In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 03-1833

TRAVELERS CASUALTY AND SURETY

COMPANY OF AMERICA,

Plaintiff-Appellant,

v.

WELLS FARGO BANK N.A. and

CHARLES SCHWAB & CO., INC.,

Defendants-Appellees.

____________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 01 C 9716—Matthew F. Kennelly, Judge.

____________

ARGUED MAY 17, 2004—DECIDED JULY 2, 2004

____________

Before POSNER,EASTERBROOK,andMANION, Circuit Judges.

POSNER, Circuit Judge. This diversity suit governed by

Illinois law raises issues of banking and commercial law.

Allianz Life Insurance Company had a checking account at

Wells Fargo bank (actually a predecessor of Wells Fargo, but

we can ignore that detail) for the payment of benefits to

employees covered by Allianz’s employee health plan.
2 No. 03-1833

Charles Schwab, a securities brokerage firm that offers

checking services to its customers, received a check for

$287,651.23 made out to it and drawn on Allianz’s account

at Wells Fargo. The check was presented to Schwab for

deposit by a man who called himself James M. Carden and

said he wanted to open a brokerage account in his name.

Schwab opened an account in Carden’s name, credited the

account with the face amount of the check, and deposited

the check in a bank in which Schwab has an account. Two

weeks later Carden faxed Schwab directions to wire various

amounts of money in his Schwab account, adding up to

almost all the money in it, to accounts (none in Carden’s

name) in other financial institutions. Schwab made the

transfers as instructed, though only after checking with

Wells Fargo to make sure that Allianz’s check to Schwab

had cleared so that the money that Carden wanted to

withdraw would not come out of Schwab’s pocket. The

check had cleared.

Within a few days, however, Allianz discovered that

Carden had never been employed by it. It believes that

Carden, whom investigators have been unable to track

down (“Carden” may not be the depositor’s real name), had

forged the $287,651.23 check. Allianz asked Wells Fargo to

make good the loss. Wells Fargo refused. Travelers had

insured Allianz against such losses, so it paid off Allianz

and then brought this suit, as Allianz’s subrogee, against

both Wells Fargo and Schwab. Although the Uniform

Commercial Code, in force in Illinois as in all states, contains elaborate provisions regulating commercial paper,

including checks, Travelers invoked a common law duty of

banks—a duty the UCC has not superseded—not to honor

checks in the circumstances of this case. After a bench trial,

the district judge ruled in favor of the defendants, and

Travelers appeals.
No. 03-1833 3

Wells Fargo could not be held liable for honoring a forged

or otherwise unauthorized check if, in fact, the check was

not forged or unauthorized; and in ruling for Wells Fargo

the judge ruled that Travelers had failed to prove that the

check made out to Schwab and deposited by Carden had

not been authorized by Allianz. Travelers had intended to

present testimony by the only two employees of Allianz

who were authorized to sign checks drawn on the account

on which the $287,651.23 check was drawn that they had not

authorized the check. But at trial, instead of putting these

employees on the witness stand or, if they were unavailable,

submitting their depositions, Travelers presented affidavits

containing their testimony. The judge correctly ruled the

affidavits inadmissible as hearsay. The affiants were not

available for cross-examination, as they would have been

had they testified live or given depositions earlier at which

the defendants could have cross-examined them.

It might seem to follow directly from this ruling that the

case was properly dismissed. Yet the district judge, while

convinced that without the affidavits Travelers could not

prove that the check was unauthorized, dismissed only the

claim against Wells Fargo on that ground. He distinguished

the claim against Schwab on the ground that Schwab might

have had a duty to Allianz to inquire whether the check was

authorized. But even so, and even if Travelers proved that

Schwab had violated its duty to Allianz, in order to obtain

relief Travelers would have to show that Schwab, had it

fulfilled its duty, would have discovered that Allianz had

not authorized the check to Schwab, and having discovered

this would not have let Carden transfer the money out of his

Schwab account. The judge may have missed this elementary point about causation because, despite ruling in favor

