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Environmental Equipment & Service Co. v. Wachovia Bank

September 23, 2010

ENVIRONMENTAL EQUIPMENT & SERVICE COMPANY, PLAINTIFF,
v.
WACHOVIA BANK, N.A., DEFENDANT.



The opinion of the court was delivered by: Anita B. Brody, J.

Anita B. Brody, J.

MEMORANDUM

I. INTRODUCTION 2

II. BACKGROUND 3

III. LEGAL STANDARD 7

IV. DISCUSSION 8

A. EES's Common Law Claims Are Displaced by the PCC . . . . . . . . . . . . . . . . . . . . . . 9

1. Comprehensive Remedial Scheme Provided by the PCC . . . . . . . . . . . . . . . . . 9

a. Negligence .............................................. 9

b. Contract and Duty of Good Faith Claims . . . . . . . . . . . . . . . . . . . . . . 11

2. Purposes of the Code ........................................... 13

B. PCC Liability ....................................................... 15

1. Default Rules of PCC Determine Wachovia's Liability Period . . . . . . . . . . . 15

a) No Reasonable Discoverability Requirement in Section 4406(f) . . . . 17

b) No Bad Faith Exception to Section 4406(f) . . . . . . . . . . . . . . . . . . . . 18

2. Section 4406(f)'s One-Year Notice Requirement Triggered . . . . . . . . . . . . 20

C. No Further Contractual Restrictions ..................................... 23

1. Exclusion of Evidence Regarding the Agreements . . . . . . . . . . . . . . . . . . . . . 24

2. Binding Effect of the Agreements.................................. 27

D. Aiding and Abetting .................................................. 32

E. Uniform Fiduciaries Act ("UFA") claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

F. Absent Checks ...................................................... 37

V. CONCLUSION 38

I. INTRODUCTION

This case arises out of an embezzlement scheme perpetrated by Elizabeth Greenawalt ("Greenawalt") against her employer, Plaintiff Environmental Equipment & Service Company ("EES").*fn1 Greenawalt, acting as EES's bookkeeper, embezzled nearly $1 million between 1997 and 2006 through fraudulent banking practices at a Linwood, Pennsylvania branch office of Wachovia Bank, N.A. ("Wachovia"). In this action, EES seeks to recoup its losses from Wachovia. According to EES, Wachovia should have been suspicious of Greenawalt's unusual banking activity and prevented her from carrying out her nine-year scheme.

Pending before me is Wachovia's Motion for Summary Judgment regarding nine counts of EES's Amended Complaint: negligence (Count I); breach of contract (Count V); breach of duty of good faith and fair dealing (Count VI); violations of Pennsylvania's Commercial Code ("PCC" or "Code"), 13 Pa. Cons. Stat. Ann. §§ 3307, 3406, 4401, 4406 (West 1999) [hereinafter PCC §§ 3307, 3406, 4401, and 4406] (Counts VII-X); aiding and abetting (Count XI); and violations of Pennsylvania's Uniform Fiduciaries Act ("PUFA"), 7 Pa.. Cons. Stat. Ann. § 6351 et seq. (West 1995) (Count XII), specifically §§ 6381, 6382, and 6391-93. Also under my consideration are EES's Memorandum in Opposition to Defendant's Motion for Summary Judgment, Wachovia's Brief in Support of its Motion for Summary Judgment, EES's Reply Memorandum in Opposition to Defendant's Motion for Summary Judgment, and Wachovia's Sur Reply.

For the reasons that follow, I will grant Wachovia's Motion for Summary Judgment in part and deny in part. I will grant the Motion with regard to EES's negligence (Count I), breach of contract (Count V), breach of duty of good faith and fair dealing (Count VI), and PUFA (Count XII) claims. I will also grant the Motion with regard to EES's remaining claims--the PCC claims (Counts VII-X) and aiding and abetting (Count XI)--but only to the extent that they are barred by the applicable statute of repose and/or statute of limitations.*fn2

II. BACKGROUND*fn3

Ralph S. Bucci formed EES as a sole proprietorship in 1973. EES distributes water and sewage treatment equipment to municipalities. In 1980, Bucci hired Greenawalt, his neighbor, to perform bookkeeping and secretarial duties for the company. By 1985, Bucci was doing all of his business and personal banking at the Linwood branch of Wachovia in Linwood, Pennsylvania (the "Linwood Wachovia").*fn4 EES had two accounts with Wachovia: a regular checking account (the "EES Account") that the business used to deposit income and pay expenses; and a command asset program account (the "CAP Account"), which functioned as an interest-bearing checking account. EES was not a "cash business," meaning that it did not receive payments in cash and did not have a practice of issuing checks payable to "Cash." The company's financial records were maintained in handwritten ledgers and later in electronic format.

