Halifax Corp. v. Wachovia Bank

Present: Hassell, C.J., Kinser and Lemons, JJ., and Carrico
and Russell, S.JJ.

HALIFAX CORPORATION
OPINION BY
v. Record No. 032444 SENIOR JUSTICE HARRY L. CARRICO
November 5, 2004
WACHOVIA BANK

FROM THE CIRCUIT COURT OF FAIRFAX COUNTY
Leslie M. Alden, Judge

Introduction

In the period from August 1995 to February 1999, Mary K.

Adams embezzled approximately $15.4 million while serving as

comptroller for companies that are now known as Halifax

Corporation (Halifax).1 Adams accomplished the embezzlement by

writing more than 300 checks on Halifax’s account with Signet

Bank and its successor, First Union National Bank

(collectively, First Union). Adams used a stamp bearing the

facsimile signature of Halifax’s president and, in her own

handwriting, made the checks payable to herself, to companies

she had formed, or to cash. She deposited the checks in

several accounts she maintained with Central Fidelity Bank and

its successor, Wachovia Bank (collectively, Wachovia),

receiving cash from some of the checks.

1
Halifax Corporation is a Virginia corporation and is
successor-in-interest to a former wholly owned subsidiary,
Halifax Technology Services Company, previously known as CMS
Automation, Inc. Hereinafter, we will refer to the three
entities collectively as Halifax.
 Procedural Background

Upon discovery of the embezzlement, Halifax brought an

action against First Union as the drawee bank and Wachovia as

the depositary bank. (Halifax I.) The trial court granted

summary judgment in favor of First Union. Halifax then took a

nonsuit of the action against Wachovia and appealed to this

Court from the order dismissing First Union. We affirmed the

dismissal, holding that Halifax’s claim was barred pursuant to

Code § 8.4-406(f), part of the Uniform Commercial Code

(hereinafter, UCC), for Halifax’s failure to notify First

Union of the unauthorized signatures within one year after the

bank’s statement covering the checks in question was made

available to Halifax. Halifax Corp. v. First Union Nat’l

Bank, 262 Va. 91, 104, 546 S.E.2d 696, 704 (2001).

While the appeal to this Court was pending, Halifax filed

in the court below a three-count motion for judgment asserting

that Wachovia and First Union were liable to Halifax for the

amounts embezzled by Adams. (Halifax II.) Count I alleged

negligence, gross negligence, and bad faith on the part of

Wachovia in violation of Code §§ 8.3A-404, -405, and –406.

Count II alleged common law conversion by Wachovia and First

Union. Count III alleged that Wachovia and First Union aided

and abetted Adams’ breach of fiduciary duty.

2
 The trial court dismissed the claims against First Union

on the ground of res judicata. This Court refused Halifax’s

petition for appeal from that dismissal. Halifax Corp. v.

First Union Nat’l Bank, March 5, 2002 (Record No. 012582).

Wachovia moved for summary judgment on Halifax’s claims

against it. The trial court granted the motion, holding,

contrary to Halifax’s contention, that Code § 8.3A-406 does

not create an affirmative cause of action, that Halifax’s

common law claim for conversion had been displaced by Code

§ 8.3A-420(a), and that Halifax had failed to allege

sufficient facts to state a cause of action for aiding and

abetting Adams’ breach of fiduciary duty, assuming such an

action exists. From the final order embodying these holdings

and granting final judgment in favor of Wachovia, we awarded

Halifax this appeal.

Factual Background

Since the trial court disposed of the case by granting

Wachovia’s motion for summary judgment, we will adopt those

inferences from the facts that are most favorable to Halifax,

the nonmoving party, unless the inferences are strained,

forced, or contrary to reason. Carson v. LeBlanc, 245 Va.

135, 139-40, 427 S.E.2d 189, 192 (1993). The facts as alleged

in Halifax’s motion for judgment show that Mary Adams, also

known as Mary Collins, became comptroller at Halifax’s

3
Richmond office in August 1995 and continued in that position

until March 1999. She maintained four personal and two

commercial accounts with Wachovia. One of the commercial

accounts was styled “Collins Racing, Inc.” and the other

“Collins Ostrich Ranch.”

When Adams first began embezzling money from Halifax in

August 1995, she deposited in her personal accounts with

Wachovia several checks each month for over $5,000.00. The

amounts of the checks soon increased to between $10,000.00 and

$15,000.00 each and before long to amounts ranging from

$50,000.00 to $150,000.00 each, and deposits were made

multiple times a day or week. For example, in July 1997,

Adams deposited on July 9 a check for $95,550.00, on July 14,

one check for $55,000.00 and another for $99,300.00, on July

16, a check for $93,500.00, on July 21, a check for

$80,600.00, and, on July 30, a check for $149,305.00, totaling

$573,255.00. In all, Adams drew 328 checks totaling

$15,429,665.42 on Halifax’s account with First Union.

Adams was “one of the best and largest individual

customers” of Wachovia’s branch where she did business.

Managers and tellers saw Adams “ ‘a lot,’ and she stood out

because of her large checks and banking activity.” The entire

branch was curious about her “because of her large checks,”

the likes of which “none of the tellers had ever seen . . .

4
before.” Some tellers claimed “to have believed or assumed

that Adams ‘was at least part owner’ of the corporate drawer.”

