BOTTOM LINE: Notwithstanding that lawsuit was first filed by plaintiff in district court in Maryland, the pendency of a damages action in a California district court constituted good reason for Maryland district court to deviate from the “first to file” rule and decline to exercise jurisdiction, because plaintiff’s entreaty to defendants’ counsel to delay filing suit was merely a disingenuous feint to allow it to file first and litigate close to home.
CASE: LWRC International, LLC v. Mindlab Media, LLC, Civil Case No. L-11-1028 (filed Sept. 26, 2011) (Judge Legg). RecordFax No. 11-0926-40, 12 pages.
FACTS: LWRC International was a Maryland LLC specializing in the design, manufacture, and sale of military, law enforcement, and civilian rifles, carbines, and pistols. Defendant Richard Machowicz was a former Navy Seal and weapons expert, as well as host of the Discovery Channel and Military Channel show “Future Weapons.”
Sometime in 2007, Machowicz and Darren Mellors, LWRCI’s Executive Vice President, met in New Mexico. A discussion between the two contemplated a straightforward business arrangement whereby LWRCI would provide Machowicz one of its rifles free of charge, and in exchange Machowicz would send LWRCI photos of himself with the rifle that LWRCI could use in its advertising. The transaction was not immediately consummated, allegedly because Machowicz’s agent, when contacted to arrange the details, requested monetary compensation in addition to the rifle.
Approximately three years later, Machowicz telephoned Mellors at his office in Maryland, and the parties resumed discussions. Ultimately, LWRCI sent Machowicz a rifle and he, in turn, emailed the requested photographs to Mellors.
LWRCI then used one of the photos in an advertisement it placed in an issue of Guns & Ammo magazine, and put a similar ad on its website. Soon thereafter, an agent for Machowicz contacted LWRCI and objected to the ads.
On March 17, 2011, LWRCI received a cease-and-desist letter from Machowicz’s attorneys, asserting that LWRCI’s actions placed at risk profitable celebrity endorsement opportunities and injured Machowicz’s ability to attract additional opportunities from other legitimate manufacturers of guns, related gun paraphernalia and equipment. The letter recited that a multi-count copyright infringement lawsuit was being prepared but offered LWRCI the opportunity to agree to a $17.25 million, three-year endorsement deal.
In the ensuing negotiations, Machowicz’s attorneys threatened to sue unless presented with what they considered a bona fide settlement offer by April 18th. On that date, LWRCI stated that LWRCI had not yet heard back from its insurance company regarding its coverage inquiries, and asked that Machowicz refrain filing suit pending LWRCI’s further exploration of the claim. The next day, LWRCI filed suit in district court, seeking a declaratory judgment that its use of the photograph did not violate the Lanham Act, the Copyright Act, or Maryland common law.
On April 21st, Machowicz filed their own suit against LWRCI in the Central District of California, styled Mindlab Media, LLC et al. v. LWRC International, LLC, C.D. Cal., No. 11-CV-03405-CAS-FFMx. On June 27th, that court granted LWRCI’s motion to stay proceedings pending a decision by the district court in Maryland as to where the case should be litigated.
Machowicz moved to dismiss or to transfer the action to the Central District of California. The district court granted the motion to dismiss.
LAW: The Declaratory Judgment Act provides that in a case of actual controversy within its jurisdiction, any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. 28 U.S.C. §2201(a). A declaratory judgment action is appropriate when the judgment will serve a useful purpose in clarifying and settling the legal relations in issue, and when it will terminate and afford relief from uncertainty, insecurity, and controversy giving rise to the proceeding. Centennial Life Ins. Co. v. Poston, 88 F.3d 255, 256 (4th Cir.1996).
Here, without citation to any legal authority, the defendants asserted that, because LWRCI ceased its use of the photograph, a declaratory judgment was not necessary to afford relief from uncertainty, insecurity, and controversy. However, the fact that LWRCI was no longer using the photograph did not mean that there was no case of actual controversy and thus no basis for invocation of the Declaratory Judgment Act.
There was indisputably a legal dispute requiring the adjudication of the parties’ rights and duties, as indicated by the defendants’ suit against LWRCI in California. The question in each case was whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment. MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007). That standard was clearly satisfied in this case.
