Three-Year Limitations Period Governs Bank Customer’s Suit for Misapplied Deposits – IL First Dist.

Now we can add PSI Resources, LLC v. MB Financial Bank (2016 IL App (1st) 152204) to the case canon of decisions that harmonize conflicting statutes of limitations and show how hard it is for a corporate account holder to successfully sue its bank.

The plaintiff, an assignee of three related companies**, sued the companies’ bank for misapplying nearly $400K in client payments over a several-year period.  The bank moved to dismiss, arguing that plaintiff’s suit was time-barred by the three-year limitations period that governs actions based on negotiable instruments.***  The court dismissed the complaint and the plaintiff appealed.

Held: Affirmed

Reasons:

The key question was whether the Uniform Commercial Code’s three-year limitations period for negotiable instrument claims or the general ten-year period for breach of written contract actions applied to the plaintiff’s negligence suit against the bank.  The issue was outcome-determinative since the plaintiff didn’t file suit until more than three years passed from the most recent misapplied check.

Illinois applies a ten-year limitations period for actions based on breach of written contract.  735 ILCS 5/13-206.  By contrast, an action based on a negotiable instrument is subject to the shorter three-year period.  810 ILCS 5/4-111.

If the subject of a lawsuit is a negotiable instrument, the UCC’s three-year time period applies since UCC Article 4 actions based on conversion and Article 3 suits for improper payment both involve negotiable instruments.  810 ILCS 5/3-118(g)(conversion); 810 ILCS 5/4-111 (improper payment).

Rejecting plaintiff’s argument that this was a garden-variety breach of contract action to which the ten-year period attached, the court held that since plaintiff’s claims were essentially based on banking transactions, the three-year limitations period for negotiable instruments governed. (¶¶ 36-38)

Where two statutes of limitations arguably apply to the same cause of action, the statute that more specifically relates to the claim applies over the more general statute.  While the ten-year statute for breach of written contracts is a general, “catch-all” limitations period, section 4-111’s three-year rule more specifically relates to a bank’s duties and obligations to its customers.

And since the three-year rule was more specific as it pertained to the plaintiff’s improper deposit and payment claims, the shorter limitations period controlled and plaintiff’s suit was untimely.

The court also sided with the bank on policy grounds.  It stressed that the UCC aims to foster fluidity and efficiency in commercial transactions.  If the ten-year period applied to every breach of contract action against a bank (as plaintiff argued), the UCC’s goal of promoting commercial finality and certainty would be frustrated and possibly bog down financial deals.

The other plaintiff’s argument rejected by the court was that the discovery rule saved the plaintiff’s lawsuit.  The discovery rule protects plaintiffs who don’t know they are injured.  It suspends (tolls) the limitations period until a plaintiff knows or should know he’s been hurt.  The discovery rule standard is not subjective certainty (“I now realize I have been harmed,” e.g.).  Instead, the rule is triggered where “the injured person becomes possessed of sufficient information concerning his injury and its cause to put a reasonable person on inquiry to determine whether actionable conduct is involved.” (¶ 47)

Here, the evidence was clear that plaintiff’s assigning companies received deposit statements on a monthly basis for a several-year period.  And the monthly statements contained enough information to put the companies on notice that the bank may have misapplied deposits.  According to the court, these red flags should have motivated the plaintiff to dig deeper into the statements’ discrepancies.

Take-aways:

This case suggests that an abbreviated three-year limitations period applies to claims based on banking transactions; even if a written contract – like an account agreement – is the foundation for a plaintiff’s action against a bank.  A plaintiff with a possible breach of contract suit against his bank should take great care to sue within the three-year period when negotiable instruments are involved.

Another case lesson is that the discovery rule has limits.  If facts exist to put a reasonable person on notice that he may have suffered financial harm, he will be held to a shortened limitations period; regardless of whether he has actual knowledge of harm.

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**  The court took judicial notice of the Illinois Secretary of State’s corporate registration database which established that the three assigned companies shared the same registered agent and business address.

*** 810 ILCS 5/3-104 (“negotiable instrument” means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it: (1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder (2) is payable on demand or at a definite time; and (3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.)