Wachovia “repeatedly accepted such huge handwritten

checks drawn on the account of Adams’ employer despite the

gross disparity with Adams payroll amount [of about $1,000.00

per pay period] shown on each teller and manager screen.” The

tellers “had concerns about individual checks or the check

activity, or both.” Bank officials knew Adams was Halifax’s

comptroller and understood that “such transactions by a

financial officer, or even a part owner, present[ed] a serious

potential for fraud.” Yet, branch “[m]anagers and supervisors

told the tellers to do whatever Adams wanted.”

Discussion

Negligence, Gross Negligence, and Bad Faith

Halifax contends that Code § 8.3A-406, when read in light

of Code §§ 8.3A-404 and –405, gives rise to an affirmative

cause of action for the negligence of a depositary bank with

respect to the alteration of an instrument or the making of a

forged signature. These sections were part of the General

Assembly’s 1992 revision of the UCC. 1992 Acts Ch. 693.

It should be noted at this point, however, that the trial

court stated in a footnote to its order granting Wachovia’s

motion for summary judgment that Halifax did “not contest

Wachovia’s motion as to Halifax’s claims under Va. Code 8.3A-

5
404 and 405,” and Halifax does not now press those claims.

Hence, we will consider Code §§ 8.3A-404 and –405 only in the

context of Halifax’s argument that they are pertinent to the

question whether Code § 8.3A-406 creates an affirmative cause

of action for the negligence of a depositary bank under the

circumstances of this case.

Code § 8.3A-406 provides as follows:

Negligence, contributing to forged signature or
alteration of instrument. — (a) A person whose failure to
exercise ordinary care substantially contributes to an
alteration of an instrument or to the making of a forged
signature on an instrument is precluded from asserting
the alteration or the forgery against a person who, in
good faith, pays the instrument or takes it for value or
for collection.

(b) Under subsection (a), if the person asserting
the preclusion fails to exercise ordinary care in paying
or taking the instrument and that failure substantially
contributes to loss, the loss is allocated between the
person precluded and the person asserting the preclusion
according to the extent to which the failure of each to
exercise ordinary care contributed to the loss.

(c) Under subsection (a), the burden of proving
failure to exercise ordinary care is on the person
asserting the preclusion. Under subsection (b), the
burden of proving failure to exercise ordinary care is on
the person precluded.

Code § 8.3A-404(a) deals with an instrument issued to an

impostor or to a person acting in concert with the impostor.

Subsection (b) deals with an instrument whose payee is

fictitious or not the person intended to have an interest in

the instrument by the person determining to whom the

6
instrument is payable. Both subsections provide that the

indorsement of such an instrument by any person in the name of

the payee is effective as the indorsement of the payee in

favor of a person who, in good faith, pays the instrument or

takes it for value or for collection.

Code § 8.3A-405 deals with the situation where an

employer entrusts an employee with responsibility with respect

to an instrument and the employee or a person acting in

concert with the employee makes a fraudulent indorsement of

the instrument. For a person who, in good faith, pays an

instrument or takes it for value or for collection, the

indorsement is effective as the indorsement of the person to

whom the instrument is payable if it is made in the name of

that person.

Both Code § 8.3A-404 and Code § 8.3A-405 contain an

important provision. In Code § 8.3A-404, the provision is

expressed in this language:

[I]f a person paying the instrument or taking it for
value or for collection fails to exercise ordinary care
in paying or taking the instrument and that failure
substantially contributes to loss resulting from payment
of the instrument, the person bearing the loss may
recover from the person failing to exercise ordinary care
to the extent the failure to exercise ordinary care
contributed to the loss.

(Emphasis added.) The language of Code § 8.3A-405 is

identical, except that the words “the fraud” are substituted

7
for the words “payment of the instrument” following the words

“loss resulting from” in the foregoing quotation.

In support of its contention that Code § 8.3A-406 creates

an affirmative cause of action, Halifax cites our decision in

Gina Chin & Assoc., Inc. v. First Union Bank, 256 Va. 59, 500

S.E.2d 516 (1998). That case involved both forged signatures

of the drawer and forged indorsements of the payee. The

drawer sought recovery from the depositary bank. The latter

claimed it was liable under Code §§ 8.3A-404 and –405 only for

forged indorsements and not where both the payee’s

indorsements and the drawer’s signatures are forged.

We disagreed. We stated that the depositary bank was

erroneous in “its conclusion that §§ 8.3A-404 and –405 cannot

be utilized by a drawer against the depositary bank in a

double forgery situation,” 256 Va. at 61, 500 S.E.2d at 517,

and that the drawer “was not precluded from asserting a cause

of action against [the depositary bank] pursuant to §§ 8.3 A-

404 or -405.” Id. at 63, 500 S.E.2d at 518.

Halifax quotes a passage from the Gina Chin opinion where

we stated that the “concept of comparative negligence

introduced in the revised sections reflects a determination

that all participants in the process have a duty to exercise

ordinary care . . . and that the failure to exercise that duty

will result in liability to the person sustaining the loss.”

8
Id. at 62, 500 S.E.2d at 517-18. Halifax argues that Code

§ 8.3A-406 also creates a duty of care and, therefore, that

“there exists [under Code § 3A-406] a right of action, as

expressly recognized in Gina Chin.”

