Present: Hassell, C.J., Lacy, Keenan, Koontz, Kinser, and
Lemons, JJ., and Compton,∗ S.J.
KURT G. SCHLEGEL
v. Record No. 051651 OPINION BY JUSTICE CYNTHIA D. KINSER
April 21, 2006
BANK OF AMERICA, N.A., ET AL.
FROM THE CIRCUIT COURT OF THE CITY OF CHARLOTTESVILLE
Edward L. Hogshire, Judge
This appeal involves a funds transfer made pursuant to
alleged unauthorized payment orders and the receiving
bank’s subsequent freezing of the transferred funds without
refunding them to the customer’s account. The primary
issue concerns whether Code § 8.4A-204(a) preempted certain
common law claims asserted as a result of the unauthorized
payment orders and the freezing of the funds. Because the
unauthorized payment orders are covered by Code § 8.4A-
204(a), the common law claims pertaining to that
transaction are preempted. Proceeding on the common law
claims relating to the subsequent freezing of the funds,
however, would not create rights, duties, and liabilities
inconsistent with the provisions of Title 8.4A. Thus,
those claims are not preempted. We will therefore affirm
∗
Senior Justice Compton participated in the hearing
and decision of this case before his death on April 9,
2006.
in part and reverse in part the judgment of the circuit
court.
I. RELEVANT FACTS AND PROCEEDINGS
The funds at issue in this appeal were transferred
from a corporate bank account in the name of Piedmont
Building & Development Corporation (Piedmont). The
appellant, Kurt G. Schlegel, and his uncle, Christopher C.
Grieb, were the corporation’s only shareholders, with each
owning 50 percent of the company’s stock. In 1999,
Schlegel, in his capacity as president and acting secretary
of Piedmont, opened a corporate checking account with a
bank that is apparently a predecessor in interest to the
appellee, Bank of America, N.A., (the Bank). The corporate
signature card listed only Schlegel as having authority to
access the Piedmont account. The corporate resolution
authorizing the opening of the account, however, listed
both the president and chief executive officer as the
corporate officials having the power to act on behalf of
Piedmont with respect to the bank account.
Less than a year earlier, in a corporate resolution
authorizing the opening of a different account for Piedmont
at the Bank, Grieb was listed as chairman of Piedmont and
was one of the persons authorized to access that particular
bank account. Schlegel admitted that he never notified the
2
Bank that the authority granted to Greib pursuant to the
earlier corporate resolution had been revoked.
At some point, Schlegel and Grieb disagreed about the
control and ownership of Piedmont. Schlegel sold property
owned by Piedmont and deposited the sale proceeds into the
Piedmont bank account at issue in this appeal. In November
2001, after Grieb learned of the transaction, he contacted
the Bank, in his capacity as chairman and chief executive
officer of Piedmont, and initiated two payment orders
against Piedmont’s bank account. Grieb instructed the Bank
to transfer all funds in excess of $5,000 from Piedmont’s
account to his personal account at the Bank. Pursuant to
those payment orders, the Bank transferred $65,655.48 from
Piedmont’s bank account to Grieb’s personal bank account.
After the transfer of Piedmont’s funds, Schlegel
notified the Bank orally and in writing that the payment
orders were unauthorized because Grieb was no longer
affiliated with Piedmont and had no authority to send the
payment orders. On November 19, 2001, in response to
Schlegel’s complaint, the Bank placed a “hard hold” on the
funds it had transferred to Grieb’s account, with neither
Schlegel nor Grieb allowed access to the funds. The funds,
however, remained in Grieb’s bank account.
3
In February 2002, Grieb filed a suit against Schlegel
to dissolve Piedmont. Schlegel and Grieb eventually
settled the suit by agreeing, among other things, that each
would receive 50 percent of the funds frozen by the Bank.
The Bank then offered to distribute the frozen funds
according to the settlement between Schlegel and Grieb,
provided the Bank could recover a portion of its attorney’s
fees and be dismissed from further liability. An agreement
was not reached on the Bank’s request.
