                            In the
 United States Court of Appeals
              For the Seventh Circuit
                         ____________

No. 03-1833
TRAVELERS CASUALTY AND SURETY
COMPANY OF AMERICA,
                                                Plaintiff-Appellant,
                                v.


WELLS FARGO BANK N.A. and
CHARLES SCHWAB & CO., INC.,
                                            Defendants-Appellees.

                         ____________
        Appeal from the United States District Court for the
          Northern District of Illinois, Eastern Division.
          No. 01 C 9716—Matthew F. Kennelly, Judge.
                         ____________
        ARGUED MAY 17, 2004—DECIDED JULY 2, 2004
                         ____________



  Before POSNER, EASTERBROOK, and MANION, Circuit Judges.
   POSNER, Circuit Judge. This diversity suit governed by
Illinois law raises issues of banking and commercial law.
Allianz Life Insurance Company had a checking account at
Wells Fargo bank (actually a predecessor of Wells Fargo, but
we can ignore that detail) for the payment of benefits to
employees covered by Allianz’s employee health plan.
2                                                No. 03-1833

Charles Schwab, a securities brokerage firm that offers
checking services to its customers, received a check for
$287,651.23 made out to it and drawn on Allianz’s account
at Wells Fargo. The check was presented to Schwab for
deposit by a man who called himself James M. Carden and
said he wanted to open a brokerage account in his name.
Schwab opened an account in Carden’s name, credited the
account with the face amount of the check, and deposited
the check in a bank in which Schwab has an account. Two
weeks later Carden faxed Schwab directions to wire various
amounts of money in his Schwab account, adding up to
almost all the money in it, to accounts (none in Carden’s
name) in other financial institutions. Schwab made the
transfers as instructed, though only after checking with
Wells Fargo to make sure that Allianz’s check to Schwab
had cleared so that the money that Carden wanted to
withdraw would not come out of Schwab’s pocket. The
check had cleared.
  Within a few days, however, Allianz discovered that
Carden had never been employed by it. It believes that
Carden, whom investigators have been unable to track
down (“Carden” may not be the depositor’s real name), had
forged the $287,651.23 check. Allianz asked Wells Fargo to
make good the loss. Wells Fargo refused. Travelers had
insured Allianz against such losses, so it paid off Allianz
and then brought this suit, as Allianz’s subrogee, against
both Wells Fargo and Schwab. Although the Uniform
Commercial Code, in force in Illinois as in all states, con-
tains elaborate provisions regulating commercial paper,
including checks, Travelers invoked a common law duty of
banks—a duty the UCC has not superseded—not to honor
checks in the circumstances of this case. After a bench trial,
the district judge ruled in favor of the defendants, and
Travelers appeals.
No. 03-1833                                                3

  Wells Fargo could not be held liable for honoring a forged
or otherwise unauthorized check if, in fact, the check was
not forged or unauthorized; and in ruling for Wells Fargo
the judge ruled that Travelers had failed to prove that the
check made out to Schwab and deposited by Carden had
not been authorized by Allianz. Travelers had intended to
present testimony by the only two employees of Allianz
who were authorized to sign checks drawn on the account
on which the $287,651.23 check was drawn that they had not
authorized the check. But at trial, instead of putting these
employees on the witness stand or, if they were unavailable,
submitting their depositions, Travelers presented affidavits
containing their testimony. The judge correctly ruled the
affidavits inadmissible as hearsay. The affiants were not
available for cross-examination, as they would have been
had they testified live or given depositions earlier at which
the defendants could have cross-examined them.
  It might seem to follow directly from this ruling that the
case was properly dismissed. Yet the district judge, while
convinced that without the affidavits Travelers could not
prove that the check was unauthorized, dismissed only the
claim against Wells Fargo on that ground. He distinguished
the claim against Schwab on the ground that Schwab might
have had a duty to Allianz to inquire whether the check was
authorized. But even so, and even if Travelers proved that
Schwab had violated its duty to Allianz, in order to obtain
relief Travelers would have to show that Schwab, had it
fulfilled its duty, would have discovered that Allianz had
not authorized the check to Schwab, and having discovered
this would not have let Carden transfer the money out of his
Schwab account. The judge may have missed this elemen-
tary point about causation because, despite ruling in favor
of Wells Fargo, he may have believed that the check was
unauthorized. For in a part of his oral opinion (and beware
oral opinions in complex cases) in which he held that
4                                                No. 03-1833

