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Koss Corp. v. American Express Co.

Court of Appeals of Arizona, First Division, Department A

August 29, 2013

KOSS CORPORATION, a Delaware corporation, Plaintiff/Appellant,
v.
AMERICAN EXPRESS COMPANY, a New York corporation; AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY, INC., a New York corporation; AMEX CARD SERVICES COMPANY, a Delaware corporation; PAMELA S. HOPKINS, Defendants/Appellees.

Appeal from the Superior Court in Maricopa County Cause No. CV2010-006631, The Honorable Jeanne M. Garcia, Judge

Law Offices of Richard W. Shapiro, PLC Phoenix by Richard W. Shapiro and Eagan Avenatti, LLP Newport Beach, CA by Michael J. Avenatti, Pro Hac Vice Attorneys for Plaintiff/Appellant.

Greenberg Traurig, LLP Phoenix by Pamela M. Overton Julie R. Barton and Greenberg Traurig, LLP Florham Park, N.J. by Louis Smith, Pro Hac Vice Attorneys for Defendants/Appellees.

OPINION

DONN KESSLER, Judge.

¶1 Appellant, Koss Corporation ("Koss") appeals the superior court's dismissal of its complaint against American Express Company, American Express Travel Related Services Company, Inc., and AMEX Card Services Company ("American Express"), and Pamela S. Hopkins ("Hopkins") (collectively "Appellees"). This case concerns alleged defalcations by a Koss employee using wire transfers and cashier's checks to pay her personal American Express bills. Pursuant to Arizona Rule of Civil Procedure 12(b)(6), the superior court dismissed Koss's common-law claims for conversion, negligence, aiding and abetting fraud, and aiding and abetting a breach of fiduciary duty after determining, in part, that the Uniform Commercial Code ("U.C.C.") preempted those claims. In addition, the court dismissed Koss's negligence claim on the basis that Appellees had no duty to Koss and the conversion claim on the theory that a party cannot convert a check.

¶2 We affirm the dismissal of the negligence claim but reverse the dismissal of the other common-law claims for several reasons. First, the U.C.C. does not displace Koss's common-law claims that concern wire transfers because those claims are grounded on allegations that Appellees knowingly aided and abetted a Koss employee's defalcations—allegations that do not pertain to any defect or irregularity in the wire transfer process. Second, the U.C.C. does not preclude a common-law conversion of cashier's check claim under these circumstances. However, we affirm the dismissal of the negligence claim because we agree Appellees did not owe a duty under negligence law to Koss to disclose such defalcations.

FACTUAL AND PROCEDURAL HISTORY

¶3 Koss is a Wisconsin-based designer, manufacturer, and marketer of high-fidelity headphones. Koss's former Vice President of Finance, Sujata Sachdeva ("Sachdeva"), supervised the accounting department. Between February 2008 and December 2009, she allegedly embezzled approximately $16, 000, 000 from Koss by wiring funds from Koss accounts to pay charges on her personal American Express credit card. During this time, Sachdeva also paid her American Express bills and other third parties by using cashier's checks drawn on Koss bank accounts totaling approximately $4, 000, 000. She also withdrew approximately $200, 000 from a Koss bank account using what the complaint called "manual checks, " which we interpret to mean checks drawn on Koss bank accounts.

¶4 During this time, Hopkins was managing the American Express Fraud Operations Group in Glendale. This group included the Financial Crimes Reporting Unit, which was responsible for "analyzing bank wire transactions used to pay card member accounts." Koss alleged that American Express and Hopkins accepted more than fifty wire transfers from Koss accounts for payment of Sachdeva's credit card balances.

