Seventh Circuit Court of Appeals Rules for Citibank in Multi-Million Dollar Fraudulently Altered Check Case

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Thompson Coburn Defends Citibank Against ANICO

Chicago, September 12, 2008 - The U.S. Court of Appeals for the Seventh Circuit has affirmed the ruling by the U.S. District Court for the Northern District of Illinois granting Citibank summary judgment against American National Insurance Co. (ANICO). The August 2007 judgment established that a non-payee alleged “real owner” of checks/proceeds lacks standing to assert a conversion claim against the depositary bank. The case examined issues regarding large-scale check and mail fraud by an individual, check ownership, claims for check conversion, the Uniform Commercial Code, the Illinois Commercial Code and the U.S. banking system’s check clearing processes. (American National Insurance Company v. Citibank, N.A.)

“This is a tremendous victory for Citibank and all commercial banks, and it has been a closely watched matter between two of the country’s most respected banking and insurance companies. One of the largest individual check fraud scams had triggered ongoing disputes and significant precedent-setting court rulings regarding ANICO’s theory that depositary banks would have to be responsible for unnamed, unknown and unknowable non-payee ‘real owners’ of checks,” said Todd A. Rowden, a partner with Thompson Coburn LLP in Chicago and lead trial counsel for defendant Citibank.

Judge Diane P. Wood wrote in the Court’s unanimous opinion of ANICO’s theory:

“This novel interpretation of the familiar drawer-drawee-indorsee-payee relationship is unprecedented, and for good reason: it betrays the fundamental axiom of negotiable instruments that banks must pay the payee…ANICO seems oblivious to the burden that its theory would put on every bank that was presented with a check for negotiation. Instead of being able to look at the payee line and to verify that the person presenting the check was indeed entitled to do so, banks in ANICO’s world would need to conduct a full-blown investigation every time to make sure that a party with an equitable interest in the check was not lurking in the background. Such a system would bring commercial transactions to a grinding halt.”

“We are very pleased that the Seventh Circuit Court of Appeals, one of our nation’s most respected, understood the enormous risk to our banking system and the Uniform Commercial Code. How could a depositary bank accept a check if potential liability extended beyond the named payee? Banks handle approximately 40 billion checks each year. Our banking system depends on efficient and predictable handling procedures and the laws interpreting those procedures,” Rowden said. “This significant decision does just that.”

Background:

• This case originated when Robert Carter, a vice president with insurance underwriter National Accident Insurance Underwriters, Inc. (NAIU) in Chicago who had no authority to receive insurance premium checks on behalf of NAIU, pled guilty to mail and tax fraud on March 18, 2004. Between February 2000 – February 2002, Carter had intercepted more than 40 insurance premium checks that were payments on travel-related insurance policies issued on behalf of American National Insurance Company, for a total of more than $17 million. Carter’s scheme involved altering the payee lines of each check to include “Sherman” as a payee, endorsing the checks, and depositing them into a Citibank bank account in the name of Sherman Imports, Inc. that Carter had established years earlier. A lavish lifestyle ensued. Following federal prosecution, Carter pled guilty to wire fraud and is serving six years in the federal penitentiary. His wife was convicted of money laundering and tax evasion and was sentenced to two years, which she is currently serving.
• On May 10, 2002, NAIU filed a complaint against Citibank for conversion of checks under 810 ILCS 5/3-420. The Uniform Commercial Code—adopted by all fifty states—under Section 3-420, allows a lawsuit against a depositary bank for conversion if that bank accepts a check for deposit from someone not entitled to the check. NAIU and Citibank reached a settlement of their dispute, and the U.S. District Court for the Northern District of Illinois entered an order dismissing NAIU’s conversion claim, with prejudice, on March 17, 2006. Citibank later moved for summary judgment against ANICO on all of its claims, which the district court granted in August 2007. ANICO then appealed to the Seventh Circuit U.S. Court of Appeals.
• Based on an underwriting agreement entered from 1998 - 2001 between NAIU and American National Insurance Co. (ANICO), in which NAIU acted as the Managing General Underwriter for the insurance business being written on behalf of ANICO, ANICO was granted leave to intervene as a third party and filed its complaint against Citibank also asserting conversion claims based on the premium checks fraudulently altered and diverted by Carter.
• Counsel for Citibank are Todd A. Rowden, Scott P. Clair and Timothy L. Binetti of Thompson Coburn LLP in Chicago.
• Counsel for ANICO are William Chittenden, Elizabeth Doolin, Jennifer Steigmaier, Andrew Mytelka, Amy Knighton and law professor Wayne Lewis from DePaul University Law School.
• Available upon request are: Seventh Circuit Opinion and Brief for Citibank; the District Court's opinion; and, an .mp3 recording of the oral arguments at the Seventh Circuit.

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