of Wells Fargo, he may have believed that the check was

unauthorized. For in a part of his oral opinion (and beware

oral opinions in complex cases) in which he held that
4 No. 03-1833

Travelers was in any event barred from relief by contributory negligence on the part of Allianz, the judge said that

the $287,651.23 check “had a similar appearance to the

earlier check”—a check that the judge thought Allianz had

been negligent in failing to investigate—“which essentially

means that, on its face, it didn’t appear phony or altered in

any way, but it is a reasonable inference that it was prepared by the same person, and it would have been a

reasonable inference that it was prepared by the same

person who prepared the earlier unauthorized check” (emphasis

added).

There had been two earlier suspicious checks drawn on

Allianz’s account at Wells Fargo. The first, for $26,500, was

payable to a Michelle R. Bryon. The second, for $46,651.23,

was payable to an Allan M. Ferrao. Since the check to

Carden was for $287,651.23, it is almost certain that whoever

forged the check to Ferrao also forged the check to Schwab

that Carden presented; at all events the inference seems

inescapable that the $287,651.23 check was also unauthorized. There was evidence of this apart from the affidavits

(which were not good evidence, as we have said)—not only

the identity of the last five digits in the second and third

checks, but also that efforts to locate Carden failed, an

experienced investigator for Allianz concluded that the

check Carden had deposited had been forged or altered, and

Schwab itself unguardedly argued that Travelers’ claim was

barred by section 4-406(d)(2) of the Uniform Commercial

Code.

To explain the last point, section 4-406(d)(2) provides that

the drawer of a check (Allianz, and thus Travelers as its

subrogee) can’t complain about the check’s alteration “by

the same wrongdoer” who had previously altered a check

of the drawer, if the drawer would have discovered the

alteration simply by comparing the bank’s statement (as-
No. 03-1833 5

suming as in this case that the bank rendered a statement of

account to its customer) with its own records. UCC § 4-406,

comment 2; Marx v. Whitney National Bank, 713 So. 2d 1142,

1146-48 (La. 1998); Mercantile Bank of Arkansas v. Vowell, 117

S.W.3d 603, 612-13 (Ark. App. 2003); Espresso Roma Corp. v.

Bank of America, N.A., 124 Cal. Rptr. 2d 549, 551-52 (App.

2002). The implication is that Carden had altered at least

one previous check and the check at issue in this case as

well.

The reason we term Schwab’s arguing section 4-406(d)(2)

“unguarded” is that the section cannot provide a defense for

Schwab, because Allianz was not a customer of Schwab.

Mac v. Bank of America, 90 Cal. Rptr. 2d 476, 479-481 (App.

1999); UnBank Co. v. Whittaker-Gomez, 438 N.W.2d 382, 384

(Minn. App. 1989); 6C Lary Lawrence, Anderson on the

Uniform Commercial Code § 4-406:10 (3d rev. ed. 2003). It may

provide a defense to Wells Fargo, but the district judge,

having decided that Wells Fargo had no prima facie liability

to Allianz, didn’t consider any of the defenses that a bank

might be able to interpose against a suit by a customer who

had been negligent. See UCC §§ 3-406(a), 4-406(c), (d); Gulf

States Section, PGA, Inc. v. Whitney National Bank, 689 So. 2d

638, 641-42 (La. App. 1997); 2 James J. White & Robert S.

Summers, Uniform Commercial Code § 19-3 (4th ed. 1995).

Maybe all the judge meant in the passage we quoted

earlier was that since as he said the $287,651.23 check

“didn’t appear phony or altered in any way,” it wouldn’t

have put Wells Fargo on notice that something was fishy;

and then Wells Fargo might be off the hook even if the

check was unauthorized. For while ordinarily a bank is

strictly liable for charging a customer’s account with an

amount that the customer had not authorized the bank

to pay (and Allianz was Wells Fargo’s customer), UCC § 4-

401(a), a bank and its customer can contract out of that strict
6 No. 03-1833

liability, §§ 4-401(a), 4-103(a), and Wells Fargo argues that

it did so in its contract with Allianz. This was another of

Wells Fargo’s defenses that the judge didn’t reach.

