Select Express, LLC v. American Trade Bindery, Inc.

JAMES A. KENNEY III, Judge, retired, specially assigned. Appellant, Select Express, LLC (“Select Express”), cashed what purported to be payroll checks (“the counterfeit checks”) drawn on a bank account of appellee, American Trade Bindery, Inc. (“ATB”). When Select Express’s account was debited the amount of the counterfeit checks, Select Express sued ATB, alleging breach of contract and negligence. The Circuit Court for Baltimore City granted summary judgment in favor of ATB on both counts.

Select Express presents the following questions for review, which we have reordered: I. Did the Circuit Court err when it granted summary judgment in favor of ATB on the negligence count finding that ATB owed no duty of care to Select Express?

II

Did the Circuit Court err when it narrowly construed § 3-406 of the Maryland Uniform Commercial Code and granted summary judgment in favor of ATB on the breach of contract count? For the following reasons, we shall affirm the judgment of the circuit court. ⁶¹⁰ FACTUAL AND PROCEDURAL HISTORY ATB, a document binding company located in Baltimore, Maryland, typically employs forty to fifty full-time employees, including an office manager who also serves as the company’s bookkeeper. ATB pays its employees weekly. During the relevant period, ATB would submit its weekly payroll information to Paychex, a payroll services business, for processing.

Paychex would prepare checks on ATB’s payroll account made payable to ATB’s employees and forward them, unsigned, to ATB. An authorized ATB officer would then personally sign the checks, and distribute them to the employees. ATB did not use or even possess a signature stamp, and all of the payroll checks were signed by hand. ATB did not keep blank payroll checks on its premises.

ATB maintained two bank accounts with Provident Bank of Maryland (“Provident Bank”), an operating account and the payroll account. Provident Bank issued a monthly statement for each account to ATB. Typically, ATB’s office manager would reconcile the accounts within two business days after receiving the statements. Leo Jubb, ATB’s Treasurer, would later review the accounts.

Select Express, operating as “Herb’s Place at Upton” (“Herb’s Place”), cashes payroll checks, social security checks, and income tax checks for a fee. It deposits the cashed checks into its account with Bank of America. Between December 6, 2001 and February 21, 2002, Select Express accepted and cashed approximately eighty-seven separate checks purporting to be ATB payroll checks. It is undisputed that none of these checks were generated by Paychex or signed by anyone at ATB.

They were not created on actual blank ATB check forms. The counterfeit checks, totaling $50,926.96, were presented to Select Express by approximately fifteen unidentified individuals. In December 2001, ATB’s office manager resigned. A new office manager was hired in March 2002.

In the interim, Jubb assumed the bookkeeping duties. On February 13, 2002, ⁶¹¹ while reconciling ATB’s accounts, Jubb discovered that the counterfeit checks had been paid from ATB’s payroll account. He contacted both the police and Provident Bank. Provident Bank immediately closed the payroll account.

Ultimately, Bank of America debited Select Express’s account in the amount of the checks. 1 On December 3, 2004, Select Express filed its Complaint against ATB, Provident Bank, Bank of America, and “individual John Doe, and Jane Doe 1-15.” 2 As to ATB, Select Express alleged negligence and breach of contract. An Amended Complaint, which no longer included Bank of America as a defendant, was filed on April 6, 2005. On November 13, 2006, ATB filed a Motion for Summary Judgment. Following a hearing on December 13, 2006, the circuit court entered summary judgment in favor of ATB on both the negligence count and the breach of contract count on December 14, 2006. 3 Select Express first noted an appeal on January 12, 2007, and again on March 13, 2007, after the dismissal of claims against Provident Bank and the Does. ⁶¹² STANDARD OF REVIEW In Lightolier, A Div. of Genlyte Thomas Group, LLC v. Hoon, 387 Md. 539, 552 , 876 A.2d 100 (2005), the Court of Appeals said: The purpose of the summary judgment procedure is not to try the case or to decide the factual disputes, but to decide whether there is an issue of fact which is sufficiently material to be tried.

Thus, once the moving party has provided the court with sufficient grounds for summary judgment, the non-moving party must produce sufficient evidence to the trial court that a genuine dispute to a material fact exists. This requires “producing] facts under oath, based on personal knowledge of the affiant to defeat the motion. Bald, unsupported statements or conclusions of law are insufficient.” (Citations omitted.) We review the circuit court’s grant of summary judgment de novo. Cochran v. Norkunas, 398 Md. 1, 11 , 919 A.2d 700 (2007).

