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THIRD DIVISION
Date Filed: December 31, 2001

No. 1-00-2958

The plaintiff, Ralph Falk, II, filed a multi-count complaintagainst the defendant, The Northern Trust Company (the Bank),seeking damages and an accounting based upon the Bank's failureto investigate and alert the plaintiff to fraudulent transactionsinvolving his accounts with the Bank.

The trial court granted the Bank's motion to dismiss theplaintiff's second amended complaint, finding that theplaintiff's action was time-barred under section 4-406(f) of theUniform Commercial Code (UCC) (810 ILCS 5/4-406(f) (West 1992). The plaintiff filed a timely notice of appeal.

On March 27, 2000, the plaintiff filed his second amendedcomplaint. In his complaint, the plaintiff alleged the followingfacts.

For over 13 years, the plaintiff employed Patricia Podmoklyas his personal assistant. Her duties for the plaintiff includedpaying his personal bills, handling his bookkeeping, reporting tohis accountants, and communicating with his investment advisors. In 1984, in order to carry out her duties, Ms. Podmokly was madea signatory on the plaintiff's demand accounts at the Bank. Ms.Podmokly held a position of a fiduciary with respect to theplaintiff, a fact which was known to the Bank.

In 1993, Ms. Podmokly began misappropriating funds from theplaintiff's accounts at the Bank for her own personal benefit. The misappropriation included drawing large amounts from theplaintiff's accounts through checks payable to cash which Ms.Podmokly used to pay her personal obligations, such as loans shehad at the Bank and obligations of her business associates andfriends at the Bank. Between 1993 and 1997, Ms. Podmoklymisappropriated over $2,000,000 of the plaintiff's funds. According to the plaintiff, the Bank ignored clear evidenceof Ms. Podmokly's misappropriation of his funds and allowed herto continue her misappropriations well into 1997. The plaintiff alleged that the Bank was placed on notice of Ms.Podmokly's misappropriation of the plaintiff's funds by thenumber of changes and irregularities in the plaintiff's accountactivity at the Bank, beginning in 1993 and continuing into 1997. In addition, in 1995, the Bank accepted an unsigned $2,000 checkdrawn on the plaintiff's account for payment of Ms. Podmokly'spersonal equity credit line at the Bank. The Bank was also placed on notice of Ms. Podmokly'smisappropriations, since she maintained her own accounts at theBank, including her mortgage and equity line of credit. Becausethe Bank made loans to her and in connection with those loans, reviewed her tax returns and other personal information, the Bankwas aware that her income was insufficient to support the accountand loan activity she was generating.

In his second amended complaint, the plaintiff requested anaccounting and alleged causes of action against the Bank innegligence; under the Uniform Fiduciaries Act (the Act) (760 ILCS65/7, 8 (West 1992)); and under the UCC (810 ILCS 5/3-101 et seq.(West 1992)).

On May 5, 2000, the Bank filed a motion to dismiss pursuantto section 2-619.1 of the Code of Civil Procedure (the Code) (735ILCS 5/2-619.1 (West 1998)). The Bank maintained, inter alia,that the second amended complaint should be dismissed in itsentirety, pursuant to section 2-619(a)(9) of the Code (735 ILCS5/2-219(a)(9) (West 1998)), because the plaintiff's claims arebarred under the provisions of section 4-406(f) of the UCC (810ILCS 5/4-406(f) (West 1998)) which required him to notify theBank within one year after receiving his bank statement of anyunauthorized signature or alteration or be precluded frombringing an action against the Bank based on those facts.

On May 24, 2000, the plaintiff filed his response to theBank's motion to dismiss. The plaintiff argued that section 4-406(f) was inapplicable to his claim against the Bank becausesection 4-406(f) did not apply to claims based upon "actualknowledge" or "bad faith" on the part of the Bank.

On July 26, 2000, the trial court entered an orderdismissing the plaintiff's second amended complaint withprejudice based upon the plaintiff's failure to comply withsection 4-406(f) of the UCC. On August 15, 2000, the plaintifffiled a timely notice of appeal.

