No. 3--05--0102
Filed July 11, 2006.
IN THE
APPELLATE COURT OF ILLINOIS
THIRD DISTRICT
A.D., 2006
INTERIOR CRAFTS, INC. ) Appeal from the Circuit Court
) of the 12th Judicial Circuit
Plaintiff, ) Will County, Illinois
)
and AMERICAN INSURANCE CO. )
as assignee/subrogee of )
INTERIOR CRAFTS, INC. )
)
Plaintiff-Appellee, )
)
v. ) No. 01--MR--187
)
TODD LEPARSKI, a/k/a Todd )
Joseph Leparski, MARLENE )
LEPARSKI, and MARQUETTE )
NATIONAL BANK. )
)
Defendants, )
)
and )
)
PAN AMERICAN BANK, ) Honorable
) Amy M. Bertani-Tomczak,
Defendant-Appellant., ) Judge, presiding
JUSTICE HOLDRIDGE delivered the opinion of the court:
Interior Crafts, Inc. (Interior), hired Todd Leparski to be an assistant comptroller.
Due to extremely lax accounting procedures at Interior, Leparski was allowed to both
receive and deposit incoming checks from Interior=s customers. Consequently, Leparski
managed to steal approximately one-half million dollars from Interior during his
employment from October 2000 to February 2001. Leparski accomplished his theft by
taking several checks from the incoming mail which were made payable to Interior by
customers. He would then endorse the checks - "Interior Crafts - For Deposit Only" -
and place the checks into deposit envelopes. He then placed those envelopes into an
automatic teller machine (ATM) owned by Pan American Bank, with instructions to
deposit the checks into a bank account which he maintained in his own name at
Marquette Bank. Following the instructions on the deposit slip, Pan American deposited
funds to Leparski=s account at Marquette Bank. Eventually, Marquette Bank alerted
Interior to the fact that Leparski was depositing checks into his personal account which
were payable to Interior. After Leparski=s actions were discovered, Interior was able to
recover in cash from Leparski approximately half of the money he had stolen. In
addition, Interior had an insurance policy with American Insurance Company which
included commercial crime coverage. American paid Interior $250,000 pursuant to that
insurance policy. Interior then sued Leparski and both Pan American Bank and
Marquette Bank for conversion seeking recovery of the money not recovered from
Leparski. American Insurance joined in the suit as Interior=s assignee and subrogee.
The trial court granted summary judgment as to both liability for conversion and
damages in favor of American Insurance against Pan American Bank. Pan American
appeals to this court from the trial court=s grant of summary judgment against it.
The only issue on appeal is whether summary judgment was properly entered
against Pan American Bank as to liability for conversion and damages.
Interior alleged that Pan American was liable for damages in conversion.
Interior=s claim is based upon the theory that Pan American was obligated under the
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restrictive endorsement - "Interior Crafts - For Deposit Only" - to deposit the funds only
in an Interior Crafts account. Interior maintains that Pan American=s depositing the
funds in Leparski=s account constituted a conversion, for which Pan American was liable
to Interior for damages.
The ATM into which Leparski placed the stolen checks was owned and serviced
by Pan American. A bank that owns an ATM does not have any information that tells it
the name of the owner of an account in another bank into which a check placed in the
ATM is to be deposited. The bank that owns the ATM has access only to the check
itself and the card number of the person who placed the check into the machine.
Accordingly, the bank which owns an ATM has no way of knowing whether the name on
the account at the depository bank matches the name of the payee on the check. In the
instant case, the Marquette Bank deposit slips that Leparski used when he put the
stolen checks into the ATM, did not state the name of the owner of the account.
Pan American employees removed the checks from the ATM and inspected the
checks for the presence of an endorsement. Pan American maintained that, because
the checks were not deposited into an account at Pan American Bank, its employees
had no means to verify the authenticity of the endorsements on the checks, nor could
they verify that the payee name matched the name on the account into which the
checks were being deposited. The checks were physically transported to a Pan
American Bank facility where Pan American wire transferred the amount of each check
to Marquette Bank for deposit into Leparski=s account at Marquette Bank, in accordance
with the instructions on the deposit slip. Pan American then endorsed the checks and
sent them through a series of collecting banks back to the various drawee banks on
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which the drawers, the customers of Interior Banks, had drawn the checks. Consistent
with automated banking procedures, the actual checks were never physically in the
possession of Marquette Bank. Plaintiffs moved for summary judgment against Pan
American Bank asserting conversion under Uniform Commercial Code (UCC) section 3-
206(c)(2), which imposes conversion liability on a depository bank for failure to honor a
restrictive endorsement. Specifically:
"If an instrument bears an indorsement * * * in blank or to a
particular bank using the words "for deposit," "for collection,"
or other words indicating a purpose of having the instrument
collected by a bank for the indorser or for a particular
account, the following rules apply: * * *
A depository bank that purchases the instrument or
takes it for collection when so indorsed converts the
instrument unless the amount paid by the bank with respect
to the instrument is received by the indorser or applied
consistently with the indorsement." 810 ILCS 5/3-
206(c)(2)(West 2000).
The trial court granted summary judgment, finding: (1) that Pan American Bank
was a "depository bank" subject to section 3-206 of the Code; and (2) that Pan
American Bank, as a depository bank was strictly liable to the payee of the checks. Pan
American Bank now appeals.
This is an appeal from an order granting summary judgment. Therefore, the
standard of review is de novo, meaning no deference is given to the judgment below.