It is plain, however, that the language quoted from Gina

Chin has reference solely to Code §§ 8.3A-404 and -405.

Indeed, the sentence immediately preceding the quotation

states that “[t]he revisions to §§ 8.3A-404 and –405 changed

the previous law by allowing ‘the person bearing the loss’ to

seek recovery for a loss caused by the negligence of any

person paying the instrument or taking it for value based on

comparative negligence principles.” Gina Chin, 256 Va. at 62,

500 S.E.2d at 517. Code § 8.3A-406 simply was not an issue in

the case in any manner. Gina Chin, therefore, does not serve

as authority for Halifax’s contention that Code § 8.3A-406

creates an affirmative cause of action.

Next, Halifax cites Official Comment 4 to Code § 8.3A-

406, which reads as follows:

Subsection (b) . . . adopts a concept of comparative
negligence. If the person precluded under subsection (a)
proves that the person asserting the preclusion failed to
exercise ordinary care and that failure substantially
contributed to the loss, the loss may be allocated
between the two parties on a comparative negligence
basis.

Halifax then says “[l]eading commentators recognize that

the concept of comparative negligence, duty, and loss

9
allocation provided in 3-406, like that in 3-404 and 3-405,

creates a cause of action.” Halifax quotes 2 James J. White &

Robert S. Summers, Uniform Commercial Code § 19-3 (4th ed.

1995) (hereinafter, White & Summers) to this effect:

“3-406 and the accompanying sections carry with them
something that did not exist under the old Code, namely,
a new cause of action.” Id. at 247. “This mechanism is
an affirmative cause of action for negligence under 3-
406(b)(and similar causes of action under 3-404, 3-405,
and 3-406) under which the depositor-employer recovers a
part of its loss by affirmative proof that the negligent
behavior of the defendant bank caused a portion of it.”
Id. “3-406(b) gives an affirmative cause of action.”
Id. at 248. “[T]he 1990 changes in 3-406, and the
analogous changes having to do with comparative
negligence in the other sections . . . are likely to
cause significant but subtle changes in the allocation of
civil liability.” Id. at 253.

According to Halifax, another White & Summers quotation

explains the “significance of the subtle language changes in

revised § 8.3A-406”:

[The] allocation of liability based on comparative
negligence is new, incorporated into the Code as part of
the 1990 amendments to Article[s] 3 and 4. Before the
1990 amendments, “preclusion” cases were standard
contributory negligence cases. A bank might first argue
that the customer was negligent, and the customer would
respond that the bank was contributorily negligent. If
both claims were proven, negligence would disappear from
the case and the bank would be barred from asserting the
customer’s negligence.

One consequence of adopting a comparative negligence
standard is that there will have to be wider recognition
of negligence as a basis not merely for defense
(preclusion), but also as a basis for asserting an
affirmative claim. For example, in section 3-406(a), a
depositor may be precluded from asserting alteration if
the depositor’s failure to exercise ordinary care

10
 substantially contributed to the alteration. Under 3-
406(b), the “loss is allocated” between the two parties
if the bank also failed to exercise ordinary care.
Although it does not say so in terms, the “loss
allocated” language in 3-406(b) must be interpreted to
grant an affirmative cause of action to the depositor in
our hypothetical case as a means of recovering for that
part of the loss which the bank should bear. As the
statute is written, the bank’s negligence no longer lifts
the preclusion of 3-406(a), as it did before 1990.
Rather, the bank’s negligence gives other parties a cause
of action to recover an appropriate share under 3-406(b).
In that respect, the 1990 revisions state a subtle
modification of the theories of recovery, and not merely
a readjustment of the identity of those who bear losses.

White & Summers, § 19-1 at 239 (emphasis added) (footnotes

omitted).2

The views of White & Summers, however, are just not

compatible with Virginia law. They say that Code § 3A-406(b)

“must be interpreted” to create a cause of action. § 19-1 at

239. However, the rule in Virginia is that, unless the

language of a legislative enactment is ambiguous, “ ‘there is

no room for interpretation or construction; the plain meaning

and intent of the [enactment] must be given it.’ ” City of

Emporia Bd. of Zoning Appeals v. Mangum, 263 Va. 38, 41, 556

S.E.2d 779, 781 (2002) (quoting Board of Zoning Appeals of the

County of York v. 852 L.L.C., 257 Va. 485, 489, 514 S.E.2d

767, 769 (1999)).

2
Halifax also cites 1 Henry J. Bailey & Richard B.
Hagedorn, Brady on Bank Checks ¶ 1.27 at 1-81 (Rev. ed. 2004)
for the proposition that “[t]he allocation-of-loss or
comparative-negligence principle [contained in Code § 8.3A-
406] is new to commercial law and introduces a tort concept.”

11
 “ ‘Language is ambiguous when it may be understood in

more than one way, or simultaneously refers to two or more

things.’ ” Supinger v. Stakes, 255 Va. 198, 205, 495 S.E.2d

813, 817 (1998) (quoting Lee-Warren v. School Bd. of

Cumberland County, 241 Va. 442, 445, 403 S.E.2d 691, 692

(1991)). For Code § 8.3A-406 to be declared ambiguous, its

language must lend itself to being understood in one way as

creating a cause of action and in another way as not creating

a cause of action. In our opinion, the statute cannot be

understood as creating a cause of action for several reasons.