The sole issue on appeal is whether section 4-406(f) barsthe plaintiff's second amended complaint.

Section 2-619.1 of the Code permits a party to bring acombined motion for dismissal pursuant to sections 2-615 and 2-619 as a single motion, provided that the combined motionpresents the bases for dismissal separately. In this case, thetrial court granted that part of the motion to dismiss based uponsection 2-619 of the Code. Motions to dismiss under section 2-619 of the Code are reviewed de novo. Owens v. McDermott, Will &Emery, 316 Ill. App. 3d 340, 344, 736 N.E.2d 145, 150 (2000).

For purposes of considering a section 2-619 motion,reviewing courts treat all well-pleaded facts and reasonableinferences that can be drawn from the complaint as true. Lykowski v. Bergman, 299 Ill. App. 3d 157, 164-65, 700 N.E. 2d1064, 1070 (1998). Section 2-619(a)(9) of the Code, the specificprovision relied upon by the Bank in this case, provides forinvoluntary dismissal of a cause of action where the claimasserted is barred by "'affirmative matter'" avoiding the legaleffect of or defeating the claim. Lykowski, 299 Ill. App. 3d at165, 700 N.E.2d at 1070 quoting 735 ILCS 5/2-619(a)(9) (West1996). The reference to "'affirmative matter'" is said to besomething in the nature of a defense that completely negates thecause of action or refutes crucial conclusions of law orconclusions of material fact contained in or inferred from thecomplaint. Lykowski, 299 Ill. App. 3d at 165, 700 N.E. 2d at1070. Under section 2-619, a motion to dismiss should be grantedif, after construing the pleadings and the supporting documentsin the light most favorable to the non-moving party, the trialcourt finds that no set of facts can be proved upon which reliefcould be granted. Owens, 316 Ill. App. 3d at 344, 736 N.E.2d at150.

Prior to January 1, 1992, section 4-406 of the UCC providedthat when a bank sent a statement to a customer accompanied byitems paid in "good faith," the customer must exercise reasonablecare and promptness to examine the statement and promptly notifythe bank of an unauthorized signature or alteration. Ill. Rev.Stats 1989, ch. 26, par.4-406(1). Section 4-406 further providedthat a customer had one year from the time the statement anditems were made available to him to report his unauthorizedsignature or alteration, or he was precluded from asserting theunauthorized signature or alteration against the bank, regardlessof the care or lack of care on the part of either the bank or thecustomer. A customer had three years to report an unauthorizedendorsement. Ill. Rev. Stat. 1989, ch. 26, par. 4-406(4).

In 1992, section 4-406 was amended and re-numbered. Section4-406(1) became section 4-406(a). Section 4-406(a) now providedthat in order for banks to impose on their customers the duty toexamine their statements and report unauthorized signatures oralterations, the statement that the Bank sends to its customermust contain sufficient information to allow the customer toidentify the items paid, and that the bank must retain items orcopies thereof for seven years. 810 ILCS 5/4-406(a)(b) (West1992), Uniform Commercial Code Comment 419 (Smith-Hurd 1992). Eliminated from section 4-406(a) was the requirementcontained in section 406(1) that the items be paid in "goodfaith." Section 4-406 goes on to provide that the customer isprecluded from asserting the customer's unauthorized signature orany alteration of an item if the customer failed to examine thebank statement with reasonable promptness. 810 ILCS 5/4-406(c)(d) (West 1992). The "preclusion" is treated differentlydepending upon the bank's conduct. If the bank "failed toexercise ordinary care" in paying the item, then the customer andthe bank share the loss. However, if the customer proves thatthe bank did not pay the item in "good faith," the preclusionunder subsection (d) does not apply. See 810 ILCS 5/4-406(e)(West 1992).

