Halifax Corp. v. First Union National Bank

Present: Carrico, C.J., Hassell, Keenan, Kinser, and Lemons,
JJ., Poff and Stephenson, S.JJ.

HALIFAX CORPORATION
                         OPINION BY JUSTICE LEROY R. HASSELL, SR.
v.   Record No. 001944               June 8, 2001

FIRST UNION NATIONAL BANK

            FROM THE CIRCUIT COURT OF FAIRFAX COUNTY
                    M. Langhorne Keith, Judge

                                I.

      The primary issue that we consider in this appeal is

whether a plaintiff's cause of action against a bank is

precluded by Code § 8.4-406(f), which is a part of Virginia's

Uniform Commercial Code.

                                II.

      Halifax Corporation filed its motion for judgment against

First Union National Bank and Wachovia Bank, N.A.     In Count I

of a multi-count motion for judgment, Halifax sought recovery

from First Union under Code § 8.4-401, which is a part of

Virginia's Uniform Commercial Code.     In Count II, Halifax

sought damages based upon First Union's alleged breach of its

deposit agreement with Halifax.      In Count III, Halifax sought

to recover against First Union and Wachovia Bank for purported

claims of negligence, gross negligence, and recklessness under

Code §§ 8.3A-404, 8.3A-405, 8.3A-406, and 8.4-406, which are

parts of Virginia's Uniform Commercial Code.
     First Union filed a motion for summary judgment alleging,

among other things, that Halifax's claims were barred under

Code § 8.4-406(f).    The circuit court, in a written opinion,

agreed with First Union and entered an order which granted the

motion for summary judgment.   Halifax nonsuited Wachovia Bank

and appeals the circuit court's judgment in favor of First

Union.

                               III.

     Because this case was decided on a motion for summary

judgment, we will state the facts pled in the plaintiff's

motion for judgment and adopt inferences from those facts in

the light most favorable to Halifax Corporation, the non-

moving party, unless the inferences are strained, forced, or

contrary to reason.    Slone v. General Motors Corp., 249 Va.

520, 522, 457 S.E.2d 51, 52 (1995).

     Halifax is a corporation organized and existing under the

laws of Virginia.    Between August 1995 and March 1999, Mary K.
                                         1
Adams served as Halifax's comptroller.       Between August 1995

and January 1997, she wrote at least 88 checks on Halifax's

account at Signet Bank, which was subsequently acquired by


     1
       Halifax Corporation, is the successor in interest to CMS
Automation, Inc., and Halifax Technology Services Company.
Adams was employed as the comptroller for these companies.
For purposes of this appeal, we will refer to CMS Automation,
Halifax Technology Services, and Halifax Corporation as
Halifax.

                                 2
First Union National Bank.    Adams used facsimile signatures on

the checks, and she made the checks payable to herself or

cash.    Adams deposited these checks in her personal account at

the former Central Fidelity Bank, which is now Wachovia Bank,

N.A.    First Union, as drawee bank, "paid each of these checks

and debited [Halifax's] account despite the forged and/or

unauthorized drawer's signatures."

        First Union paid each check and debited Halifax's account

even though most of these corporate checks "were drawn in

large amounts exceeding $10,000 and $20,000, of which

approximately one quarter were drawn in exceptionally large

amounts of between $50,000 and $100,000 each, and payable to

'Mary Adams,' an individual who [First Union] knew to be an

employee and Comptroller of [Halifax]."    First Union paid

these large checks "despite one, and in many instances, two

levels of inspection of the individual checks for purposes of

payment approval."

        In January 1999, Halifax discovered accounting

irregularities in certain check transactions and initiated an

investigation.    Subsequently, Halifax learned that Adams had

embezzled at least $15,445,230.49 from its account.      Halifax

does not dispute that First Union sent Halifax monthly

statements reflecting the unauthorized checks and that Halifax




                                  3
failed to notify First Union of the unauthorized signatures

within one year after the statements were sent to Halifax.

                                 IV.

                                 A.

     The following former and current statutes are relevant to

our resolution of this appeal.    Code § 8.4-401, a current

statute, states in pertinent part:

          "When bank may charge customer's account. — (a)
     A bank may charge against the account of a customer
     an item that is properly payable from that account
     even though the charge creates an overdraft. An
     item is properly payable if it is authorized by the
     customer and is in accordance with any agreement
     between the customer and the bank.

