Dawda, Mann, Mulcahy & Sadler, PLC v. Bank of America

Filing 14

OPINION AND ORDER DENYING 10 Defendant's Motion to Dismiss. Signed by District Judge Terrence G. Berg. (Chubb, A)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
DAWDA, MANN, MULCAHY &
SADLER, P.L.C.
Plaintiff,
Case No. 14-10636
HON. TERRENCE G. BERG

v.
BANK OF AMERICA, N.A.,
Defendant.

/

OPINION AND ORDER DENYING
DEFENDANT’S MOTION TO DISMISS (DKT. 10)
This matter is before the Court on Defendant Bank of America, N.A.’s
(“Defendant’s”) motion to dismiss under Federal Rule of Civil Procedure 12(b)(6).
(Dkt. 10) This motion was fully briefed and the parties presented oral argument on
June 9, 2014. For the reasons set out below, Defendant’s motion to dismiss is
DENIED.
I. INTRODUCTION
This is a negligence case. Plaintiff, the law firm of Dawda, Mann, Mulcahy &
Sadler, P.L.C. (“Plaintiff”), alleges that it suffered significant monetary losses
because of Defendant Bank of America, N.A.’s negligence in accepting over $500,000
in diverted trust account checks. As part of a fraudulent scheme, a former partner
of Plaintiff caused Plaintiff to write a number of checks made payable to Defendant

from Plaintiff’s IOLTA account.1 The partner, an account holder and customer of
Defendant, presented these checks to Defendant, and Defendant deposited the
funds into the partner’s personal account maintained by Defendant. Though
Plaintiff did not owe Defendant any money and did not have a business relationship
with Defendant, it is alleged that Defendant made no inquiry regarding the checks
before depositing them. As a result, Plaintiff alleges that Defendant violated the
common law “duty of inquiry.” Defendant counters that it did not owe Plaintiff any
duty and that it held the checks as a holder in due course under the Uniform
Commercial Code (“UCC”), free from any claims on the checks. For the reasons that
follow, Defendant’s motion to dismiss is DENIED.
II. FACTUAL AND PROCEDURAL BACKGROUND
Plaintiff is a law firm located in Bloomfield Hills, Michigan. (Second
Amended Complaint, Dkt. 9, at ¶ 1.) Beginning on or about November 15, 2010,
Plaintiff’s former partner Kenneth Flaska (“Flaska”) defrauded Plaintiff by
laundering funds through Defendant.2 (Id. at ¶ 6.) Flaska’s fraud consisted of
presenting and depositing checks drawn on Plaintiff’s IOLTA account into Flaska’s
personal bank account maintained by Defendant. (Id.) From November 2010 until
March 2013, Defendant received and credited nine of these checks into Flaska’s
account, totaling $529,676.50.3 (Id. at ¶ 7.) All of the checks were drawn from

An IOLTA (“Interest on Lawyer’s Trust Account”) account is an interest-bearing account
maintained by an attorney or law firm to pool funds being held in trust for a client or clients, as
required under Michigan Rule of Professional Responsibility 1.15(d).
2 Flaska pled guilty to bank fraud and money laundering for this scheme, and was sentenced to 64
months in prison. See E.D. Mich. Case No. 14-20131.
3 Dkt. 9 at ¶ 7 lists the checks as follows:
1

2

Plaintiff’s IOLTA account and were payable on their face to “Bank of America,” the
Defendant. (Id. at ¶¶ 6-7., Exs. A-I.) Despite the fact that Plaintiff was not one of
Defendant’s customers and was not indebted to Defendant, Defendant allegedly
never inquired into these checks before crediting them to Flaska’s account. (Second
Amended Complaint, Dkt. 9 at ¶¶ 9, 13.)
On November 15, 2013, Plaintiff sued Defendant in Oakland County Circuit
Court. 4 (Dkt. 1, Ex. 1.) Plaintiff amended its state court complaint on February 5,
2014, alleging four counts against Defendant, including: (1) breach of the common
law duty of inquiry; (2) common law conversion; (3) statutory conversion; and (4)
negligence. (Id.) Defendant removed the case to this Court on February 11, 2014.
(Dkt. 1.) Plaintiff subsequently amended its complaint, eliminating Counts 2 and 3
and proceeding solely on Counts 1 and 4. (Id.)
III.