We first determine whether a genuine dispute of material fact exists; if not, we then determine whether the party in whose favor judgment was entered is entitled to judgment as a matter of law. Id. at 12 , 919 A.2d 700 . “Even where it is shown that there is a dispute as to a fact, when the resolution of that factual dispute is not material to the controversy, such dispute does not prevent the entry of judgment.” Educ. Testing Serv. v. Hildebrant, 399 Md. 128, 140 , 923 A.2d 34 (2007)(quoting Lynx, Inc. v. Ordnance Products, 273 Md. 1, 7-8 , 327 A.2d 502 (1974)). To defeat a motion for summary judgment, the party opposing the motion must identify “with particularity each material fact as to which it is contended that there is a genuine dispute.” Maryland Rule 2-501(b). “[M]ere general allegations or conclusory assertions which do not show facts in detail and with precision will not suffice to overcome a motion for summary judgment.” Educ.

Testing Serv., 399 Md. at 139 , 923 A.2d 34 . On appeal, we ordinarily “review ‘only the grounds upon which the trial court relied in granting summary judgment.’ ” ⁶¹³ Standard Fire Ins. Company v. Berrett, 395 Md. 439, 451 , 910 A.2d 1072 (2006) (quoting Ross v. State Bd. of Elections, 387 Md. 649, 659 , 876 A.2d 692 (2005)). DISCUSSION Select Express argues that summary judgment is not appropriate because a genuine dispute of material fact exists as to “whether ATB’s actions and inactions were a ‘failure to exercise ordinary care’ that contributed to the forgeries.” Based on our understanding of Select Express’s arguments on both its contract and negligence claims, we believe such an inquiry first invites a legal analysis.

Select Express’s negligence argument is dependent on a duty owed to it by ATB; if there is no duty, there can be no negligence as a matter of law. See West Virginia Central & Pittsburgh Ry. Co. v. Fuller, 96 Md. 652, 671 , 54 A. 669 (1903) (“Of course there can be no negligence where there is no duty that is due; for negligence is the breach of some duty that one person owes another.”) Its breach of contract claim rests on its assertion that ATB’s actions or inactions, about which there is no material dispute, invoke the provisions of Maryland Code Annotated (1975, 2002 RepLVol.), § 3-406(a) of the Commercial Law Article (“CL”), which preclude a person who has substantially contributed to “the alteration of an instrument or to the making of a forged signature on an instrument” from asserting that alteration or forgery as a defense to payment. If they do not, the breach of contract count also fails as matter of law.

I. Negligence In granting summary judgment in favor of ATB on the negligence count, the circuit court found that ATB had no duty to Select Express to check its bank account statement earlier than it did. Whether a legal duty exists is to be decided by the court, as a question of law, not an issue of fact to be submitted to a fact-finder. Pendleton v. State, 398 Md. 447, 462 , 921 A.2d 196 (2007); Gourdine v. Crews, 177 Md. App. 471, 479 , 935 A.2d 1146 (2007). ⁶¹⁴ In response to the court’s query at the summary judgment hearing, “Why did [ATB] have an obligation to ever check [its bank statements]?,” Select Express’s counsel responded: “There is under the law the equivalent to contractual privity and it says if there is a nexus between the parties then there can be a duty between the drawer and the party who takes the check.” Select Express argues that the nexus supporting ATB’s duty to Select Express to check its bank statements in a more timely fashion arose from the fact that ATB knew or should have known that Select Express had cashed payroll checks for ATB employees over a period of time. This knowledge arose from the fact that when ATB received its checks back with the bank statement, Select Express’s indorsement was on the back of the checks.

This was in addition to an alleged telephone call to ATB when it first cashed an ATB payroll check. As Select Express recognizes, when a failure to exercise due care creates the risk of economic loss only, an intimate nexus between the parties is a predicate to the imposition of tort liability. “The rationale underlying the requirement of an intimate nexus between the parties as a condition of liability for negligent conduct creating only a risk of economic damages is to avoid ‘liability in an indeterminate amount for an indeterminate time to an indeterminate class.’ ” Simmons v. Lennon, 139 Md.App. 15, 36 , 773 A.2d 1064 (2001) (citing Walpert, Smullian & Blumenthal, P.A. v. Katz, 361 Md. 645, 671 , 762 A.2d 582 (2000)). The requisite nexus may be established by contractual privity or its equivalent. See Jacques v. First National Bank, 307 Md. 527, 534-535 , 515 A.2d 756 (1986); Chicago Title Ins.