Finally, section 4-406(f) provides as follows:

"Without regard to care or lack of care of either thecustomer or the bank, a customer who does not within oneyear after the statement or items are made available to thecustomer (subsection (a)) discover and report the customer'sunauthorized signature on or any alteration on the item isprecluded from asserting against the bank the unauthorizedsignature or alteration. If there is a preclusion underthis subsection, the payor bank may not recover for breachof warranty under Section 4-208 with respect to theunauthorized signature or alteration to which the preclusionapplies." 810 ILCS 5/4-406(c)(d)(e)(f) (West 1992) asamended by Pub. Act 87-582, eff. January 1, 1992, and Pub.Act 87-1135, eff. September 17, 1992.

III. Discussion

Whether the time limitation set forth in section 4-406(f)bars an action against a bank where the bank is alleged to havepaid items in bad faith, is a case of first impression inIllinois.

Prior to the 1992 amendments to section 4-406, the Court ofAppeals for the Seventh Circuit held that where the plaintiffalleged that the bank acted in bad faith in allowing theplaintiff's fiduciary to cash checks and make withdrawals fromher accounts with forged endorsements or no endorsements at all,the time limitation in section 4-406(4) did not apply becausesection 4-406(1) required that the bank pay the items in "goodfaith." See Appley v. West, 832 F.2d 1021, 1032 (7th Cir. 1987).

The Bank maintains that the decision in Appley is notcontrolling because the 1992 amendments to section 4-406eliminated the requirement in section 4-406(1) that the items bepaid in "good faith" by the bank. See 810 ILCS 5/4-406(a). TheBank also maintains that the decision in Appley has noprecedential value in light of this court's decision in EuroMotors, Inc. v. Southwest Financial Bank and Trust Co., 297 Ill.App. 3d 246, 696 N.E.2d 711 (1998)

In Euro Motors, Inc., the plaintiff's checking accountrequired two signatures for any check drawn over $30,000. In1994, Southwest paid two checks over $30,000, both with only thesignature of the plaintiff's president. The president wasremoved in 1995. In 1996, the plaintiff sued Southwest forbreach of contract and conversion seeking to recover the facevalue of the checks. Southwest moved for summary judgmentalleging, inter alia, that the plaintiff had not timely notifiedit of the unauthorized signatures and therefore, section 4-406(f)barred the plaintiff's suit. The trial court granted summaryjudgment, and the plaintiff appealed.

This court held that the plaintiff's suit was time-barred bysection 4-406(f). This court first found that section 4-406(f)was not a statute of limitation, but a statutory prerequisite ofnotice and therefore not subject to the discovery rule. We thendetermined that the provisions of section 4-406(f) evidenced apublic policy in favor of imposing on customers the duty ofprompt examination of their bank accounts and the notification tobanks of forgeries and alterations and in favor of reasonabletime limitations on the responsibility of banks for payment offorged, altered or unauthorized items. Euro Motors, Inc., 297Ill. App. 3d at 253, 696 N.E.2d at 716. This court then statedas follows:

"Both the breach of contract claim and the conversionclaim asserted in Euro Motor's complaint are time-barred bysection 4-406(f). This provision bars any untimely claims,whether under the UCC or under common law. [Citation.] Thetime limit imposed by UCC section 4-406 is applicablewithout regard to the theory on which the customer bringshis or her action. [Citations.] Moreover, the commercialcertainty doctrine and the purposes of the UCC arecompelling regardless of the theory underlying the lawsuit." Euro Motors, Inc., 297 Ill. App. 3d at 254, 696 N.E.2d at716.

The present case is more akin to Appley than to Euro Motors,Inc. since the latter case did not deal with the issue of badfaith on the part of Southwest in paying the checks in question. While Appley is a federal case and decisions of the federal courtare not binding on this court, (see Cameron v. Bogusz, 305 Ill.App. 3d 267, 273, 711 N.E.2d 1194, 1198 (1999)), a federalcourt's interpretation of Illinois law is persuasive unless itruns contrary to previously decided State cases which ifcorrectly reasoned will not be overturned. In re ConsolidatedObjections to Tax Levies of School District No. 205, 306 Ill.App. 3d 1104, 1113, 715 N.E.2d 1212, 1217 (1999).