ANALYSIS

A. Standard of Review
A Rule 12(b)(6) motion tests whether a legally sufficient claim has been
pleaded in a complaint, and provides for dismissal when a plaintiff fails to state a
claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). “To survive a

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 On or about November 15, 2010 a check for $39,229
 On or about February 14, 2011 a check for $50,000
 On or about August 24, 2011 a check for $46,797.56
 On or about March 29, 2012 a check for $46,235
 On or about May 22, 2012 a check for $200,000
 On or about October 22, 2012 a check for $10,000
 On or about February 14, 2013 a check for $24,828
 On or about February 28, 2013 a check for $35,219.94
 On or about March 1, 2013 a check for $77,366.60
Oakland County Circuit Court Case No: 2013-137389-CB.
3

motion to dismiss, a complaint must contain sufficient factual matter, accepted as
true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).
A claim is facially plausible when a plaintiff pleads factual content that permits a
court to reasonably infer that the defendant is liable for the alleged misconduct. Id.
(citing Twombly, 550 U.S. at 556). When assessing whether a plaintiff has set forth
a “plausible” claim, the district court must accept all of the complaint’s factual
allegations as true. See Ziegler v IBP Hog Mkt., Inc., 249 F.3d 509, 512 (6th Cir.
2001). A plaintiff must provide “more than labels and conclusions,” or “a formulaic
recitation of the elements of a cause of action.” Twombly, 550 U.S. at 556.
Therefore, “[t]hreadbare recitals of the elements of a cause of action, supported by
mere conclusory statements, do not suffice.” Iqbal, 556 U.S. at 678.
B. Discussion
1. The Common Law Duty of Inquiry.
Plaintiff alleges that Defendant was negligent because it breached its
common law “duty of inquiry.” In diversity jurisdiction actions, federal courts must
“appl[y] the substantive law of the forum state—in this case, Michigan.” Conlin v.
Mortg. Elec. Registration Sys., Inc., 714 F.3d 355, 358 (6th Cir. 2013). The Michigan
Court of Appeals first recognized a common law duty of inquiry in Allis Chalmers
Leasing Servs. Corp. v. Byron Ctr. State Bank, 341 N.W.2d 837 (Mich. Ct. App.
1983). In Allis Chalmers, the plaintiff wrote a check payable to the defendant,
Byron Center State Bank, as part of a purchase and leaseback agreement that the
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plaintiff had entered into with Gary Deneen, a customer of the defendant. Id. at
839. Deneen presented the check to the defendant as part of a fraudulent scheme
Deneen devised to defraud the plaintiff. Id. The defendant’s employee distributed
the proceeds according to Deneen’s instructions without making any inquiry into
how the funds should be used. Id.
Seeking to recover its losses, the plaintiff brought a negligence action against
the defendant bank for the amount of the check. The plaintiff alleged that the
defendant bank was negligent in disbursing the check to Deneen without first
inquiring into how the funds should be disbursed. Id. On appeal, the Michigan
Court of Appeals affirmed the trial court’s grant of summary judgment in favor of
the plaintiff, citing the general rule that “[w]here a check is drawn to the order of a
bank to which the drawer is not indebted, the bank is authorized to pay the
proceeds only to persons specified by the drawer; it takes the risk in treating such a
check as payable to bearer and is placed on inquiry as to the authority of the
drawer’s agent to receive payment.” Id. (internal citation omitted).
In addition, the Michigan Court of Appeals, adopting a California Supreme
Court decision, held that plaintiff’s negligence action was not abrogated by the
UCC’s “holder in due course” doctrine. The defendant in Allis Chalmers argued
that it was a holder in due course under the UCC and not liable under the common
law duty of inquiry. A holder in due course then, and now, takes an instrument free
of any claims on the instrument. See Mich. Comp. Laws § 440.3306. The Michigan
Court of Appeals rejected the defendant’s argument and instead adopted the

