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HALIFAX CORPORATION v. FIRST UNION NATIONAL BANK


NOTICE: The opinions posted here are
subject to formal revision. If you find a typographical error or
other formal error, please notify the Supreme Court of Virginia.


HALIFAX CORPORATION

v.

FIRST UNION NATIONAL BANK


June 8, 2001

Record No. 001944

HALIFAX CORPORATION

v.

FIRST UNION NATIONAL BANK

FROM THE CIRCUIT COURT OF FAIRFAX COUNTY

M. Langhorne Keith, Judge


OPINION BY JUSTICE LEROY R. HASSELL, SR.

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

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. Adams served as Halifax’s comptroller.
[1] Between August 1995 and January 1997, she wrote at
least 88 checks on Halifax’s account at Signet Bank, which was
subsequently acquired by 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 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 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 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 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 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 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.

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 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) 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, 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. 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
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 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 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.

FOOTNOTES:

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

[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.

 

 

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