 

UCC Bars Bank Customer Suit Versus Bank For Estranged Husband’s Unauthorized Account Withdrawals

Kaplan v. JPMorgan Chase Bank, NA (2015 WL 2358240 (N.D.Ill. 2015)), starkly illustrates the challenges a bank customer faces when trying to pin liability on a bank that pays out on a fraudulent transaction involving the customer’s account.  There, the plaintiff bank customer sued JPMorgan Chase for breach of contract and negligence after the plaintiff’s estranged husband was able to siphon about $1M from two of plaintiff’s accounts over an 18-month period starting in 2009.  Plaintiff filed suit in 2014.

The plaintiff claimed the bank breached its contractual obligations and its duty of care by allowing the husband to forge plaintiff’s name on two account signature cards which enabled him to transfer the money from the accounts behind plaintiff’s back.

The Northern District granted summary judgment for the bank and in doing so, provides a good primer on a bank customer’s duties to monitor account statements and the reach of a bank’s liability for unauthorized withdrawals from a customer’s account.

Summary judgment Standards

To defeat summary judgment, a plaintiff must show there is a genuine disputed material fact that can only be resolved after a full trial on the merits

A disputed fact is “material” if it might affect the outcome of the case. A dispute is “genuine” where the evidence is such that a reasonable jury could return a verdict for the nonmoving party.

The moving party has the initial burden of showing that it is entitled to judgment as a matter of law and can make this showing by establishing that the other party has no evidence on an issue that it has the burden of proof.

Once the moving party meets this burden, the nonmovant must come forward with specific facts that demonstrate there is a genuine issue for trial and may not rely on conclusions, allegations or a “scintilla” (a trace or spark http://www.merriam-webster.com/dictionary/scintilla) of evidence to show that facts exist that will defeat summary judgment.

The Bank-Customer Contractual Relationship

The signature card defines the relationship between plaintiff and the bank defendant. A contract between a bank and its depositor is created by signature cards and a deposit agreement.

The signature card here incorporated Account Rules and Regulations (“Account Rules”) by reference.  These Rules, in turn, required the Plaintiff to notify the bank of any errors or unauthorized items within 30 days of the date on which the error or unauthorized item was made available to the plaintiff. If the plaintiff failed to do so within that 30-day window, the error or item would be enforceable against her.

The unauthorized transfers occurred over an 18 month time span starting in 2009 and ending in 2011. But the plaintiff didn’t notify the bank until nearly a year later in April 2012. As a result, the plaintiff missed the Account Rules’ 30-day time limit.

The UCC – Article 4

Plaintiff’s claims were also too late under the Uniform Commercial Code (UCC).  Section 4-406 of the UCC provides that where a bank makes a statement available to a customer, the customer must exercise “reasonable promptness” in notifying the bank of any errors. This section also immunizes a bank from liability where it pays in good faith on an unauthorized signature or alteration and the customer doesn’t notify the bank within a reasonable time, “not exceeding 30 days.” 4-406(c)-(d)

The UCC contains a one-year repose period, too. Section 4-406(f) provides that regardless of whether a bank exhibits a lack of care in paying an item, if a customer fails to notify the bank of an unauthorized signature or alteration within one year of a statement being made available, the customer’s claim is barred.

The court held that since the bank filed affidavits stating that plaintiff had free on-line access to her accounts on a monthly basis, the bank “made available” the account information under the UCC. The court held making account information available under 4-406(c) did not require a customer’s physical receipt of the statements.

Turning to whether the bank exhibited good faith in allowing the plaintiff’s husband to withdraw nearly $1M from the accounts, the court noted that good faith is defined by the UCC as “honesty in fact and the observance of reasonable commercial standards of fair dealing.” UCC 3-103(a)(4). Since the plaintiff came forth with no evidence that the bank knew either that the signature cards were forged by the husband or that he lacked authority to add himself as an account signer, there was no showing that the bank lacked good faith.

UCC Article 3

Another UCC section that barred the plaintiff’s claims was 3-118(g). This section provides a 3 year limitations period for claims involving conversion of an instrument, breach of warranty or to enforce any other UCC rights not covered by another section.

The discovery rule – a judge-made rule that delays the start of a statute of limitations until an injured plaintiff knows or reasonably should know she has been injured – doesn’t apply to claims that fall within 3-118(g). This is because applying a discovery rule to an unauthorized monetary transaction would undermine the UCC’s stated goals of finality, predictability, uniformity and efficiency in commercial transactions.

