• Common Law and Equitable Claims May Co-Exist with UCC Claims Ross v. Bank of America, N.A., 693 F.Supp.2d 692 (S.D. Tex. 2010)
  • February 18, 2011 | Authors: Brian A. Kilpatrick; Gordon M. Shapiro
  • Law Firm: Jackson Walker L.L.P. - Dallas Office
  • In Ross v. Bank of America, N.A., United States District Judge Lee Rosenthal, a well-respected federal jurist in Houston, issued a memorandum opinion denying a motion to dismiss filed by the defendant bank which requested dismissal of a “money had and received” claim as displaced by the UCC, and held that the revised Section 3.420 of the UCC does not preclude the claim.  This is the first Texas case (albeit in federal court) to decide the precise question of whether a “money had and received” claim is displaced by the UCC.

    In this bookkeeper embezzlement case, the plaintiff alleged that the bank improperly honored several checks that contained restrictive endorsements. The plaintiff alleged a cause of action for conversion, under Section 3.420 of the UCC, as well as an equitable claim for “money had and received.”

    In a check fraud case, it is not unusual for a plaintiff to assert common law, tort, or statutory theories of liability against a bank which contradict or vary from the UCC’s statutory standard of liability under Section 3.420 (conversion).  We have handled dozens of such cases for bank clients, and have argued that because Section 3.420 of the UCC provides a comprehensive liability scheme for negotiable instrument fraud, such statutory provision occupies the entire field and displaces all common law liability claims.   We have relied on various authorities for this proposition, including Bank One v. Little, 978 S.W.2d 272, 279 (Tex. App.—Fort Worth 1998, pet denied) (rejecting plaintiff’s attempt to impose extra common law duties on a bank with respect to letters of credit, holding that “imposition of a duty in this case could work to undermine the UCC and the ordinary customs and practices of banks in letters of credit transactions”), and Miller-Rogaska, Inc. v. Bank One, Texas, N.A., 931 S.W.2d 655, 662 (Tex.App.--Dallas 1996, no pet.) (holding that common law conversion is displaced by the UCC conversion statute).

    In Ross, the defendant bank made a similar argument with respect to the plaintiff’s “money had and received” claim.  In its motion to dismiss, the defendant contended that liability, if any, should be determined based on the UCC conversion statute, Section 3.420, and other UCC provisions which set forth a statutory scheme of liability.  While there did not appear to be any published Texas decision answering the specific question regarding a “money had and received” cause of action, the defendant bank relied on various authorities, including AMX Enterprises, Inc. v. Bank One, N.A., 196 S.W.3d 202, 207 (Tex. App.—Houston [1st Dist.] 2006, pet denied) (“Section 3.420 of the UCC preempts common law causes of action that supplant the provisions of the UCC in a suit to recover losses involving negotiable instruments”), and certain out of state decisions. 

    Judge Rosenthal, in denying defendant’s motion to dismiss, held that the revised UCC does not automatically displace all other applicable sources of law, including the “money had and received” claim asserted by plaintiff.  She held that if the common law claim is not completely displaced by the UCC, it can survive if it is tailored to meet UCC restrictions.

    Judge Rosenthal relied on Peerless Insurance Co. v. Texas Commerce Bank-New Braunfels, a Fifth Circuit case that decided this same issue under the former version of the UCC in 1986.  791 F.2d 1170, 1180 (5th Cir. 1986) (citing Bryan v. Citizens National Bank in Abilene, 628 S.W.2d. 761 (Tex. 1982)).  Judge Rosenthal held that Peerless was still good law -- even under the revised UCC and in spite of the authorities cited by defendant to the contrary. She went on to point out that a comment to the revised UCC that was not included in its predecessor supports this liberal construction. The comment states that common law and equitable principles may supplement the UCC to the extent they are not inconsistent with its provisions. See AMX Enterprises, Inc. v. Bank One, N.A., 196 S.W.3d 202, 207-208 (Tex.App.—Houston 2006, pet. denied); and Mazon Associates, Inc. v. Comerica Bank, 195 S.W.3d 800, 804-806 (Tex.App.—Dallas 2006, no pet.). This means that while inconsistencies should be resolved in the Code’s favor, a common law claim not preempted by the Code will stand if it accommodates the restrictions identified in the relevant UCC provisions. So, Judge Rosenthal allowed the “money had and received” claim to go forward, but noted that plaintiff’s damages under such claim would be limited to the face amount of the check, which was a limitation in Section 3.420 of the UCC.

    We expect that plaintiffs’ lawyers will begin citing Ross for the proposition that non-UCC claims should be allowed to go forward, at least insofar as the UCC provision does not completely displace the claim.  We expect that the financial institution defendants will argue that Ross should be limited to “money had and received” claims in the context of Section 3.420 of the UCC, and not be expanded to other common law claims or UCC provisions.  To the extent plaintiffs seek further expansion, though, Judge Rosenthal’s more liberal approach may ultimately be a distinction without a difference, if the applicable UCC provision provides adequate restrictions that can be read into the non-UCC cause of action.  However, where such restrictions are not present, or are less restrictive than desired, this decision will arguably open up additional bases of liability and/or damages for plaintiffs in cases arguably governed by the UCC.