Tuesday, April 17, 2012

Client, Not Bank, Responsible for Not Identifying Evidence of of Embezzlement

Court of Appeals Holds Client, and Not Bank, Responsible
For Not Recognizing Evidence of Embezzlement Scheme

        A recent ruling of the Kentucky Court of Appeals held that the customer of the bank, and not the bank, would bear responsibility for not recognizing the evidence of an employee’s embezzlement.   Dean v. Commonwealth Bank & Trust Co., 2012 WL 1137907 (Ky. App. April 6, 2012). 
      Mark D. Dean, PSC (“Dean”) maintained a banking account with Commonwealth Bank & Trust Co.  Both Mark Dean and his bookkeeping/secretary, Jody Willis, were signatories on the Commonwealth account; only one signature was required to effect transactions in the account.  The Deposit Account Agreement provided that the client is “responsible for promptly examining your statement each statement period and reporting any irregularities to [Commonwealth].”  Willis thereafter began a check-kiting scheme, and in furtherance thereof began diverting the monthly bank statements to preclude Mark Dean from reviewing them and thereby learning of her activities.

      Responding to indications of suspicious activity in the account, and at Commonwealth’s request, Mark Dean held a meeting with them in February 2005; activity in the account ceased the following month.  In September 2008, law enforcement contacted Mark Dean regarding Willis’ unlawful activities.  In January 2009, Dean filed suit against the bank, alleging that it aided and abetted the illegal activity, breached its duty of care, committed common law negligence and breach of contract, and violated its duty of good faith and fair dealing.  Ultimately, Commonwealth was granted summary judgment on all of the claims against it, from which Dean appealed.

      The summary judgments in favor Commonwealth were upheld.
      Dean relied upon KRS § 355.4-111, in setting forth a general three-year statute of limitations that, combined with a discovery rule, he asserted it allowed him to pursue his claims against the Commonwealth.  The Court reject that analysis, holding that KRS § 355.4-406 controlled.  Under that statute, the customer has a duty to examine bank statements in a prompt and reasonable manner and “must exercise reasonably promptness in examining the statement of the items to determine whether any payment was unauthorized” and then “the customer must promptly notify the bank of the relevant facts.”  KRS § 355.4-406(3).  The statute goes on to require that the customer act within a year or waive any right from moving against the bank with respect to a transaction effective pursuant to the unauthorized signature or alteration.  KRS § 355.4-406(6).  Citing as well Concrete Materials Corp. v. Bank of Danville & Trust Co., 938 S.W.2d 254 (Ky. 1997), the Court found that any of Dean’s claims against the bank were barred by the failure to act within one year of the receipt of the statements from which evidence of the illegal activity could have been ascertained.  “Dean’s dilatoriness is an inadequate basis for concluding that it could not reasonably discover the unauthorized payments.”  2012 WL 1137907, *5.
      In addition, the Court of Appeals noted that from 2006, the official comments to the UCC are adopted as expressing the legislative intent of the Kentucky General Assembly.  Consequently, “it behooves both bench and bar to read these official comments in their entirety.”  2012 WL 1137907, *3, fn. 1.

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