Nor was there was any legal authority for defendants’ proposition that a declaratory judgment action is inappropriate in any situation in which the alleged infringement has ceased on threat of litigation. While Defendants noted that the Guns & Ammo ad was intended to be a one-time placement, they also acknowledged that LWRCI removed the photograph from its website after defendants complained. Thus, whether LWRCI could legally continue to display the photograph on its website without incurring damages was precisely the type of uncertainty from which a declaratory judgment action would provide relief.
Nevertheless, it has long been settled that a federal court has a measure of discretion to decline to entertain a declaratory judgment action that is otherwise properly within its jurisdiction. See, e.g., Pub. Affairs Assoc., Inc. v. Rickover, 369 U.S. 111, 112 (1962). This discretion is not unbounded, and a district court may not refuse to entertain a declaratory judgment action out of “whim or personal disinclination,” but may do so for “good reason.” Id. at 112. Machowicz argued that the pendency of their damages action in the Central District of California constituted good reason for the court to decline the exercise of jurisdiction, notwithstanding that the instant suit was filed first.
When determining which of two identical or substantially similar suits should proceed, the “first-to-file rule” generally affords priority, for purposes of choosing among possible venues when parallel litigation has been instituted in separate courts, to the party who first establishes jurisdiction. Nw. Airlines, Inc. v. Am. Airlines, Inc., 989 F.2d 1002, 1006 (8th Cir.1993). The rule, however, yields to the interests of justice, and will not be applied when a court finds compelling circumstances supporting its abrogation. U.S. Fire Ins. Co. v. Goodyear Tire & Rubber Co., 920 F.2d 487, 488 (8th Cir.1990). In some cases, there may come a point after which the potential lawsuit that may otherwise have given rise to a proper declaratory judgment action has become so certain or imminent, that the declaratory judgment action is merely an improper act of forum shopping, or a race to the courthouse. Learning Network, Inc. v. Discovery Commc’ns, Inc., 11 Fed. Appx. 297, 301 (4th Cir.2001) (not reported).
Courts look with especial disfavor on such preemptive strikes in cases that involve a threat of litigation followed by settlement talks. See, e.g., Hanson PLC v. Metro—Goldwyn—Mayer, Inc., 932 F.Supp. 104 (S.D.N.Y.1996). In Hanson, the court found circumstances warranting departure from the first-to-file rule when: (1) the plaintiff filed a declaratory judgment action in an attempt to preempt the filing of a lawsuit by the defendant; (2) the defendant in the declaratory judgment action had waited to file suit in reliance upon representations made by the plaintiffs lawyers; and (3) the two cases were filed only one business day apart. Procedural fencing of this kind counsels against exercising jurisdiction over a declaratory judgment action. Learning Network, 11 Fed. Appx. at 301.
In this case, the facts were comparable to those in Hanson, and demonstrated that LWRCI’s entreaty to defendants’ counsel to delay filing suit until it could explore the case and speak with its insurance company was little more than a disingenuous feint to allow it to file first and litigate close to home. LWRCI sent its request for additional time on April 18, 2011, the very day that defendants had threatened to file their infringement suit, and then instituted its declaratory judgment action the very next day. LWRCI did not deny its intentions, nor offer any innocent explanation for its behavior; rather, it attempted to justify its actions on the grounds that defendants’ pre-filing conduct reflected a deliberate effort to dress up an almost trivial business disagreement into a major legal controversy and to pressure LWRCI into agreeing to a long-term product endorsement deal with Machowicz.
In these circumstances, LWRCI could not be faulted for wishing to litigate in Maryland. If the balance of inconvenience had strongly favored LWRCI, the court might have considered adhering to the first-to-file rule. However, the factor of party convenience was in equipoise because, in any event, one party would have to travel across the country.
As such, the district court declined to exercise jurisdiction under the Declaratory Judgment Act, and dismissed the case.
COMMENTARY: Machowicz also moved for dismissal on the ground that he had insufficient contacts with the state of Maryland for the Court to exercise personal jurisdiction over him. However, Machowicz contended that, even if he were found to be subject to personal jurisdiction, LWRCI’s Complaint did not state a claim for declaratory relief. Thus, for purposes of the instant motion, the court assumed, without deciding, that personal jurisdiction over Machowicz would be proper. See Ashwander v. Tenn. Valley Auth., 297 U.S. 288, 347 (1936). As such, the court was not compelled to resolve the question of specific jurisdiction.
