asserts that plaintiff’s decision to allow a convicted criminal to handle these
responsibilities constitutes “culpable negligence” which justifies dismissal of his conversion claim and
argues that the propriety of its conduct in accepting the checks is inconsequential. Plaintiff responds that
he should not be held accountable for Kabanuk’s conduct because there were no indications from
which he could infer that she was forging endorsements and depositing the checks into her personal
account. Plaintiff contends that defendant’s actions should be evaluated because if defendant had
followed its written policy regarding the acceptance of checks payable to businesses, Kabanuk would
not have succeeded in depositing the funds into her personal account. Both parties are in part correct.
Equitable estoppel arises where “a party, by representations, admissions, or silence,
intentionally or negligently induces another party to believe facts, the other party justifiably relies and
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acts on this belief, and will be prejudiced if the first party is permitted to deny the existence of those
facts.” Hoye v Westfield Ins Co, 194 Mich App 696, 705; 487 NW2d 838 (1992) (quoting
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Southeastern Oakland Co Incinerator Auth v Dep’t of Natural Resources, 176 Mich App 434,
442-443; 440 NW2d 649 (1989)). Thus, the doctrine of equitable estoppel bars plaintiff’s conversion
claim if defendant establishes:
(1) that by representations, conduct, or silence, plaintiff induced defendant to believe that
Kabanuk was the proprietor of Neurometrics or Neuro Labs and authorized to endorse
checks payable to plaintiffs’ business;
(2) that plaintiff’s conduct was intentional or negligent;
(3) that defendant justifiably relied upon its belief; and
(4) that defendant will be prejudiced if plaintiff were allowed to deny the fact that he culpably
permitted Kabanuk to hold herself out to be the proprietor of Neurometrics or Neuro
Labs.
After reviewing the evidence presented by both parties, we conclude that a factual dispute exists
concerning whether plaintiff should be held accountable for Kabanuk’s conduct in representing herself
as the owner of his business and whether defendant was justified in relying upon Kabanuk’s
representations that she was the owner of the b
usiness when accepting the checks over a forged
endorsement.
For estopple to bar plaintiffs’ claim, defendant must show that plaintiff acted with knowledge,
actual or constructive, of what was transpiring. Langschwager v Penny, 351 Mich 473, 482; 88
NW2d 276 (1958). Based on our review of the evidence, there exists a factual dispute as to whether
plaintiff knew or should have known of Kabanuk’s scheme.
Defendant contends that plaintiff acted negligently by not ascertaining the nature of Kabanuk’s
criminal charges before accepting her return to work. Defendant also stresses that plaintiff was negligent
for giving Kabanuk authority to receive, record and endorse checks for the business. Defendant
maintains that plaintiff’s absence from the office and plaintiff’s decision to keep his d/b/a certificate in an
unlocked file cabinet gave Kabanuk the opportunity to forge the certificate and present herself as the
business owner to defendant’s employees. Plaintiff counters by stating that Kabanuk had been a
reliable employee prior to her criminal action and that he understood that her criminal case related to
past conduct involving her personal credit, which he believed that she had overcome. Plaintiff explains
that the nature of his work, physical therapy, requires that he be out of the office most of the time.
Plaintiff maintains that despite his absence, he supervised Kabanuk’s work when he was in the office
and on other occasions, by reviewing Kabanuk’s typewritten reports and his business records. Plaintiff
further explained that on a monthly basis, he reviewed his business records, signed all his checks, made
all his deposits, and reconciled his bank statements. Plaintiff also submitted the deposition testimony of
his accountant and an affidavit from another accountant, attesting that plaintiff’s practices in monitoring
his finances were reasonable.
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Although defendant points to disparities in plaintiff’s practices, plaintiff has set forth evidence
which creates a material factual dispute as to whether his conduct was reasonable given the nature of his
business. Therefore, we cannot conclude as a matter of law that plaintiff’s actions were negligent such
that he should be charged with constructive knowledge of her scheme. Accordingly, given the existence
of this factual dispute, summary disposition was inappropriate. Mitchell, supra at 725.