Company v. Allfirst Bank, 394 Md. 270, 290-291 , 905 A.2d 366 (2006). Because there is no contractual relationship between Select Express and ATB, any duty must be based on the equivalent of contractual privity. In Farmers Bank of Maryland v. Chicago Title Ins. Co., 163 Md.App. 158, 177-178 , 877 A.2d 1145 (2005), after an ⁶¹⁵ extensive analysis of Jacques and Walpert, we recognized that the “nexus requirement may not be as close as the word ‘intimate’ would suggest” and in determining whether it exists, the focus is “on the defendant’s knowledge.” As we stated in Simmons, 139 Md.App. at 40-41 , 773 A.2d 1064 , “[t]he common denominator of the Maryland cases, where no contractual privity existed but nevertheless a tort was found, is that in each case the relationship of the litigants was close enough that the defendant knew that the plaintiff was likely to take some action based on what the defendant said or did.” See Walpert, 361 Md. 645 , 762 A.2d 582 (An accounting firm’s knowledge that a particular third party was going to rely on its audits and reports constituted the equivalent of privity.); Weisman v. Connors, 312 Md. 428 , 540 A.2d 783 (1988) (The equivalent of privity arose in precontractual negotiations between a prospective employer and prospective employee because the prospective employer had a duty to impart relevant and accurate information concerning the prospective employer and the proposed position.) In determining whether the equivalent of contractual privity is present, we consider, along with ATB’s knowledge of Select Express’s likely reliance on ATB checking its bank statement, the recognized policy objective of limiting the potential for unpredictable and unlimited economic damages.

Chicago Title Ins. Co., 394 at 295, 905 A.2d 366 . Here, Select Express would limit the class of potential claimants to whom ATB owes a duty to those who might be known to ATB by looking at the back of returned checks or those who might have telephoned ATB before cashing a check sometime in the past. Even if we were to assume that the endorsement on the back of the cancelled checks provided ATB with knowledge that Select Express had been cashing payroll checks over a period of time and that Select Express had even contacted someone at ATB before cashing the first check, these actions would not communicate to ATB that Select Express was relying on ATB’s internal bank statement reconciliation proce ⁶¹⁶ dures in cashing or in refraining from cashing ATB’s checks.

Moreover, any such reliance would be unreasonable. There was no duty. 4 II. Breach of Contract Select Express’s breach of contract count relies on CL § 3-406(a), which reads: (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. The Official Comment states that “[n]o attempt is made to define particular conduct that will constitute ‘failure to exercise ordinary care [that] substantially contributes to an alteration.’ ” “Ordinary care” is defined in CL § 3-103(a)(7) as “observance of reasonable commercial standards, prevailing in the area in which the person is located, with respect to the business in which the person is engaged.” Citing James J. White & Robert S. Summers, Uniform Commercial Code, § 16-1 at 519 (1st ed.1972), Select Express asserts as “black letter law”: If party conducts his business in such a manner as to encourage forgeries or if he fails to use diligence in discovering forgeries on his cancelled checks, the Code (§§ 3-406, 4-406, 3-405) estops him from asserting forgery. ⁶¹⁷ ATB maintains that the circuit court properly granted summary judgment in its favor because “there [was] simply no cause of action for breach of contract.” According to ATB, CL § 3-406(a) “does not create an affirmative cause of action as suggested by Select Express.” In support of its argument, ATB points to the two preceding sections, §§ 3-404 5 and 3-405, 6 which expressly provide that the person bearing the loss may recover from the person failing to exercise ordinary care.

CL § 3-406, on the other hand, contains no such language. ATB also notes that Official Comment 1 to CL § 3-406(a) states that “Section 3-406 does not make the negligent party liable in tort for damages resulting from the alteration.” ATB also contends that CL § 3-406(a) “applies to the alteration or forgery of an otherwise valid instrument,” and not to “the creation of a fake or counterfeit check.” Moreover, to the extent that Official Comment 1 to § 3-406(a) suggests “that the failure to exercise control over an instrument can lead to a duty of care,” ATB did not exercise control ⁶¹⁸ “over [the counterfeit checks] as a maker, drawer, or issuer.” Instead, “some unknown individual created, signed, and delivered the counterfeit checks.” In other words, because ATB was never in possession of the counterfeit checks, it could in no way contribute to the making, alteration, or forgery of the counterfeit checks. In its reply brief, Select Express explains that it “is not using [CL] § 3-406 as an affirmative cause of action in negligence, nor is it using it for the basis for any affirmative cause of action,” even though, it contends, Maryland law does not prevent it from presenting an affirmative cause of action under CL § 3-406. Instead, Select Express relies on CL § 3-406 to support its position that it was a good faith holder of the counterfeit checks because CL § 3-406