¶5 According to the complaint, Appellees failed to develop and maintain a program designed to detect and report suspicious activity that might show financial crimes. For example, the complaint alleged that in October 2008, American Express knew that Sachdeva had wired $120, 000 from Koss's corporate accounts to pay for charges on her personal card and did little or nothing about it except to learn that Sachdeva was employed by Koss with an annual salary of approximately $200, 000. American Express allegedly continued to accept other wire transfers without properly reviewing them for possible fraud and failed to alert Koss to what Sachdeva was doing. In August 2009, an American Express Financial Crimes Reporting Unit analyst allegedly inquired into payments on Sachdeva's card made in June 2009 and alerted another unit member that, since October 2008, Sachdeva had purchased about $3, 500, 000 in luxury goods and paid her credit card bills with funds wired from Koss bank accounts. The latter employee allegedly recognized this conduct as a "clear case of embezzlement" and alerted another American Express Financial Intelligence Unit member and Hopkins about Sachdeva's activities in early August 2009. Appellees allegedly took no action on this report despite the employee's recommendations that they contact Koss and appropriate authorities. It was not until December 18, 2009, that American Express contacted Koss to inquire about Sachdeva's wire transfers. Koss immediately terminated Sachdeva's employment and notified the Federal Bureau of Investigation.

¶6 As relevant to this appeal, Koss sued, alleging that by accepting the wire transfers and cashier's checks, Appellees aided and abetted Sachdeva's breach of fiduciary duty to Koss and her fraud, and were liable for negligence. Koss also asserted a common-law conversion claim against American Express based on its control over Koss funds transferred by the wire transfers and cashier's checks. Koss sought the return of each "payment and transfer" and punitive damages.

¶7 Appellees moved to dismiss the complaint under Rule 12(b)(6) arguing: (1) the U.C.C. displaced or preempted the common-law claims; (2) Koss could not state a claim for conversion of checks because a check is not property, but an obligation; and (3) Appellees did not owe Koss a duty of care as required to state a claim for negligence. Koss argued that the U.C.C. did not displace the common-law claims and that Appellees owed a duty of care to Koss or voluntarily assumed a duty. At a later oral argument, Koss sought to add claims for fraudulent concealment and non-disclosure, and to identify "the exact beneficiary bank for each of the wire transfers at issue . [and] the exact beneficiary for each of the wire transfers."[1]

¶8 The superior court granted Appellees' motion and dismissed Koss's claims. In so doing the court ruled: (1) The U.C.C. preempted Koss's common-law claims, and its sole remedy was under the U.C.C; (2) Under Arizona Revised Statutes ("A.R.S.") sections 47-4A202 through -4A204 (2005 & Supp. 2012), [2] a receiving bank must refund any payment made pursuant to a payment order, and because Appellees were not a receiving bank, they were not responsible for Koss's loss; (3) Relying in part on Berthot v. Sec. Pac. Bank of Ariz., 170 Ariz. 318, 321, 823 P.2d 1326, 1329 (App. 1991), A.R.S. § 47-3420(A)(1) (2005) barred Koss's conversion claims because the drawer of a check may not bring such a claim against a payee, and a check is an obligation and not property that can be converted; and (4) Appellees did not owe a duty of care to Koss.

¶9 Koss timely appealed. We have jurisdiction pursuant to A.R.S. § 12-2101(A)(1), (A)(5)(a) (Supp. 2012).

DISCUSSION

I. Issues on appeal, standards of review, and statutory construction.

¶10 On appeal, Koss argues the U.C.C. did not preclude its common-law claims, its complaint stated a cause of action for common-law conversion, and Appellees owed it a duty of care so the court should not have dismissed its negligence claim.[3]

¶11 We review the superior court's judgment de novo both to the extent it is based on a matter of statutory interpretation and because it dismissed the complaint under Rule 12(b)(6). City of Tucson v. Clear Channel Outdoor, Inc., 209 Ariz. 544, 547, ¶ 8, 105 P.3d 1163, 1166 (2005); see also Coleman v. City of Mesa, 230 Ariz. 352, 355-56, 7, 284 P.3d 863, 866-67 (2012) . "In reviewing a trial court's decision to dismiss a complaint for failure to state a claim, we assume as true the facts alleged in the complaint and will not affirm the dismissal unless satisfied as a matter of law that plaintiffs would not be entitled to relief under any interpretation of the facts susceptible of proof." Fidelity Sec. Life Ins. Co. v. Ariz. Dep't of Ins., 191 Ariz. 222, 224, 4, 954 P.2d 580, 582 (1998). However, such facts must be well-pled. Jeter v. Mayo Clinic Ariz., 211 Ariz. 386, 389, 4, 121 P.3d 1256, 1259 (App. 2005).

