Continental Finance Company, LLC v. TD Bank, N.A.

Citation: Not availableDocket: N17C-07-002 MMJ CCLD

Court: Superior Court of Delaware; December 9, 2018; Delaware; State Appellate Court

Original Court Document: View Document

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Continental Finance Company, LLC filed a lawsuit against TD Bank, N.A. following the embezzlement of funds by Roberta Czap, the company's Vice President of Accounting. Czap diverted money from Continental's TD Bank account to her personal account using automated clearing house (ACH) services. She pled guilty in federal court. Continental alleges that TD Bank failed to detect the embezzlement scheme and seeks damages based on a Cash Management Master Agreement established in 2011, which outlines security procedures and limits TD Bank’s liability. The agreement states that Continental is responsible for compliance with the security protocols and that TD Bank is not liable for losses due to breaches if it has complied with the security procedures. The court previously dismissed Continental's negligence claims, finding them barred by the agreement's language and preempted by the UCC. However, claims of gross negligence, willful misconduct, or bad faith may proceed if supported by specific factual allegations. TD Bank asserts that Continental had the duty to prevent unauthorized transactions and monitor account activity.

On April 30, 2018, Continental filed an amended complaint that included additional gross negligence claims against TD Bank, specifically for failing to monitor ACH transactions, provide adequate account statements, and monitor both the Continental and Czap accounts, as well as a breach of the U.C.C. for inadequate security procedures. TD Bank responded with a Motion to Dismiss, which prompted a court hearing on November 14, 2018. 

The court's standard for a Rule 12(b)(6) motion requires it to accept all well-pleaded allegations as true and to draw all reasonable inferences in favor of the non-moving party. The motion must be denied if the claimant can demonstrate a possibility of recovery under any conceivable circumstances. 

In opposition to the Motion to Dismiss, Continental argued that its relationship with Czap and TD Bank constitutes a "unique situation" not governed by the UCC. However, the court noted the absence of relevant case law supporting this claim and pointed out that Continental had not identified any specific contractual duties beyond those established by the UCC. While Continental claimed that TD Bank's contracts varied from standard UCC duties, it failed to substantiate this assertion, and its example of an inadequate bank statement did not reference a specific UCC violation.

The court affirmed that Article 4A of the UCC governs ACH transfers and that the common law claims are displaced by the UCC. According to prior court opinions, Continental's claims could not be upheld as the agreements did not expand or modify UCC duties. Additionally, the bank statements provided by TD Bank met the requirements of Section 406 of Article 4.

Continental also argued that TD Bank's failure to act reasonably, given its knowledge of the unique relationship, imposed a duty to investigate suspicious transactions. However, the court found no fiduciary, contractual, or "special relationship" that would create such a duty under common law. Continental attempted to argue that UCC provisions should not preempt its negligence claims and cited case law, including Gilson v. TD Bank. However, the court distinguished this case, noting that the misconduct in Gilson involved unauthorized access, unlike Czap, who was an Authorized User under the Master Agreement. Thus, the court rejected Continental's arguments and proceeded to dismiss the claims.

The Gilson court concluded that the plaintiffs’ negligence claim was not preempted by the Uniform Commercial Code (UCC) because it focused on the defendant's negligent actions related to account openings, a claim not made in this instance. Continental's assertions are based on gross negligence, contending that the substantial theft from Continental indicates TD Bank's failure in its duties due to gross negligence. Gross negligence is characterized as a significant departure from ordinary care and is compared to criminal negligence under Delaware law. It requires a failure to recognize a risk that a reasonable person would have perceived. Continental acknowledged that the facts in the Amended Complaint did not differ from those in the original Complaint. The court previously determined that simple negligence claims were barred by the contracts between the parties, and establishing gross negligence necessitates additional facts beyond mere simple negligence. As such, the court found that Continental did not establish a prima facie case of gross negligence against TD Bank. The conclusion stated that the Amended Complaint merely restated simple negligence claims as gross negligence without new factual allegations. The court ruled that common law claims are displaced by UCC Article 4A governing ACH transactions, and the one-year statute of repose under the UCC applies. Consequently, the court granted TD Bank's Motion to Dismiss the Amended Complaint.