Even if as defendant contends, plaintiff’s actions or inactions allowed Kabanuk to forge his
d/b/a certificate, there remains a factual dispute as to whether defendant acted reasonably in accepting
the checks endorsed by Kabanuk, i.e., whether defendant justifiably relied on plaintiff’s purported
negligence in allowing Kabanuk to represent herself as the owner of the business. According to
defendant’s written policy, the only representation that it would accept for an individual’s endorsement
of checks payable to a business is a certified d/b/a certificate expressly authorizing the individual to
endorse the checks. Defendant’s policy also requires that a copy of the certificate be maintained in the
bank’s files.
The parties dispute if and when Kabanuk produced a d/b/a certificate. Defendant claims that
Kabanuk provided such a certificate in the first half of 1990. Some of defendant’s employees testified
in their depositions that it was their understanding that Kabanuk had a d/b/a certificate in defendant’s
files as early as 1990.
Plaintiff contends that defendant has not established that Kabanuk supplied a d/b/a certificate.
Plaintiff indicates that the employees who understood that a d/b/a certificate was on file also testified that
they had not personally seen the certificate in 1990. There was also deposition testimony that in April
1993, defendant’s employees at one branch could not locate a copy of the certificate in their files, and
that Kabanuk produced a photocopy of the certificate several days later. That copy is in evidence and
was Kabanuk’s forgery of plaintiff’s d/b/a certificate. Also, one of defendant’s employees, who
accepted deposits from Kabanuk at another branch, testified that when defendant’s loss prevention
department contacted her in April 1994, she was unable to locate a copy of any d/b/a certificate in her
branch’s files.
Plaintiff further contends that acceptance of the photocopy from Kabanuk was contrary to
defendant’s written policy that it would only accept a certified copy. In his deposition, James Neil, an
employee of defendant, described that a certified copy of the d/b/a certificate would bear the stamp of
the county’s Register of Deeds. Plaintiff argues that the photocopy supplied by Kabanuk would have
been detected as a forgery if defendant’s employees had followed bank policy and asked Kabanuk to
submit a certified copy.
The question raised by this evidence is whether any of defendant’s employees saw a d/b/a
certificate before Kabanuk began depositing checks from plaintiff’s business. There is also a question
whether defendant acted reasonably when accepting the photocopy of the forged d/b/a certificate as
opposed to a certified copy in contravention of its written policy. Resolution of these factual questions
is essential to determine whether defendant justifiably relied upon Kabanuk’s representation that she
was the owner of the business. Westfield, supra at 705. If defendant accepted the checks without
reviewing a d/b/a certificate, its claim that it justifiably relied upon Kabanuk’s representation is
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questionable. Moreover, such conduct by defendant has a bearing on its ability to establish the last
element of its estoppel defense: whether defendant would be prejudiced by plaintiff’s denial that his
conduct allowed Kabanuk to represent herself as the owner of the business. Id. Therefore, we
conclude that there is a factual dispute regarding defendant’s justifiable reliance. Specifically, questions
of fact exist concerning when Kabanuk produced the forged certificate, who, within defendant’s employ
actually saw this certificate, and whether acceptance of the forged photocopy was reasonable. Because
the resolution of these issues involve questions of credibility solely within the province of the trier of fact,
the circuit court erred in granting defendant’s motion for summary disposition. Vanguard Ins Co v
Bolt, 204 Mich App 271, 276-277; 514 NW2d 525 (1994).
III. STATUTE OF LIMITATIONS
Plaintiff next challenges the circuit court’s decision to grant defendant’s partial motion for
summary disposition. The circuit court held that plaintiff could not seek damages for checks that were
accepted before March 11, 1991, three years prior to the date plaintiff filed his complaint. The court
held that the statute ran from each forged endorsement and that plaintiff could not avail himself of any
tolling principle. Plaintiff contends that he should be allowed to take advantage of at least one of the
following tolling principles: the discovery rule, the continuing violation theory, or defendant’s alleged
fraudulent concealment of facts regarding his claim. We disagree.
When reviewing a motion for summary disposition brought pursuant to MCR 2.116(C)(7), we
accept the plaintiff’s well-pleaded allegations as true and construe them in the plaintiff’s favor. Male v
Mayotte, Crouse & D’Haene Architects, Inc, 163 Mich App 165, 168; 413 NW2d 698 (1987). If
there are no facts in dispute, the issue whether the claim is statutorily barred is one of law for the court.
Executone Business Sys Corp v IPC Communications, Inc, 177 Mich App 660, 665; 442 NW2d
755 (1989).