In the first place, the term “cause of action” or “may

recover” or anything remotely resembling either term nowhere

appears in Code § 8.3A-406. And this Court cannot supply the

language that would have created an affirmative cause of

action under the circumstances of this case. “[C]ourts are

not permitted to rewrite statutes. This is a legislative

function. The manifest intention of the legislature, clearly

disclosed by its language, must be applied. There can be no

departure from the words used where the intention is clear.”

Supinger, 255 Va. at 206, 495 S.E.2d at 817 (quoting Anderson

v. Commonwealth, 182 Va. 560, 566, 29 S.E.2d 838, 841 (1944)).

Second, Official Comment 1 to Code § 8.3A-406 states that

subsection (a) “adopts the doctrine” that a “drawer who so

negligently draws an instrument as to facilitate its material

12
alteration [or its forgery] is liable to a drawee who pays the

altered [or forged] instrument in good faith.” (Emphasis

added.) But statutory language making a drawer liable to a

drawee cannot possibly be taken as showing an intention to

create a cause of action in favor of a drawer against a

depositary bank.

Third, Official Comment 1 further states: “Section 3-406

does not make the negligent party liable in tort for damages

resulting from the alteration. If the negligent party is

estopped from asserting the alteration the person taking the

instrument is fully protected because the taker can treat the

instrument as having been issued in the altered form.” We

will assume Halifax is correct in saying the comment means “3-

406 is not intended to make the negligent drawer subject to

preclusion liable in tort.” But Halifax is incorrect in

saying “the comment shows the converse was intended, that 3-

406 makes the bank liable in tort.” This is not only a non

sequitur but it is also contrary to the provision in the very

next sentence of the Comment, which states that “the person

taking the instrument is fully protected because the taker can

treat the instrument as having been issued in the altered [or

forged] form.” It is difficult to imagine how something that

is designed to protect the taker can logically be turned on

13
its head and used to create a cause of action against the

taker.

Finally, and of overriding importance, we follow the rule

in Virginia that “when the General Assembly includes specific

language in one section of a statute, but omits that language

from another section of the statute, we must presume that the

exclusion of the language was intentional.” Halifax I, 262

Va. at 100, 546 S.E.2d at 702. Strikingly absent from Code

§ 8.3A-406 is the specific language contained in Code §§ 8.3A-

404 and –405 that “the person bearing the loss may recover

from the person failing to exercise ordinary care.” The

General Assembly knows how to create a cause of action when

that is its intention, and the omission of the “may recover”

or similar language from Code § 8.3A-406 represents an

unambiguous manifestation of a contrary intention.

Halifax cites several out-of-state decisions in support

of its contention that “revised 3-406 provides a cause of

action, in favor of a drawer against a depositary bank.” Cited

are National Union Fire Ins. Co. v. Hibernia Nat’l Bank, 258

F.Supp.2d 490 (W.D. La. 2003); National Union Fire Ins. Co. v.

Allfirst Bank, 282 F.Supp.2d 339 (D. Md. 2003); Delta Textiles

New York, Ltd. v. Diaz, Docket No. BER-L-10648-01 (N.J. Super.

Ct. Oct. 24, 2003); Nat’l Union Fire Ins. Co. of Pittsburgh,

PA v. Sun Nat’l Bank, Docket No. MER-L-2894-03 (N.J. Super.

14
Ct. April 2, 2004); Atlantic Mutual Ins. Co. v. The Provident

Bank, 669 N.E.2d 901 (Oh. Mun. Ct. 1996). These are all trial

court decisions; we find them unpersuasive.3

One appellate decision cited by Halifax, Micro Experts,

Inc. v. Edison Tech., Inc., 701 N.E.2d 1033 (Oh. Ct. App.

1997), involved an Ohio statute that is the equivalent of our

Code § 8.3A-406. The court stated that “[o]rdinarily this

statute is used as a defense, rather than in support of a

claim.” Id. at 1039.4 But, the court continued, “[a]ssuming

arguendo that the statute may be raised” by the drawer of the

checks involved, the drawer still lost because it did not

“demonstrate that [the bank] failed to exercise ordinary

care.” Id. Halifax can take little comfort from this

decision.

Nor can Halifax find comfort in another appellate court

case it cites. In Wachovia Bank, N.A. v. Fed. Reserve Bank of

Richmond, 338 F. 3rd 318 (4th Cir. 2003), the court stated:

“U.C.C. § 8.3-406 . . . provides for a defense but does not

expressly create a cause of action. To the extent that such a

3
Delta Textiles and Sun Nat’l Bank are especially
unpersuasive. Both cases are still pending in the trial
courts where they were brought and both involve only pretrial
orders which may be subject to reversal upon reconsideration
by those courts or upon appeal. So, for the time being at
least, the two cases are of doubtful precedential value.
4
The court cited Fifth Third Bank of Toledo, N.A. v.
Dziersk, 12 F.3d 600 (6th Cir. 1993), as authority for the
quoted statement.

15
cause of action is cognizable, which we do not hold, we

conclude that summary judgment in favor of [the drawer] was

properly granted [because it was not shown] that the asserted

negligence of the [drawer] substantially contributed to the

alteration of the check.” Id. at 325.

