Bank not liable for more than $500,000 of forged checks

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Two companies that were embezzled out of a half-million dollars sued the bank that processed more than 100 forged checks but couldn’t prove negligence to the Indiana Court of Appeals.  

Angela Kincaid, an employee working for both EngineAir, Inc., and JMA Rail Products, Inc., was convicted of stealing more than $500,000 from the companies’ bank accounts at Centra Credit.

Citing to Indiana’s version of the Uniform Commercial Code and common law negligence, the companies argued that Centra Credit “failed to act with ordinary care when it cashed over 105 fraudulent checks written by Kincaid on EngineAir’s, JMA’s, and other related entities’ accounts.”

Their complaint was dismissed by the Jackson Superior Court for failure to state a claim pursuant to Indiana Trial Rule 12(B)(6). Both companies argued the trial court erred when it dismissed their complaint, determining that as the depositary bank, Centra Credit owed the companies no duty of care as a matter of law for the loss sustained, and that the UCC created no warranty or statutory obligation for Centra Credit to the companies.

The companies also argued Centra Credit failed to report Kincaid’s extreme banking activity as suspicious.

The Indiana Court of Appeals used a three-part balancing test to determine that Centra Credit owed no duty to the companies under UCC Section 3.1-405 which finds that “the risk of loss for fraudulent indorsements by employees who are entrusted with responsibility with respect to checks should fall on the employer rather than the bank that takes the check or pays it, if the bank was not negligent in the transaction.”

The appellate court also found that imposing a duty of reasonable care on Centra Credit, as a depositary bank, to monitor checks with forged signatures, would place it in the position of being an insurer for noncustomers unfortunate enough to hire thieves and embezzlers.

Both companies contend that Centra Credit’s failure to comply with the reporting requirements of the Bank Secrecy Act resulted in the loss, because had those reports been filed, the companies could have stopped Kincaid’s embezzlement sooner.

But the appellate court found that the bank’s failure to file such reports, if any, would not support the companies’ cause of action because there can be no private right of action for violation of the Bank Secrecy Act.

“We find that under the facts of this case, the UCC has displaced any cause of action that the Companies may have against Centra Credit,” Judge James Kirsch wrote for the court in EngineAir, Inc. and JMA Rail Products, Inc. v. Centra Credit Union, 36A01-1709-CT-2177. “Because the Companies have alleged no theory under which Centra Credit could be liable for the loss the Companies sustained from Kincaid’s forged checks, we affirm the trial court’s grant of Centra Credit’s motion to dismiss for failure to state a claim.”

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