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California Supreme Court’s holding in Sun 'N Sand, Inc. v. United Cal. Bank, 582
P.2d 920 (Cal. 1978). Id. at 840.
In Sun ‘N Sand, the California Supreme Court recognized that banks have a
duty of inquiry that is “activated only when checks, not insignificant in amount, are
drawn payable to the order of a bank and are presented to the payee bank by a third
party seeking to negotiate the checks for his own benefit.” 582 P.2d at 937. Sun ‘N
Sand explained that the duty of inquiry is narrow in scope, stating
“[T]he bank’s obligation is minimal. We hold simply that the bank
may not ignore the danger signals inherent in such an attempted
negotiation. There must be objective indicia from which the bank
could reasonably conclude that the party presenting the check is
authorized to transact in the manner proposed. In the absence of such
indicia the bank pays at its peril.”
Id. Since the bank was under the duty of inquiry, Sun ‘N Sand held that the UCC’s
holder in due course doctrine was not a defense to the common law duty of inquiry
because banks were on notice “so as to preclude UCB from holder in due course
status[.]” Id. at 933.
2. The 1993 Revision to the UCC.
In response, Defendant argues that Allis Chalmers is old law, and that
Michigan’s 1993 revision to the UCC abrogated the common law duty of inquiry.
Defendant cites no case law in support of its position that the duty of inquiry was
preempted or overturned in Michigan as a result of the 1993 UCC revisions, and the
Court finds little precedential support for this assertion.
Indeed, contrary to Defendant’s position, there is case law holding that the
duty of inquiry recognized in Allis Chalmers remains in force in Michigan and may
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preclude a party from taking as a holder in due course under the UCC. In Grand
Rapids Auto Sales, Inc. v. MBNA Am. Bank, 227 F. Supp. 2d 721, 725-726 (W.D.
Mich. 2002), citing Allis Chalmers, the court held that there is a duty of inquiry that
“arises only in circumstances where the check is physically presented to the bank
for negotiation by the dishonest employee and the bank, through its agent, has the
opportunity to inspect the check for irregularities that should alert the bank that
fraud is amiss.” Grand Rapids involved an employee of a Michigan company who
defrauded the company by taking company checks made payable to defendant
MBNA bank and having MBNA apply the checks to her husband’s credit card. Id.
at 723. The bank accepted the checks through automatic electronic processing. Id.
The company, who did not have a relationship with MBNA, sued MBNA alleging
that MBNA violated its common law duty of inquiry. Id. at 722.
Although the court rejected the company’s argument and held that MBNA
was a holder in due course, it did so because it ruled that the duty of inquiry did not
extend to automatic credit card payments, not because the duty of inquiry did not
exist. Id. at 726. And the court explicitly distinguished its holding from Allis
Chalmers based on the factual circumstances of the case, “[t]he key distinction
between this case and Sun ‘N Sand and Allis Chalmers is that the banks in those
cases actually inspected the checks and should have been alerted by the
circumstances – a check drawn payable to the order of the bank by a drawer not
indebted to the bank and presented by a third party seeking to negotiate the check
for his own benefit – that the employee's conduct may have been improper.” Id. at

7

726-27 (internal citations omitted). The factual scenario offered by the court as an
example of the situation where the duty of inquiry should still apply is exactly what
Plaintiff alleges happened in the case at bar.
Moreover, Grand Rapids is not the only Michigan case arising after the 1993
revision of the UCC which refers to the continuing vitality of the duty of inquiry.
See In re First Independence Capital Corp., 181 Fed. App'x 524, 529 n.2 (6th Cir.
2006) (“[t]o the extent that First Independence seeks to maintain a claim under
Allis Chalmers, we note that Allis Chalmers involved an ordinary negligence action
for a bank’s breach of its duty of inquiry.”); cf. Double v. Bank of Lenawee, No.
262541, 2005 WL 2372149, at *2 (Mich. Ct. App. Sept. 27, 2005) (rejecting
defendant bank’s defense under a different UCC provision and citing Allis Chalmers
for the proposition that “[w]here a check is drawn to the order of a bank to which
the drawer is not indebted, the bank is authorized to pay the proceeds only to
persons specified by the drawer; it takes the risk in treating such a check as payable
to bearer and is placed on inquiry as to the authority of the drawer's agent to
receive payment.”).
3. Sun ‘N Sand’s Holding that a Party under a Duty of Inquiry Takes
with Notice and Is Not a Holder in Due Course Remains Good
Law.
Defendant next attempts a collateral attack on Allis Chalmers by arguing
that Sun ‘N Sand, the basis for Allis Chalmers, is no longer good law. This
argument is not well taken. Defendant advances two arguments to establish that
Sun ‘N Sand has been overturned: (1) that the language of the UCC explicitly
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rejects Sun ‘N Sand’s holdings and (2) that changes in the UCC’s holder in due
course language now prevent the result in Sun ‘N Sand.
Defendant’s first point is without merit because the UCC does not explicitly
reject Sun ‘N Sand’s holding regarding the duty of inquiry. Defendant relies upon
Comment Two of Mich. Comp. Laws § 440.3417, which states, “[i]n Sun 'N Sand,
Inc. v. United California Bank, 582 P.2d 920 (Cal.1978), the court held that under
former Section 3-417(1) a warranty was made to the drawer of a check when the
check was presented to the drawee for payment. The result in that case is rejected.”
This comment rejects Sun ‘N Sand’s result holding that a warranty is made to the
drawer of the check when it is presented to the drawee, but it does not address Sun
‘N Sand’s holding regarding the duty of inquiry. This comment is consequently
inapplicable.
Defendant’s second point fares no better. Defendant argues that the 1993
revision of the UCC abrogated Sun ‘N Sand’s holding that defendant had notice and
as such was not a holder in due course. The UCC section in force when Sun ‘N
Sand was decided, §3-304, provided in relevant part:
(1) The purchaser has notice of a claim or defense if
(a) the instrument is so incomplete, bears such visible
evidence of forgery or alteration, or is otherwise so irregular
as to call into question its validity, terms or ownership or to
create an ambiguity as to the party to pay; or
****
Sun ‘N Sand found the facts before it to “suggest an irregularity in the negotiation
of the checks which at the very least creates an ambiguity as to the proper
9

