Kirsch, J.
After Angela Kincaid (“Kincaid”), an employee working for both EngineAir, Inc. (“EngineAir”) and JMA Rail Products, Inc. (“JMA”), was convicted of having embezzled more than $500,000 from the companies’ bank accounts, the companies sued Kincaid’s depositary bank,Centra Credit Union (“Centra Credit”). [Footnote omitted.] Citing to Indiana’s version of the Uniform Commercial Code (“UCC” or “the Act”) and common law negligence, the companies argued that Centra Credit “failed to act with ordinary care when it cashed over 105 fraudulent checks written by Kincaid on EngineAir’s, JMA’s, and other related entities’ accounts.” Appellants’ App. Vol. 2 at 10. On Centra Credit’s motion, the trial court dismissed the companies’ complaint for failure to state a claim pursuant to Indiana Trial Rule 12(B)(6).
The companies raise one issue on appeal, which we restate as: Whether the trial court erred when it dismissed the companies’ complaint for failure to state a claim under Indiana Trial Rule 12(B)(6) after concluding that (1) Centra Credit, as the depositary bank, owed the companies, as drawers, no duty of care as a matter of law for the loss the companies sustained when Kincaid deposited checks that she had stolen from the companies, made out to herself as payee, and, on which she had forged the signature of the companies’ president; [Footnote omitted.] (2) the UCC warranties created no warranty or statutory obligation from Centra Credit to the companies; and (3) Centra Credit’s failure to report Kincaid’s extreme banking activity as suspicious did not constitute a breach of duty.
We affirm.
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The Companies first contend that the trial court erred in dismissing their complaint because, contrary to the trial court’s conclusion, a duty of care can exist between a depositary bank and a non-customer drawer. The Companies argue that “the question of whether a bank may owe a non-customer a duty has been established,” and each court having addressed that issue “has found or presumed that such a duty may exist.” Appellants’ Br. at 13 (citing Auto-Owners Ins. Co. v. Bank One, 879 N.E.2d 1086 (Ind. 2008)). [Footnote omitted.] While a depositary bank may, under certain circumstances, owe a duty of care to a non-customer, because our review is de novo, the question before this court is whether Centra Credit owed a duty of care to the Companies.
In their complaint, the Companies asserted that pursuant to established Indiana law and the UCC, Centra Credit owed the Companies “a duty to exercise ordinary care in inspecting, negotiating and making a reasonable inquiry with respect to the checks submitted by Kincaid.” …
The Companies suggest that common law negligence and the UCC operate jointly and, therefore, the Companies can bring a common law negligence action in addition to any UCC claim. Centra Credit counters that the UCC “preempted negligence claims generally,” and, since the Companies’ claims fall within the provisions of the UCC, any common law claim arising from Centra Credit’s conduct is “displaced.”…
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Because (1) not every check or collection scenario falls within the coverage of the UCC and (2) “the proper construction of the [UCC] requires that its interpretation and application be limited to its reason,” UCC Section 1-102, comment 1, the drafters included Section 1-103,… That being said, where the UCC addresses a specific commercial practice, the UCC displaces the common law. Cf. Farmers Loan & Tr. Co. v. Letsinger, 652 N.E.2d 63, 65 (Ind. 1995) (“Because no particular provision of the UCC governs the bank’s claim on the guaranty, Indiana common law and the Indiana law of equity control.”). To determine whether the common law has been displaced in the instant case, we consider the UCC scheme and common law duty as applied to the parties before us.
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The Companies’ entire argument regarding the relationship between the parties is as follows: “[T]he parties relationship[,] that of the drawer of a check and the depository bank, justifies a finding of duty, especially where, as here, the dismissed complaint alleges Centra Credit knew or should have known of the misconduct at issue and where special circumstances existed.” Appellants’ Br. at 23. Our court has said, “A duty of reasonable care is ‘not, of course, owed to the world at large,’ but arises out of a relationship between the parties.” [Footnote omitted.] Id.