PRACTICE TIPS: For purposes of determining whether specific jurisdiction exists, an individual’s contract with an out-of-state party cannot, alone, automatically establish sufficient minimum contacts in the other party’s home forum. Ordinarily, the contract simply memorializes the results of prior negotiations and provides for future actions. It is these factors — prior negotiations and contemplated future consequences, along with the terms of the contract and the parties’ actual course of dealing — which must be evaluated in determining whether the defendant purposefully established minimum contacts within the forum.
Labor & Employment
Americans with Disabilities Act
BOTTOM LINE: Defendant employer was entitled to summary judgment on employee’s claims of unlawful retaliation and failure to accommodate where employee, who was terminated following her diagnosis with a sleep disorder, failed to establish that she had a serious medical condition that impaired her life activity and/or that employer’s proffered performance-based reasons for employee’s termination were a pretext for discrimination.
CASE: Anderson v. Discovery Communications, LLC, Civil Action No. 08-cv-02424 (filed Sept. 29, 2011) (Judge Williams). RecordFax No. 11-0929-40, 19 pages.
FACTS: From 2004 through early 2007, Victoria Anderson was employed by Discovery Communications, LLC, as a full-time attorney in the Programming, Production, and Talent (“PPT”) group of Discovery’s Legal Department. Anderson reported to Janell Coles, who was at that time Director of the PPT group. Coles in turn reported to Lisa Williams-Fauntroy, who was at that time the Vice President of the PPT group. Anderson’s work consisted of negotiating and drafting agreements for television programs, providing ongoing legal advice to clients, and providing legal support for the Discovery Health Channel and Discovery’s Asia networks.
Regarding Anderson’s work performance, Anderson never received a “fully meets” all expectations on any of her formal performance reviews. Anderson’s mid-year 2005 review rated her as “needs improvement” in certain areas. Her mid-year 2006 review rated her as “below expectations” in a number of categories. Similarly, in Anderson’s 2006 annual performance review, her supervisor further cautioned regarding her interactions with clients.
In October of 2006, while in California for an ABA Conference, Anderson visited the doctor complaining of flu-like symptoms, a severe earache and difficulty falling asleep. Anderson’s doctor, Dr. Bailey-Walton, advised her that she could be suffering from a mental impairment affecting her sleep. Due to her sleeping problems, Anderson took four sick days the week of October 15 and remained in California that week. Following her appointment with Dr. Bailey-Walton, Anderson requested and was provided with FMLA leave for the period of October 20, 2006 through November 15, 2006.
On October 27, 2006, Dr. Cullen’s examination revealed that all of Anderson’s laboratory test results were normal, but that she was suffering from fatigue or sleep deprivation. Dr. Cullen wrote on a prescription pad: “Return to full duty with hour restriction to 8 hours per day.” On November 14, 2006, Anderson saw Dr. Andrew Tucker, who ultimately diagnosed her with insomnia. Upon preparing to return to work in November of 2006, Anderson requested that she be limited to a standard eight-hour work day.
Upon receiving Anderson’s request, Anderson’s supervisors asked her to submit a work plan in which she would propose how she planned to perform the necessary functions of her job with this restriction. Anderson submitted a plan in which she indicated that she could commit to being in the office between 11 a.m. and 4 p.m. Discovery considered and ultimately denied Anderson’s request to work a reduced number of hours, finding that the restriction would have the effect of preventing Anderson from performing the essential functions of her position and would make it difficult-to-impossible for PPT to provide satisfactory service to its clients. In December of 2006, Discovery terminated Anderson’s employment.
On September 16, 2008, Anderson filed suit in district court, naming as defendants Discovery, Janell Coles, Lisa Williams-Fauntroy, and Doe Defendants 1 through 4. In her complaint, Anderson alleged: (1) unlawful termination and retaliation on the basis of disability in violation of the Americans with Disabilities Act, 42 U.S.C. §12101 et seq. (“ADA”) and the Montgomery County Human Rights Act, Montgomery Cty.Code §27-1 et seq.; and (2) deprivation and interference of rights and unlawful retaliation in violation of the Family and Medical Leave Act, 29 U.S .C. §2601 et seq. (“FMLA”). Anderson subsequently filed a motion for discovery sanctions, and the defendants moved for summary judgment on all counts.
The court denied Anderson’s motion for discovery sanctions and granted defendants’ motion for summary judgment.
LAW: Anderson claimed that her rights under the ADA and the MCHRA were violated when defendants failed to accommodate her disability and removed her from her position at Discovery because of her disability. Because Anderson’s ADA claims paralleled her claims under the MCHRA, the Court considered Anderson’s ADA and MCHRA claims together.