Generally, a cause of action accrues “at the time the wrong upon which the claim is based was
done regardless of the time when damage results.” MCL 600.5827; MSA 27A.5827. Plaintiff’s
conversion claim is based on the Uniform Commercial Code’s (“UCC”) recognition that a conversion
occurs if a check is paid on a forged endorsement. 5 MCL 440.3419(1)(c); MSA 19.3419(1)(c). A
conversion is committed when dominion is wrongfully asserted over the personal property of another.
Miller v Green, 37 Mich App 132, 138; 194 NW2d 491 (1971). Consequently, a claim for
conversion accrues on the date when dominion was asserted, when the check is paid on a forged
endorsement, and as conversion results in injury to a person’s property, the claim must be brought
within three years from the date of the conversion. Continental Casualty Co v Huron Valley Nat’l
Bank, 85 Mich App 319, 324; 271 NW2d 218 (1978); MCL 600.5805(8); MSA 27A.5805(8).
Plaintiff does not dispute these general principles, but instead seeks to avail himself of an equitable tolling
principle to delay the date that his cause of action accrued.
A. Discovery Rule
First, plaintiff argues that the discovery rule applies such that his claim did not accrue until
plaintiff discovered or should have discovered the conversion. This Court has rejected the application
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of the discovery rule in similar cases. Continental Casualty, supra at 325; Insurance Co of North
America v Manufacturer’s Bank (hereinafter “INA”), 127 Mich App 278, 283-284; 338 NW2d
214 (1983). As in this case, those plaintiffs urged this Court to recognize that their claims for
conversion accrued from the date that they should have known of the conversion. Continental
Casualty, supra at 325; INA, supra at 283. Both panels rejected this argument for sound policy
reasons.
Plaintiff urges us to overrule these cases and adopt application of the discovery rule in this
context. Plaintiff maintains that Michigan law has consistently recognized that a plaintiff should not be
deprived of a cause of action before a plaintiff knows, or should know, of his claim. See Moll v Abbott
Laboratories, 444 Mich 1, 13; 506 NW2d 816 (1993). Plaintiff contends that application of the
discovery rule in this context would not offend the purposes underlying the statutes of limitation such as
barring stale claims and loss of reliable evidence. See Lemmerman v Fealk, 449 Mich 56; 534
NW2d 695 (1995); Stephens v Dixon, 449 Mich 531; 536 NW2d 755 (1995). Plaintiff also points
to specific language in a comparable provision of the UCC, which recognizes application of the
discovery rule, as further support for his claim that the rule’s application should be extended to his
conversion claim. We disagree and hold that this Court’s prior well-reasoned holdings should not be
disturbed.
The primary purposes behind statutes of limitations are: (1) to encourage plaintiffs to pursue
claims diligently; and (2) to protect defendants from having to defend against stale and fraudulent claims.
Lemmerman, supra at 65. Nevertheless, Michigan courts have recognized in special cases, the
importance of these goals conflict with the injustice of precluding some claims such that application of
the discovery rule is required. Id. In limited contexts, Michigan courts have recognized policy reasons
for application of the discovery rule, which cases generally have been negligence-type actions such as
products liability or medical malpractice involving injuries to persons. See, e.g., cases discussed in
Lemmerman, supra at 66-67. Plaintiff has not identified, nor have we discovered, a Michigan case
which extends this principle beyond those contexts, and specifically in the area of intentional torts.6
Moreover, plaintiff has not convinced this Court that strict enforcement of the three-year statute of
limitations for conversion actions creates the kind of injustice that has prompted extension of the
discovery rule in other contexts.
The Supreme Court has instructed that a decision to apply the discovery rule requires a
balancing of competing policy considerations. Goodridge v Ypsilanti Twp Bd, 451 Mich 446, 454
455; 547 NW2d 668 (1996); Stephens, supra at 536. In Goodridge, the Supreme Court explained
that in deciding whether to strictly enforce a period of limitation or to apply a discovery rule, a court
must consider whether the party who has the burden of initiating litigation “‘was given a fair opportunity
to bring [the claim]’” and whether the responding party’s “‘equitable interests would be unfairly
prejudiced by tolling the statute of limitations.’” Goodridge, supra at 454-455 (quoting Stephens,
supra at 536). The Goodridge Court emphasized that this analysis was critical to ensure that the
purposes of the legislation are respected. Id.
