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STATE OF MICHIGAN COURT OF APPEALS

MICHIGAN BASIC PROPERTY INSURANCE ASSOCIATION, Plaintiff-Appellee, v JOYCE WASHINGTON, CLEVELAND POWELL, COUNTRYWIDE HOME LOANS, DIMONTI & ASSOCIATES, and SAN DIEGO NATIONAL BANK, Defendants, and FIFTH THIRD BANK, Defendant/Third-Party-Plaintiff, v NATIONAL CITY BANK, a/k/a PNC BANK NA, Defendant/Third-Party-DefendantAppellant.

UNPUBLISHED January 24, 2012

No. 299597 Wayne Circuit Court LC No. 08-107295-CK

Before: GLEICHER, P.J., and CAVANAGH and O'CONNELL, JJ. PER CURIAM. This controversy concerns a simple piece of paper, a common check. The question before us is not as simple or straight forward as the piece of paper at its core: Who bears the loss when someone forges an endorsement on a check and wrongfully takes the proceeds? Specifically, we are asked to consider whether defendant Fifth Third Bank is statutorily or contractually liable to its customer, plaintiff Michigan Basic Property Insurance Association (MBP), for honoring a check with forged endorsements and deducting those funds from MBP's account. We conclude that Fifth Third Bank would be required by the Uniform Commercial Code (UCC) to recredit the check proceeds to its customer's account as it deducted those funds over a -1-

forged endorsement. However, the parties altered their statutory duties by contract. MBP assumed liability for "any improper endorsements by payees." MBP also agreed to review its account statements and notify Fifth Third of any discrepancies or forgeries within 30 days. MBP failed to do so and its breach of the contractual notice requirement, as well as its contractual assumption of risk, precludes its claim to relief. As the trial court granted summary disposition in MBP's favor, we reverse and remand for entry of judgment favoring Fifth Third Bank.1 I. CHECK COLLECTION PROCESS "In the normal functioning of the check collection process," a "drawer" writes a check made payable to a "payee," with the funds ultimately to be deducted from the drawer's checking account. J Walter Thompson, USA, Inc v First BancoAmericano, 518 F3d 128, 131 (CA 2, 2008); MCL 440.3103(1)(e). The payee takes the check to his or her bank for cash or deposit. "The payee's bank, which is the first to receive the check, is known as the `depositary bank.'" J Walter Thompson, 518 F3d at 131; MCL 440.4105(b). In a simple transaction, the depositary bank sends the check directly to the drawer's bank for payment. In that situation, the depositary bank is also a "collecting" and "presenting" bank. "A `collecting bank' . . . handles a check for collection. A `presenting bank' . . . presents an item for payment." J Walter Thompson, 518 F3d at 131; MCL 440.4105(e)-(f). The check is "presented" to the bank that holds the drawer's bank account. That bank is referred to as a "drawee bank" as it "draws" the funds from its customer's account and a "payor bank" as it pays the cash promised in the check. J Walter Thompson, 518 F3d at 131; MCL 440.4104(c); MCL 440.4105(c). II. FACTUAL AND PROCEDURAL BACKGROUND Plaintiff Michigan Basic Property Insurance Association (MBP) issued a $69,559.06 check jointly payable to its insured, Joyce Washington, and two lien holders over her property, Countrywide Home Loans and T & C Federal Credit Union (the "Washington-Countrywide" check).2 Either Joyce Washington or Cleveland Powell, who acted with Washington's power of attorney, took the check to National City Bank on February 16, 2007. Either Washington or Powell endorsed the check by signing "Countrywide Home Loans," "T & C Credit Union" and "Joyce Washington," interspersed with two additional but illegible signatures. The signatures were all made in the same handwriting. National City accepted the check and deposited the proceeds into an account shared by Washington, Powell and a corporate entity. National City presented the check directly to Fifth Third Bank. MBP maintains an account at Fifth Third and wrote the Washington-Countrywide check from its Fifth Third account. Pursuant to a special commercial client account agreement, Fifth Third sent MBP a daily account statement detailing all checks presented for payment against MBP's account. That

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From our review of the record, it appears that MBP's fraud and conversion claims against defendants Joyce Washington and Cleveland Powell remain pending. The check was part of a larger homeowner's insurance settlement and was made jointly payable due to a mortgage clause in the underlying policy.