Travelers was in any event barred from relief by contribu-
tory negligence on the part of Allianz, the judge said that
the $287,651.23 check “had a similar appearance to the
earlier check”—a check that the judge thought Allianz had
been negligent in failing to investigate—“which essentially
means that, on its face, it didn’t appear phony or altered in
any way, but it is a reasonable inference that it was pre-
pared by the same person, and it would have been a
reasonable inference that it was prepared by the same
person who prepared the earlier unauthorized check” (emphasis
added).
  There had been two earlier suspicious checks drawn on
Allianz’s account at Wells Fargo. The first, for $26,500, was
payable to a Michelle R. Bryon. The second, for $46,651.23,
was payable to an Allan M. Ferrao. Since the check to
Carden was for $287,651.23, it is almost certain that whoever
forged the check to Ferrao also forged the check to Schwab
that Carden presented; at all events the inference seems
inescapable that the $287,651.23 check was also unautho-
rized. There was evidence of this apart from the affidavits
(which were not good evidence, as we have said)—not only
the identity of the last five digits in the second and third
checks, but also that efforts to locate Carden failed, an
experienced investigator for Allianz concluded that the
check Carden had deposited had been forged or altered, and
Schwab itself unguardedly argued that Travelers’ claim was
barred by section 4-406(d)(2) of the Uniform Commercial
Code.
  To explain the last point, section 4-406(d)(2) provides that
the drawer of a check (Allianz, and thus Travelers as its
subrogee) can’t complain about the check’s alteration “by
the same wrongdoer” who had previously altered a check
of the drawer, if the drawer would have discovered the
alteration simply by comparing the bank’s statement (as-
No. 03-1833                                                  5

suming as in this case that the bank rendered a statement of
account to its customer) with its own records. UCC § 4-406,
comment 2; Marx v. Whitney National Bank, 713 So. 2d 1142,
1146-48 (La. 1998); Mercantile Bank of Arkansas v. Vowell, 117
S.W.3d 603, 612-13 (Ark. App. 2003); Espresso Roma Corp. v.
Bank of America, N.A., 124 Cal. Rptr. 2d 549, 551-52 (App.
2002). The implication is that Carden had altered at least
one previous check and the check at issue in this case as
well.
  The reason we term Schwab’s arguing section 4-406(d)(2)
“unguarded” is that the section cannot provide a defense for
Schwab, because Allianz was not a customer of Schwab.
Mac v. Bank of America, 90 Cal. Rptr. 2d 476, 479-481 (App.
1999); UnBank Co. v. Whittaker-Gomez, 438 N.W.2d 382, 384
(Minn. App. 1989); 6C Lary Lawrence, Anderson on the
Uniform Commercial Code § 4-406:10 (3d rev. ed. 2003). It may
provide a defense to Wells Fargo, but the district judge,
having decided that Wells Fargo had no prima facie liability
to Allianz, didn’t consider any of the defenses that a bank
might be able to interpose against a suit by a customer who
had been negligent. See UCC §§ 3-406(a), 4-406(c), (d); Gulf
States Section, PGA, Inc. v. Whitney National Bank, 689 So. 2d
638, 641-42 (La. App. 1997); 2 James J. White & Robert S.
Summers, Uniform Commercial Code § 19-3 (4th ed. 1995).
  Maybe all the judge meant in the passage we quoted
earlier was that since as he said the $287,651.23 check
“didn’t appear phony or altered in any way,” it wouldn’t
have put Wells Fargo on notice that something was fishy;
and then Wells Fargo might be off the hook even if the
check was unauthorized. For while ordinarily a bank is
strictly liable for charging a customer’s account with an
amount that the customer had not authorized the bank
to pay (and Allianz was Wells Fargo’s customer), UCC § 4-
401(a), a bank and its customer can contract out of that strict
6                                                  No. 03-1833