disbursement of the funds represented by the checks…notice derives not from a
mere ambiguity as to the person to be paid, but from affirmative indications that an
improper party is attempting to procure payment.” Id. (emphasis added).
Defendant posits that this holding is no longer valid because the 1993 version
of this section of the UCC eliminated the language regarding an ambiguity as to the
party to pay. This argument fails to note that in Sun ‘N Sand, the Court’s holding
that the bank had notice derived “not from a mere ambiguity as to the person to be
paid,” but rather from other affirmative indications that an improper party was
trying to be paid. Id. As such, the revision eliminating the language about
ambiguity as to the party to be paid does not invalidate the full scope of Sun ‘N
Sand’s holding because it also found notice to be sufficient where there were other
indications – not just ambiguity as to the person to be paid – which suggested that
the person attempting to negotiate the check was not entitled to receive the funds.
Id.
Additionally, Mich. Comp. Laws § 440.3302(1)(a), the current section that
defines a holder in due course, retains the language concerning irregularity on the
instrument that the Sun ‘N Sand court interpreted. Mich. Comp. Laws §
440.3302(1)(a) states that a party is a “holder in due course” if both of the following
apply:
(a) The instrument when issued or negotiated to the holder does
not bear such apparent evidence of forgery or alteration or is not
otherwise so irregular or incomplete as to call into
question its authenticity.

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(b) The holder took the instrument (i) for value, (ii) in good faith,
(iii) without notice that the instrument is overdue or has been
dishonored or that there is an incurred default with respect to
payment of another instrument issued as part of the same series,
(iv) without notice that the instrument contains an unauthorized
signature or has been altered, (v) without notice of any claim to
the instrument described in section 3306, and (vi) without notice
that any party has a defense or claim in recoupment described in
section 3305(1).
(emphasis added). A check written to a bank as a payee by a non-customer who
does not owe it any money is likely an irregularity under Mich. Comp. Laws §
440.3302. This is consistent with the position of the court in Grand Rapids where
the court held that banks that physically inspect a suspect check are in a position to
be placed on notice. 227 F. Supp. 2d at 726 (“the banks in those cases actually
inspected the checks and should have been alerted by the circumstances . . .”).
Defendant counters that under Mich. Comp. Laws § 440.3302, the
irregularity must be on the face of an instrument and not merely based on the
circumstances of a transaction. In support of this argument, Defendant points to
Comment One of Mich. Comp. Laws § 440.3302(a)(1), which states in relevant part:
Subsection (a)(1) is a return to the N.I.L.5 rule that the taker of
an irregular or incomplete instrument is not a person the law
should protect against defenses of the obligor or claims of prior
owners. This reflects a policy choice against extending the holder
in due course doctrine to an instrument that is so incomplete or
irregular “as to call into question its authenticity.” The term
The Uniform Law Commissioners first promulgated the Uniform Negotiable Instruments Law
(“N.I.L”) in 1896 as way to organize the law of negotiable instruments. A revised version of the
N.I.L. makes up the current version of Article 3 of the UCC. See Uniform Law Commission, UCC
Article 3, Negotiable Instruments (1990) Summary, available at
http://www.uniformlaws.org/ActSummary.aspx?title=UCC%20Article%203,%20Negotiable%20Instru
ments%20(1990) (“The old NIL in either its independent form or as part of the UCC has governed
negotiable instruments in the United States for about 80 years, as its first major revisions are
prepared for promulgation by the ULC in the year 1989. Another 80 or so years of service is
expected for the revisions.”).
5