Take-aways:

1/ A bank defendant has an arsenal of statutory defenses under the UCC to actions brought by customers;

2/ The UCC’s goals of fostering fluidity in commercial transactions trumps any opposing claims of individual customers;

3/  Harmed bank customers will at least have a chance to defraying her economic damages by vigilantly reviewing account statements and promptly notifying her bank within 30 days of any statement discrepancies.

Five-Year Limitations Period to Sue Dissolved Corporation Applies to Piercing Corporate Veil Suit – IL Court

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Peetom v. Swanson, 334 Ill.App.3d 523 (2nd. Dist. 2002) provides a dated yet instructive recitation of the statute of limitations standards that govern corporate veil piercing actions in Illinois.

The case’s relevant chronology includes: (1) Plaintiff filed a negligence action in 1995 against a corporate defendant for injuries plaintiff suffered in 1993, (2) In May 1997 – the corporate defendant was defaulted; (3) In June 1998, the corporate defendant was involuntarily dissolved by the Illinois Secretary of State for failure to file a report and pay its taxes, (4) In November 1998, a $1M money judgment entered against corporate defendant; and (5) in 2000, plaintiff filed suit against corporate shareholders under a veil piercing theory to enforce the 1998 default judgment.

The trial court dismissed the suit as untimely under the two-year limitations period for personal injury actions and the plaintiff appealed.

Held: Reversed.

Q: Why?

A: The case involves the interplay between three limitations periods in the Code of Civil Procedure.  Section 13-202 sets forth a two-year limitations period for personal injury claims, Section 12.80 of the Business Corporation Act requires a claim against a dissolved corporation (or its shareholders and directors) to be brought within five years after dissolution, and Code Section 12-108 provides for a seven-year period to enforce a judgment.  735 ILCS 5/13-202, 815 ILCS 5/12.80, 735 ILCS 5/12-108.

Since piercing the corporate veil is an equitable remedy and not a cause of action, the limitations period applicable to a piercing claim is governed by the nature of the underlying cause of action.  The question is “which underlying action?”  The 1995 negligence suit or the 2000 action to enforce the money judgment against the corporate shareholders?

The court rejected the shareholder defendants’ argument that the 1995 case was the underlying claim and that the two-year period for personal injury suits applied.  The court found that plaintiff’s 2000 piercing action, which sought to affix liability to the shareholder defendants for the $1M money judgment against the corporation, was the underlying claim for purposes of applying the statute of limitations.  The court found that in the 2000 case, Plaintiff was not alleging negligence against the shareholders but was instead trying to enforce the 1998 judgment assessed against the dissolved corporation.  As a result, Plaintiff would normally have seven years – through November 2005 – to sue on the money judgment.

However, since the corporate defendant was dissolved, the five-year period for suing a dissolved corporation and its shareholders based on pre-dissolution debts applied.  Plaintiff’s piercing suit was still timely though.  The judgment entered in 1998 and plaintiff filed suit in 2000 – well within the five-year period.

The other argument the First District rejected was defendant’s claim that the five-year period to sue a defunct corporation didn’t apply since at the time the corporation was dissolved, the plaintiff’s claim hadn’t yet been reduced to judgment and so plaintiff didn’t have an existing claim prior to the dissolution.

The court disagreed and found that since the corporation had been defaulted in 1997 – prior to the 1998 dissolution – the plaintiff’s claim against the corporation had already been deemed valid even though the plaintiff’s money claim wasn’t mathematically certain until after the company dissolved.  As a consequence, plaintiff had a pre-existing claim against the corporation under the Illinois BCA to trigger application of the five-year limitations period.

Afterwords:

An obvious pro-creditor decision.  The case stands for proposition that in a judgment creditor’s action against corporate shareholders to pierce the corporate veil after an earlier, unsatisfied judgment against a corporation, the seven-year limitations period to enforce a judgment applies.  The only reason the five-year period applied here was because of the specific BCA section (815 ILCS 5/12.80) that speaks to suing dissolved corporations.

Still, the plaintiff’s suit was timely as he filed well before the 2003 deadline.  Had the defendant prevailed, the plaintiff’s claim would have been barred if he didn’t sue in 1995 – two years after plaintiff’s underlying personal injury.