Indiana courts “have a long and continuous history of recognizing negligence actions for statutory violations.” Kho v. Pennington, 875 N.E.2d 208, 212 (Ind. 2007). Citing to Section 3.1-405, the Companies claim that this section creates a duty, which allows them to sue Centra Credit. In support of that claim, the Companies cite to Auto-Owners Insurance Co. v. Bank One, 879 N.E.2d 1086, 1089-90 (Ind. 2008), in which our Supreme Court, analyzing UCC Section 3.1- 405, accepted that an employer could bring a cause of action, but found negligence in account opening was insufficient, by itself, to state a claim pursuant to UCC Section 3.1-405. Appellants’ App. at 5.
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… We find that Centra Credit owes no duty to the Companies arising under Section 3.1-405, and therefore no cause of action against Centra Credit arises under that section.
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As pertinent to this appeal, that allocation takes into consideration: (1) whether the fraudulent transaction involved an unauthorized signature, Ind. Code §§ 26- 1-3.1-401, 3.1-402, Ind. Code § 26-1-3.1-403, or a fraudulent endorsement, Ind. Code § 26-1-3.1-405; (2) whether the loss occurred as the result of a transfer to a collecting bank, Ind. Code §§ 26-1-3.1-416, 4-207, or a presentment to a payor bank, Ind. Code §§ 26-1-3.1-417, 4-208; (3) whether a fraudulent endorsement was committed at the hand of the drawer’s employee who had access to the drawer’s checks, Ind. Code § 26-1-3.1-405, and (4) whether the drawer was negligent in duties owed, Ind. Code § 26-1-4-406. This complex scheme reveals that the drafters of the UCC considered both foreseeability and public policy when they drafted the Act.
As a general rule, under the UCC a drawer is not liable on a negotiable instrument unless the person or his agent signed the instrument. Ind. Code § 26-1-3.1-401, -402. The corollary to that rule is that a bank has the authority to “charge against the account of a customer an item that is properly payable from that account . . . .” Ind. Code § 26-1-4-401(a). “By implication, the section also tells when a bank ‘may not’ charge the account.” White & Summers, supra, § 19.3. “An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and the bank.” Id. A bank does not “properly pay” over a forgery. Id. If, like here, a drawee bank does not discover the forged signature, but makes a final payment on the check, the drawee, in the absence of a drawer’s negligence, may not charge the drawer’s account and, therefore, will bear the loss. Kincaid forged the signature of the Companies’ president, and the Companies did not authorize the payment of the forged checks, so without more, the Companies would not have been liable for their losses.
Under circumstances, like here, where the drawee pays over a forged signature and withdraws the money from the drawer’s account, the UCC contemplates that the drawer will have an action against the drawee bank for breach of the customer’s contract with the bank or a statutory claim under UCC Section 4- 401. [Footnote omitted.]…
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With the goal to simplify, clarify, and modernize the laws governing commercial transactions and allow continued expansion of commercial practices through custom and usage, the drafters of the UCC intended to bring this foreseeable fraudulent commercial transaction under the UCC. Accordingly, we conclude that the Companies have no claim of negligence at common law. Instead, as non-customers, their remedy, if any, must arise from the UCC.
Without citation to a specific UCC section, the Companies also argue that they can pursue a claim against Centra Credit for breach of “the UCC’s warranty provisions.”…
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Because the Sun ‘n Sand holding was rejected by the 1990 amendment, so too was the result in N.A. Insurance. The Companies have no causes of action against Centra Credit for breach of warranty under the now superseded reasoning in N.A. Insurance.
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We find that under the facts of this case, the UCC has displaced any cause of action that the Companies may have against Centra Credit. Because the Companies have alleged no theory under which Centra Credit could be liable for the loss the Companies sustained from Kincaid’s forged checks, we affirm the trial court’s grant of Centra Credit’s motion to dismiss for failure to state a claim.[ Footnote omitted.]
Affirmed.
Baker, J., and Bradford, J., concu