                            . . . .

          "(d) A bank that in good faith makes payment to
     a holder may charge the indicated account of its
     customer according to:
          "(1) the original terms of the altered item; or
          "(2) the terms of the completed item, even
     though the bank knows the item has been completed
     unless the bank has notice that the completion was
     improper."

     Former Code § 8.4-406 stated in part:

          "Customer's duty to discover and report
     unauthorized signature or alteration. — (1) When a
     bank sends to its customer a statement of account
     accompanied by items paid in good faith in support
     of the debit entries or holds the statement and
     items pursuant to a request or instruction of its
     customer or otherwise in a reasonable manner makes
     the statement and items available to the customer,
     the customer must exercise reasonable care and
     promptness to examine the statement and items to
     discover his unauthorized signature or any
     alteration on an item and must notify the bank


                                  4
     promptly after discovery thereof. The furnishing or
     making available to the customer of copies of such
     statement and items shall be deemed in compliance
     with this section.
          "(2) If the bank establishes that the customer
     failed with respect to an item to comply with the
     duties imposed on the customer by subsection (1) the
     customer is precluded from asserting against the
     bank
          "(a) his unauthorized signature or any
     alteration on the item if the bank also establishes
     that it suffered a loss by reason of such failure;
     and
          "(b) an unauthorized signature or alteration by
     the same wrongdoer on any other item paid in good
     faith by the bank after the first item and statement
     was available to the customer for a reasonable
     period not exceeding fourteen calendar days and
     before the bank receives notification from the
     customer of any such unauthorized signature or
     alteration.
          "(3) The preclusion under subsection (2) does
     not apply if the customer establishes lack of
     ordinary care on the part of the bank in paying the
     item(s).
          "(4) Without regard to care or lack of care of
     either the customer or the bank a customer who does
     not within one year from the time the statement and
     items are made available to the customer (subsection
     (1)) discover and report his unauthorized signature
     or any alteration on the face or back of the item or
     does not within three years from that time discover
     and report any unauthorized indorsement is precluded
     from asserting against the bank such unauthorized
     signature or indorsement or such alteration."

(Emphasis added).

     The General Assembly amended Code § 8.4-406 and,

effective January 1, 1993, the revised statute states:

          "Customer's duty to discover and report
     unauthorized signature or alteration. — (a) A bank
     that sends or makes available to a customer a
     statement of account showing payment of items for
     the account shall either return or make available to


                               5
the customer the items paid or provide information
in the statement of account sufficient to allow the
customer reasonably to identify the items paid. The
statement of account provides sufficient information
if the item is described by item number, amount, and
date of payment.
                         . . . .
      "(c) If a bank sends or makes available a
statement of account or items pursuant to subsection
(a), the customer must exercise reasonable
promptness in examining the statement or the items
to determine whether any payment was not authorized
because of an alteration of an item or because a
purported signature by or on behalf of the customer
was not authorized. If, based on the statement or
items provided, the customer should reasonably have
discovered the unauthorized payment, the customer
must promptly notify the bank of the relevant facts.
      "(d) If the bank proves that the customer
failed with respect to an item to comply with the
duties imposed on the customer by subsection (c) the
customer is precluded from asserting against the
bank:
      "(1) the customer's unauthorized signature or
any alteration on the item, if the bank also proves
that it suffered a loss by reason of the failure;
and
      "(2) the customer's unauthorized signature or
alteration by the same wrongdoer on any other item
paid in good faith by the bank if the payment was
made before the bank received notice from the
customer of the unauthorized signature or alteration
and after the customer had been afforded a
reasonable period of time, not exceeding thirty
days, in which to examine the item or statement of
account and notify the bank.
      "(e) If subsection (d) applies and the customer
proves that the bank failed to exercise ordinary
care in paying the item and that the failure
substantially contributed to loss, the loss is
allocated between the customer precluded and the
bank asserting the preclusion according to the
extent to which the failure of the customer to
comply with subsection (c) and the failure of the
bank to exercise ordinary care contributed to the
loss. If the customer proves that the bank did not



                          6
     pay an item in good faith, the preclusion under
     subsection (d) does not apply.
          "(f) Without regard to care or lack of care of
     either the customer or the bank, a customer who does
     not within one year after the statement or items are
     made available to the customer (subsection (a))
     discover and report the customer's unauthorized
     signature on or any alteration on the item is
     precluded from asserting against the bank the
     unauthorized signature or alteration. If there is a
     preclusion under this subsection, the payor bank may
     not recover for breach of warranty under § 8.4-207.2
     with respect to the unauthorized signature or
     alteration to which the preclusion applies."

