Opinion ID: 1059022
Heading Depth: 1
Heading Rank: 5

Heading: Negligence, Gross Negligence, and Bad Faith

Text: Halifax contends that Code § 8.3A-406, when read in light of Code §§ 8.3A-404 and -405, gives rise to an affirmative cause of action for the negligence of a depositary bank with respect to the alteration of an instrument or the making of a forged signature. These sections were part of the General Assembly's 1992 revision of the UCC.1992 Acts Ch. 693. It should be noted at this point, however, that the trial court stated in a footnote to its order granting Wachovia's motion for summary judgment that Halifax did not contest Wachovia's motion as to Halifax's claims under Va.Code 8.3A-404 and 405, and Halifax does not now press those claims. Hence, we will consider Code §§ 8.3A-404 and -405 only in the context of Halifax's argument that they are pertinent to the question whether Code § 8.3A-406 creates an affirmative cause of action for the negligence of a depositary bank under the circumstances of this case. Code § 8.3A-406 provides as follows: Negligence, contributing to forged signature or alteration of instrument.  (a) A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection. (b) Under subsection (a), if the person asserting the preclusion fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss, the loss is allocated between the person precluded and the person asserting the preclusion according to the extent to which the failure of each to exercise ordinary care contributed to the loss. (c) Under subsection (a), the burden of proving failure to exercise ordinary care is on the person asserting the preclusion. Under subsection (b), the burden of proving failure to exercise ordinary care is on the person precluded. Code § 8.3A-404(a) deals with an instrument issued to an impostor or to a person acting in concert with the impostor. Subsection (b) deals with an instrument whose payee is fictitious or not the person intended to have an interest in the instrument by the person determining to whom the instrument is payable. Both subsections provide that the indorsement of such an instrument by any person in the name of the payee is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection. Code § 8.3A-405 deals with the situation where an employer entrusts an employee with responsibility with respect to an instrument and the employee or a person acting in concert with the employee makes a fraudulent indorsement of the instrument. For a person who, in good faith, pays an instrument or takes it for value or for collection, the indorsement is effective as the indorsement of the person to whom the instrument is payable if it is made in the name of that person. Both Code § 8.3A-404 and Code § 8.3A-405 contain an important provision. In Code § 8.3A-404, the provision is expressed in this language: [I]f a person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from payment of the instrument, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss. (Emphasis added.) The language of Code § 8.3A-405 is identical, except that the words the fraud are substituted for the words payment of the instrument following the words loss resulting from in the foregoing quotation. In support of its contention that Code § 8.3A-406 creates an affirmative cause of action, Halifax cites our decision in Gina Chin & Assoc., Inc. v. First Union Bank, 256 Va. 59, 500 S.E.2d 516 (1998). That case involved both forged signatures of the drawer and forged indorsements of the payee. The drawer sought recovery from the depositary bank. The latter claimed it was liable under Code §§ 8.3A-404 and -405 only for forged indorsements and not where both the payee's indorsements and the drawer's signatures are forged. We disagreed. We stated that the depositary bank was erroneous in its conclusion that §§ 8.3A-404 and -405 cannot be utilized by a drawer against the depositary bank in a double forgery situation, 256 Va. at 61, 500 S.E.2d at 517, and that the drawer was not precluded from asserting a cause of action against [the depositary bank] pursuant to §§ 8.3 A-404 or -405. Id. at 63, 500 S.E.2d at 518. Halifax quotes a passage from the Gina Chin opinion where we stated that the concept of comparative negligence introduced in the revised sections reflects a determination that all participants in the process have a duty to exercise ordinary care ... and that the failure to exercise that duty will result in liability to the person sustaining the loss. Id. at 62, 500 S.E.2d at 517-18. Halifax argues that Code § 8.3A-406 also creates a duty of care and, therefore, that there exists [under Code § 3A-406] a right of action, as expressly recognized in Gina Chin.  