In addition, the court in Euro Motors, Inc. did not addressthe decision in Appley which further compels the decision that Euro Motors, Inc. did not encompass the scenario in which a bankacted in bad faith by paying an item. In fact, using thereasoning of the court in Euro Motors, Inc., regardless of thetype of suit brought, the public policy behind placing the burdenof discovering an authorized signature or alteration on thecustomer is hardly served where the bank is an active or passivepartner in the scheme to defraud the customer.

Therefore, we conclude that Euro Motors, Inc., does notcontrol the result in this case. We must now examine the statuteto determine if the 1992 amendments require a result differentthan the one reached in Appley.

In interpreting a statute, the primary rule of statutoryconstruction to which all other rules are subordinate is toascertain and give effect to the true intent and meaning of thelegislature. Village of Cary v. Trout Valley Association, 282Ill. App. 3d 165, 169, 667 N.E.2d 1082, 1085 (1996). In order todetermine the legislative intent, courts must read the statute asa whole, all relevant parts must be considered, and each sectionshould be construed in connection with every other section. Village of Cary, 282 Ill. App. 3d at 169, 667 N.E.2d at 1085. Courts should look to the language of the statute as the bestindication of legislative intent, giving the terms of the statutetheir ordinary meaning. Village of Cary, 282 Ill. App. 3d at169, 667 N.E.2d at 1085. Where the statutory language is clear,courts should give effect to the statute as enacted withoutconsidering extrinsic aids for construction. Village of Cary,282 Ill. App. at 169, 667 N.E.2d at 1085.

Our own examination of the section 4-406, as amended, in itsentirety convinces us that section 4-406(f) does not bar suitsbrought beyond the time limitation set forth in that section,where the customer alleges that the bank acted in "bad faith" inpaying the items that are the subject of the suit.

As we previously noted, while prior to the 1992 amendments,section 4-406(1) required the bank to have paid the items in"good faith" before the time limitation in section 4-406(4) wouldrun, the 1992 amendments eliminated the term "good faith" fromsection 4-406(a), section 4-406(1)'s amended counterpart. However, while prior to the 1992 amendments, section 4-406(3)provided that the customer was not precluded from assertingagainst the bank an unauthorized signature or alteration if thecustomer could establish that the bank did not use "ordinarycare," its amended counterpart, section 4-406(e) requires thebank and the customer to share the loss where the customerestablishes that the bank did not use "ordinary care" in payingthe item. In addition, section 4-406(e) now allows a customer toavoid preclusion entirely, if the customer can prove that thebank did not pay the item in "good faith." 810 ILCS 5/4-406(e).

Finally, under amended section 4-406(f), the bank escapesliability regardless of the "care" or lack thereof exercised byit or the customer, if the unauthorized signature or alterationis not reported to the bank within one year of the customer'sreceipt of the statement from the bank. Unlike section 4-406(e),however, section 4-406(f) does not refer to "good faith."

We believe that the legislature's use of the term "care" insection 4-406(f) cannot be read to include "good faith." Thefact that in other parts of section 4-406, the legislature drew adistinction between "ordinary care" and "good faith" indescribing the consequences suffered, clearly indicates that thelegislature did not intend to limit a bank's liability when itacted in "bad faith" as opposed to acting with a lack of carewhen paying an item.

In addition, we agree with the plaintiff that under the UCCevery contract or duty contains an obligation of "good faith" inits performance or enforcement, therefore, the Bank was requiredto pay the items in "good faith." See 810 ILCS 5/1-202 (West1992). The Bank points out that in Halifax Corp. v. WachoviaBank, N.A., 41 UCC Rep. Serv. 2d 897 (2000), the circuit courtrejected the argument that section 1-203 of the UCC applied tosection 4-406(f) because section 4-406(f) was a statute oflimitations and did not involve a contract or duty. HalifaxCorp., 41 UCC Rep. Serv. 2d at 900-02. In Euro Motors, Inc.,this court rejected the argument that section 4-406(f) was astatute of limitations, finding instead that it was a statutoryprerequisite of notice. Euro Motors, Inc., 297 Ill. App. 3d at253, 696 N.E.2d at 716.