     Code § 8.1-203, a current statute which is also a part of

Virginia's Uniform Commercial Code, states:   "Every contract

or duty within [the Uniform Commercial Code] imposes an

obligation of good faith in its performance or enforcement."

                               B.

     Halifax argues that the circuit court erred in ruling

that its claims under Code § 8.4-401 were barred by the

revised Code § 8.4-406(f) because First Union allegedly acted

in bad faith.   Halifax, relying upon Code § 8.1-203, asserts

that First Union had an obligation to act in good faith, and

First Union failed to discharge that obligation when it paid

checks which contained unauthorized signatures.   Halifax

states in its brief:   "Both the original 1962 Code and the

revised 1990 Code make clear that if a bank acts in bad faith,

it cannot claim the one-year preclusion of 4-406.   That

interpretation is reached two ways:   either by reference to



                                7
the first subsection of 4-406, or to the last.    Neither

subsection has changed substantively in the revised Code."

     Continuing, Halifax states in its brief:    "The first

subsection, 4-406(1) of the 1962 Code, referred to the bank

returning 'items paid in good faith.'   . . . Under the

revision, that subsection has been expanded to three

subsections, § 8.4-406(a)-(c) of the 1990 Code, adding

document retention periods when the bank does not return items

to the customer.   In the rewrite, the first subsection no

longer refers to the return of 'items paid in good faith,' but

to the return of 'items paid.' . . . No mention is made in the

Official Comments, as it clearly would be for such a momentous

change, that because of this rewrite items no longer need be

paid in good faith.   Indeed, the Official Drafting History of

revised 4-406, entitled 'Reason for 1990 Change' states that

apart from changes explained there and in the Official

Comments:   'The other modifications are made to conform with

current legislative drafting practices, with no intent to

change substance.' . . . Any separate reference to good faith

would be redundant, as all duties are subject to § 8.1-203."

     We disagree with Halifax's contentions.     Initially, we

observe that we must confine our inquiry to the statutory

language contained in Code §§ 8.4-406 and 8.1-203.    We have




                                8
repeatedly articulated principles of statutory construction

that we must apply when statutes are clear and unambiguous.

          "While in the construction of statutes the
     constant endeavor of the courts is to ascertain and
     give effect to the intention of the legislature,
     that intention must be gathered from the words used,
     unless a literal construction would involve a
     manifest absurdity. Where the legislature has used
     words of a plain and definite import the courts
     cannot put upon them a construction which amounts to
     holding the legislature did not mean what it has
     actually expressed."

Watkins v. Hall, 161 Va. 924, 930, 172 S.E. 445, 447 (1934);

accord Weinberg v. Given, 252 Va. 221, 225, 476 S.E.2d 502,

504 (1996); Turner v. Wexler, 244 Va. 124, 127, 418 S.E.2d

886, 887 (1992); Grillo v. Montebello Condominium Owners

Assoc., 243 Va. 475, 477, 416 S.E.2d 444, 445 (1992); Barr v.

Town & Country Properties, 240 Va. 292, 295, 396 S.E.2d 672,

674 (1990).

     When analyzing a statute, we must assume that the General

Assembly chose, with care, the words it used in enacting the

statute, and we are bound by those words when we apply the

statute.   Barr, 240 Va. at 295, 396 S.E.2d at 674.

Additionally, 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.   See, e.g., Turner,

244 Va. at 127, 418 S.E.2d at 887.



                                9
     Code § 8.4-406 imposes certain duties upon bank customers

to discover and report unauthorized signatures or alterations.

Code § 8.4-406(a) provides that a bank which elects to send or

make available to a customer a statement of account showing

payment of items for the account must provide certain

information to the customer.

     Code § 8.4-406(c) imposes a duty upon a customer to

exercise reasonable promptness to examine the bank statement

or items to determine whether any payment was not authorized

because of an alteration or unauthorized signature.   Code

§ 8.4-406(c) also imposes a duty upon the customer to promptly

notify the bank of the relevant facts.   Code § 8.4-406(c) does

not limit the scope of the customer's duty to those items that

the bank paid in good faith.

