Wachovia Bank, N.A. v. Foster Bancshares, Inc.

In the
United States Court of Appeals
For the Seventh Circuit
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No. 05-3703
WACHOVIA BANK, N.A.,
Plaintiff-Appellee
v.

FOSTER BANCSHARES, INC., and FOSTER BANK,
Defendants-Appellants.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 04 C 3914—James F. Holderman, Chief Judge.
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ARGUED MAY 11, 2006—DECIDED JULY 24, 2006
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Before POSNER, EASTERBROOK, and WOOD, Circuit Judges.
POSNER, Circuit Judge. This diversity suit pits two banks
(for unexplained reasons, the defendant bank’s parent
was also joined as a defendant) against each other in a
quarrel over liability for a forged or altered check.
A customer of Foster Bank named Choi deposited in her
account a check for $133,026 that listed her as the payee. The
check had been drawn on Wachovia Bank by a company
called MediaEdge that had an account with that bank.
Foster presented the check to Wachovia for payment.
Wachovia paid Foster and debited MediaEdge’s account.
2 No. 05-3703

Now as it happened the actual payee of the check as
originally issued had not been Choi; it had been a com-
pany called CMP Media. When CMP Media told MediaEdge
that it had not received the check, an investigation ensued
and revealed that Choi had somehow gotten her name
substituted for CMP Media on the check she’d deposited
with Foster. By the time this was discovered, Choi had
withdrawn the money from her account and vanished,
while Wachovia had destroyed the paper check that Foster
had presented to it for payment. It had done this pursuant
to its normal practice, the lawfulness of which is not
questioned. It had retained a computer image of the check,
but whether the image is of the original check drawn on
Wachovia, with an alteration, or a forged check, cannot be
determined.
MediaEdge sued Wachovia in New York for the amount
of the check. That suit has been stayed pending the outcome
of the present suit, in which Wachovia seeks a declaratory
judgment that Foster must indemnify it in the event that
MediaEdge obtains a favorable judgment in the New York
suit. Wachovia’s suit is based on the Uniform Commercial
Code’s “presentment warranty”: when a depositary bank,
Foster in this case, presents a check for payment by the bank
that issued the check, it warrants that the check “has not
been altered.” UCC §§ 3-417(a)1-2, 4-208(a)1-2; Clean World
Engineering, Ltd. v. MidAmerica Bank, FSB, 793 N.E.2d 110,
117-18 (Ill. App. 2003); Wachovia Bank, N.A. v. FRB, 338 F.3d
318, 321-22 (4th Cir. 2003). The district court granted
summary judgment for Wachovia. Foster had impleaded
Choi as a third-party defendant but could not serve her
because of her disappearance, so the district court dismissed
the third-party claim. Foster does not challenge that ruling.
There is a question of appellate jurisdiction, specifically
whether the district court’s judgment is final. The judg-
No. 05-3703 3

ment order states, so far as pertains to that question, merely
that Wachovia’s “motion for summary judgment . . . is
granted” and “judgment is entered in favor of plaintiff
against defendant Foster.” (Foster Bancshares, the parent, is
not mentioned, but the omission was inadvertent; there is
nothing pending against it in the district court.) Normally a
judgment that merely determines liability and does not
specify relief is not a final judgment and so is not appealable
under 28 U.S.C. § 1291, the final-decision rule that furnishes
the only ground for Foster’s appeal. The judgment order
that the district court issued does not specify any relief. Nor
can relief be calculated mechanically. (If it could be, the
judgment would be sufficiently final to be appealable.
Production & Maintenance Employees’ Local 504, Laborers’ Int’l
Union v. Roadmaster Corp., 954 F.2d 1397, 1401 (7th Cir.
1992); Vitale v. Latrobe Area Hospital, 420 F.3d 278, 281 (3d
Cir. 2005).) The district judge said in his opinion that
“Wachovia is entitled to the $133,026.00 it paid on the check
plus appropriate interest, less any reimbursement owed it
from MediaEdge.” But the judge did not define “appropri-
ate interest”; and the “reimbursement owed [Wachovia]
from MediaEdge” cannot yet be calculated—the amount
depends on the outcome of the New York suit, which has
been stayed.
But we must remember that Wachovia was seeking a
declaratory judgment, which is deemed final although it
does not specify relief. 28 U.S.C. § 2201(a). The judge
mentioned on the first page of his opinion that the bank was
seeking such a judgment. He didn’t repeat this in the
judgment order, but the omission is not critical. Wilson v.
City of Chicago, 120 F.3d 681, 685 (7th Cir. 1997); see Chase
Manhattan Mortgage Corp. v. Moore, 446 F.3d 725, 728 (7th
Cir. 2006). That order is most sensibly interpreted as the
declaratory judgment that Wachovia sought. What else
4 No. 05-3703