Instead, Schlegel pursued the suit he had filed
against the Bank in December 2002, seeking damages for
conversion, breach of contract, and violation of Code
§ 8.4A-204 for the unauthorized payment orders.1 Schlegel
alleged that the Bank not only transferred funds from
Piedmont’s corporate bank account without authority to do
so, but also wrongfully froze the funds, thereby depriving
Piedmont of the use of its property. In response, the Bank
filed an answer, a cross-bill for interpleader of the
frozen funds, and a third-party cross-bill against Grieb
1
Schlegel alleged that Piedmont had assigned its cause
of action against the Bank to him and he was therefore
bringing the suit in his own name.
Schlegel filed a motion for leave to file an amended
bill of complaint. Although the Bank had no objection to
Schlegel’s motion, the circuit court never entered an order
granting the motion.
4
for indemnification and/or contribution. Grieb denied any
liability to the Bank.
The Bank subsequently filed a motion for summary
judgment with regard to Schlegel’s suit and its cross-bill
for interpleader. The Bank argued that Code § 8.4A-204
preempted Schlegel’s common law claims and provided the
exclusive remedy for the alleged unauthorized payment
orders. The Bank asked the circuit court to order that the
frozen funds be distributed between Schlegel and Grieb and
to permit it to recover its attorney’s fees from the funds
before distribution. Schlegel filed a cross-motion for
summary judgment with regard to the Bank’s cross-bill for
interpleader, asking that the Bank be required to return
the funds transferred from Piedmont’s bank account and pay
attorney’s fees and costs. Schlegel also requested that a
trial date be set for his claims against the Bank for
conversion and breach of contract.2
In a letter opinion, the circuit court identified two
issues based on the cross-motions for summary judgment:
(1) whether Code § 8.4A-204 preempted Schlegel’s common law
claims for conversion and breach of contract; and (2)
2
Grieb also filed a motion for summary judgment,
stating that the Bank’s claim against him should be
dismissed if summary judgment were granted in favor of the
Bank.
5
whether the Bank was entitled to an award of attorney’s
fees under its cross-bill for interpleader. As to the
first issue, the circuit court concluded that Schlegel’s
allegations fell “squarely within the confines” of Code
§ 8.4A-204 and that his common law claims were, therefore,
preempted by that statute. On the second issue, the
circuit court, exercising its discretion to award
attorney’s fees and costs in an interpleader action when
the plaintiff has acted in good faith, see Pettus v.
Hendricks, 113 Va. 326, 332, 74 S.E. 191, 194 (1912),
decided that the Bank should be awarded reasonable
attorney’s fees and costs. Thus, the court granted the
Bank’s motion for summary judgment and denied both
Schlegel’s and Grieb’s motions for summary judgment.
After receiving evidence on the issue of attorney’s
fees, the circuit court, in a separate letter opinion,
directed that the interpleaded funds be divided equally
between Schlegel and Grieb. The court, however, awarded 20
percent of the interpleaded funds to the Bank as its
attorney’s fees. The court found that the Bank had filed
its cross-bill for interpleader a month after Schlegel and
Grieb settled the suit between them but that resolution of
the interpleader was delayed because Schlegel pursued his
claims for breach of contract and conversion. In the
6
court’s view, the Bank had been required to expend an
“extraordinary amount of time and money in defending and
prosecuting the interpleader.” Thus, the court directed
that the Bank collect 95 percent of its award for
attorney’s fees from Schlegel’s share and 5 percent from
Grieb’s share. Schlegel now appeals the circuit court’s
judgment.
II. ANALYSIS
On appeal, Schlegel challenges the circuit court’s
conclusion that Code § 8.4A-204 preempted his common law
claims and the award of attorney’s fees. The circuit court
decided the preemption issue on cross-motions for summary
judgment. When no material facts are genuinely in dispute,
summary judgment is appropriate. Former Rule 3:18 (now
Rule 3:20); Thurmond v. Prince William Prof’l Baseball
Club, Inc., 265 Va. 59, 64, 574 S.E.2d 246, 250 (2003).
Since the circuit court’s ruling on that issue was
predicated entirely on a question of law, this Court will
review the decision de novo. See Sheets v. Castle, 263 Va.
407, 410, 559 S.E.2d 616, 618 (2002).
