## Facts

- David J. Reiner was a supervisor for Elgin Township (the Township).
- The Township maintained deposit relationships and accounts at multiple financial institutions, including Bank One, Chicago National Association (Bank One) and American National Bank and Trust Company of Chicago (ANB).
- Over roughly 20 years, Reiner carried out a check-kiting and embezzlement scheme using Township accounts at these institutions.
- The scheme allegedly caused losses of more than $1,700,000.
- The Township assigned to Ohio Casualty Insurance Company (Ohio Casualty) all claims arising from the losses.
- Ohio Casualty sued Bank One and ANB, alleging each breached the Uniform Commercial Code (UCC) duty of good faith in connection with paying and depositing checks tied to the kite.
- As to ANB, Ohio Casualty’s complaint did not allege that any ANB employee knew of Reiner’s check kiting or embezzlement.
- As to Bank One, Ohio Casualty alleged that a Bank One employee caught Reiner in the kiting scheme.

## Issues

1. Whether a complaint states a UCC good-faith claim against a bank based on payment/deposit of kited checks when the pleading does not allege the bank’s actual knowledge of the kite.
2. Whether alleging that a bank employee discovered the check-kiting scheme is sufficient, at the pleading stage, to state a UCC good-faith claim based on the bank’s handling of checks connected to the scheme.
3. Whether allegations amounting to failure to detect suspicious activity (without facts showing dishonesty or knowing participation) can support UCC liability for losses caused by a third party’s check-kiting fraud.

## Decision

- The court evaluated whether Ohio Casualty’s complaint stated a valid UCC good-faith claim against each defendant bank.
- The court treated the claims differently because the complaint alleged knowledge for Bank One (an employee allegedly caught the kite) but alleged no such knowledge for ANB.
- The court concluded that, as pleaded, the allegations against ANB were insufficient to state a UCC good-faith claim because they did not include facts showing ANB’s awareness of the kite.
- The court concluded that, as pleaded, the allegations against Bank One were sufficient to proceed because the complaint included an allegation that Bank One, through an employee, discovered the scheme.

## Legal Principles

- A UCC good-faith theory against a bank requires more than allegations that the bank processed fraudulent items or should have detected irregular account activity.
- Pleadings that sound only in negligence—such as inadequate monitoring, weak internal controls, or failure to recognize warning signs—do not, without more, state a claim for lack of UCC good faith.
- Allegations that bank personnel had actual awareness of a check-kiting scheme can support an inference of lack of good faith at the pleading stage, depending on what the bank is alleged to have done after discovery.
- When multiple banks are sued based on the same underlying kite, the sufficiency of the pleadings may differ bank-by-bank based on whether the complaint alleges knowledge (or comparable facts) for each institution.
- An assignee (here, the insurer that received an assignment of the Township’s claims) may pursue the assignor’s claims to the extent those claims are validly stated.

## Conclusion

Ohio Casualty, as assignee of Elgin Township’s losses from a long-running check-kiting and embezzlement scheme, brought UCC good-faith claims against Bank One and ANB for paying and depositing checks tied to the fraud; the court held the pleadings were deficient as to ANB because they did not allege employee knowledge of the scheme, but sufficient as to Bank One because the complaint alleged a Bank One employee caught Reiner’s kiting activity.


Ohio Casualty Co. v. Bank One, 1997 U.S. Dist. LEXIS 10974 (1997)