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“authenticity” is used to make it clear that the irregularity or
incompleteness must indicate that the instrument may not be
what it purports to be. Persons who purchase or pay such
instruments should do so at their own risk. Under subsection (1)
of former Section 3-304, irregularity or incompleteness gave a
purchaser notice of a claim or defense. But it was not clear from
that provision whether the claim or defense had to be related to
the irregularity or incomplete aspect of the instrument. This
ambiguity is not present in subsection (a)(1).
Defendant’s reading of Comment One to say that any irregularity must be on the
face of an instrument is not supported by the language of the Comment itself. A
more accurate reading of this Comment is that where the irregularity is present on
the face of the instrument, so that a doubt is created that the instrument is what it
purports to be, the taker of an instrument with such an irregularity is not protected
as a holder in due course. The Comment does not preclude a finding that the actual
language of Mich. Comp. Laws § 440.3302(a)(1) contemplated the possibility of
irregularities arising both on the face of the instrument and in the circumstances of
its negotiation. That language speaks not only of the face of the instrument but
also of its negotiation when it states: “[t]he instrument when issued or negotiated
to the holder does not bear such apparent evidence of forgery or alteration or is not
otherwise so irregular or incomplete as to call into question its
authenticity.” (Id.) (emphasis added). An instrument that has no marks of
forgery or alteration on its face may nevertheless have its authenticity called into
question by the surrounding circumstances of its negotiation. Further, had the
drafters of the UCC intended to change the holder in due course section to require
that an irregularity must be on the face of an instrument, they would have so
stated. Indeed, the drafters were clear in their express rejection of Sun ‘N Sand’s
12

warranty holding. This Court does not find support in the statutory text to hold
that an irregularity must be on the face of the check.
Moreover, Defendant’s position on the alleged abrogation of Sun ‘N Sand is
unsupported by case law. California courts continue to invoke Sun ‘N Sand’s duty
of inquiry even after the amendments to the UCC upon which Defendant relies were
adopted. See Casey v. U.S. Bank Nat’l Ass’n, 26 Cal. Rptr. 3d 401, 411 n.3 (Cal. Ct.
App. 2005) (“California courts have recognized one situation in which a bank has a
duty to nondepositors to investigate a suspicious banking transaction.”) (citing Sun
‘N Sand); Mills v. U.S. Bank 83 Cal. Rptr. 3d 146, 160 n.22 (Cal. Ct. App. 2008)
(“[w]e note that several California cases have recognized that under a common law
negligence theory, a drawer of a check is owed a duty of care by a collecting bank
when the risk of harm is foreseeable. Indeed, in Mills I we followed those cases in
ruling that Plaintiffs had pled a cause of action for common law negligence.”).
4. Other Jurisdictions Maintain the Duty of Inquiry Against Holder
in Due Course Status.
In addition to Michigan and California, multiple jurisdictions continue to
deny the holder in due course defense where a taker is under a duty of inquiry. In
Travelers Cas. & Sur. Co. of Am. v. Wells Fargo Bank N.A., 374 F.3d 521, 527-28
(7th Cir. 2004) (citing Allis Chalmers among others), the Seventh Circuit affirmed
that banks under a duty of inquiry do not take as holders in due course under the
UCC, stating that “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
13