     By contrast, subsection 1 of the former version of Code

§ 8.4-406 also imposed a duty upon bank customers to examine

their bank statements and report any alterations or

unauthorized signatures.   However, the duty imposed upon bank

customers by former Code § 8.4-406 applied only with respect

to items paid in good faith by the bank.   The former Code

provision stated:   "When a bank sends to its customer a

statement of account accompanied by items paid in good faith

in support of the debit entries . . . the customer must

exercise reasonable care and promptness to examine the


                               10
statement and items to discover his unauthorized signature or

any alteration on an item and must notify the bank promptly

after discovery thereof."

     Current Code § 8.4-406(d), which precludes a customer

from asserting a claim against a bank for a loss caused by an

unauthorized signature or alteration in certain prescribed

circumstances, provides that this preclusion does not apply if

the bank failed to pay an item in good faith.   Code § 8.4-

406(d) explicitly limits the preclusion to items "paid in good

faith by the bank."   Additionally, the General Assembly also

expressly used the phrase "good faith" in Code § 8.4-406(e).

This provision states in relevant part:   "If the customer

proves that the bank did not pay an item in good faith, the

preclusion under subsection (d) does not apply."

     Code § 8.4-406(f) bars a customer, who received a

statement or item from a bank but failed to discover or report

the customer's unauthorized signature or alteration on the

item to the bank within one year after the statement or item

is made available to the customer, from asserting a claim

against the bank for the unauthorized signature or alteration.

The customer's compliance with this one-year statutory notice

provision is a condition precedent to the customer's right to

file an action against the bank to recover losses caused by

the unauthorized signature or alteration.   Code § 8.4-406(f)


                               11
is devoid of any language which limits the customer's duty to

discover and report unauthorized signatures and alterations to

items paid in good faith by the bank.   The absence of the

phrase, "good faith," in the language chosen by the General

Assembly compels this Court to conclude that a bank's

statutory right to assert a customer's failure to give the

statutorily prescribed notice is not predicated upon whether

the bank exercised good faith in paying the item which

contained the unauthorized signature or alteration.   If the

General Assembly had intended to limit the preclusion

contained in Code § 8.4-406(f) to items paid in good faith,

the General Assembly would have done so explicitly.     See

Allstate Insurance Co. v. Eaton, 248 Va. 426, 430, 448 S.E.2d

652, 655 (1994).

     We recognize that neither the Official Comments to the

Uniform Commercial Code nor the Virginia Comments to the

Uniform Commercial Code contain any commentary discussing

whether a bank, which asserts as a defense the customer's

failure to give the statutorily prescribed notice in Code

§ 8.4-406(f), must have exercised good faith when the bank

paid the item which contains the unauthorized signature or

alteration.   However, as we have stated in another context,

"while official Comments concerning the Uniform Commercial

Code are frequently helpful in discerning legislative intent,


                               12
they should not become devices for expanding the scope of Code

sections where language within the sections themselves defies

such an expansive interpretation."     Leake v. Meredith, 221 Va.

14, 17, 267 S.E.2d 93, 95 (1980).     Certainly, the absence of

Official Comments on this issue does not permit this Court to

add the phrase "good faith" to Code § 8.4-406(f).    And, as we

have already noted, the General Assembly, which included the

phrase "good faith" in Code § 8.4-406(d) and -406(e), did not

include that phrase in § 8.4-406(f).

     We acknowledge, as Halifax observes, that Code § 8.1-203

provides that every contract or duty within the Uniform

Commercial Code imposes an obligation of good faith in its

performance.    Code § 8.1-203, however, does not require that a

bank asserting the preclusion contained in Code § 8.4-406(f)

demonstrate that it paid the unauthorized items in good faith.

     Code § 8.1-203 is a statute of general application

whereas Code § 8.4-406 is a statute of specific application.

"[W]hen one statute speaks to a subject in a general way and

another deals with a part of the same subject in a more

specific manner, . . . where they conflict, the latter

prevails."     Dodson v. Potomac Mack Sales & Service, 241 Va.

89, 94-95, 400 S.E.2d 178, 181 (1991) (quoting Virginia Nat'l

Bank v. Harris, 220 Va. 336, 340, 257 S.E.2d 867, 870 (1979));

accord County of Fairfax v. Century Concrete Services, 254 Va.