Finally, Halifax cites a work of another of its “leading

commentators,” where it is stated that “[the] preclusion

provision [of Code § 8.3A-406] seems to be purely defensive in

nature, although conceivably [it] could constitute grounds for

affirmative action.” 2A Frederick M. Hart & William F.

Willier, Negotiable Instruments Under the Uniform Commercial

Code § 12.37 at 12-234 (2001). (Emphasis added.)5 This hardly

provides support for Halifax’s claim that Code § 8.3A-406

creates an affirmative cause of action for the negligence of a

depositary bank.

We conclude that the trial court did not err in its

holding that Code § 8.3A-406 does not create an affirmative

cause of action and in awarding summary judgment to Wachovia

with respect to that claim.

Common Law Conversion6

5
This quotation also appears in White Sands Forest
Prods., Inc. v. First National Bank of Alamogordo, 50 P.3d
202, 206 (N.M. App. 2002), where the court held that UCC § 3-
406 does not create an affirmative cause of action.
6
Count II of Halifax’s motion for judgment is labeled as
a claim for “COMMON LAW CONVERSION” and Count III is labeled

16
 Code § 8.3A-420(a) provides as follows:

(a) The law applicable to conversion of personal
property applies to instruments. An instrument
is also converted if it is taken by transfer,
other than a negotiation, from a person not
entitled to enforce the instrument or a bank
makes or obtains payment with respect to the
instrument for a person not entitled to enforce
the instrument or receive payment. An action
for conversion of an instrument may not be
brought by (i) the issuer or acceptor of the
instrument or (ii) a payee or indorsee who did
not receive delivery of the instrument either
directly or through delivery to an agent or a
co-payee.

(Emphasis added.)

The term “instrument” means a negotiable instrument and

includes a check. Code § 8.3A-104(b) and (f). The term

“issuer” means a maker or drawer of an instrument. Code

§ 8.3A-105(c). The term “drawer” means a person who signs or

is identified in a draft as a person ordering payment. Code

§ 8.3A-103(3).

Under these statutory definitions and the facts as

alleged in Halifax’s motion for judgment, Halifax was the

issuer of the checks in question. It would appear, therefore,

as a claim for “AIDING AND ABETTING BREACH OF FIDUCIARY DUTY.”
Halifax now employs the unfamiliar label on its claim for
conversion as a “COMMON LAW CLAIM FOR CONVERSION FACILITATING
A BREACH OF FIDUCIARY DUTY” and otherwise intermingles its
argument on its claim for conversion with its argument on its
claim for aiding and abetting a breach of fiduciary duty.
These are separate claims, and we will treat them as such.
The claim for aiding and abetting will be discussed infra.

17
that Code § 8.3A-420(a)(i) would bar Halifax’s claim for

conversion.

Halifax contends, however, that Code § 8.3A-420 does not

displace a common law claim for conversion. In support of

this contention, Halifax cites Stefano v. First Union Nat’l

Bank of Virginia, 981 F.Supp. 417 (E.D. Va. 1997), where it is

stated:

Analysis properly begins with the terms of Virginia Code
§ 8.1-103,[7] which sets the standard for Code
displacement of the common law. This section provides
that “unless displaced by the particular provisions of
[the UCC], the principles of law and equity, including
the law merchant . . . supplement its provisions.” The
teaching of this section is plain: The common law action
for conversion is displaced by the Code only in
circumstances where Virginia Code § 8.3A-420 applies. In
other circumstances, common law conversion survives.

Id. at 420. Halifax then says that the drawer preclusion

contained in Code § 8.3A-420(a)(i) applies only to statutory

conversion and not to common law conversion.

We agree with the Stefano court’s “standard for Code

displacement of the common law,” but we disagree with

7
Code § 8.1-103 provides that “[u]nless displaced by the
particular provisions of [the UCC], the principles of law and
equity, including the law merchant and the law relative to
capacity to contract, principal and agent, estoppel, fraud,
misrepresentation, duress, coercion, mistake, bankruptcy, or
other validating or invalidating clause shall supplement its
provisions.” Although this statute was repealed in July of
2003, its successor, Code § 8.1A-103(b), features language
virtually identical to that just quoted here.

18
Halifax’s assertion that the drawer preclusion of Code § 8.3A-

420(a)(i) applies only to an action for statutory conversion.

In the first place, the language of Code § 8.3A-420(a)(i)

is unambiguous. In clear and unmistakable terms, in keeping

with Code § 8.1-103 and its successor, Code § 8.1A-103, it

specifically precludes a drawer of a check from bringing an

“action for conversion,” and there is no language in Code

§ 8.3A-420 that can possibly be read as limiting the

preclusion to an action for statutory conversion.

Furthermore, contrary to what Halifax would like us to

believe, Stefano does not support its position. The plaintiff

there, unlike Halifax here, was a co-payee of instruments that

were accepted by the bank without the plaintiff’s endorsement

and were deposited into an account in the sole name of the

other payee. The plaintiff asserted two claims against the

bank for conversion, one under Code § 8.3A-420 and another

under the common law. While the court made the statement

quoted above concerning the standard to be applied “for Code

displacement of the common law,” it actually held that the

plaintiff’s common law claim for conversion was displaced by

the provision in the second sentence of Code § 8.3A-420

allowing “an action for conversion where a ‘bank makes or

obtains payment with respect to a negotiable instrument for a

person not entitled to enforce the instrument.’ ” Id. at 420.