The Bank argues that had the drafters of section 4-406(f)intended to impose a "good faith" condition, they could have doneso as they did in section 4-406(e). See Halifax Corp., 41 UCCRep. Serv. 2d at 901. The Bank further argues that the casesrelied on by the plaintiff, holding that a party who acts in "badfaith" is not entitled to assert the defenses of section 4-406,concerned the pre-amended section 4-406. See Grahsm v. Strother,684 So.2d 1088 (La. App. 1996); Lichenstein v. Kidder, Peabody &Co., Inc., 777 F. Supp. 423. 423 (W.D.Pa. 1991). It should benoted that the opinion in Lichenstein, which was followed by thecourt in Graham, cited the "good faith" requirement of section 1-203 of the UCC as the basis for its decision. Lichenstein, 777F.Supp. at 426-27; Graham, 684 So.2d at 1092.

The Bank relies on Henrichs v. Peoples Bank, 992 P.2d 1241(Kan. App. 1999) as holding that "good faith" does not apply tosection 406(f). In that case, the plaintiff alleged that section4-406 did not apply because the bank had actual knowledge of themisappropriation of funds. However, the reviewing court upheldsummary judgment for the bank on the basis that the plaintiff hadproduced no evidence to support her contention of actualknowledge and that the statute indicated that a lack of care wasnot a consideration. Henrichs, 992P.2d at 1243. However, thecase did not specifically address the issue of "good faith" andno issue as to section 1-203 was raised therein. Therefore, weare not persuaded by the decision in Henrichs.

In summary, we conclude that section 4-406(f) requires thata bank act in "good faith" when paying the items on the statementin order to claim the protection of the prerequisite of noticerequirement contained in that section. As we stated previously,the public policy behind placing the burden on the customer todetermine unauthorized signatures or alterations is not servedwhen the bank is a party, either actively or passively, to ascheme to defraud the customer.

However, a plaintiff may not avoid dismissal by merelyreciting the words "actual knowledge" and "bad faith." County ofMacon V. Edgcomb, 274 Ill. App. 3d 432, 438, 654 N.E.2d 598, 602(1995). We must determine whether, taking all well-pleaded factsand reasonable inferences as true, the plaintiff has set forthsufficient facts to support his claim that the Bank acted in "badfaith."

In this case, the plaintiff alleged that the Bank was placedon notice of Ms. Podmokly's misappropriations from his accountsat the Bank based upon certain facts, such as the increasedactivity in his accounts during Ms. Podmokly's tenure as hispersonal assistant along with specific transactions and that theBank's failure to take action upon such notice amounted to "badfaith."

Section 3-307 of the UCC provides in pertinent part asfollows:

"(b) If (i) an instrument is taken from a fiduciary forpayment or collection or for value, (ii) the taker hasknowledge of the fiduciary status of the fiduciary, and(iii) the represented person makes a claim to the instrumentor its proceeds on the basis that the transaction of thefiduciary is a breach of fiduciary duty, the following rulesapply:

(4) If an instrument is issued by the representedperson or the fiduciary, as such, to the taker aspayee, the taker has notice of the breach of fiduciaryduty if the instrument is (i) taken in payment of or assecurity for a debt known by the taker to be thepersonal debt of the fiduciary, (ii) taken in atransaction known by the taker to be for the personalbenefit of the fiduciary, or (iii) deposited to anaccount other than an account of the fiduciary, assuch, or an account of the represented person." 810ILCS 5/3-307(b)(4) (West 1992).

The second amended complaint alleged that the Bank hadactual knowledge of the fiduciary relationship between Ms.Podmokly and the plaintiff. It further alleged that the Bank hadaccepted checks drawn by Ms. Podmokly on the plaintiff's accountfor payment of her loans at the Bank, for payment on her personalequity credit line at the Bank and for deposit into her ownpersonal account at the Bank.