On the other hand, the award of attorney’s fees to the
Bank rested within the sound discretion of the circuit
court. See Coady v. Strategic Resources, Inc., 258 Va. 12,
18, 515 S.E.2d 273, 276 (1999). On appeal, we will set
7
aside the circuit court’s determination on that issue only
if the court abused its discretion. See Holmes v. LG
Marion Corp., 258 Va. 473, 479, 521 S.E.2d 528, 533 (1999).
A. Code § 8.4A-204 and Preemption
The question whether the provisions of Code § 8.4A-204
preempted Schlegel’s common law claims for conversion and
breach of contract is one of first impression in Virginia.
Title 8.4A, which is essentially identical to Article 4A of
the Uniform Commercial Code, governs a particular method of
payment generally referred to as a funds transfer. Code
§ 8.4A-102 cmt.; see also Fitts v. AmSouth Bank, 917 So.2d
818, 822 (Ala. 2005). The term
“[f]unds transfer” means the series of transactions,
beginning with the originator’s payment order, made
for the purpose of making payment to the beneficiary
of the order. The term includes any payment order
issued by the originator’s bank or an intermediary
bank intended to carry out the originator’s payment
order. A funds transfer is completed by acceptance by
the beneficiary’s bank of a payment order for the
benefit of the beneficiary of the originator’s payment
order.
Code § 8.4A-104(a). In pertinent part, the term “[p]ayment
order” is defined as “an instruction of a sender to a
receiving bank, transmitted orally, electronically, or in
writing, to pay, or to cause another bank to pay, a fixed
or determinable amount of money to a beneficiary.” Code
§ 8.4A-103(a)(1).
8
In the funds transfer at issue in this appeal, Grieb’s
instruction to the Bank to transfer money out of Piedmont’s
account to his personal account was a “payment order.” See
Code § 8.4A-104 cmt. 1. Grieb was the “sender” of the
payment order, and the Bank was the “receiving bank.” See
id.; Code §§ 8.4A-103(a)(4) and (5) (defining the terms
“receiving bank” and “sender”). Grieb, in his individual
capacity, was the “beneficiary” of the payment order, and
the Bank was the “beneficiary’s bank.” See Code § 8.4A-104
cmt. 1; Code §§ 8.4A-103(a)(2) and (3) (defining the terms
“beneficiary” and “beneficiary’s bank”). In this funds
transfer, there was no “[i]ntermediary bank.” See Code
§ 8.4A-104(b).
The statute forming the basis of the circuit court’s
decision, Code § 8.4A-204(a), provides:
If a receiving bank accepts a payment order
issued in the name of its customer as sender
which is (i) not authorized and not effective as
the order of the customer under § 8.4A-202, or
(ii) not enforceable, in whole or in part,
against the customer under § 8.4A-203, the bank
shall refund any payment of the payment order
received from the customer to the extent the bank
is not entitled to enforce payment and shall pay
interest on the refundable amount calculated from
the date the bank received payment to the date of
the refund. However, the customer is not
entitled to interest from the bank on the amount
to be refunded if the customer fails to exercise
ordinary care to determine that the order was not
authorized by the customer and to notify the bank
of the relevant facts within a reasonable time
9
not exceeding 90 days after the date the customer
received notification from the bank that the
order was accepted or that the customer’s account
was debited with respect to the order. The bank
is not entitled to any recovery from the customer
on account of a failure by the customer to give
notification as stated in this section.
This statutory provision provides a customer, such as
Piedmont (and now Schlegel, through assignment of
Piedmont’s claim), with a remedy for acceptance of an
unauthorized payment order. The remedy is a refund of the
amount wrongfully transferred plus interest if the customer
exercised ordinary care to determine that the payment order
was unauthorized and so notified the receiving bank within
a reasonable time. Id. The question, however, is whether
that is the only remedy for acceptance of an unauthorized
payment order. The Bank argues that it is the sole remedy
because Code § 8.4A-204(a) expressly addresses a customer’s
rights in the event of an unauthorized payment order and
thereby preempts any common law remedy.
Even though the circuit court concluded that the
provisions of Code § 8.4A-204(a) preempted Schlegel’s
common law claims for conversion and breach of contract,
the court nevertheless recognized that some courts have
allowed common law claims to proceed when the claims fell
outside the particular situation covered by Code § 8.4A-
204(a). We agree that certain common law claims may not be
10
preempted by Title 8.4A, but we disagree with a portion of
the circuit court’s decision in this case.