We really don’t know what the judge was thinking. His

findings on the question whether the check was authorized

are in irreconcilable conflict. But probably the best interpretation is that he thought it didn’t matter. He clearly thought

Schwab was off the hook even if the check was unauthorized, and let us consider whether he was correct about that

at least. The common law of Illinois as of other states

requires a bank, if someone tries to deposit a check made

out to it in his own account, to exercise due care to make

sure that the drawer (the third party) intended the depositor

to receive the drawer’s money. Mutual Service Casualty Ins.

Co. v. Elizabeth State Bank, 265 F.3d 601, 613-14 (7th Cir. 2001)

(Illinois law); Douglass v. Wones, 458 N.E.2d 514, 522 (Ill.

App. 1983); Federal Ins. Co. v. NCNB National Bank of North

Carolina, 958 F.2d 1544, 1549-50 (11th Cir. 1992); Master

Chemical Corp. v. Inkrott, 563 N.E.2d 26, 28-29 (Ohio 1990);

Allis Chalmers Leasing Services Corp. v. Byron Center State

Bank, 341 N.W.2d 837, 839 (Mich. App. 1983) (per curiam);

cf. Murray v. Bank of America, N.A., 580 S.E.2d 194, 198

(S.C. App. 2003); see also Boyd J. Peterson, Annotation,

“Liability of Bank for Diversion to Benefit of Presenter or

Third Party of Proceeds of Check Drawn to Bank’s Order by

Drawer Not Indebted to Bank,” 69 A.L.R.4th 778 (1989)

(collecting cases). The danger is great in such a case that the

depositor merely found, stole, or forged the check. The risk

of his getting away with such fraud is reduced if the bank

has a duty to check with the drawer or take other steps to

make reasonably sure that the deposit is authorized. The

duty is imposed, it should be noted, as a matter of tort law

rather than contract law or UCC law (which is mainly

contract law); there was no contractual relation between

Schwab and Allianz.
No. 03-1833 7

As our reference in the preceding paragraph to finding or

stealing a check implied, the duty is not limited to cases in

which a check is unauthorized (which will usually mean

forged). Suppose Allianz wrote a check payable to Schwab

in order to transfer funds to Allianz’s own investment

account with Schwab, and someone stole the check and

presented it to Schwab, which credited the thief’s account,

and the thief later drained the account. Schwab would have

committed a tort by not checking with Allianz to learn the

drawer’s instructions. However, there is no suggestion in

this case that Allianz may have authorized the check to

Schwab but that Carden then stole it and presented it to

Schwab.

The initial question concerning Schwab’s performance of

its tort duty to Allianz is whether, not being a bank, it had

such a duty. We cannot find any cases on whether the duty

extends to any other commercial enterprises, though we

point out for what it is worth that the term “bank” in the

Uniform Commercial Code (e.g., UCC § 4-105(1)) has been

interpreted to cover other financial institutions that perform

bank-type services—including brokerage firms, as

in Lichtenstein v. Kidder, Peabody & Co., 727 F. Supp. 975, 978-

79 (1989), vacated on other grounds, 777 F. Supp. 423 (W.D.

Pa. 1991); Edward D. Jones & Co. v. Mishler, 983 P.2d 1086,

1093-97 (Ore. App. 1999); Pinasco v. Ara, 631 N.Y.S.2d 346,

348 (App. Div. 1995); Asian Int’l, Ltd. v. Merrill Lynch, Pierce,

Fenner & Smith, Inc., 435 So. 2d 1058, 1062 (La. App. 1983);