Applying this analysis to this case supports our affirmation of Continental Casualty and INA.
We conclude first that plaintiff had a reasonable opportunity to bring his claim after discovering
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Kabanuk’s scheme in October 1993 and that defendant’s interests would be unfairly prejudiced by
extending the discovery rule to an action by a payee to recover for payment on a forged endorsement.
This would frustrate the strong public policy of finality in commercial transactions. INA, supra at 283
284. Both INA and Continental Casualty adopted the well-reasoned holding in Fuscellaro v
Industrial National Corp, 117 RI 558; 368 A2d 1227 (1977). The Fuscellaro court stated:
In the instant case, analysis of the underlying policies leads us to conclude that a
payee’s action for conversion of a check must be governed by the general rule that in
the absence of fraud by those i voking the statute of limitations, a cause of action in
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conversion accrues at the time the defendant wrongfully exercises dominion, regardless
of the plaintiff’s ignorance. The finality of transactions promoted by an ascertainable
definite period of liability is essential to the free negotiability of instruments on which
commercial welfare so heavily depends. Our law of commercial paper has codified a
public policy strongly favoring such finality. That a discovery date would mitigate
against finality and certainty of obligation is amply illustrated by the facts of the instant
case. The plaintiff-payees apparently could not discover the forgery until after their
father died and the estate was probated.
In choosing the date of the wrongful exercise of dominion as the point from
which the period of limitations runs, the law of conversion presumes that property
owners know what and where their assets are, despite the fact that the presumption
may work a hardship upon the property owner who fails to discover his or her
ownership rights until after the period has run. . . . We fail to see why the limitation on
an owner’s action for conversion should be measured differently and with less
predictability merely because the property involved is commercial paper, particularly
when our commercial law places such great emphasis on certainty of liability. [Id. at
563-564.][Citations omitted.]
Based on these policy considerations, we conclude that the holdings of Continental Casualty and INA
are sound and should not be disturbed.7
B. Continuing Violation Theory
Second, plaintiff argues that the acceptance of the checks with forged endorsements constituted
a continuation violation such that plaintiff’s cause of action encompassed transactions which occurred
outside of the limitations period. Plaintiff contends that defendant’s wrongful acts were part of
defendant’s continuing failure to verify Kabanuk’s authority to endorse checks payable to plaintiff’s
business. We disagree. Plaintiff’s argument fails for two reasons. First, plaintiff cannot establish that
actions under the UCC warrant application of the “continuing violation” theory. Second, plaintiff cannot
show that defendant’s conduct constituted a continuing violation as opposed to series of separate
violations, each of which were actionable.
In Sumner v Goodyear Tire & Rubber Co, 427 Mich 505, 510; 398 NW2d 368 (1986), the
Michigan Supreme Court adopted the “continuing violation” theory. The theory had been applied by
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federal courts in Title VII actions in order to avoid the harsh effects of a strict application of that act’s
ninety day limit for bringing claims. Id. at 525. The policy reasons behind this doctrine involve
considering whether the purpose of a remedial statute would be frustrated if most claims were barred by
the statute of limitations or given the nature of the wrong, a plaintiff would have difficulty identifying the
precise date of its occurrence. See Id. at 525-526; Phinney vPerlmutter, et al, 222 Mich App 508,
545-548; ___ NW2d ___ (1997).
The UCC is not a remedial statue designed to redress the violation of rights. Instead, the major
purpose of the Uniform Commercial Code is to “make uniform the law among the various jurisdictions.”
Continental Casualty, supra at 324; MCL 440.1102(2)(c); MSA 19.1102(2)(c). Moreover, the
nature of conversion of a check by a forged endorsement is distinct enough for an aggrieved party to
comprehend the date of its occurrence before the limitations period expired. Thus, there is no policy
based rationale to apply this doctrine in the area of commercial transactions. Further, Michigan courts
have not recognized a cause of action for continued negligence. Traver Lakes Community
Maintenance Ass’n v The Douglas Co, ___ Mich App ___ (Docket No. 182054, issued 6/27/97,
slip op at 2.
Further, plaintiff cannot show that the wrong alleged in this case, was of a continuing nature.