                                 13
423, 427, 492 S.E.2d 648, 650 (1997); City of Winchester v.

American Woodmark, 250 Va. 451, 460, 464 S.E.2d 148, 153

(1995).   Thus, to the extent any conflict exists between Code

§ 8.1-203 and § 8.4-406(f), we must apply the statute of

specific application, in this instance, Code § 8.4-406(f).

And, as we have already concluded, the exclusion of the good

faith requirement in Code § 8.4-406(f) was intentional, and

the General Assembly did not intend to impose that requirement

upon a bank which asserted that a customer was precluded from

recovering against it because the customer failed to discover

and report an unauthorized signature or alteration on an item

within the prescribed one year.

                                 C.

     Halifax alleged in its motion for judgment that it had

claims of negligence, gross negligence, and recklessness

against First Union, which paid checks purportedly bearing

forged indorsements.   In support of its purported claims,

Halifax cited Code §§ 8.3A-404, -405, -406, and Code § 8.4-406

in its motion for judgment.   The circuit court granted First

Union's motion for summary judgment.

     Halifax contends that the circuit court erred because an

issue of fact exists whether the checks that Adams negotiated

contained forged indorsements.    Halifax's contentions are

without merit.   Halifax did not allege in its motion for


                                 14
judgment that Adams had forged indorsements on the checks at

issue.   Rather, Halifax pled that First Union paid checks

which contained "forged and/or unauthorized drawer

signatures."      Thus, the circuit court did not err in granting

the motion for summary judgment because, as a matter of law,

Halifax failed to plead a cause of action based upon forged

indorsements. 2

                                  D.

     As we have already stated, Halifax alleged in its motion

for judgment that First Union breached its contract with

Halifax.   Halifax pled that "[t]he deposit agreement and/or

corporate banking authorization . . . authorized [First Union]

to recognize certain signatures specifically indicated in the

agreement and/or corporate banking authorization, in the

payment of funds or transaction of business on the account."

The circuit court granted First Union's motion for summary

judgment on the contract claim because First Union's contract

with Halifax was subject to the provisions of Virginia's

     2
       Even though the circuit court did not decide this issue,
we have serious reservations regarding whether Halifax would
have had a cause of action under Code §§ 8.3A-404, -405, -406,
and § 8.4-406 even if it had pled that Adams had affixed
forged indorsements to the checks at issue. Code § 8.3A-404
governs indorsements made by imposters and fictitious payees.
Code § 8.3A-405 deals with an employer's responsibility for a
fraudulent indorsement by an employee. Code § 8.3A-406
precludes a customer from recovering sums improperly paid by a



                                  15
Uniform Commercial Code.   Halifax argues that the circuit

court erred.   We disagree.

     Code § 8.1-103, a part of Virginia's Uniform Commercial

Code, states in relevant part:

     "Unless displaced by the particular provisions of
     this act, 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
     cause shall supplement its provisions."

We hold that Title 8.4, which governs the relationships

between a bank and its customers, delineates the rights of a

customer against its drawee bank for the improper payment of

checks drawn on the customer's account.    The principles of

contract law, which Halifax purportedly pled, have been

displaced by the Uniform Commercial Code, which was enacted to

promote uniformity, predictability, and finality in certain

types of commercial transactions.     We will not permit Halifax

to circumvent the Uniform Commercial Code by asserting a

breach of contract claim that has been displaced.

                                 V.

     In summary, we hold that Halifax's claims under Code

§ 8.4-401 are barred because Halifax failed to satisfy the

condition precedent in Code § 8.4-406(f).    We also hold that



bank if the customer's own negligence contributed to a forged
signature or alteration of an instrument.

                                 16
Halifax failed to allege a cause of action based upon forged

indorsements, and Halifax's claim that First Union breached

the "deposit agreement and/or corporate banking authorization"

is displaced by the Uniform Commercial Code.

     In view of our holdings, we need not address Halifax's

remaining contentions.   Accordingly, we will affirm the

judgment of the circuit court. 3

                                                       Affirmed.




     3
       We observe that the circuit court's final judgment
incorporates by reference the circuit court's opinion letter.
We do not agree with all the rulings contained in that letter,
but those rulings are not germane to this Court's opinion.

                               17