Arizona Court of Appeals Division One Holds That (1) Common Law Causes Of Action Are Preempted By the U.C.C. Only To The Extent That Particular Provisions of the U.C.C. Displace the Action, (2) A Conversion Action Can Be Brought Against A Third-Party Recipient Of Funds In Certain Circumstances, and (3) A Credit Card Company Has No Duty Of Disclosure To Third Parties.

In December 2009, Koss Corporation (“Koss”) learned that its Vice President of Finance, Sujata Sachdeva (“Sachdeva”), had embezzled approximately $16,000,000 from Koss to pay charges on her personal American Express credit card.  She paid her personal bills by wiring funds from Koss accounts, by using cashier’s checks drawn on Koss accounts and using “manual checks” drawn on the company’s accounts.  Koss terminated Sachdeva’s employment and filed a suit against American Express Company, American Express Travel Related Services Company, Amex Card Services, and an individual who managed American Express’s Fraud Operations Group (collectively “Amex”).   

Koss alleged that as early as October 2008 Amex knew the funds received from Sachdeva had been embezzled but said nothing.  Koss asserted that Amex aided and abetted Sachdeva’s fraud and breach of fiduciary duty and also asserted a common-law conversion claim and a negligence claim against Amex.  Koss sought to recover the payments made and punitive damages.   

Amex moved to dismiss the complaint arguing that the U.C.C. preempted the common law claims, that Koss could not state a claim for conversion, and that Amex owed Koss no duty of care.  The trial court granted Amex’s motion to dismiss and Koss timely appealed. 

The Court of Appeals affirmed in part, reversed in part, and remanded.  First, addressing the preemption issue, the Court held that the common-law claims asserted by Koss were not preempted by the U.C.C.  Causes of action are preempted by the U.C.C. only to the extent that particular provisions of the U.C.C. displace the action.  Article 4 of the U.C.C. (A.R.S. § 47-4A102) governs the rights, duties, and liabilities among entities involved in wire fund transfers.   Article 3 of the U.C.C. (A.R.S. § 47-3101, et seq) governs negotiable instruments, including checks.  Emphasizing that Koss’s claims concerned Amex’s acceptance of the funds when it allegedly knew the funds had been embezzled, the Court held that the misconduct fell outside the scope of Articles 3 and 4 of the U.C.C because the misconduct did not occur during the actual wire transfer process or the negotiation of checks.  The Court noted that it would run “counter to the principles of the U.C.C.” to permit Amex, allegedly knowing of the fraud against Koss, to keep funds transferred to it and use the U.C.C. as a shield for its own wrongdoing. 

The Court further held that Koss had stated a common-law claim for conversion. Conversion is the “act of wrongful dominion or control over personal property in denial of or inconsistent with the rights of another.”  Case Corp. v. Gehrke, 208 Ariz. 140, 143 ¶ 11, 91 P.3d 362, 365 (App. 2004).  A conversion action can be brought for converting the proceeds of a check and it can be brought against a third-party recipient of funds who has knowledge of the fraudulent conversion.  The Court, therefore, held that if Amex knew that Sachdeva was embezzling funds to pay her personal bills, it could be liable for conversion.   The Court distinguished cases relied on by Amex in its briefing. 

Lastly, the Court held that Koss failed to state a claim for negligence against Amex. The Court held that Amex had no duty to report the alleged embezzlement, noting that such a disclosure duty to third parties would place a heavy-duty on a credit card company.  The Court also rejected the argument that Amex voluntarily undertook a duty to monitor for fraud.  It was not the duty to monitor but the failure to disclose the alleged fraud that created Koss’s cause of action.  The Court stated that it was irrelevant that Koss had its own Amex account because those accounts were not involved in the transactions at issue, and, lastly, that the theft statutes did not create a duty from Amex to Koss sounding in negligence. 

Judge Kessler authored the unanimous opinion; Judges Norris and Gemmill concurred.