Plaintiff’s contention that defendant’s continuing failure to verify Kabanuk’s authority to endorse the
checks is without merit because defendant’s failure to follow its own internal policy is not an actionable
wrong, although such conduct is relevant to the question whether defendant may properly assert
equitable estoppel to defeat plaintiff’s lawsuit. Rather the touchstone of our analysis must be the statute
itself. The statute expressly provides that a check is converted when it is paid on a forged
endorsement. See MCL 440.3419(1)(c); MSA 19.3419(1)(c). Therefore, the statute makes clear that
the wrong and the injury are complete upon payment such that a claim for conversion accrues with each
payment. Continental Casualty, supra at 324. Because the express language of the statute provides
that each payment is actionable, we will not engraft a contrary interpretation that revives an otherwise
stale claim if a plaintiff establishes a series of payments as opposed to an individual transaction occurred.
International Union, United Auto Aerospace and Agr Implement Workers of America-UAW v
Governor, 50 Mich App 116, 119; 212 NW2d 814 (1973).
C. Fraudulent Concealment
Plaintiff lastly argues that the statute of limitations was tolled because defendant fraudulently
concealed information from plaintiff that would have disclosed his cause of action. Specifically, plaintiff
contends that he submitted Kabanuk’s waiver for release of her account information in October 1993
and that defendant delayed its response for four months without justification. Plaintiff also emphasizes
that certain key facts were not ascertained until after the complaint was filed. Plaintiff thus concludes
that defendant’s conduct constitutes affirmative acts of misrepresentation which deprived him of material
facts pertinent to his right of action. We disagree.
A cause of action will not be barred if a plaintiff successfully proves that a defendant fraudulently
concealed his cause of action. MCL 600.5855; MSA 27A.5855 provides:
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If a person who is or may be liable for any claim fraudulently conceals the existence of
the claim or the identity of any person who is liable for the claim from the knowledge of
the person entitled to sue on the claim, the action may be commenced at any time within
2 years after the person who is entitled to bring the action discovers, or should have
discovered, the existence of the claim or the identity of the person who is liable for the
claim, although the action would otherwise be barred by the period of limitations.
To establish fraudulent concealment for the purposes of postponing the running of a limitations period, a
plaintiff must prove that the fraud was manifested by an affirmative act or misrepresentation. The
plaintiff must show that the defendant engaged in some arrangement or contrivance of an affirmative
character designed to prevent subsequent discovery. Witherspoon v Guilford, 203 Mich App 240,
248; 511 NW2d 720 (1994). Plaintiff has not made this showing.
The only material fact which plaintiff could not ascertain before February 1994 was the
existence of the forged d/b/a certificate that Kabanuk supplied to defendant. However, plaintiff’s cause
of action is based on defendant’s acceptance of a check based upon payment on a forged endorsement
not upon defendant’s acceptance of a forged certificate. See MCL 440.3419(1)(c); MSA
19.3419(1)(c). To that end, plaintiff had all the pertinent facts necessary to establish a colorable claim
for conversion in October 1993, i.e., before or simultaneously with the time he submitted Kabanuk’s
waiver for release of information to defendant. By that time, plaintiff had obtained Kabanuk’s
confession of her embezzlement scheme, copies of the stolen checks from the insurance companies that
issued them, and learned that defendant accepted these checks over a forged endorsement. In fact, it
was based on this information that plaintiff submitted Kabanuk’s written release to defendant.
Thus, because plaintiff was fully aware that defendant had paid checks with a forged
endorsement before or simultaneously with his submission of the release, we conclude that he had
obtained sufficient facts to bring a conversion action pursuant to MCL 440.3419(1)(c); MSA
19.3419(1)(c) and that defendant’s delay in responding to plaintiff was not an affirmative act of
misrepresentation that justifies tolling the statute of limitations under MCL 600.5855; MSA 27A.5855.
IV. BREACH OF WARRANTY
Plaintiff next challenges the circuit court’s dismissal of his breach of warranty claim that is based
on the implied warranties provided in MCL 440.3417; MSA 19.3417 and MCL 440.4207; MSA
19.4207. The circuit court held that defendant made no warranties, express or implied, to plaintiff. We
agree and affirm.
The express language of the UCC imposes certain implied warranties in connection with
negotiable instruments. Plaintiff relies upon the implied warranties imposed by §§ 3417 and 4207.
