J. Walter Thompson, U.S.A., Inc. v. First BankAmericano
518 F.3d 128 (2008)
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Rule of Law:
Under U.C.C. § 3-406, a drawer's failure to take preventative measures does not constitute negligence that 'substantially contributes' to a check's alteration unless the failure makes the act of alteration itself easier. A failure to utilize post-alteration detection methods, especially those that are not commercially available, does not meet this standard.
Facts:
- J. Walter Thompson (JWT) maintained a checking account with Bank of America (BoA) and subscribed to BoA's 'Positive Pay' fraud detection service, which at the time could not match payee names.
- Prior to the events in question, ten instances of check fraud or attempted fraud occurred on JWT's account, resulting in less than $9,000 in total losses.
- On October 31, 2001, JWT issued a check for $382,210.15 payable to Outdoor Life Network.
- An unknown party stole the check and altered the payee name to 'Diversified Business Enterprises, Inc'.
- The altered check was deposited into an account at First BankAmericano (FBA).
- FBA presented the check for payment through the banking system, and BoA ultimately paid the check, debiting JWT's account for the full amount.
- Upon discovering the fraud, JWT notified BoA and requested its account be credited, but BoA refused.
Procedural Posture:
- J. Walter Thompson (JWT) sued Bank of America (BoA) in federal district court for improperly paying an altered check.
- BoA filed a third-party complaint against First BankAmericano (FBA) and the Federal Reserve Bank of Atlanta (Atlanta Fed) for breach of presentment warranties.
- JWT moved for summary judgment against BoA, and BoA moved for summary judgment against FBA and the Atlanta Fed.
- The U.S. District Court granted both summary judgment motions, holding BoA liable to JWT and FBA/Atlanta Fed liable to BoA.
- FBA and the Atlanta Fed, as appellants, appealed the district court's judgment to the U.S. Court of Appeals for the Second Circuit.
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Issue:
Does a drawer's failure to take enhanced security measures, such as closing an account or implementing unavailable technology after experiencing prior minor fraud, constitute negligence that 'substantially contributes' to a subsequent check alteration under U.C.C. § 3-406, thereby precluding the drawer from recovering its loss?
Opinions:
Majority - Cabranes, J.
No. A drawer's failure to take extra security measures does not constitute negligence that 'substantially contributes' to a check's alteration under U.C.C. § 3-406 unless the drawer's conduct made the alteration itself easier to accomplish. Here, JWT's decisions did not meet this standard. First, it was not negligent to keep the account open, as the prior fraud incidents involved de minimis losses compared to the significant costs of closing the account, and there was no evidence a new account would be safer. Second, JWT could not have been negligent for failing to implement a payee matching system, as that technology was not available at the time. Crucially, the court reasoned that even if available, a failure to use payee matching could not have 'substantially contributed' to the alteration because such systems only detect fraud after the alteration has occurred; they do not prevent or facilitate the physical act of altering the check. Therefore, JWT's conduct did not preclude its recovery.
Analysis:
This decision clarifies the scope of the drawer negligence defense under U.C.C. § 3-406, setting a high bar for what constitutes a 'substantial contribution' to an alteration. The court firmly establishes that the drawer's negligence must relate to the creation of the alteration itself, not merely the failure to detect it later. This reinforces the U.C.C.'s general loss-allocation scheme, which places liability for an altered check on the depositary bank as the party in the best position to prevent the loss by knowing its customer. The ruling protects drawers from liability for failing to adopt extraordinary or unavailable security measures, thereby promoting stability and predictability in commercial transactions.