see also Woods v. MONY Legacy Life Ins. Co., 641 N.E.2d

1070, 1072 (N.Y. 1994) (life insurer that administered money

market account). But certainly the common law duty should

extend to enterprises such as Schwab that offer a checking

service in competition with banks. To lift the duty of inquiry

from Schwab’s shoulders would be to give it an arbitrary

cost advantage in competing with banks for capital. Banks

make their money by lending, and they obtain much of that
8 No. 03-1833

money by offering checking services to people looking for

a place to park their money. Schwab wants to obtain capital

from the same source—people who can be induced to

deposit their money with a financial institution in exchange

for the convenience of being able to deposit and withdraw

the money by check. Had Schwab no duty of inquiry, this

would reduce its costs of liability insurance and of scrutinizing checks submitted to it for payment and it could use its

resulting cost advantage to lure customers from banks that,

though they may be no less efficient than Schwab, cannot

avoid those costs. There is no reason to confer such a

windfall competitive advantage on the brokerage industry.

The common law is flexible enough to permit the modification of one of its doctrines when necessary to avoid producing an anomalous result because of a change in commercial

practice.

It is true but irrelevant that the common law’s imposition

of a duty of care on a bank which receives a check made out

to it by a drawer who owes the bank no money is unusual

because it creates a form of “good Samaritan” liability,

which the common law normally refuses to impose. See,

e.g., Cuyler v. United States, 362 F.3d 949, 953 (7th Cir. 2004);

Stockberger v. United States, 332 F.3d 479 (7th Cir. 2003);

Restatement (Second) of Torts § 314 (1965); W. Page Keeton et

al., Prosser and Keeton on the Law of Torts § 56, pp. 375-76 (5th

ed. 1984). The drawer in a case such as this, to repeat, is not

a customer of the payee institution (Allianz drew the check

on Wells Fargo, not on Schwab), or anyone else to whom the

payee would owe a duty of care under normal tort principles. Rather it’s a third party whom the payee is asked to

“rescue” from a possible fraud. But unusual as the rule may

be in our common law system, it is firmly established (as are

many other exceptions to “no ‘good Samaritan’ liability”

reviewed in the Stockberger opinion) and there is no justification for confining it to banks that offer checking services.
No. 03-1833 9

The next question is whether Schwab fulfilled its tort duty

of care to Allianz. The district judge thought it had

by verifying with Wells Fargo that Allianz had enough

money in its account to cover the check. But in doing this

Schwab was protecting itself, not the drawer, Allianz. It

should have tried to find out from Allianz whether the

check had been authorized. Although Allianz’s check listed

no address or phone number, only a P.O. box number in

Milwaukee, it would have taken no more than a minute to

look up Allianz’s phone number and place a call. If having

done so Schwab had found itself entangled in an endless

automated phone menu or otherwise unable to get through

to a responsible employee of the company in a reasonable

amount of time and get a prompt answer to its query, its

duty of care might have been satisfied. Alternatively, it

could have warned Wells Fargo of the unusual deposit; the

warning doubtless would have impelled Wells Fargo to

check the matter with its customer, in order to avoid liability. Schwab did nothing and there is no evidence that,

had it made a reasonable effort to protect the drawer, even

a minimum effort, the effort would have been fruitless.

Schwab violated its duty of care to Allianz.

The judge committed two further errors with regard to the

claim against Schwab. The first was to rule that Schwab was

a holder in due course of the $287,653.21 check and therefore took free from all defenses that the drawer might have

against other recipients. A payee can, it is true, be a holder

in due course. UCC § 3-302(a)(2), comment 4. And while,

like other holders in due course, it must take in good faith,

it is reasonably clear that “good faith,” as the term connotes,

does not include due care, UCC § 3-103, comment 4; 6B

Anderson on the Uniform Commercial Code, supra, § 3-302:16R,

though some cases say it does. First Federal Savings & Loan

Ass’n of South Carolina v. Chrysler Credit Corp., 981 F.2d 127,

132-33 (4th Cir. 1992); Maine Family Federal Credit Union v.
10 No. 03-1833

Sun Life Assurance Co., 727 A.2d 335, 342-44 (Me. 1999); First

City Federal Savings Bank v. Bhogaonker, 715 F. Supp. 1216,

1220 (S.D.N.Y. 1989). Yet implicit in the common law rule

governing banks’ liability to drawers is the proposition that

a bank presented with a check made out to it by someone

who owes it no money, for deposit in the presenter’s

account, does not take the check in due course. Mutual

Service Casualty Ins. Co. v. Elizabeth State Bank, supra, 265 F.3d

at 621-22; Douglass v. Wones, supra, 458 N.E.2d at 522-23;

Dalton & Marberry, P.C. v. NationsBank, N.A., 982 S.W.2d 231,

235 (Mo. 1998). Otherwise section 3-302(a)(2) would dissolve the common law rule, which no one contends it does.