The Americans with Disabilities Act of 1990, 104 Stat. 328, 42 U.S.C. §12101 et seq., prohibits discrimination by covered entities, including private employers, against qualified individuals with a disability. Under the Act, “disability” is defined as a physical or mental impairment that substantially limits one or more of the major life activities of such individual, a record of such impairment, or being regarded as having such an impairment. 42 U.S.C. §12102(2). In a failure to accommodate case, the plaintiff must show that: (1) plaintiff was an individual who had a disability within the meaning of the statute; (2) the employer had notice of the plaintiff’s disability; (3) with reasonable accommodation, the plaintiff could perform the essential functions of the position; and (4) that the employer refused to make such accommodations. Rhoads v. F.D.I.C., 257 F.3d 373, 387 (4th Cir. 2001). Here, the primary issue was whether Anderson was an individual with a disability within the meaning of the statute.
To make out a claim for disability employment discrimination, the first question is whether the plaintiff is disabled and is an “otherwise qualified individual.” Rhoads v. F.D.I.C., 257 F.3d at 387. The ADA defines a “qualified individual with a disability” as an individual with a disability who, with or without reasonable accommodation, can perform the essential functions of the employment position that such individual holds or desires. 42 U.S.C. §12111(8). If the plaintiff establishes a prima facie case, the defendant must present a legitimate, nondiscriminatory reason for the challenged conduct. See Reeves v. Sanderson Plumbing Prod., Inc., 530 U.S. 133, 142 (2000).
If the defendant succeeds in presenting such a reason, that showing will rebut the presumption of discrimination raised by the plaintiff’s prima facie case. See Stokes v. Westinghouse Savannah River Co., 206 F.3d 420, 429 (4th Cir.2000). The plaintiff must then prove by a preponderance of the evidence that the legitimate reasons offered by the defendant were not its true reasons, but were a pretext for discrimination. on for the challenged conduct. Texas Dept. of Cmty. Affairs v. Burdine, 450 U.S. 248, 253 (1981)). In the end, the plaintiff always bears the ultimate burden of proving that the employer intentionally discriminated against her. Evans v. Tech. Applications & Serv. Co., 80 F.3d 954, 959 (4th Cir.1996).
In this case, however, Anderson’s doctor was of the opinion that despite her insomnia, Anderson functioned normally, and, as of December 19, 2006, was not disabled from a sleep standpoint. Anderson told her doctor that despite sleeping only a few hours a night, she would awake feeling fully refreshed and did not contend that her daytime functioning was significantly impaired by her sleep disorder; rather, she argued only that her major life activity of sleep was impaired. Dr. Cullen could not find a physiologic cause for Anderson’s sleep problems. And, during Anderson’s sleep test on November 16, 2006, she slept seven hours and the test results were normal. When viewed as a whole, the medical opinions provided by Anderson’s doctors and her own claims failed to establish that Anderson was substantially limited in any major life activity. See, e.g., E.E.O.C. v. Sara Lee Corp., 237 F.3d 349, 352 (4th Cir.2001).
Even if Anderson had established a prima facie case, defendants presented several legitimate, non-discriminatory reasons for terminating Anderson: Anderson’s longstanding problems with communication and respect, as documented in every single formal review; Anderson’s communication problems with her supervisors; and Anderson’s inability or refusal to correct time discrepancies or to provide an explanation for such inconsistencies as requested by her supervisor. Anderson did not present any evidence to show that defendants’ legitimate, non-discriminatory reasons were pretextual. For these reasons, the court granted defendants’ motion for summary judgment on Anderson’s disability discrimination claims.
Similarly, with regard to Anderson’s claims for violations of the FMLA, Anderson failed to demonstrate that she had a serious medical condition which would entitle her to FMLA leave, or that she gave her employer adequate notice of her need for leave. Accordingly, Anderson did not provide sufficient evidence for a reasonable jury to conclude that defendants violated the FMLA, and granted defendants’ motion for summary judgment on Anderson’s FMLA retaliation and interference claims.