could it be? It is clear on the one hand that the judge meant
to enter a final and therefore an appealable judgment, and
on the other hand that he was not intending to issue a
further order, specifying relief. A judgment that declares
rights but does not order relief is appealable under 28 U.S.C.
§ 1291 as, and only as, a declaratory judgment.
As we pointed out in the Chase Manhattan case, more-
over, a judgment is final for purposes of appeal when the
district judge is through with the case whether or not he
should be, lest the case be left in limbo—no longer in the
district court, but barred from our court by the final-deci-
sion rule. 446 F.3d at 726-27; see also Moreau v. Harris
County, 158 F.3d 241, 244 (5th Cir. 1998). Not one but two
cases would be in limbo, because MediaEdge’s suit in
New York has been stayed pending the resolution of the
present case. The two suits would be Alphonse and Gaston.
Ordinarily if a district court mistakenly abandoned a
case after finding liability but before ordering relief, the
plaintiff would appeal. But in the present case the plaintiff,
Wachovia, got everything it asked for in the judgment that
the district court entered. The aggrieved party is Foster,
since the judgment declares its liability to Wachovia. If
it cannot appeal, the parties’ dispute cannot be resolved—
which provides the clinching argument for deeming the
judgment a declaratory judgment. Even if the judge didn’t
think he’d washed his hands of the case, he could not
proceed to award relief because the amount of reimburse-
ment owed Wachovia by MediaEdge cannot be resolved
until the New York suit resumes.
So we have jurisdiction of Foster’s appeal and can turn
to the merits. The bank argues that Wachovia, because it
cannot produce the paper check, cannot prove that the check
was altered. For all we know, rather than the check being
No. 05-3703 5

“altered” in the usual sense, Choi used sophisticated
copying technology to produce a copy that was identical in
every respect to the original check (including the authorized
signature by MediaEdge’s chief financial officer) except for
an undetectable change of the payee’s name. Had the
original paper check not been destroyed, it could be exam-
ined and the examination might reveal whether the check
had been forged as just described or the payee’s name had
been changed by chemical washing of the check or by some
other method that utilized rather than replaced the original
check.
The bank on which a check is drawn (Wachovia in this
case) warrants to the presenting bank that the check is
genuine, UCC § 3-418(c); id., Official Comment 1; Henry J.
Bailey & Richard B. Hagedorn, Brady on Bank Checks
§ 28.11[1] (2006), hence not forged, while as we know the
presenting bank warrants that the check hasn’t been altered
since its issuance. When checks were inspected by hand,
when copying technology was primitive, and when
cancelled checks were stored rather than digitized copies
alone retained, this allocation of liability was consistent with
the sensible economic principle that the duty to avoid a loss
should be placed on the party that can prevent the loss at
lower cost. Holtz v. J.J.B. Hilliard W.L. Lyons, Inc., 185 F.3d
732, 743 (7th Cir. 1999); Edwards v. Honeywell, Inc., 50 F.3d
484, 490 (7th Cir. 1995); National Union Fire Ins. Co. v. Riggs
Nat’l Bank, 5 F.3d 554, 557 (D.C. Cir. 1993) (concurring
opinion). Having no dealings with MediaEdge, Foster could
not determine at reasonable cost whether, for example, the
drawer’s signature had been forged. Wachovia might be
able to determine this by comparing the signature on the
check presented to it for payment with the authorized
signature in its files. But Wachovia would have no idea who
the intended payee was, while Foster might have reason to
6 No. 05-3703