However, plaintiff’s argument misconstrues the language of the statute. The warranties in §3417
generally provide that the transferor of the instrument warrants to the transferee that he or she has
good title to the instrument and that all signatures are authorized.8 MCL 440.3417(2); MSA
19.3417(2). Under these facts only Kabanuk is the transferor of the instruments. Similarly, the
warranties in §4207 generally provide that a customer or collecting bank warrants to the payor bank or
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payor that he or she has good title and presents an instrument with authorized signatures.9 MCL
440.4207; MSA 19.4207. Again, under these facts only Kabanuk, as the customer, has made implied
warranties to defendant, the payor bank. Plaintiff’s business was the payee on the checks stolen by
Kabanuk. Neither section creates an express warranty running from a transferee or payor bank to the
payee. See Matco Tools Corp v Pontiac State Bank, 614 F Supp 1059, 1060-1061 (ED Mich,
1985); see also National Surety Corp v Citizens State Bank, 41 Colo App 580; 593 P2d 362
(1978), aff’d 199 Colo 497 (1980). Therefore, the circuit court properly dismissed plaintiff’s breach of
warranty claim.
Plaintiff nevertheless urges this Court to adopt Judge Kelly’s reasoning in his dissenting opinion
in Continental Casualty. Continental Casualty, supra at 326. In his dissent, Judge Kelly advocated
for allowing a payee to pursue a claim under an “implied contract” theory in order to avail himself of the
six-year statute of limitations authorized for contract actions. Id. at 327. However, Judge Kelly later
recognized in his concurrence to INA that his dissent in Continental Casualty was incorrect such that
an implied contract theory would still be subject to a three-year period of limitation. INA, supra at 285.
More significant, Judge Kelly was interpreting the language in §3419 of the UCC which stated that a
collecting bank “would not be liable in conversion or otherwise” if it acted in good faith and in
accordance with reasonable commercial standards. Continental Casualty, supra at 327; MCL
440.3419(3); MSA 19.3419(3) (emphasis added). For purposes of this case, we need not address the
propriety of this interpretation because plaintiff’s warranty action is brought pursuant to §§3417 and
4207.
Instead, we adopt the reasoning of the majority in Continental Casualty, which stated as we
do today, that: “The implied warranty of good title runs from a customer or collecting bank who obtains
payment or acceptance of an item or transfers an item for value to each subsequent payor bank or
other payor who, in good faith, pays or accepts the item. Since here plaintiff is a payee and not a
payor of the item, plaintiff has no cause of action based on this theory.” Continental Casualty, supra
at 325.
IV. DISCOVERY
Plaintiff lastly challenges the circuit court’s decision to grant defendant’s motion for a protective
order. The court held that plaintiff’s request for all documentation related to defendant’s losses due to
forged endorsements was overbroad and unduly burdensome, and issued a protective order precluding
their discovery. Plaintiff argues that the court abused its discretion because the information was relevant
to ascertaining whether defendant had knowledge that its practices were inadequate and therefore
consistent with reasonable banking standards. We disagree.
A trial court’s decision regarding a discovery matter is reviewed for an abuse of discretion.
SCD Chemical Distributors, Inc v Medley, 203 Mich App 374, 382; 512 NW2d 86 (1994).
Plaintiff requested copies of files regarding any and all forged endorsement cases or claims that the bank
may have experienced. Irrespective of any possible relevancy that these materials might have, plaintiff
has not presented evidence that overrides defendant’s evidence substantiating its claim that satisfying the
request would have been unduly burdensome. Specifically, defendant presented evidence to the circuit
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court that the information sought by plaintiff would require pulling and copying files from 169 branches.
Accordingly, the court did not abuse its discretion in granting the protective order.
Our conclusion is further supported by the fact that the court allowed plaintiff to depose
defendant’s branch managers regarding compliance with the bank’s policy to avoid acceptance of
forged endorsements and also ordered defendant to produce a copy of its Corporate Security Manual
and “criminal referrals for the period between 1989 and 1993” for in-camera review, along with a job
description of defendant’s vice-president of Corporate Security.
We reverse in part, affirm in part, and remand for proceedings consistent with this opinion. No
costs may be taxed, neither party having prevailed in full.
/s/ Robert P. Young, Jr.
