Case Title: Halifax Corp. v. First Union National Bank

Citation: 

Docket Number: 001944

State: virginia

Court: Virginia Supreme Court

Date: 2001-06-08T00:00:00Z

Document:
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. 
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 
                     
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 
 
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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 
 
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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