COMMENTARY: Anderson also moved for discovery sanctions under Fed.R.Civ.P. 37(d). Pursuant to F.R.C.P. 30(b)(6), when a party seeks discovery from an organization but does not know the identity of individuals with relevant knowledge, the party may name the organization as the deponent, requiring it to designate persons to testify in response. The deponent organization is obligated to produce one or more witnesses who are thoroughly educated about the noticed deposition topics with respect to any and all facts known to the deponent organization or its counsel. Int’l Ass’n of Machinists and Aerospace Workers v. Werner-Masuda, 390 F.Supp.2d 479, 487 (D.Md.2005). Rule 37(d) sanctions are appropriate for “failure to appear by any means of wholly failing to educate a Rule 30(b)(6) witness, unless the conduct was substantially justified.” Werner-Masuda, 390 F.Supp.2d at 489.
In this case, Williams-Fauntroy was deposed pursuant to Rule 30(b)(6). Anderson contended that Williams-Fauntroy was “unable to answer almost anything with any certainty” regarding the termination of Anderson’s employment and that his testimony was so unhelpful and so unresponsive to the areas of inquiry that the deponent effectively failed to appear for her deposition. However, in the deposition at issue, Williams-Fauntroy’s responses to any of the topics upon which she was questioned were not so unresponsive and inadequate as to render discovery sanctions proper.
Accordingly, Anderson’s motion for discovery sanctions was denied.
PRACTICE TIPS: The core requirements for triggering an employer’s obligations under the Family Medical Leave Act are a “serious health condition” and adequate communication, meaning a timely communication sufficient to put an employer on notice that the protections of the Act may apply. When timely and adequate communication is not given, the protections of the Act do not apply, even if the employee in fact has a serious health condition.
BOTTOM LINE: The negligence section of the Maryland Uniform Commercial Code displaced common-law negligence action when a payee sought to recover from a depositary bank that accepted unauthorized and fraudulently endorsed checks.
CASE: Advance Dental Care, Inc. v. Suntrust Bank, Civil Action No. AW-10-01286 (filed Sept. 29, 2011) (Judge Williams). RecordFax No. 11-1007-40, 9 pages.
FACTS: Michelle Rampersad was employed at Advance Dental Care, Inc., from early 2004 until fall of 2007. During this time, Advance Dental received insurance reimbursement checks via U.S. mail for services rendered.
Without authorization, Rampersad took approximately 185 checks totaling $400,954. Although the checks were made payable to Advance Dental, Rampersad endorsed them to herself and delivered them to SunTrust Bank for deposit into her personal accounts, and SunTrust deposited the checks into Rampersad’s accounts.
On May 21, 2010, Advance Dental filed suit against SunTrust, alleging several negligence claims as well as a claim of conversion.
The court dismissed Advance Dental’s claim of negligence, but declined to dismiss its claim of common-law negligence. On April 14, 2011, SunTrust renewed its motion to dismiss the common-law negligence claim.
The Court granted the renewed motion to dismiss.
LAW: In this case of first impression, the issue was whether §3-420 of the Maryland Uniform Commercial Code displaced common-law negligence when a payee sought to recover from a depositary bank that accepted unauthorized and fraudulently endorsed checks. Maryland courts have not addressed U.C.C. displacement of common-law actions in suits brought by a payee against a depositary bank. In the absence of a pertinent decision, the district court was called to apply the rule of decision that the Maryland Court of Appeals would apply.
In making this determination, Maryland case law concerning a drawer’s claims against a depositary bank was instructive. See Chicago Title Ins. Co. v. Allfirst Bank, 905 A.2d 366 (Md.2006). Although in Chicago Title, the court allowed a common-law action to proceed, the drawer’s lack of adequate remedy under the U.C.C. was fundamental to its ruling. See Chicago Title, A.2d at 376. Additionally, other courts have held that common-law negligence claims can proceed only in the absence of an adequate U.C.C. remedy. See, e.g., Equitable Life Assurance Society of the U.S. v. Okey, 812 F.2d 906, 909 (4th Cir.1987). In the present case, it was indisputable that Advance Dental had an adequate U.C.C. remedy (conversion) for which Advance Dental had already filed a claim. Therefore, in light of the overwhelming case law, it was reasonable to infer that the Maryland Court of Appeals would hold that §3-420 displaces common-law negligence because Advance Dental had an adequate U.C.C. remedy.