suspect that the person who deposited the check with it was
not the intended payee. And it would be in as good a
position as Wachovia to spot an alteration on the check.
But this last point assumes that a payee’s name would
be altered in the old-fashioned way, by whiting out or
otherwise physically effacing the name on the paper check.
If Choi created a new check, there would be no physical
alteration to alert Foster when she deposited the check
with the bank. That is why Foster complains that
Wachovia’s failure to retain the paper check prevents
determining how the “alteration” was effected—more
precisely, whether it is a case of alteration or of forgery. The
fact that MediaEdge acknowledges having issued a check to
CMP Media is not conclusive on the question because Choi
might have destroyed that check, rather than altering it, and
substituted a copy that seemed perfectly genuine, with her
name in place of CMP Media.
So the case comes down to whether, in cases of doubt,
forgery should be assumed or alteration should be assumed.
If the former, Foster wins, and if the latter, Wachovia. It
seems to us that the tie should go to the drawer bank,
Wachovia. Changing the payee’s name is the classic alter-
ation. It can with modern technology be effected by forging
a check rather than by altering an original check, but since
this is a novel method, the presenting bank must do more
than merely assert the possibility of it. Granted, it is the
duty of the drawee bank to take reasonable measures to
prevent the forging of its checks, as by marking them in a
way that a forger could not discover and therefore dupli-
cate. But Foster has made no effort to show that retention of
mountains of paper checks—which would be necessary to
determine whether the original check had such a mark-
ing—would be a reasonable method of determining whether
No. 05-3703 7

the drawee bank or the presenting bank should be liable for
the loss.
Nor did Foster make any effort to show—as it might have
been able to do, see Henry Bailey & Richard Hagedorn,
supra, § 28.3—that duplication of the entire check (that is,
forgery of the check deposited with the presenting bank),
rather than just physical alteration of the payee’s name
on the original check, has become a common method of
bank fraud. Nor did it try to show that banks have, as they
are allowed to do, been contracting around the provisions
of the UCC relating to the warranties of drawee and pre-
senting banks in cases such as this. Nor did it try to show
what Choi’s modus operandi was, assuming that she had
stolen money in this way on other occasions, though such
evidence may of course have been unobtainable.
Even if Foster had shown that forgery of the entire
check has become a routine method of altering the payee’s
name, we would not adopt the rule for which it contends,
which is that the drawee bank cannot enforce the present-
ment warranty unless it retains the paper check. The
question of which bank was, in the language of economic
analysis of law, the “cheaper cost avoider” would still be
open. (Maybe neither bank is—which would hardly be a
persuasive ground for changing a long-settled rule of law.)
A depositary bank can sometimes discover an alteration of
the payee’s name even when there is no physical alteration
in the check presented to the bank for deposit. The size of
the check may be a warning flag that induces the bank to
delay making funds deposited by the check available for
withdrawal. E.g., Bank of America, “Frequently Asked
Questions,” http://www.bankofamerica.com/deposits/
checksave/index.cfm?template=lc_faq_acct_info (visited
July 5, 2006); Kennebunk Savings Bank, “Deposit Account
8 No. 05-3703

Agreement,” http://www.kennebunksavings.com/
depositagreement.html, (visited July 5, 2006). The check that
Choi deposited with Foster was for a hefty $133,000, and
there is no evidence that Choi had previously deposited
large checks. We do not suggest that Foster was careless in
deciding to make the money available for withdrawal when
it did. But the uncertainties that the bank has made no effort
to dispel counsel against adopting the legal change that it
urges. Reform if needed in the light of modern copying
technology should be left to the Uniform State Commission-
ers rather than engineered by a federal court in a diversity
case. The judgment for Wachovia is therefore
AFFIRMED.

A true Copy:
Teste:

_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit

USCA-02-C-0072—7-24-06