In Centre-Point Merchant Bank Ltd. v. American Express
Bank Ltd., 913 F.Supp. 202, 204 (S.D.N.Y. 1996), the court
addressed two separate claims, one being that American
Express had failed to debit Centre-Point’s account and
reinvest the funds as instructed by a “telex” communication
and the other claim being that American Express had
transferred funds from Centre-Point’s account pursuant to a
fraudulent payment order. With regard to the first claim,
the court held that the “rollover” instructions were not
“payment orders” within the meaning of Article 4A of New
York’s Uniform Commercial Code. Id. at 207. As to the
second claim, the court found that the fraudulent payment
order did fall within the scope of Article 4A. Id.
The next question for the court was whether Article 4A
provided the exclusive remedy for the injury caused by the
fraudulent payment order. Id. at 208. The court concluded
that the claim involved an alleged breach of a duty to
provide commercially reasonable security procedures to
verify payment orders. Id. Therefore, the claim concerned
a transaction covered by Article 4A and would determine the
rights, duties, and obligations of the parties to the
transaction. Id. Thus, the court decided that the claim
11
for the fraudulent payment order was precluded by Article
4A. Id.; see also Fitts, 917 So.2d at 825 (common law
claims for breach of contract, negligence, suppression,
wantonness, and conspiracy were all based on an improper
funds transfer and were thus preempted by Article 4A).
Explaining its decision, the court quoted extensively
from the holding in Sheerbonnet, Ltd. v. American Express
Bank, Ltd., 951 F.Supp. 403 (S.D.N.Y. 1995):
While Article 4-A should be the first place parties
look for guidance when they seek to resolve claims
arising out of a funds transfer, “the article has not
completely eclipsed the applicability of common law in
the area. The exclusivity of Article 4-A is
deliberately restricted to ‘any situation covered by
particular provisions of the Article.’ Conversely,
situations not covered are not the exclusive province
of the Article.” In fact, the Official Comment
tacitly states that resorting to principles of law or
equity outside of Article 4-A is acceptable, so long
as it does not create rights, duties and liabilities
“inconsistent with those stated in this Article.”
Centre-Point, 913 F.Supp. at 206 (quoting Sheerbonnet, 905
F.Supp. at 407-08).
In contrast, the court in Hedged Investment Partners,
L.P. v. Norwest Bank Minnesota, N.A., 578 N.W.2d 765, 771
(Minn. Ct. App. 1998), held that certain claims arising
from unauthorized funds transfers were not preempted by
Article 4A of Minnesota’s Uniform Commercial Code. At
issue were 26 funds transfers that allegedly were not
authorized under an Agency Agreement between a limited
12
partnership and a bank. Id. at 769. The court concluded
that the contractual responsibilities at issue were not
excluded by Article 4A because the Agency Agreement
addressed fiduciary responsibilities that went beyond the
scope of funds transfers. The court stated that
the exclusivity of Article 4A is restricted to
situations that are covered by particular
provisions of the Article and that principles of
law and equity may be applied to disputes
relating to funds transfers so long as those
principles do not create rights, duties, or
liabilities inconsistent with those stated in the
Article.
Id. at 771.
In the case before us, Schlegel’s common law claims
against the Bank involved two separate transactions. The
first one was the alleged unauthorized payment orders Greib
sent to the Bank. The provisions of Code § 8.4A-204(a)
address a receiving bank’s liability if it accepts a
payment order that is not authorized and not effective as
the order of the customer. The alleged unauthorized
payment orders are a “situation covered by the particular
provisions” of Code § 8.4A-204(a) and the remedy Schlegel
seeks in his common law claims would conflict with the
statutory remedy. Code § 8.4A-102 cmt.; see Sheerbonnet,
951 F.Supp. at 408, 410. In other words, to allow Schlegel
to proceed on his common law claims with regard to the
13
unauthorized payment orders would “create rights, duties
and liabilities inconsistent with those stated in” Code
§ 8.4A-204(a). Code § 8.4A-102 cmt.; see also Centre-
Point, 913 F.Supp. at 206; Fitts, 917 So.2d at 824.