Statutory authority also emphasized the necessity of displacing common-law negligence under the circumstances of the present case. Section 1-103(b) of the Maryland U.C.C. establishes the U.C.C.’s position regarding the survival of common-law actions alongside the U.C.C., stating that unless displaced by the particular provisions of Titles 1-10 of this article, the principles of law and equity shall supplement its provisions. Since the U.C.C. has no express “displacement” provision, it was necessary to determine whether §3-420 was a “particular provision” that displaced the common law. See, e.g., Okey, 812 F.2d at 909.
There is significant overlap between §3-420 and common-law negligence. Section 3-420(a) defines conversion as payment with respect to an instrument for a person not entitled to enforce the instrument or receive payment. Here, Advance Dental alleged that SunTrust was liable in negligence for allowing Rampersad to fraudulently endorse and deposit checks made payable to Advance Dental into her personal account. Negligence and conversion require a consideration of whether there was payment over a wrongful endorsement. Equitable Life Assurance Society of the United States v. Okey, 812 F.2d 906, 909 (4th Cir.1987). The duplicative nature of these two theories suggests the U.C.C.’s intention to create a comprehensive regulation of payment over unauthorized or fraudulent endorsements. See Okey, 812 F.2d at 909.
Furthermore, Advance Dental’s common-law negligence action had no independent significance apart from §3-420. See Okey, 812 F.2d at 910. In fact, when discussing common-law negligence, Advance Dental simply referred to the same conduct alleged in its first count (conversion) to argue that SunTrust has breached its duty of reasonable and ordinary care. In other words, §3-420 effectively subsumed common-law negligence claims.
Not only is common-law negligence insufficiently distinct from §3-420, but the conflicting defenses available for each cause of action were also problematic. The U.C.C. is based on the principle of comparative negligence. See, e.g., Okey, 812 F.2d at 910. By contrast, contributory negligence remains a defense for common-law negligence. See, e.g., Okey, 812 F.2d at 910. Displacement is thus required, as Maryland courts hesitate to adopt or perpetuate a common-law rule that would be plainly inconsistent with the legislature’s intent in passing Titles 3 and 4 of that Article. See, e.g., Hartford Fire, 671 A.2d at 32.
Finally, allowing SunTrust a common-law, due care defense would be inconsistent with the intent behind the U.C.C. In general, the U.C.C.’s loss allocation rules place liability upon the party best situated to prevent the loss. See, e.g., Hartford Fire, 671 A.2d at 32. In fact, legislators purposefully revised §3-420(c) to disallow depositary banks a good faith defense. See U.C.C. §3-420(c) cmt. 3 (1990). As such, faithful adherence to the U.C.C.’s intentions dictated that the court displace Advance Dental’s common-law negligence claim.
Accordingly, the district court granted SunTrust’s renewed motion to dismiss Advanced Dental’s claim of common-law negligence.
COMMENTARY: Although SunTrust did not have a “good faith” defense under §3-420(c), SunTrust was still able to invoke the protection of negligence principles as affirmative defenses. The Maryland U.C.C. recognizes four negligence defenses that the defendant may raise to avoid loss. One such defense, elucidated in §3-406(a), is based on general negligence and concerns a party’s duty of care. It precludes a party who, by failing to exercise ordinary care, substantially contributes to the making of a forged endorsement from asserting the forgery against a depository bank who pays the instrument in good faith. See §3-406(a).
Here, Advance Dental argued that the §3-406 was inapplicable to the instant case because a “forged signature” and “unauthorized signature” are not interchangeable. In Maryland, however, a forged endorsement is the same as an unauthorized endorsement for purposes of conversion. See Citizens Bank of Md. v. Md. Indus. Finishing Co. Inc., 659 A.2d 313, 318 (Md.1995). Additionally, Official Comment 3 to §3-406 affirms that conduct similar to Rampersad’s can form the basis of a preclusion under §3-406. See U.C.C. §3-406 cmt. 3 (1990).
Section 3-405 provides an employee fraud defense. Under §3-405(b), when an employer entrusts an employee with the responsibility of an instrument and the employee makes a fraudulent endorsement, the risk of loss falls on the employer rather than a bank that pays the instrument in good faith. Thus, if SunTrust sufficiently established that Advance Dental entrusted Rampersad with the responsibility of handling the fraudulently endorsed checks, §3-405 would apply.
Accordingly, dismissal of SunTrust’s common-law negligence claim was appropriate, as SunTrust could still avail itself of affirmative defenses rooted in negligence.
PRACTICE TIPS: A conversion claim brought under the Maryland U.C.C. is distinguishable from and not to be confused with the intentional tort of conversion.