It is plain, however, that the language quoted from Gina Chin has reference solely to Code §§ 8.3A-404 and -405. Indeed, the sentence immediately preceding the quotation states that [t]he revisions to §§ 8.3A-404 and -405 changed the previous law by allowing `the person bearing the loss' to seek recovery for a loss caused by the negligence of any person paying the instrument or taking it for value based on comparative negligence principles. Gina Chin, 256 Va. at 62, 500 S.E.2d at 517. Code § 8.3A-406 simply was not an issue in the case in any manner. Gina Chin, therefore, does not serve as authority for Halifax's contention that Code § 8.3A-406 creates an affirmative cause of action. Next, Halifax cites Official Comment 4 to Code § 8.3A-406, which reads as follows: Subsection (b) ... adopts a concept of comparative negligence. If the person precluded under subsection (a) proves that the person asserting the preclusion failed to exercise ordinary care and that failure substantially contributed to the loss, the loss may be allocated between the two parties on a comparative negligence basis. Halifax then says [l]eading commentators recognize that the concept of comparative negligence, duty, and loss allocation provided in 3-406, like that in 3-404 and 3-405, creates a cause of action. Halifax quotes 2 James J. White & Robert S. Summers, Uniform Commercial Code § 19-3 (4th ed.1995) (hereinafter, White & Summers) to this effect: 3-406 and the accompanying sections carry with them something that did not exist under the old Code, namely, a new cause of action. Id. at 247. This mechanism is an affirmative cause of action for negligence under 3-406(b)(and similar causes of action under 3-404, 3-405, and 3-406) under which the depositor-employer recovers a part of its loss by affirmative proof that the negligent behavior of the defendant bank caused a portion of it. Id. 3-406(b) gives an affirmative cause of action. Id. at 248. [T]he 1990 changes in 3-406, and the analogous changes having to do with comparative negligence in the other sections ... are likely to cause significant but subtle changes in the allocation of civil liability. Id. at 253. According to Halifax, another White & Summers quotation explains the significance of the subtle language changes in revised § 8.3A-406: [The] allocation of liability based on comparative negligence is new, incorporated into the Code as part of the 1990 amendments to Article[s] 3 and 4. Before the 1990 amendments, preclusion cases were standard contributory negligence cases. A bank might first argue that the customer was negligent, and the customer would respond that the bank was contributorily negligent. If both claims were proven, negligence would disappear from the case and the bank would be barred from asserting the customer's negligence. One consequence of adopting a comparative negligence standard is that there will have to be wider recognition of negligence as a basis not merely for defense (preclusion), but also as a basis for asserting an affirmative claim. For example, in section 3-406(a), a depositor may be precluded from asserting alteration if the depositor's failure to exercise ordinary care substantially contributed to the alteration. Under 3-406(b), the loss is allocated between the two parties if the bank also failed to exercise ordinary care. Although it does not say so in terms, the loss allocated language in 3-406(b) must be interpreted to grant an affirmative cause of action to the depositor in our hypothetical case as a means of recovering for that part of the loss which the bank should bear. As the statute is written, the bank's negligence no longer lifts the preclusion of 3-406(a), as it did before 1990. Rather, the bank's negligence gives other parties a cause of action to recover an appropriate share under 3-406(b). In that respect, the 1990 revisions state a subtle modification of the theories of recovery, and not merely a readjustment of the identity of those who bear losses. White & Summers, § 19-1 at 239 (emphasis added) (footnotes omitted). [2] The views of White & Summers, however, are just not compatible with Virginia law. They say that Code § 3A-406(b) must be interpreted to create a cause of action. § 19-1 at 239. However, the rule in Virginia is that, unless the language of a legislative enactment is ambiguous, `there is no room for interpretation or construction; the plain meaning and intent of the [enactment] must be given it.' City of Emporia Bd. of Zoning Appeals v. Mangum, 263 Va. 38, 41, 556 S.E.2d 779, 781 (2002) (quoting Board of Zoning Appeals of the County of York v. 852 L.L.C., 257 Va. 485, 489, 514 S.E.2d 767, 769 (1999)). `Language is ambiguous when it may be understood in more than one way, or simultaneously refers to two or more things.' Supinger v. Stakes, 255 Va. 198, 205, 495 S.E.2d 813, 817 (1998) (quoting Lee-Warren v. School Bd. of Cumberland County, 241 Va. 442, 445, 403 S.E.2d 691, 692 (1991)). For Code § 8.3A-406 to be declared ambiguous, its language must lend itself to being understood in one way as creating a cause of action and in another way as not creating a cause of action. In our opinion, the statute cannot be understood as creating a cause of action for several reasons. In the first place, the term cause of action or may recover or anything remotely resembling either term nowhere appears in Code § 8.3A-406. And this Court cannot supply the language that would have created an affirmative cause of action under the circumstances of this case. [C]ourts are not permitted to rewrite