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Valparaiso Univ. Law School

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Tuesday, July 17, 2012

First Circuit on UCC Pre-Emption of Common Law Claims

1st CirIn May of 2009, Patco Construction Company’s (“Patco”) internet banking account was hacked, and $588,851.26 was withdrawn.  Although Ocean Bank (a branch of People’s United Bank) flagged the transactions as inconsistent with Patco’s previous activity, it failed to notify Patco and allowed the payments to go through.  Patco brought suit against the Bank in the United States District Court in Maine claiming that the bank should bear the loss because its security system was not commercially reasonable under Article 4A of the UCC, and also alleging negligence, breach of contract, breach of fiduciary duty, unjust enrichment, and conversion.  Both parties filed motions for summary judgment.  The District Court affirmed the Magistrate’s grant of the Bank’s motion and denied Patco’s.  On appeal, the Court of Appeals for the First Circuit reversed the District Court’s grant of the Bank’s notion for summary judgment and remanded, while also encouraging the parties to settle. 

The First Circuit first concluded that the Bank’s security system was commercially unreasonable, but it did not therefore grant summary judgment to Patco on its UCC claim.  Rather, the Court remanded for further briefing on the issue of “what, if any, obligations or responsibilities are imposed on a commercial customer under Article 4A even where a bank’s security system is commercially unreasonable.

In the part of the opinion that concerns us at the ContractsProf blog, the First Circuit found that UCC Article 4A does not preempt Patco’s common law claims for breach of contract and breach of fiduciary duty.  The First Circuit relied on the official comment to Article 4A in finding that Article 4A “embodies an intent to restrain common law claims only to the extent that they create rights, duties, and liabilities inconsistent with Article 4A.”  The Court then found that Patco’s breach of contract and breach of fiduciary duty claims are not inherently inconsistent its Article 4A claim, as there could be, at least in theory, higher standards imposed on the Bank, either by contract or through assumption of fiduciary duties.  The Court referenced other rulings in which plaintiffs were permitted to rely on common law remedies to seek redress for alleged harms arising from funds transfers where Article 4A did not protect against the underlying injury or misconduct alleged.  

[JT and Christina Phillips]

http://lawprofessors.typepad.com/contractsprof_blog/2012/07/first-circuit-on-ucc-pre-emption-of-common-law-claimsin-may-of-2009-patco-construction-companys-patc.html

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