19
The court made this statement, which is equally applicable

here:

Plaintiff’s reliance on the first sentence of § 8.3A-420,
which states that “the law applicable to conversion of
personal property applies to instruments,” is misplaced.
This sentence merely states the general rule that where a
claim for conversion of a negotiable instrument is not
specifically covered by § 8.3A-420, then the claim will
be governed by the common law of conversion as it applies
generally to personal property. See Virginia Code § 8.1-
103. It does not disrupt, as plaintiff suggests, the
Code’s stated design that particular provisions of the
act may displace a cause of action under the common law.
See Id. In sum, then, § 8.3A-420 is plaintiff’s sole
conversion remedy.

Stefano, 981 F. Supp. at 421.

Once again, Halifax relies upon White & Summers to

support its argument that its claim for conversion has not

been displaced by Code 8.3A-420. Citing and quoting in part

from White & Summers, Halifax states that “this could not be a

clearer case where common law ‘make[s] one guilty of

conversion for dealing with an instrument in ways not

described by the statutory definition (second sentence)’ and

of ‘liability under the common law introduced into Article 3

by the first sentence of 3-420.’ 2 White & Summers § 18-4 at

216.”

But the full quotation from White & Summers indicates

that the case is not as clear as Halifax would like. The full

quotation is as follows:

20
 Section 3-420’s opening sentence incorporates common
law conversion: “The law applicable to conversion of
personal property applies to instruments.” It is
conceivable, therefore, that the law of Minnesota or New
York or Florida might make one guilty of conversion for
dealing with an instrument in ways not described by the
statutory definition (second sentence). When that is so,
there will be liability under the common law introduced
into Article 3 by the first sentence of 3-420.

Id. (emphasis added). We need not speculate about what might

conceivably be the result if an instrument is dealt with in

some unidentified way not described by the statutory

definition. We know for certain what the result must be when

an instrument with a forged signature is the subject of a

claim for conversion brought by the issuer thereof. The

result is the dismissal of the claim. “An action for

conversion of an instrument may not be brought by . . . the

issuer . . . of the instrument.” Code § 8.3A-420(a)(i).

Halifax argues, however, that “as clearly explained in

the comments to the revised Code, [the] preclusion is intended

only to extend to claims for statutory conversion, namely

those involving forged indorsements.” Halifax then quotes

Official Comment 1 to Code § 8.3A-420, as follows:

Under former Article 3, the cases were divided on the
issue of whether the drawer of a check with a forged
indorsement can assert rights against a depositary bank
that took the check. The last sentence of Section 3-
420(a) resolves the conflict by following the rule stated

21
 in Stone & Webster Engineering Corp. v. First National
Bank & Trust Co., 184 N.E.2d 358 (Mass. 1962).[8]

But this does not say that the preclusion in the last

sentence of Code § 8.3A-420(a) extends only to claims

involving forged indorsements. Nor does Code § 8.3A-420

itself contain any such limiting language. The statute

clearly precludes a drawer from bringing an action for

conversion of “an instrument,” and it does not differentiate

between an instrument with a forged signature and one with a

forged indorsement. As noted in White & Summers, Code § 8.3A-

420 “denies the drawer a conversion cause of action where the

drawer’s signature has been forged.” White & Summers, § 19-5

at 274.

We conclude that the trial court did not err in its

holding that Halifax does not have a claim for conversion and

in awarding summary judgment to Wachovia with respect to that

claim.9

Aiding and Abetting Breach of Fiduciary Duty

8
Stone & Webster involved checks with forged
indorsements. The Supreme Judicial Court of Massachusetts
held that the drawer of the checks had no “right of action”
against the depositary bank, 184 N.E.2d at 362, because the
drawer “had no valuable rights in them,” id.
9
The views we have expressed with respect to the claim
for conversion make it unnecessary to consider the trial
court’s alternate holding that Halifax had no claim for
conversion because “such a claim lies only where personal
property . . . is converted,” and a “check represents an
obligation of the drawer rather than property of the drawer.”

22
 With respect to this claim, the trial court assumed,

“arguendo, that Virginia recognizes a cause of action for

aiding and abetting a breach of fiduciary duty.” The trial

court concluded, however, that Halifax had “failed to allege

sufficient facts to state such a claim.” We will make the

same assumption and reach the same conclusion.

The dispute between the parties centers upon what Halifax

needed to allege in its motion for judgment concerning (1)

Wachovia’s knowledge of Adams’ breach of fiduciary duty, and

(2) Wachovia’s participation in that breach. We will discuss

these matters seriatim.

Wachovia’s Knowledge

Halifax says that Code § 8.3A-307(b)(3) “expressly

defines the meaning of ‘notice’ and ‘knowledge’ for purposes

of bank liability under the common law,” and that, in its

motion for judgment, it made the necessary allegations. This

Code section provides that “[i]f an instrument is issued by

the represented person or the fiduciary as such, and made

payable to the fiduciary personally, the taker does not have

notice of the breach of fiduciary duty unless the taker knows

of the breach of fiduciary duty.” (Emphasis added.)10 In this

10
Halifax also cites Code § 8.3A-307(b)(2) and (4) which,
as Wachovia points out, “on their face, do not apply to the
checks at issue here.”

