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Travelers Casualty and Surety Co. v. Washington Trust Bank

United States District Court, E.D. Washington

February 5, 2015

TRAVELERS CASUALTY AND SURETY COMPANY, Plaintiff,
v.
WASHINGTON TRUST BANK, Defendant

Page 1149

For Travelers Casualty and Surety Company of America, as assignee and subrogee of Skils'Kin, Plaintiff: Bruce Kenneth Medeiros, LEAD ATTORNEY, Davidson Backman Medeiros, Spokane, WA; Mark E Wilson, LEAD ATTORNEY, PRO HAC VICE, FisherBroyles LLP, Chicago, IL.

For Washington Trust Bank, Defendant, Counter Claimant, ThirdParty Plaintiff: Leslie Richard Weatherhead, LEAD ATTORNEY, Geana Van Dessel, Lee & Hayes, PLLC, Spokane, WA.

Page 1150

MEMORANDUM OPINION AND ORDER RE: SUMMARY JUDGMENT MOTIONS

JUSTIN L. QUACKENBUSH, SENIOR UNITED STATES DISTRICT JUDGE.

BEFORE THE COURT are Defendant Bank's Motion for Summary Judgment (ECF No. 88), Plaintiff Traveler's Motion for Partial Summary Judgment (ECF No. 82), and Bank's Motion to Strike supporting evidentiary materials (ECF No. 120). The court heard oral argument on the matter on January 20, 2015. Mark Wilson argued the Motions for Plaintiff. Local counsel Bruce Medeiros also appeared for Plaintiff. Leslie Weatherhead argued on behalf of Defendant. Geana Van Dessel also appeared for Defendant. This Order memorializes and supplements the oral rulings of the court.

I. Introduction/Procedural History

This action was filed on December 9, 2013. Travelers filed a First Amended Complaint on December 11, 2013. (ECF No. 5). Bank moved to dismiss the First Amended Complaint and that Motion was denied. Travelers then sought and was granted leave to file a Second Amended Complaint (" SAC" ) (ECF No. 42). The SAC is the operative pleading. Bank filed a Third-Party Complaint against Skils'Kin, Inc.. Skils'Kin appeared and moved to dismiss the Third-Party Complaint. After hearing argument, the court granted the Motion to Dismiss Third-Party Complaint. See Order at ECF No. 66.

This matter was originally set for jury trial on January 20, 2015. At the parties request the trial and pretrial dates were stricken. The parties sought additional time to fully develop the summary judgment record, evaluate the court's ruling prior to trial, and discuss settlement. See Stipulated Motion to Amend Scheduling Order at ECF No. 75. As claims remain

Page 1151

for trial, the court resets the pretrial and trial dates.

II. Factual Background

The court herein recites the basic Factual Background and will reference additional pertinent facts in its discussion of the legal issues. The parties have filed a Stipulation (ECF No. 69) as to certain facts. Each side has also filed a Statement of Facts in support of its Motion, and the parties have filed Response and Reply briefs.

Plaintiff, Travelers Casualty and Surety Company (" Travelers" or " Plaintiff" herein), issued a policy of insurance to Skils'Kin, a community-based, not-for-profit, agency with offices located in Spokane, Washington. Skils'Kin provides services to adults with developmental, physical, and mental disabilities, including money management services. (ECF No. 69, ¶ 4-5). Skils'Kin is appointed by the Social Security Administration as the " representative payee" for many of its clients. ( Id. at ¶ 6). Skils'Kin is also authorized to act as representative payee by its clients who signed an agreement specifically acknowledging and appointing Skils'Kin as agent and representative payee. (Bank S of F[1] #9).

Skils'Kin managed the monthly income and living expenses of approximately 1,000 clients acting as representative payee. Skils'Kin was allowed by the Social Security Administration to charge a fee for this service and did charge each client a monthly fee of approximately $38.00. Skils'Kin maintained a single business checking account at Bank. (Bank S of F #10-12). The average monthly balance in this account ranged from $166,876.47 to $510,224.60 during the period of January 2010 to February 2013. (Bank S of F #14).

Shannon Patterson was a Skils'Kin employee, Payee Services Coordinator, and a signatory on the bank account. In 2009 Patterson was promoted to Payee Manager, and in March 2010 to Director of Payee Services. (Bank S of F #15 & 17). Patterson engaged in a several year embezzlement in which she presented checks at Bank that were made payable to Skils'Kin clients, and signed by Patterson for Skils'Kin as the payor. Patterson cashed and kept the money from over 300 such checks. Although the payees on the checks were Skils'Kin clients, Patterson signed the back of the checks with her own name when the checks were cashed. Bank contends this was an indorsement.[2] Bank contends the checks were signed pursuant to an oral agreement between Bank and Patterson. Bank contends Patterson was authorized by Corporate Resolution to make such agreements. Bank further contends that although the procedure was a departure from standard practice, it was an accommodation. Bank employees testified concerning reasons why Patterson was allowed to cash checks made payable to Skils'Kin clients - - that some Skils'Kin clients were homebound, were disruptive when they were in the bank, and/or did not have proper identification. Teller Nicki Atha testified that Deb Carlson, a branch manger, gave her approval to allow Patterson to sign the back of checks and receive the cash. Other bank tellers also cashed checks for Patterson. Some tellers testified that this did not comply with the Bank's standard procedures.