/s/ Clifford W. Taylor
/s/ Richard C. Livo
1
Plaintiff originally brought suit against Jill Kabanuk, First Federal of Michigan, and Standard Federal
Bank. Jill Kabanuk died shortly after the complaint was filed and was later dismissed from the action.
Also, plaintiff’s claims with First Federal of Michigan have been resolved and are not part of this appeal.
“Defendant” hereinafter refers solely to Standard Federal Bank.
2
The 1987 charges alleged that Kabanuk presented an altered check resulting in a $6,000.00 credit to
her cash reserve account with a bank, and a fraudulent death certificate to a credit card company
resulting in the company’s forgoing a collection action against the allegedly deceased individual.
3
Michigan law requires that any proprietor conducting under an assumed name must obtain such a
certificate to identify the name of the business and to provide the general public with a record of the
name and address of the person conducting the business. MCL 445.1(1); MSA 19.821(1).
4
Plaintiff kept his d/b/a certificate in an unlocked file cabinet in the office.
5
This section was amended by 1993 PA 130, § 1. Although the 1993 amendment rewrote this section,
the statute prior to its amendment is applicable to this case. It provides:
(1) An instrument is converted when
(a) a drawee to whom it is delivered for acceptance refuses to return it on demand; or
(b) any person to whom it is delivered for payment refuses on demand either to pay or to return
it; or
(c) it is paid on a forged indorsement.
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(2) In an action against a drawee under subsection (1) the measure of the drawee's liability is the
face amount of the instrument. In any other action under subsection (1) the measure of liability
is presumed to be the face amount of the instrument.
(3) Subject to the provisions of this act concerning restrictive indorsements a representative,
including a depository or collecting bank, who has in good faith and in accordance with the
reasonable commercial standards applicable to the business of such representative dealt with an
instrument or its proceeds on behalf of one who was not the true owner is not liable in
conversion or otherwise to the true owner beyond the amount of any proceeds remaining in his
hands.
(4) An intermediary bank or payor bank which is not a depository bank is not liable in conversion
solely by reason of the fact that proceeds of an item indorsed restrictively (sections 3205 and
3206) are not paid or applied consistently with the restrictive indorsement of an indorser other
than its immediate transferor. [MCL 440.3419; MSA 440.3419.]
6
Plaintiff’s reliance on the holdings in Lemmerman and Stephens is misplaced. Those cases provide
no analyses that support plaintiff’s argument. In fact, both cases indicate the Supreme Court’s
reluctance to extend the scope of the rule’s application. The Lemmerman Court rejected application of
the discovery rule for intentional tort claims of assault and battery and intentional infliction of emotional
distress based on sexual abuse that was discovered from repressed memories. Lemmerman, supra at
74-75. The Supreme Court also rejected application of the discovery rule in cases of ordinary
negligence where a plaintiff later discovers the severity of a known injury. Stephens, supra at 537-538.
7
In so holding we reject plaintiff’s contention that the UCC recognizes the discovery rule based on the
language in another part of the statute that an action for breach of warranty accrues when the person
should have known of the breach. See MCL 440.3417(6); MCL 19.3417(6). This provision was
added by a recent amendment that went into effect after the events in this case had already transpired.
See 1993 PA 130, § 1. Furthermore, that provision does not appear in the statutory basis for plaintiff’s
conversion action, § 3419, as amended or before its amendment. The omission of a provision in one
part of a statute that is included in another part is construed as an intentional omission. See Farrington
v Total Petroleum, Inc, 442 Mich 201, 210; 501 NW2d 76 (1993); Gazette v City of Pontiac, 212
Mich App 162, 169; 536 NW2d 854 (1995), remanded on other grounds, 453 Mich 973 (1996).
8
This section was amended by 1993 PA 130, § 1. Although the 1993 amendment rewrote this
section, the statute prior to its amendment is applicable to this case. It provides:
(1) Any person who obtains payment or acceptance and any prior transferor warrants to a person
who in good faith pays or accepts that
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(a) he has a good title to the instrument or is authorized to obtain payment or acceptance on
behalf of one who has a good title; and
(b) he has no knowledge that the signature of the maker or drawer is unauthorized, except that
this warranty is not given by a holder in due course acting in good faith
(i) to a maker with respect to the maker's own signature; or
(ii) to a drawer with respect to the drawer's own signature, whether or not the drawer
is also the drawee; or
(iii) to an acceptor of a draft if the holder in due course took the draft after the
acceptance or obtained the acceptance without knowledge that the drawer's
signature was unauthorized; and
(c) the instrument has not been materially altered, except that this warranty is not given by a
holder in due course acting in good faith
(i) to the maker of a note; or
(ii) to the drawer of a draft whether or not the drawer is also the drawee; or
(iii) to the acceptor of a draft with respect to an alteration made prior to the acceptance
if the holder in due course took the draft after the acceptance, even though the
acceptance provided 'payable as originally drawn' or equivalent terms; or
(iv) to the acceptor of a draft with respect to an alteration made after the acceptance.