23
scenario, Halifax is “the represented party,” Adams is “the

fiduciary,” and Wachovia is “the taker.”

All Halifax alleged, however, was that Wachovia had

“actual knowledge of Adams’ fiduciary duty and actual . . .

notice [of] Adam’s [sic] breach of duty.” While this may be

sufficient to allege Wachovia’s actual knowledge of Adams’

fiduciary duty, it is not sufficient to allege that Wachovia

“[knew] of the breach of fiduciary duty,” in the words of Code

§ 8.3A-307(b)(3). Alleging actual knowledge of a fiduciary

duty is not tantamount to alleging actual knowledge of a

breach of the duty. “Notice which does not amount to

knowledge is not enough to cause Section 3-307 to apply.”

Official Comment 2 to Code § 8.3A-307. “A person ‘knows’ or

has ‘knowledge’ of a fact when he has actual knowledge of it.

‘Discover’ or ‘learn’ or a word or phrase of similar import

refers to knowledge rather than to reason to know.” Code

§ 8.1-201(25).11

Yet again, Halifax relies on White & Summers, this time

for the proposition that Code § 8.3A-307(b)(3) is violated

where “the person who received payment was known to be a

11
Code § 8.1-201 was repealed effective July 1, 2003, and
was replaced by Code § 8.1A-202. Subsection (b) of the new
version states: “ ‘Knowledge’ means actual knowledge. ‘Knows’
has a corresponding meaning.” New subsection (c) states:
“ ‘Discover,’ or ‘learn,’ or words of similar import refer to
knowledge rather than to reason to know.”

24
fiduciary by the taker . . . [and] the taker made the money

available to the fiduciary personally by putting it in his or

her account or otherwise in a transaction known to be for the

embezzler’s personal use.” White & Summers, § 19-5 at 276.

But, here again, Halifax does not tell the whole story.

The statement quoted from White & Summers has reference

to a hypothetical case where “the embezzler, with authority to

draw, draws a check payable to the order of the corporation,

forges the corporate indorsement (he or she has no authority

to indorse) and passes the check to a depositary bank.” Id.

at 275-76. But the checks here were not payable to Halifax

and they bore no forged indorsements, so the statement quoted

from White & Summers is inapposite. Furthermore, White &

Summers did not say that the hypothetical represented a

violation of Code § 8.3A-307(b)(3) as, indeed, they could not −

the hypothetical checks were not covered by that section but

by Code § 8:3A–307(b)(2); White & Summers merely said that

“the owner of the account might strengthen this case by noting

that he or she had carried the substantial burden by proving

the conditions required under 3-307(b).” § 19-5 at 276. And,

in the end, White & Summers say: “[W]e are uneasy about all of

this.” Id.

Finally, Wachovia states on brief that Halifax “did not

and could not allege that Wachovia had actual knowledge of the

25
most relevant fact, i.e., that Adams did not have Halifax’s

authority to draw the checks to herself (or to her companies

or to cash).” When asked during oral argument whether Halifax

“alleged that,” counsel for Halifax responded by saying: “We

alleged [it] in the entire body of the long motion for

judgment, we did not use, we concede, the two words actual

knowledge with respect to . . . the second element, actual

knowledge of the breach.”

Wachovia’s Participation

As the trial court noted in its final order, a plaintiff

asserting a claim for breach of fiduciary duty is required to

allege “more than mere knowledge that the breach of fiduciary

duty has occurred.” The Court stated that “[f]or a claim to

survive, the plaintiff must assert that the defendant somehow

recruited, enticed, or participated in the fiduciary’s breach

of its duty,” yet Halifax had not alleged that Wachovia

“recruited, enticed, encouraged, or benefited from Adams’

breach of fiduciary duty.”

Halifax says that it alleged in its motion for judgment

that Wachovia “‘participated’ in the breach of fiduciary

duty,” and that this was sufficient to withstand Wachovia’s

motion for summary judgment. Halifax states that no

allegation of “affirmative, conspiratorial aid is required.”

26
 Halifax cites Tysons Toyota, Inc. v. Globe Life Ins. Co.,

1994 U.S. App. LEXIS 36692 (4th Cir. Dec. 29, 1994) (per

curiam), which involved a corporate officer’s diversion from

the plaintiff corporation to the defendant insurance companies

of a business opportunity belonging to the plaintiff. The

plaintiff claimed that the defendants “recruited and enticed

[the corporate officer] to breach his fiduciary duty to [the

corporation]” and alleged facts supporting that claim. Id. at

*4. The court held that the plaintiff had “alleged sufficient

participation by the defendants in [the corporate officer’s]

breach of fiduciary duty.” Id. at *13. But Halifax made no

allegation here that Wachovia recruited and enticed Adams to

breach her fiduciary duty, and it alleged no facts that would

have supported the allegation had it been made.

Halifax also cites Patteson v. Horsley, 70 Va. (29

Gratt.) 263 (1877). There, a trustee, John Horsley, sold

bonds for $9,000.00 he held in trust to G. A. Hancock, for

which Hancock gave his bond for $8,280.00. When that bond

fell due in 1863, Hancock proposed to pay the bond in

Confederate money, and Horsley accepted payment in that

currency. Upon a bill of complaint praying for the settlement

of the accounts of Horsley, as trustee, the trial court ruled

that neither Horsley nor Hancock was liable for any loss that

had resulted to the trust fund. On appeal, this Court

27
reversed, holding that the transaction between Horsley and

Hancock was a breach of trust by the former in which the

latter had participated, “the same having been committed at

[Hancock’s] instance and for his benefit.” Id. at 270.