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Gullen v. Potomac Insurance Co., 203 Ill. 2d 141 (2003). Under de novo review, the
court considers the facts and law related to the case to determine whether the trial court
was correct in its conclusion that there was no genuine issue of material fact and the
movant was entitled to judgment as a matter of law. Bank One, Springfield v. Roscetti,
309 Ill. App. 3d 1048 (1999). Summary judgment is a drastic remedy to be granted only
where the movant=s right to it is so clear as to be free from doubt. Groshek v. Frainey,
274 Ill. App. 3d 566, 569 (1995).
The key issue in this matter is whether the trial court was correct in determining
that Pan American Bank is a "depository bank" within the meaning of section 3-206 of
the UCC. Pan American Bank maintains that it is not a "depository bank" and thus is
not liable for conversion under section 3-206.
A discussion of what is a "depository bank" must begin with a definition. The
UCC as codified in Illinois contains a definition of "depository bank." Under the Illinois
Code, a "depository bank" is "the first bank to take an item even though it is also the
payor bank, unless the item is presented for immediate payment over the counter. 810
ILCS 5/4-105(2)(West 2000).
Thus, if we follow the Illinois Code definition of "depository bank" Pan American
Bank clearly is a "depository bank." It was the first bank to take the checks when the
checks were deposited in the ATM. Section 3-206 imposes conversion liability on the
depository bank for failure to honor a restrictive endorsement. Pan American Bank
maintains, however, that the statutory definition of "depository bank" is erroneous in that
the definition of "depository bank" as been preempted by a federal regulatory definition.
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Pan American notes that under federal bank regulations at 12 C.F.R section
229.2(o):
"Depository bank means the first bank to which a check is
transferred even though it is also the paying bank or the
payee. A check deposited in an account is deemed to be
transferred to the bank holding the account into which the
check is deposited, even though the check is physically
received and indorsed first by another bank." 12 C.F.R.
section 229.2 (2006).
Under this definition, in the instant matter, Marquette Bank, not Pan American
Bank, was the depository bank. Leparski used Pan American=s ATM machine to
deposit the checks into his account at Marquette Bank. Thus, under the federal
regulation, Marquette Bank, not Pan American would have been solely liable for
conversion as a "depository bank."
We are faced with two conflicting definitions of "depository bank" and the
definition which applies will determine the outcome. Pan American argues that the
federal code has preempted the statutory definition. We disagree.
Pan American cites no authority for the proposition that the
UCC definition of "depository bank" has been pre-empted by the
federal regulatory definition. We note that while the federal
regulatory definition dates back to at least 1988 (see 53 FR
31290-01) Illinois courts have continued to rely upon the UCC
definition. See, Continental Casualty Co., Inc. v. American
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National Bank and Trust Co. of Chicago, 329 Ill. App. 3d 686
(2002). Preemption cannot occur by accident, but only by the
manifest intent of the federal government acting within its
jurisdiction. Fifth Third Bank ex rel. Trust Officers v. CSX
Corp., 415 F.3d 741 (7th Cir. 2005).
Moreover, in reading the federal regulatory scheme in its
entirety, it is clear that the definition of "depository bank"
contained in the cited federal regulations, was intended to be
limited in scope and was not intended to preempt the UCC law of
negotiable instruments. We therefore find that the trial court
was correct as a matter of law in finding that Pan-American Bank
was a depository bank.
Pan-American next maintains that the trial court erred in
determining that it strictly liable for failure to honor the
restrictive endorsement "Interior Crafts - For Deposit Only." We
disagree.
Article 3 of the UCC imposes certain duties and
responsibilities on the depository bank. With respect to
restrictive endorsements, the depository bank is liable in
conversion for failing to honor a restrictive endorsement.
Section 3-206(c)(2) of the Code provides:
"If an instrument bears an indorsement * * *
in blank or to a particular bank using the
words "for deposit," "for collection," or
other words indicating a purpose of having
the instrument collected by a bank for the
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indorser or for a particular account, the
following rules apply: * * *
A depository bank that purchases the
instrument or takes it for collection when so
indorsed converts the instrument unless the
amount paid by the bank with respect to the
instrument is received by the indorser or
applied consistently with the indorsement."
810 ILCS 5/3-206(c)(2)(West 2000).
Under section 3-206 a depository bank is liable in conversion
unless the payee under a restrictive endorsement receives the
amount of the check or unless the amount of the check is
deposited in the endorser=s account. It is undisputed that
neither occurred in the instant matter.
However, Pan-American maintains that it can escape liability
for conversion because Leparski, not Interior Designs was the
restrictive endorser. We disagree. The Code provides for
liability if payment is made inconsistent with the restrictive
endorsement. There is no requirement that the restrictive
endorsement be made only by an by authorized agent. Pan-American
suggests that Western Assurance Co., Inc. v. Star Financial Bank
of Indianapolis, 3 F.3d 1129 (7th Cir. 1993), provides support for
its proposition. However, Western Assurance is distinguishable
in one salient detail: Western Assurance dealt with the question
of apparent authority to negotiate checks, not whether the
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depository bank was liable for failure to honor a restrictive
endorsement. Western Assurance, 3 F.3d at 1131-32.
Pan-American lastly maintains that the trial court erred in
not allowing it to assert certain affirmative defenses.
Specifically, Pan-American maintains that it should be able to
asset Interior Crafts= alleged comparative negligence available
to a depository bank against strict liability for conversion for
paying an instrument over a forged endorsement. 810 ILCS 5/3-405
and 3-406 (West 2000). We disagree. The affirmative defense of comparative
negligence is available where the indorsement is forged, not, as in the instant matter,
where the depository bank simply fails to honor the restrictive endorsement.
For the foregoing reasons, we find that the trial court did not err in granting
summary judgment. The judgment of the circuit court of Will County is affirmed.
Affirmed.
LYTTON and BARRY, JJ., concur.
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