Second, the judge held that by failing to discover that two

previous checks drawn in its name had been unauthorized,

Allianz was guilty of contributory negligence in also failing

to discover, before Schwab permitted Carden to withdraw

the proceeds of the check, that the third check, the one at

issue in this case, was unauthorized. It is good practice for

a bank to close an account (of course with notice to the

customer, see J. Bailey & Richard B. Hagedorn, Brady on

Bank Checks: The Law of Bank Checks ¶ 22.08 (2004)) as soon

as it discovers that an unauthorized check has been written

on the account. The bank may indeed be required to do so

in the exercise of its duty of ordinary care to the customer.

UCC § 3-103(9). But the customer has a correlative duty, as

we know, under section § 4-406(d) to notify the bank that

unauthorized checks are being written on its account, if

such notification is feasible because the bank has given the

customer a statement of his account that the customer can

compare with his own records and by doing so readily

discover the fraud. The violation of this duty gives the

customer’s bank a defense; does it also give a defense to a

bank, in this case Schwab, that is not the customer’s bank

but instead a bank to which another unauthorized check

drawn on the customer’s bank is presented? It could not be
No. 03-1833 11

a defense under section 4-406(d), but would have to be a

common law defense created by analogy to the defense

created by that section.

There is some support in case law for such a defense.

Federal Ins. Co. v. Groveland State Bank, 333 N.E.2d 334, 336-

37 and n. 2 (N.Y. 1975); Robbins v. Passaic National Bank &

Trust Co., 160 A. 418, 420 (N.J. 1932); cf. Sun ‘n Sand, Inc. v.

United California Bank, 582 P.2d 920, 940-41 (Cal. 1978). We

do not know whether Illinois courts would recognize the

defense but we do know that if they did it would not be a

complete defense because Illinois like most states has replaced contributory with comparative negligence. Alvis v.

Ribar, 421 N.E.2d 886 (Ill. 1981); Williams Electronics Games,

Inc. v. Garrity, 366 F.3d 569, 573 (7th Cir. 2004); Spinozzi v.

ITT Sheraton Corp., 174 F.3d 842, 847 (7th Cir. 1999). Neither

contributory nor comparative negligence is any defense to

an intentional tort, e.g., Williams Electronics Games, Inc. v.

Garrity, supra, 366 F.3d at 573 (Illinois law), but here it

would be asserted against Schwab’s unintentional tort of

negligence.

Since the case must be remanded, however, we need not

decide whether Schwab has preserved a defense of comparative negligence and if so whether such a defense may,

under Illinois law, be asserted in a case such as this.

The judgment in favor of the defendants must be reversed. All that is certain at this stage is that Schwab violated its tort duty of care to Allianz and hence to Travelers.

The case must be remanded for a new trial at which the

main issues will be whether the check was authorized and

if not whether Wells Fargo is liable to Travelers for paying

the check and whether Schwab has any (partial) defenses to

its prima facie liability to Travelers. If the trial determines

that the check was authorized, neither defendant is liable to

Travelers, for remember that Travelers does not contend
12 No. 03-1833

that the check might have been authorized but stolen or

otherwise misdirected. Whether Travelers should be given

another chance to present admissible evidence that the

check was (as it strongly appears to be) unauthorized is

another issue for resolution by the district judge in the first

instance.

REVERSED AND REMANDED.

A true Copy:

Teste:

 _____________________________

Clerk of the United States Court of 

Appeals for the Seventh Circuit 

USCA-02-C-0072—7-2-04