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statement listed the check number, date presented, amount payable and electronic tracing number of the subject check. Fifth Third expected MBP to review the daily account statement and immediately notify it of any checks that should not be paid. MBP did not object to the presentment of the check so Fifth Third withdrew the funds from MBP's account and transferred $69,559.06 to National City. Fifth Third later sent MBP a February 2007 monthly account statement including the same item description as the daily statement to memorialize that the check had been paid. MBP raised no objection to the monthly statement. Despite that the subject check was made payable to joint payees, it appears that Washington kept the entirety of the proceeds, and she certainly did not satisfy the lien held by Countrywide Home Loans. Countrywide notified MBP of the lack of payment and, on March 31, 2007, MBP issued a duplicate joint check for $69,559.06 and mailed it directly to Countrywide. One year later, in March 2008, MBP filed a fraud and conversion suit against Washington and Powell, as well as claims against National City for UCC violations.3 However, National City owed no direct duty to MBP and the court dismissed the UCC claims. Only then did MBP pursue reimbursement from its own bank, Fifth Third. On May 18, 2009, MBP filed suit against Fifth Third, arguing that the bank's payment of the subject check was "unauthorized" because the forged payee endorsements rendered the check "not properly payable." Fifth Third, in turn, filed a third-party claim against National City, now PNC Bank, for breaching its warranty under the UCC that the check it presented for payment was properly endorsed. Fifth Third and National City each sought summary dismissal of MBP's reimbursement claim. Fifth Third contended that MBP was not entitled to reimbursement because it failed to use ordinary care and contributed to the forgery by mailing the original check to Washington instead of Countrywide. Fifth Third challenged MBP's failure to review its account statements and timely notify the bank of any discrepancies or forgeries as required by the account terms. National City added that Fifth Third's account contract placed the risk of forged endorsements on the customer, MBP. Fifth Third also sought summary disposition of its third-party claim against National City for presenting a check with forged endorsements for payment in violation of the UCC. MBP filed a counter motion for summary disposition, seeking reimbursement as a matter of law. MBP contended that Fifth Third violated MCL 440.4401 of the UCC by charging against MBP's account a check that was not "properly payable" due to forged endorsements. MBP defended that it had exercised ordinary care because it was contractually required to mail the Washington-Countrywide check to its insured, and had no reason to suspect that Washington would forge the endorsements of her joint payees. MBP further asserted that it reasonably expected Fifth Third to have a procedure in place to prevent payment on unauthorized checks. MBP insisted that it could not have discovered the forgery from the sparse information provided
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MBP also raised several claims against financial institutions related to Countrywide's negotiation of the March 31, 2007 check. Those claims were settled in the trial court and are not at issue in this appeal.

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in Fifth Third's daily and monthly account statements and therefore could never provide the notice required by the account terms. The trial court determined that Fifth Third was liable to reimburse MBP $69,559.06 and that National City was liable to indemnify Fifth Third in the same amount. The court denied Fifth Third's motion to dismiss MBP's claims on various grounds: Fifth Third's motion to dismiss [MBP's] claims for reimbursement is denied. MCL 440.3406[1] only bars [MBP's] claims if its failure to exercise ordinary care substantially contributed to an alteration or forgery of the check at issue. [MBP] had a contractual obligation to its insured to issue a check jointly payable to the payees noted on the check at issue. This Court does not find evidence proving that [MBP] failed to exercise ordinary care. [MBP's] claims are not barred under

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