the check in due course. Otherwise section 3–302(a)(2) would dissolve the common
law rule, which no one contends it does.” See also Mut. Serv. Cas. Ins. Co. v.
Elizabeth State Bank, 265 F.3d 601, 614 (7th Cir. 2001) (“The Land of Lincoln is by
no means an exception in that regard. This general proposition enjoys the
unwavering support of a vast body of judicial opinion originating both before and
after the creation of the U.C.C.”) (internal quotations omitted).
Illinois is joined by various jurisdictions in holding that the duty of inquiry is
not abrogated by the UCC. See Govoni & Sons Const. Co. v. Mechanics Bank, 742
N.E.2d 1094, 1100 (Mass. App. Ct. 2001) (“[t]his rule is consistent with the code,
and we have found no jurisdiction rejecting it.”); Dalton & Marberry, P.C. v.
NationsBank, N.A., 982 S.W.2d 231, 235 (Mo. 1998) (“[c]ases from other
jurisdictions clearly hold that a drawee bank that is the payee, and under a duty to
inquire, cannot be a holder in due course. The holder in due course doctrine is
inapplicable in this case.”) (internal citations omitted).
Considering the weight of authority, this Court is not persuaded that the
revision to the UCC abrogated the common law duty of inquiry. For the foregoing
reasons, the common law duty of inquiry remains a viable claim in Michigan.
Where it applies, the holder in due course defense is inapplicable.
5. Mich. Comp. Laws § 440.3307.
Defendant also seeks refuge in another section of the UCC, claiming that
Mich. Comp. Laws § 440.3307 effectively abrogates the common law duty of inquiry.
Mich. Comp. Laws § 440.3307 defines when a taker of a negotiable instrument has
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notice of a breach of fiduciary duty and thus does not take as a holder in due course.
Mich. Comp. Laws § 440.3307(2) provides:
If (i) an instrument is taken from a fiduciary for payment or
collection or for value, (ii) the taker has knowledge of the
fiduciary status of the fiduciary, and (iii) the represented person
makes a claim to the instrument or its proceeds on the basis that
the transaction of the fiduciary is a breach of fiduciary duty, the
following rules apply:
(a) Notice of breach of fiduciary duty by the fiduciary is notice
of the claim of the represented person.
****
(d) If an instrument is issued by the represented person or the
fiduciary as such, to the taker as payee, the taker has notice of
the breach of fiduciary duty if the instrument is (i) taken in
payment of or as security for a debt known by the taker to be the
personal debt of the fiduciary, (ii) taken in a transaction known
by the taker to be for the personal benefit of the fiduciary, or (iii)
deposited to an account other than an account of the fiduciary, as
such, or an account of the represented person.
The Court has found no case addressing the question whether Mich. Comp.
Laws § 440.3307 abrogates the common law duty of inquiry on the merits. The
Seventh Circuit, in Mut. Serv. Cas. Ins. Co. v. Elizabeth State Bank, 265 F.3d 601,
621 (7th Cir. 2001), came close to addressing this argument when it stated in dicta
that the “case for displacement is anything but obvious, as the courts’ continued
reliance on the common-law rule itself suggests.” There, defendant bank argued
that Illinois’ version of Mich. Comp. Laws § 440.3307 eliminated the common law
duty of inquiry. Id. at 621. However, since the defendant did not raise this
argument until appellate review, the Seventh Circuit declined to decide the issue on
the merits. Id.

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The Court begins with a plain reading of Mich. Comp. Laws § 440.3307.
Comment Two of Mich. Comp. Laws § 440.3307 states that the section applies
where a “fiduciary in effect embezzles money of the represented person by applying
the proceeds of an instrument that belongs to the represented person to the
personal use of the fiduciary.” Mich. Comp. Laws § 440.3307(1)(a) defines
“fiduciary” narrowly, as an “an agent, trustee, partner, corporate officer or director,
or other representative owing a fiduciary duty with respect to an instrument.”
(emphasis added). So, even if a party is a fiduciary of an organization, Mich. Comp.
Laws § 440.3307 is inapplicable if the party is not a fiduciary with respect to the
check itself. This is what the Seventh Circuit held in Elizabeth State Bank. There,
the Seventh Circuit found that a controller for a company who managed the
company’s books and accounts was not a fiduciary under Illinois’ version of Mich.
Comp. Laws § 440.3307 because he had “no authority to direct the proceeds” of
checks on the company’s account at issue. 265 F.3d at 622. As such, the Seventh
Circuit held that the controller “may have been a fiduciary for some purposes, but
he did not qualify as a fiduciary with respect to checks drawn on the operating
account and made payable to the bank’s order.” Id. Because this section applies
only where a fiduciary (as to a particular check) is involved, it is narrowly drawn
and does not cover every situation where a third-party attempts to divert the
proceeds of a check by presenting a check made payable to a taker. It follows that
the scope of Mich. Comp. Laws § 440.3307, like its Illinois counterpart, does not
encompass every situation where the common law duty of inquiry applies.