(2) Any person who transfers an instrument and receives consideration warrants to his transferee
and if the transfer is by indorsement to any subsequent holder who takes the instrument in good
faith that
(a) he has a good title to the instrument or is authorized to obtain payment or acceptance on
behalf of one who has a good title and the transfer is otherwise rightful; and
(b) all signatures are genuine or authorized; and
(c) the instrument has not been materially altered; and
(d) no defense of any party is good against him; and
(e) he has no knowledge of any insolvency proceeding instituted with respect to the maker or
acceptor or the drawer of an unaccepted instrument.
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(3) By transferring 'without recourse' the transferor limits the obligation stated in subsection (2)(d)
to a warranty that he has no knowledge of such a defense.
(4) A selling agent or broker who does not disclose the fact that he is acting only as such gives the
warranties provided in this section, but if he makes such disclosure warrants only his good faith
and authority. [MCL 440.3417; MSA 19.3417].
9
This section was amended by 1993 PA 130, § 1. Although the 1993 amendment rewrote this section,
the statute prior to its amendment is applicable to this case. It provides:
(1) Each customer or collecting bank who obtains payment or acceptance of an item and each prior
customer and collecting bank warrants to the payor bank or other payor who in good faith pays
or accepts the item that
(a) he has a good title to the item or is authorized to obtain payment or acceptance on behalf of
one who has a good title; and
(b) he has no knowledge that the signature of the maker or drawer is unauthorized, except that
this warranty is not given by any customer or collecting bank that is a holder in due course
and acts in good faith
(i) to a maker with respect to the maker's own signature; or
(ii) to a drawer with respect to the drawer's own signature, whether or not the drawer
is also the drawee; or
(iii) to an acceptor of an item if the holder in due course took the item after the
acceptance or obtained the acceptance without knowledge that the drawer's
signature was unauthorized; and
(c) the item has not been materially altered, except that this warranty is not given by any
customer or collecting bank that is a holder in due course and acts in good faith
(i) to the maker of a note; or
(ii) to the drawer of a draft whether or not the drawer is also the drawee; or
(iii) to the acceptor of an item with respect to an alteration made prior to the acceptance
if the holder in due course took the item after the acceptance, even though the
acceptance provided 'payable as originally drawn' or equivalent terms; or
(iv) to the acceptor of an item with respect to an alteration made after the acceptance.
-17
(2) Each customer and collecting bank who transfers an item and receives a settlement or other
consideration for it warrants to his transferee and to any subsequent collecting bank who takes
the item in good faith that
(a) he has a good title to the item or is authorized to obtain payment or acceptance on behalf of
one who has a good title and the transfer is otherwise rightful; and
(b) all signatures are genuine or authorized; and
(c) the item has not been materially altered; and
(d) no defense of any party is good against him; and
(e) he has no knowledge of any insolvency proceeding instituted with respect to the maker or
acceptor or the drawer of an unaccepted item.
In addition each customer and collecting bank so transferring an item and receiving a
settlement or other consideration engages that upon dishonor and any necessary notice of
dishonor and protest he will take up the item.
(3) The warranties and the engagement to honor set forth in the 2 preceding subsections arise
notwithstanding the absence of indorsement or words of guaranty or warranty in the transfer or
presentment and a collecting bank remains liable for their breach despite remittance to its
transferor. Damages for breach of such warranties or engagement to honor shall not exceed the
consideration received by the customer or collecting bank responsible plus finance charges and
expenses related to the item, if any.
(4) Unless a claim for breach of warranty under this section is made within a reasonable time after
the person claiming learns of the breach, the person liable is discharged to the extent of any loss
caused by the delay in making claim.
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