Page 1152

Travelers contends Patterson signed the back of the checks only to signify that cash was received, and that her signature was not an indorsement or " unauthorized signature" within the meaning of the Uniform Commercial Code (" U.C.C." ). Skils'Kin CEO Brian Behler avers that Patterson had no authority to cash the checks. (ECF No. 83).

Patterson's fraud went undetected from sometime in late-2008 until February 2013. In February 2013, Patterson committed suicide and admitted to the fraud in a suicide note(s). After the fraud was discovered, Skils'Kin made a claim under its fidelity insurance policy to Travelers. Travelers paid the claim, and brought this action as the subrogee and assignee of Skils'Kin.

III. The Claims

The SAC claims that the Bank, in disregard of reasonable commercial standards and its duty to exercise ordinary care, cashed checks for Patterson, even though Patterson was not the named payee and the named payee had not endorsed the checks. (SAC at ECF No. 42, ¶ 7). Travelers contends the checks were not " properly payable" under RCW 62A.4-401(a) because they were not indorsed by the payee. Travelers further contends that Patterson signed the backs of the checks " to acknowledge receipt for cash from the Bank rather than for the purposes of negotiating the checks", and that Patterson's signature was not an " unauthorized signature" under RCW 62A.1-201(b)(41). Travelers claims that Skils'Kin " had no way of discovering these improper payments from reviewing [Bank] statements" because the statements did not include copies of the back sides of the checks. (ECF No. 42, ¶ 12).

IV. Standard of Review

The purpose of summary judgment is to avoid unnecessary trials when there is no dispute as to the material facts before the court. Northwest Motorcycle Ass'n v. U.S. Dept. of Agriculture, 18 F.3d 1468, 1471 (9th Cir. 1994). The moving party is entitled to summary judgment when, viewing the evidence and the inferences arising therefrom in the light most favorable to the nonmoving party, there are no genuine issues of material fact in dispute. Fed.R.Civ.P. 56; Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). While the moving party does not have to disprove matters on which the opponent bears the burden of proof at trial, they nonetheless bear the burden of producing evidence that negates an essential element of the opposing party's claim and the ultimate burden of persuading the court that no genuine issue of material fact exists. Nissan Fire & Marine Ins. Co. v. Fritz Companies, 210 F.3d 1099, 1102 (9th Cir. 2000). When the nonmoving party has the burden of proof at trial, the moving party need only point out that there is an absence of evidence to support the nonmoving party's case. Devereaux v. Abbey, 263 F.3d 1070, 1076 (9th Cir. 2001).

Once the moving party has carried its burden, the opponent must do more than simply show there is some metaphysical doubt as to the material facts. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Rather, the opposing party must come forward with specific facts showing that there is a genuine issue for trial. Id.

Although a summary judgment motion is to be granted with caution, it is not a disfavored remedy: " Summary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed to secure the just, speedy and inexpensive determination

Page 1153

of every action." Celotex Corp. v. Catrett, 477 U.S. 317, 327, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)(citations and quotations omitted).

V. Discussion

A. Travelers' Arguments for Partial Summary Judgment

Travelers seeks to have the court rule on a series of discrete legal issues, including ruling on several of Bank's affirmative defenses. Such rulings would not be dispositive of the case. Travelers argues that the case is " about bad banking practices", and that Bank behaved recklessly and improperly. (ECF No. 82, p. 4). Travelers argues that the court should conclude, as a matter of law, that Bank did not comply with reasonable standards of banking. Travelers contends the Bank could not agree to deviate from reasonable commercial standards through the alleged agreement between branch manager, Debbi Carlson, and Patterson to allow Patterson to cash checks made payable to third-party payees. Travelers further argues that Patterson had no authority to enter into such an agreement.

As to the Bank's asserted defenses, Travelers asserts that Skils'Kin had " no duty to discover and report the Bank's improper payments" . (ECF No. 82, p. 16). Travelers also argues that the Bank did not make the items (processed checks) reasonably available because Bank provided copies of only the front of the checks with the monthly statements.

B. Bank's Arguments for Summary Judgment

Bank argues that both under the applicable statute, RCW 62A.4-406, and pursuant to its banking agreement with Skils'Kin, Skils'Kin was required to examine the monthly banking statements and to report unauthorized signatures or alterations within 60 days. Bank argues that it provided monthly statements which listed the checks paid by number, date, and dollar amount and included copies of the face of each check. (ECF No. 88, p. 6). Having providing this information, Bank contends Skils'Kin allowed the fraudulent activity of Patterson to continue for over four years. Bank contends Skils'Kin could have easily identified Patterson's unauthorized activity by looking at the backs of the checks on-line, calling the Bank's customer service number to obtain copies of the checks, or through other internal accounting measures. Bank contends it first received notice of Patterson's fraudulent activities in a letter dated March 1, 2013, which only specifically identified two checks - - one from October 2012, the other from February 2013. (ECF No. 88, p. 13).

Bank also argues the checks at issue were properly payable because Patterson was an agent of Skils'Kin and Skils'Kin was an authorized agent of its client payees. Bank further contends that the checks were cashed in accordance with an ...


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