Judge Johnston Grants Motion to Dismiss in Case Arising from Embezzlement Scheme

April 26, 2018


In Continental Finance Company, LLC v. TD Bank, N.A., C.A. No. N17C-07-002 MMJ CCLD, Judge Johnston granted a motion to dismiss a negligence case arising out of an embezzlement scheme perpetuated by a non-party. Plaintiff Continental Finance Company, LLC sued defendant TD Bank, N.A. for negligence and alleged that TD Bank negligently failed to detect an embezzlement scheme. TD Bank moved to dismiss and argued that the negligence claim was barred by the parties’ contractual obligations, by the economic loss doctrine, and because the Delaware Uniform Commercial Code (the “UCC”) displaced common law negligence under the facts presented.

Before addressing the merits, Judge Johnston analyzed whether it would be appropriate to consider documents extraneous to the complaint. Although Judge Johnston recognized the general rule that a court should only consider the pleadings when deciding a motion to dismiss, she acknowledged that an exception existed for integral documents incorporated into the complaint. Here, Judge Johnston found that the parties’ relationship was governed by contract and those contracts governed the nature of the defendant’s liability. Accordingly, Judge Johnston freely considered the applicable contract even though the plaintiff had not attached it to the complaint because the plaintiff could not avoid dismissal “simply by declining to attach an otherwise fatal, integral document.”

After examining the contract, Judge Johnston found that it “explicitly allocate[d] the risk between the parties” and barred tort claims “not brought under a theory of ‘gross negligence, willful misconduct, or bad faith.’” Accordingly, the Court held that Continental’s claims were barred because Continental alleged only simple negligence.

Judge Johnston also considered whether Continental’s common law claim of negligence involved an area of law governed by the UCC. In analyzing this argument, Judge Johnston noted that Sections 4A-201-203 of the UCC address the duties of a depository bank when it authorizes electronic transfers, including when such a transfer is effective, factors for determining the reasonableness of a bank’s security measures, and whether a bank can enforce an unauthorized payment made by a person entrusted to act on the customer’s behalf. Judge Johnston held that this section of the UCC was intended to govern disputes such as the one brought by Continental, and, therefore, Continental’s simple negligence claim was barred.

Based on her analysis of the applicable contracts and Delaware’s UCC, Judge Johnston dismissed the complaint without prejudice. In so holding, Judge Johnston stated that claims grounded in gross negligence, willful misconduct, or bad faith supported by particularized factual allegations were not contractually excluded, but must be asserted under the UCC.

Analysis: Judge Johnston’s decision highlights both procedural and substantive issues the CCLD is called upon to resolve. Although the universe of materials that may be considered in connection with a motion to dismiss is narrow, a court may consider contractual documents incorporated by referenced into the complaint. Here, this procedural point proved dispositive because it allowed Judge Johnston to analyze the contracts in question and resolve the pending motion based on the contractual language.

Judge Johnston’s decision also highlights the intersection between tort and contract law. Common law claims as they apply to the duties of a depository bank are displaced to the extent that the UCC contains particular provisions regarding those duties. Mahaffy & Assoc., Inc. v. Long, 2003 WL 22351271, at *6 (Del. Super.). Here, the UCC addressed the duties implicated by the plaintiff’s claims, so Judge Johnston found that the plaintiff should be required to proceed under the UCC rather than in tort.

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