Therefore, his common law claims as they relate to the
alleged unauthorized payment orders are preempted by the
provisions of Code § 8.4A-204(a).
We do not, however, reach the same conclusion with
regard to Schlegel’s common law claims arising from the
second transaction, i.e. the freezing of the funds without
refunding them to Piedmont’s bank account. Schlegel
asserted that the Bank wrongfully exercised dominion and
control over Piedmont’s funds when the Bank froze the funds
instead of returning them after learning that the payment
orders were not authorized. According to Schlegel, that
dominion and control over the funds continued when the Bank
refused to disburse the frozen funds after Schlegel and
Grieb resolved their differences about ownership of
Piedmont and the transferred funds.
The Bank nevertheless contends that, pursuant to its
deposit agreement with Piedmont, it had the authority to
freeze the funds at issue because of the dispute between
Schlegel and Grieb. Regardless of whether the Bank is
correct, no provision of Title 8.4A covers the second,
14
independent transaction by the Bank and Schlegel’s common
law claims for conversion and breach of contract arising
from that transaction. We agree with the observations of
the court in Sheerbonnet:
The rules of [Article 4A] are transactional, aimed
essentially at resolving conflicts created by
erroneous instruction or execution of payment orders,
whether by the originator, by an intermediary or
receiving bank, or by the beneficiary’s bank. A major
objective is to reduce and control risks that arise in
payment systems by defining when and how rights and
obligations are incurred and discharged. As organized
by the article, funds transfer errors fall into three
main categories. Errors may occur during the issuance
and acceptance of the payment order [as when the Bank
in the instant case accepted Grieb’s alleged
unauthorized payment orders], or [when the payment
order] identifies the wrong beneficiary or . . . is
untimely cancelled. Errors may also occur during the
execution of the payment order by the receiving bank –
– as when the originator’s instructions are not
followed, or the order is executed late, or is issued
in an improper amount, or is not executed at all.
Errors may also stem from payment issues – as in the
obligation of the originator to pay the receiving
bank, of the beneficiary’s bank to pay the
beneficiary, and notification of payment and discharge
of duties requirements.
951 F.Supp. at 412.
Schlegel’s common law claims as to the second
transaction by the Bank do not fall within these categories
of error. In other words, the freezing of the funds in
Grieb’s account instead of returning the funds to
Piedmont’s account is not a situation covered by any of the
particular provisions of Title 8.4A. See Code § 8.4A-102
15
cmt. Thus, contrary to the circuit court’s finding, we
conclude that Schlegel’s common law claims in this regard
do not “fall squarely within the confines” of Code § 8.4A-
204 or any other provision of Title 8.4A. These specific
common law claims are not preempted, and the circuit court
erred in finding otherwise.
B. Attorney’s Fees
With regard to the circuit court’s ruling on
attorney’s fees, Schlegel argues not only that the Bank was
not entitled to “any” attorney’s fees, but also that the
award of 20 percent of the funds at issue was “speculative,
excessive, and unreasonable.” Schlegel also asserts that
the circuit court erred in ruling that he was responsible
for paying 95 percent of the attorney’s fee award.
As the circuit court noted, we held in Pettus that
when the plaintiff in the interplea has acted in
good faith, and has grounds upon which to base
his call for the interposition of a court of
equity, requiring the adverse claimants to
interplead, he is entitled to his costs out of
the fund in his hands or which he may pay into
the court. And these costs may include an
attorney’s fee.
113 Va. at 332, 74 S.E. at 194 (quoting Woodmen of the
World v. Wood, 75 S.W. 377, 378 (Mo. Ct. App. 1903)).
Contrary to Schlegel’s argument, the principle announced in
Pettus remains valid. Applying that principle, we cannot
16
say that the circuit court abused its discretion in
deciding that the Bank was entitled to an award of
attorney’s fees. Considering the controversy between
Schlegel and Grieb about the ownership of Piedmont and its
assets, the Bank had grounds for filing its cross-bill for
interpleader.
