Cincinnati Insurance Co. v. Wachovia Bank

Schultz Foods Company (Schultz) had a checking account with Wachovia Bank, National Association (Wachovia) (defendant). When opening the account, Schultz signed a deposit agreement. The agreement provided that if Schultz failed to implement any of Wachovia’s products or services made available to customers to detect or deter check fraud, Schultz would be precluded from asserting claims against Wachovia for paying any unauthorized, altered, or fraudulent check. One such product that Wachovia offered was the Positive Pay check-fraud-protection software. Under the Positive Pay software system, a customer would submit information to Wachovia about each check that the customer issued, which Wachovia would then compare against any received check before paying the check. Schultz issued a check for more than $153,000. The check was stolen, and the name of a different payee was substituted onto the check. That payee endorsed and presented the check, and Wachovia paid out the amount of the check. Upon discovering the fraud, Schultz demanded that Wachovia bear the loss and re-credit Schultz’s account for the amount of the altered check. Wachovia refused. Schultz’s insurer, Cincinnati Insurance Company (Cincinnati) (plaintiff), paid out a claim to Schultz and then brought a subrogation action against Wachovia. Cincinnati argued that Wachovia had violated Uniform Commercial Code (UCC) § 4-401(a) by charging Schultz’s account for the altered check, which was not properly payable. Wachovia argued that Schultz was liable for the loss on the check, because Schultz had failed to implement Positive Pay.