From 1985 to 2006, Greenawalt took weekly trips to the Linwood Wachovia to conduct financial activities on behalf of EES. Greenawalt was responsible for depositing checks, preparing checks payable to creditors, which the Buccis would review and sign, and for maintaining the company's financial records. However, Greenawalt never had the authority to draw or indorse checks on the company's behalf. Only Ralph Bucci and his son, Stephen, were authorized to sign checks on behalf of EES; they were the only authorized signatories on the EES and CAP Accounts.

From 1985 to 1997, on a weekly basis Greenawalt deposited checks payable to EES totaling between $15,000 and $30,000 at the Linwood Wachovia. In addition, every two weeks she cashed and/or deposited her biweekly paycheck, which ranged from $600 to $1200 over the years, into her own personal account at the bank. During that time, Greenawalt did not regularly cash company checks at the Bank; she had no authority to draw checks payable to cash and the Buccis rarely made checks out to cash. Some of the Linwood Wachovia employees who dealt with Greenawalt knew that she was EES's bookkeeper. Some of them also knew Ralph and Stephen Bucci because both did their personal banking at the branch.

Beginning in late 1997, however, Greenawalt began to change her banking practices pursuant to her embezzlement scheme. Greenawalt engaged in five different methods of fraudulent banking activity:

(1) Greenawalt altered checks payable to vendors of EES by changing the name of the vendor Payee to "Cash" and then cashing the check at the Bank. She also sometimes altered the amount of the check. ("vendor checks")

(2) Greenawalt manipulated checks payable to Ralph Bucci by changing the amount of the check, depositing the original amount in Bucci's account, and taking the difference in cash. ("Bucci checks")

(3) Greenawalt fraudulently indorsed checks payable to AWHD, a company owned by Greenawalt's son that was an occasional vendor of EES, and cashed them at the Bank. ("AWHD checks")

(4) Greenawalt prepared checks payable to credit card companies ostensibly to pay EES bills, had the Buccis sign them, input her own personal account number in the memo section of the checks, and then sent the checks to the credit card companies as payment for her personal bills. ("credit card payments")

(5) Greenawalt changed the amount on her employee paychecks, took them to the Bank, and cashed them. ("altered paychecks")

Greenawalt attempted to hide her actions in a variety of ways. Each month Wachovia sent EES an EES Account statement along with copies of the original canceled checks processed that month for the EES account; Wachovia also sent EES a monthly CAP Account statement (but not original checks), which included information regarding the payee, the amount, and the date of each CAP Account check.*fn5 Greenawalt would intercept the returned checks for the EES Account and would sometimes change the name of the Payee from "Cash" back to the original vendor, or she would "black out" or erase her endorsement or the entry she put in the check's memo section. Other times she would tear off the top of the check where she had indorsed it. Greenawalt also at times inaccurately input transactions into EES's financial records database to make detection more difficult; she would enter the wrong date of a check, two transactions for a single check, or the wrong Payee name or check number.

EES estimates that, between 1997 and 2006, Greenawalt negotiated over 650 altered or unauthorized checks at the Linwood Wachovia. On October 31, 2006, one of the Buccis noticed a discrepancy in the company's financial records and began to suspect that Greenawalt was embezzling money from EES. That day Ralph Bucci spoke to a Linwood Wachovia teller who confirmed that Greenawalt had been routinely cashing checks from EES. Bucci advised the teller that Greenawalt was not authorized to do so. The next day, Bucci notified Wachovia's branch manager that Greenawalt had been cashing checks without his authorization. On November 2, 2006, Bucci confronted Greenawalt and she admitted to the embezzlement scheme.

After investigating the extent of Greenawalt's damage, Stephen Bucci contacted Wachovia's Loss Management department on August 29, 2007 to report the fraudulent scheme and complain of Wachovia's complicity in allowing it to take place. Wachovia disclaimed liability for any of Bucci's losses in a letter dated the same day. On February 25, 2008, Bucci filed suit against Wachovia seeking damages on the basis of Wachovia's failure ...


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