We do not, however, reach the same conclusion with
regard to the amount of the award. Upon reviewing the
Bank’s invoices itemizing its expenses for attorney’s fees,
we find entries that relate solely to attorney’s fees
incurred by the Bank for litigating the issues raised in
Schlegel’s bill of complaint as opposed to the Bank’s
cross-bill for interpleader. For example, an entry for
January 27, 2003 pertained to a conference concerning how
to respond to Schlegel’s motion for leave to amend his bill
of complaint. As another example of many such entries, the
Bank claimed attorney’s fees on April 27, 2004 for studying
law review articles about Article 4A’s exclusivity.
A party requesting an award of attorney’s fees must
establish a prima facie case that the fees requested are
reasonable. Chawla v. BurgerBusters, Inc., 255 Va. 616,
623, 499 S.E.2d 829, 833 (1998). In deciding whether a
party has shown the reasonableness of the fees,
17
the fact finder may consider, inter alia, the
time and effort expended by the attorney, the
nature of the services rendered, the complexity
of the services, the value of the services to the
client, the results obtained, whether the fees
incurred were consistent with those generally
charged for similar services, and whether the
services were necessary and appropriate.
Id. In the present case, the Bank did not carry its burden
to establish “to a reasonable degree of specificity those
attorneys’ fees associated with its [interpleader].” Ulloa
v. QSP, Inc., 271 Va. 72, 83, 624 S.E.2d 43, 50 (2006).
Although the circuit court did not award the full amount of
attorney’s fees requested because the Bank incurred many of
the fees in defending against Schlegel’s claims, the court
nevertheless did not determine whether the amount awarded
represented compensation for services that were “necessary
and appropriate” to the cross-bill for interpleader.
Chawla, 255 Va. at 623, 499 S.E.2d at 833. Thus, we
conclude that the circuit court abused its discretion in
awarding attorney’s fees to the Bank in the amount of 20
percent of the funds at issue.3
We likewise conclude that the circuit court abused its
discretion in directing that 95 percent of the attorney’s
3
The Bank argues that it was also entitled to an award
of attorney’s fees pursuant to the deposit agreement with
Piedmont. The terms of the deposit agreement do not change
our conclusion that the circuit court abused its discretion
in determining the amount of the award.
18
fees awarded be deducted from Schlegel’s portion of the
funds. The circuit court believed that Schlegel was
responsible for the Bank’s incurring the majority of the
attorney’s fees because he protracted the litigation by
filing numerous “ungrounded motions.” The court, however,
did not relate how those motions protracted resolution of
the narrow issues involved in the cross-bill for
interpleader in light of the fact that Schlegel and Grieb
had reached a settlement that divided the funds at issue
equally between them. The order memorializing that
settlement required the custodian for Piedmont to pay all
outstanding expenses of Piedmont and then distribute the
funds at issue to Schlegel and Grieb. While the Bank’s
expenditures for attorney’s fees might not have been an
outstanding expense of Piedmont at the time the settlement
order was entered, we find no reason why the award of
attorney’s fees should not be paid in the same manner, i.e.
by paying whatever amount is awarded to the Bank and then
distributing the remaining funds equally between Schlegel
and Grieb.
III. CONCLUSION
In summary, the circuit court did not err in
concluding that Code § 8.4A-204(a) preempted Schlegel’s
common law claims arising from the alleged unauthorized
19
payment orders. The circuit court, however, did err in
finding that Code § 8.4A-204(a) preempted Schlegel’s common
law claims for conversion and breach of contract arising
from the Bank’s failure to return the funds to Piedmont’s
bank account after it learned of the alleged unauthorized
payment orders and the Bank’s alleged continuing dominion
and control over the transferred funds.
With regard to the award of attorney’s fees, we
conclude that the circuit court did not abuse its
discretion in finding that the Bank is entitled to an award
for attorney’s fees incurred with respect to its cross-bill
for interpleader. However, the circuit court did abuse its
discretion by awarding 20 percent of the frozen funds as
attorney’s fees and by directing that Schlegel pay 95
percent of the award from his portion of the funds at
issue.
For these reasons, we will affirm in part and reverse
in part the judgment of the circuit court and remand for
further proceedings consistent with this opinion.
Affirmed in part,
reversed in part,
and remanded.
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