Based upon the above allegations, the Bank was on noticethat Ms. Podmokly was acting in breach of her fiduciary duties tothe plaintiff. Given the number of years and the numeroustransactions alleged by the plaintiff, the Bank's failure toinvestigate in light of its knowledge of the breach of fiduciaryduty, constitutes more than a lack of care for which it would beprotected by section 4-406(f). See Edgcomb, 274 Ill. App. 3d at436, 654 N.E.2d at 601 (an example of bad faith is where thetaker suspects that the fiduciary is acting improperly anddeliberately refrains from investigating in order that he mayavoid knowledge that the fiduciary is acting improperly). As thecourt stated in Appley,

"In determining whether the bank acted with bad faith,'courts have asked whether it was commercially unjustifiablefor the payee to disregard and refuse to learn facts readilyavailable.' [Citation.] 'At some point, obviouscircumstances become so cogent that it is "bad faith" toremain passive.' [Citation.]" Appley, 832 F.2d at 1031.⁽¹⁾

We conclude that the plaintiff has set forth sufficientfacts to establish that the Bank acted in bad faith rather thanwith a lack of care when it permitted Ms. Podmokly's checkwriting activities to continue without conducting aninvestigation in light of the fact that it was on notice that shewas in breach of her fiduciary duties to the plaintiff.

The judgment of the circuit court of Cook County is reversedand the cause is remanded for further proceedings in accordancewith the views expressed in this opinion.

WOLFSON, J., concurs.

CERDA, J., dissents.

JUSTICE CERDA dissenting:

I respectfully dissent. I believe that one should read 810ILCS 5/4-406 as a whole, considering all relevant parts inconnection with every other section. Section 5/4-406(f) statesas follows:

"Without regard to care or lack of care ofeither the customer or the bank, a customerwho does not within one year after thestatement or items are made available to thecustomer (sub-section (a)) discover andreport the customer's unauthorized signatureon or any alteration on the item is precludedfrom asserting against the bank theunauthorized signature or alteration."

I believe that the legislature could have inserted "goodfaith" if it had wanted to do so. Since "good faith" was notincluded in 5/4-406(f) I do not believe that we can require thebank to pay the items in "good faith" in order for the one yearperiod to apply.

I agree with the statement in Euro Motors, Inc. v. SouthwestFinancial Bank and Trust Co., 297 Ill. App. 3d 246, 696 N.E.2d711 (1998) which stated:

"We agree with the majority of jurisdictionsthat section 4-406(f) is a rule ofsubstantive law that creates a statutoryprerequisite to filing suit. Failure to"discover and report" an unauthorizedsignature within one year from the time thebank makes available to the customer astatement of account and accompanying itemsprecludes the customer's assertion of a claimagainst the bank." Euro Motors, 297 Ill.App. 3d at 253.

In this case, the plaintiff did not discover and reportunauthorized actions by Ms. Podmokly to the bank within the oneyear period, therefore he is precluded from making any claimagainst the bank in this case. That includes claims of "badfaith" or lack of "good faith" in paying the unauthorized checks. The burden falls on the customer to examine the bank statements.

I would affirm.

1. In National Union Fire Insurance Co. of Pittsburg v. FirstNational Bank of Des Plaines, 90 C 6851 (N.D. Ill. 1991), thedistrict court held that the plaintiff had alleged bad faith bypleading that the bank had failed to exercise ordinary care andutilize reasonable commercial practices, which, it could beargued, would permit the Bank in this case to invoke theprotections of section 4-406(f). However, that case pre-datedthe 1992 amendments to section 3-307 which set forth certainconditions that placed a bank on notice of a breach of fiduciaryduty. In the case at bar, it is the knowledge of the breach offiduciary duty coupled with the Bank's failure to investigatethat raises the Bank's conduct from a mere lack of care to actingin bad faith.