¶12 We review issues of statutory construction de novo with the goal of giving effect to legislative intent. Short v. Dewald, 226 Ariz. 88, 93-94, ¶ 26, 244 P.3d 92, 97-98 (App. 2010) . "[W]hen construing a statute, 'we examine its individual provisions in the context of the entire statute to achieve a consistent interpretation.'" Id. at 94, ¶ 26, 244 P.3d at 98 (quoting State v. Gaynor-Fonte, 211 Ariz. 516, 518, ¶ 13, 123 P.3d 1153, 1155 (App. 2005)). "[W]e look to the plain language as the most reliable indicator of meaning." Powers v. Carpenter, 203 Ariz. 116, 118, ¶ 9, 51 P.3d 338, 340 (2002). However, we will not construe a statute literally when such a construction would lead to an absurd result, would conflict with clear legislative intent, or would be contrary to the rest of the statutory scheme. See N. Valley Emergency, Specialists, L.L.C., v. Santana, 208 Ariz. 301, 303, ¶ 9, 93 P.3d 501, 503 (2004); Oaks v. McQuiller, 191 Ariz. 333, 334, ¶ 5, 955 P.2d 971, 972 (App. 1998).

¶13 "The [U.C.C.] should be construed in accordance with its underlying purposes and policies. The text of each section should be read in the light of the purpose and policy of the rule or principle in question, as [sic] also of the [U.C.C.] as a whole, and the application of the language should be construed narrowly or broadly, as the case may be, in conformity with the purposes and policies involved." Official Uniform Commercial Code § 1-103 cmt. 1 (stating that properly construing the U.C.C. requires "that its interpretation and application be limited to its reason"); accord A.R.S. § 47-1103 (Supp. 2012). Broadly defined, the underlying purposes and policies of the U.C.C. include simplifying, modernizing, and clarifying commercial transactions law and creating uniformity among various jurisdictions. A.R.S. § 47-1103(A); accord U.C.C. § 1-103 cmt. 1.

II. Koss's common-law claims are not preempted by the U.C.C.

¶14 The superior court held that Koss's common-law claims were preempted by the U.C.C. More specifically, the court first held that Article 4A (A.R.S. §§ 47-4A202 through 4A204) barred Koss's claims. Since those sections deal with wire transfers, we understand the order to hold that all of Koss's common-law claims based on wire transfers were preempted. Second, the court held that at a minimum Koss's common-law conversion claim was preempted by Article 3 (A.R.S. § 47- 3420(A)(1)).[4] Since Article 3 deals with negotiable instruments, in this case, cashier's checks, we read the order as holding that the conversion and other common-law claims were barred to the extent they were based on the cashier's checks paid to American Express. Finally, the court held that the negligence claims were also preempted by the U.C.C. which we read as applying to both the wire transfers and the checks.

¶15 We reach different conclusions than the superior court. First, since the common-law claims did not arise out of the mechanics of wire transfers but out of American Express's acceptance and use of Koss funds while allegedly knowing that Sachdeva was embezzling those funds from Koss to pay her own American Express charges, they do not come within the remedies of Article 4A. Second, as relevant here, A.R.S. § 47-3420(A)(1) only bars common-law conversion claims brought by the "drafter" and "issuer" of negotiable instruments, and as a matter of law, Koss was neither the "drafter" nor "issuer" of the cashier's checks. The common-law claims can proceed, subject to possible U.C.C. and other defenses, including but not limited to the defense that American Express is a holder in due course.[5]

¶16 We begin with a general discussion of U.C.C. preemption and then discuss the limits of such preemption as to wire transfers. We will then turn to the limits on preemption as to the cashier's checks.[6]

¶17 The U.C.C. does not preempt common-law causes of action unless particular provisions of the U.C.C. displace those actions. A.R.S. § 47-1103(B), like U.C.C. § 1-103(b), provides "[u]nless displaced by the particular provisions of [this title], the principles of law and equity . . . fraud, misrepresentation . . . supplement [the U.C.C.'s] provisions." U.C.C. § 1-103 cmt. 2, provides:

[W]hile principles of common law and equity may supplement provisions of the [U.C.C], they may not be used to supplant its provisions, or the purposes and policies those provisions reflect, unless a specific provision of the [Code] provides otherwise. In the absence of such a provision, the [Code] preempts principles of common law and equity ...

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