16

The Court must also consider that the UCC by its own terms provides for
supplementation by other sources of law, such as the common law duty of inquiry.
Mich. Comp. Laws § 440.1103 provides that “[u]nless displaced by the particular
provisions of this act, the principles of law and equity…shall supplement its
provisions.” As discussed above, Mich. Comp. Laws § 440.3307 only applies where a
fiduciary with respect to a certain instrument presents that instrument to a taker
as payee. Because the duty of inquiry applies more broadly to situations that do not
involve a fiduciary, the common law duty of inquiry is not displaced by a particular
provision of the UCC.
Similarly, the holder in due course section specifically provides for
supplementation by other sources of law. Mich. Comp. Laws § 440.3302(7) provides
that “[t]his section is subject to any law limiting status as a holder in due course in
particular classes of transactions.” As evidenced by the considerable body of case
law discussed above, numerous jurisdictions deny banks holder in due course status
when they are “presented with a check made out to it by someone who owes it no
money, for deposit in the presenter’s account.” Travelers, 374 F.3d at 527-28.
Consequently, the duty of inquiry limits the holder in due course section.
Finally, the UCC’s underlying purpose of promoting uniformity among
jurisdictions weighs against a finding that Mich. Comp. Laws § 440.3307 has
abrogated the common law duty of inquiry. Mich. Comp. Laws § 440.1103 provides:
(1) This act must be liberally construed and applied to promote
the following underlying purposes and policies:

17

(a) To simplify, clarify, and modernize the law governing
commercial transactions.
****
(c) To make uniform the law among the various jurisdictions.
Various jurisdictions have upheld the common law duty of inquiry both before and
after the enactment of the UCC. This Court has found no case abrogating the
common law duty of inquiry in any jurisdiction. Hence, the interest of uniformity
militates against abrogating the common law duty of inquiry.
For the foregoing reasons, this Court holds that the Mich. Comp. Laws §
440.3307 does not abrogate the common law duty of inquiry.6
6. Plaintiff has raised a Plausible Claim that Defendant had a Duty
of Inquiry.
Having found that the common law duty of inquiry remains viable as a legal
claim, we must now analyze whether Plaintiff’s facts present a plausible claim that
Defendant had a duty of inquiry in this case. Sun ‘N Sand held that the duty is
“activated only when checks, not insignificant in amount, are drawn payable to the
order of a bank and are presented to the payee bank by a third party seeking to
negotiate the checks for his own benefit.” 582 P.2d at 937. Here, Plaintiff’s checks
were payable to Defendant. These checks were for a significant amount; together
the nine checks totaled $529,676.50. And Flaska, a third-party, presented the

Although Mich. Comp. Laws § 440.3307 does not abrogate the common law duty of inquiry, the
Court notes that this section would apply here if Flaska is a fiduciary under the statute. Plaintiff
asserts that Flaska was a fiduciary of the IOLTA account. However, since Plaintiff is not raising a
claim under Mich. Comp. Laws § 440.3307 and further disclaims that Flaska is a fiduciary under
that section, this Court need not decide the question whether Flaska is a fiduciary as defined in §
440.3307 at this time.
6

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checks to Defendant for his own benefit. Under these circumstances, a “bank may
not ignore the danger signals inherent in such an attempted negotiation.” Id.
Based on these allegations, Plaintiff has raised a plausible claim that Defendant
had a duty of inquiry.
As such, this Court holds that Plaintiff has pled a plausible claim for relief.
Defendant’s motion to dismiss (Dkt. 10) is DENIED.
IV.

CONCLUSION

For the foregoing reasons, Plaintiff has stated a plausible claim for relief and
Defendant’s motion to dismiss is DENIED.
SO ORDERED.
Dated: November 24, 2014

s/Terrence G. Berg
TERRENCE G. BERG
UNITED STATES DISTRICT JUDGE

Certificate of Service
I hereby certify that this Order was electronically submitted on November 24,
2014, using the CM/ECF system, which will send notification to all parties.
s/A. Chubb
Case Manager

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