statutes. This is a legislative function. The manifest intention of the legislature, clearly disclosed by its language, must be applied. There can be no departure from the words used where the intention is clear. Supinger, 255 Va. at 206, 495 S.E.2d at 817 (quoting Anderson v. Commonwealth, 182 Va. 560, 566, 29 S.E.2d 838, 841 (1944)). Second, Official Comment 1 to Code § 8.3A-406 states that subsection (a) adopts the doctrine that a  drawer who so negligently draws an instrument as to facilitate its material alteration [or its forgery] is liable to a drawee who pays the altered [or forged] instrument in good faith. (Emphasis added.) But statutory language making a drawer liable to a drawee cannot possibly be taken as showing an intention to create a cause of action in favor of a drawer against a depositary bank. Third, Official Comment 1 further states: Section 3-406 does not make the negligent party liable in tort for damages resulting from the alteration. If the negligent party is estopped from asserting the alteration the person taking the instrument is fully protected because the taker can treat the instrument as having been issued in the altered form. We will assume Halifax is correct in saying the comment means 3-406 is not intended to make the negligent drawer subject to preclusion liable in tort. But Halifax is incorrect in saying the comment shows the converse was intended, that 3-406 makes the bank liable in tort. This is not only a non sequitur but it is also contrary to the provision in the very next sentence of the Comment, which states that the person taking the instrument is fully protected because the taker can treat the instrument as having been issued in the altered [or forged] form. It is difficult to imagine how something that is designed to protect the taker can logically be turned on its head and used to create a cause of action against the taker. Finally, and of overriding importance, we follow the rule in Virginia that 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. Halifax I, 262 Va. at 100, 546 S.E.2d at 702. Strikingly absent from Code § 8.3A-406 is the specific language contained in Code §§ 8.3A-404 and -405 that the person bearing the loss may recover from the person failing to exercise ordinary care. The General Assembly knows how to create a cause of action when that is its intention, and the omission of the may recover or similar language from Code § 8.3A-406 represents an unambiguous manifestation of a contrary intention. Halifax cites several out-of-state decisions in support of its contention that revised 3-406 provides a cause of action, in favor of a drawer against a depositary bank. Cited are National Union Fire Ins. Co. v. Hibernia Nat'l Bank, 258 F.Supp.2d 490 (W.D.La. 2003); National Union Fire Ins. Co. v. All-first Bank, 282 F.Supp.2d 339 (D.Md.2003); Delta Textiles New York, Ltd. v. Diaz, Docket No. BER-L-10648-01 (N.J.Super.Ct. Oct. 24, 2003); Nat'l Union Fire Ins. Co. of Pittsburgh, PA v. Sun Nat'l Bank, Docket No. MER-L-2894-03 (N.J.Super. Ct. April 2, 2004); Atlantic Mutual Ins. Co. v. The Provident Bank, 79 Ohio Misc.2d 5, 669 N.E.2d 901 (Oh.Mun.Ct.1996). These are all trial court decisions; we find them unpersuasive. [3] One appellate decision cited by Halifax, Micro Experts, Inc. v. Edison Tech., Inc., 122 Ohio App.3d 394, 701 N.E.2d 1033 (1997), involved an Ohio statute that is the equivalent of our Code § 8.3A-406. The court stated that [o]rdinarily this statute is used as a defense, rather than in support of a claim. Id. at 1039. [4] But, the court continued, [a]ssuming arguendo that the statute may be raised by the drawer of the checks involved, the drawer still lost because it did not demonstrate that [the bank] failed to exercise ordinary care. Id. Halifax can take little comfort from this decision. Nor can Halifax find comfort in another appellate court case it cites. In Wachovia Bank, N.A. v. Fed. Reserve Bank of Richmond, 338 F.3d 318 (4th Cir.2003), the court stated: U.C.C. § 8.3-406 ... provides for a defense but does not expressly create a cause of action. To the extent that such a cause of action is cognizable, which we do not hold, we conclude that summary judgment in favor of [the drawer] was properly granted [because it was not shown] that the asserted negligence of the [drawer] substantially contributed to the alteration of the check. Id. at 325. Finally, Halifax cites a work of another of its leading commentators, where it is stated that [the] preclusion provision [of Code § 8.3A-406] seems to be purely defensive in nature, although conceivably [it] could constitute grounds for affirmative action. 2A Frederick M. Hart & William F. Willier, Negotiable Instruments Under the Uniform Commercial Code § 12.37 at 12-234 (2001). (Emphasis added.) [5] This hardly provides support for Halifax's claim that Code § 8.3A-406 creates an affirmative cause of action for the negligence of a depositary bank. We conclude that the trial court did not err in its holding that Code § 8.3A-406 does not create an affirmative cause of action and in awarding summary judgment to Wachovia with respect to that claim.