Nothing in Halifax’s motion for judgment even comes close to

an allegation that Adams’ breach of fiduciary duty was

committed at Wachovia’s instance or for its benefit.

Next, Halifax cites W. L. Chase & Co. v. Norfolk Nat’l

Bank of Commerce & Trusts, 151 Va. 1040, 145 S.E. 725 (1928).

There, Chase had an account with the Norfolk National Bank and

another with a bank in Rocky Mount, North Carolina. An

employee of Chase, J. C. Custis, without authority, drew a

check on the Rocky Mount bank payable to the Norfolk Bank.

That bank allowed the check, endorsed by Custis, to be

deposited in his personal account, which Custis then used to

pay off a debt he owed the Norfolk Bank. Chase brought an

action in assumpsit, not aiding and abetting, against the

Norfolk bank and was allowed to recover the amount of the

check. This Court held that by complying with the employee’s

request to place the proceeds of the check in his personal

account, the Norfolk Bank “manifestly allowed him to exceed

his authority and so participated in the diversion of funds

under [its] control.” Id. at 1057, 145 S.E. at 730. The

dissimilarity between the present case and Chase is at once

28
obvious. Here, Halifax was not Wachovia’s customer, the

checks in question were not made payable to Wachovia, and the

proceeds from the checks were not used to pay an indebtedness

due Wachovia.12

Halifax also cites CaterCorp, Inc. v. Catering Concepts,

Inc., 246 Va. 22, 431 S.E.2d 277 (1993). One of the claims

asserted in the case was for tortious interference with

contracts. We said that one of the elements of such a claim

is “intentional interference inducing or causing a breach or

termination of the relationship or expectancy,” and we held

that the plaintiff had alleged the element of intentional

interference with sufficient specificity. Id. at 28, 431

S.E.2d at 281 (emphasis added). It is surprising that Halifax

cites this case. It certainly does not support Halifax’s

argument, noted supra, that it was not required to allege

“affirmative . . . aid” as an element of its claim for aiding

and abetting.

This brings us to the crux of the issue whether Halifax’s

allegation that Wachovia “participated” in Adams’ bank

12
Halifax cites several cases similar to Chase. All are
inapposite. Jones v. United States Fid. & Guar. Co., 165 Va.
349, 182 S.E. 560 (1935); Trust Co. of Norfolk v. Snyder, 152
Va. 572, 147 S.E. 234 (1929); Bank of Giles County v. Fidelity
& Dep. Co. of Md., 84 F.2d 321 (4th Cir. 1936); Fidelity &
Dep. Co. of Md. v. Bank of Smithfield, 11 F.Supp. 904 (E.D.
Va. 1932); Scottsbluff Nat’l Bank v. Blue J Feeds, Inc., 54
N.W.2d 392 (Neb. 1952); Wichita Royalty Co. v. City Nat’l Bank
of Wichita Falls, 89 S.W.2d 394 (Tex. 1935).

29
transactions is sufficient to state a claim of aiding and

abetting. Generally speaking, the word “participate,”

standing alone, is of a neutral and innocuous nature,

importing no wrongdoing of any kind. See Black’s Law

Dictionary 1141 (7th ed. 1999). However, its meaning can vary

depending upon the context in which it is used. On the other

hand, the term “aiding and abetting” invariably imports

purposeful conduct. Id. at 69 (“aid given with mens rea is

abetment”). When the word “participate” is used in the

phrase, “participate in aiding and abetting,” it sheds its

neutral and innocuous nature and takes on the characteristic

of affirmative participation inherent in the other words of

the phrase. The maxim noscitur a sociis “instructs that ‘the

meaning of a word takes color and expression from the purport

of the entire phrase of which it is a part, and it must be

read in harmony with its context.’ ” Andrews v. American

Health & Life Ins. Co., 236 Va. 221, 225, 372 S.E.2d 399, 401

(1988) (quoting Turner v. Commonwealth, 226 Va. 456, 460, 309

S.E.2d 337, 339 (1983).

A bank participates in numerous transactions every day

involving the acceptance and deposit of checks. Yet, unless

it actually knows a breach of fiduciary duty is occurring and

participates with mens rea in the consummation of the breach,

30
it should not be held liable for aiding and abetting the

breach.

Halifax’s motion for judgment neither alleges affirmative

participation by Wachovia nor states facts that would support

such an allegation. Rather, Halifax’s allegations are

negative in nature, listing all the things Wachovia did not do

that might have uncovered the embezzlement. This is

insufficient to overcome the lack of allegations of

affirmative participation on the part of Wachovia.

Leave to Amend

Halifax states on brief that “[in] the event that the

circuit court found [Halifax’s] allegations were not pled with

sufficient particularity, Halifax was entitled to leave to

amend.” However, Halifax has a problem; it has not assigned

error to the denial of leave to amend, and we will not notice

the denial now. Rule 5:17(c) (“[o]nly errors assigned in the

petition for appeal will be noticed by this Court”).

Conclusion

Finding no error in the holdings of the trial court, we

will affirm its judgment.

Affirmed.

31