liability, §§ 4-401(a), 4-103(a), and Wells Fargo argues that
it did so in its contract with Allianz. This was another of
Wells Fargo’s defenses that the judge didn’t reach.
   We really don’t know what the judge was thinking. His
findings on the question whether the check was authorized
are in irreconcilable conflict. But probably the best interpre-
tation is that he thought it didn’t matter. He clearly thought
Schwab was off the hook even if the check was unautho-
rized, and let us consider whether he was correct about that
at least. The common law of Illinois as of other states
requires a bank, if someone tries to deposit a check made
out to it in his own account, to exercise due care to make
sure that the drawer (the third party) intended the depositor
to receive the drawer’s money. Mutual Service Casualty Ins.
Co. v. Elizabeth State Bank, 265 F.3d 601, 613-14 (7th Cir. 2001)
(Illinois law); Douglass v. Wones, 458 N.E.2d 514, 522 (Ill.
App. 1983); Federal Ins. Co. v. NCNB National Bank of North
Carolina, 958 F.2d 1544, 1549-50 (11th Cir. 1992); Master
Chemical Corp. v. Inkrott, 563 N.E.2d 26, 28-29 (Ohio 1990);
Allis Chalmers Leasing Services Corp. v. Byron Center State
Bank, 341 N.W.2d 837, 839 (Mich. App. 1983) (per curiam);
cf. Murray v. Bank of America, N.A., 580 S.E.2d 194, 198
(S.C. App. 2003); see also Boyd J. Peterson, Annotation,
“Liability of Bank for Diversion to Benefit of Presenter or
Third Party of Proceeds of Check Drawn to Bank’s Order by
Drawer Not Indebted to Bank,” 69 A.L.R.4th 778 (1989)
(collecting cases). The danger is great in such a case that the
depositor merely found, stole, or forged the check. The risk
of his getting away with such fraud is reduced if the bank
has a duty to check with the drawer or take other steps to
make reasonably sure that the deposit is authorized. The
duty is imposed, it should be noted, as a matter of tort law
rather than contract law or UCC law (which is mainly
contract law); there was no contractual relation between
Schwab and Allianz.
No. 03-1833                                                    7

  As our reference in the preceding paragraph to finding or
stealing a check implied, the duty is not limited to cases in
which a check is unauthorized (which will usually mean
forged). Suppose Allianz wrote a check payable to Schwab
in order to transfer funds to Allianz’s own investment
account with Schwab, and someone stole the check and
presented it to Schwab, which credited the thief’s account,
and the thief later drained the account. Schwab would have
committed a tort by not checking with Allianz to learn the
drawer’s instructions. However, there is no suggestion in
this case that Allianz may have authorized the check to
Schwab but that Carden then stole it and presented it to
Schwab.
   The initial question concerning Schwab’s performance of
its tort duty to Allianz is whether, not being a bank, it had
such a duty. We cannot find any cases on whether the duty
extends to any other commercial enterprises, though we
point out for what it is worth that the term “bank” in the
Uniform Commercial Code (e.g., UCC § 4-105(1)) has been
interpreted to cover other financial institutions that perform
bank-type services—including brokerage firms, as
in Lichtenstein v. Kidder, Peabody & Co., 727 F. Supp. 975, 978-
79 (1989), vacated on other grounds, 777 F. Supp. 423 (W.D.
Pa. 1991); Edward D. Jones & Co. v. Mishler, 983 P.2d 1086,
1093-97 (Ore. App. 1999); Pinasco v. Ara, 631 N.Y.S.2d 346,
348 (App. Div. 1995); Asian Int’l, Ltd. v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 435 So. 2d 1058, 1062 (La. App. 1983);
see also Woods v. MONY Legacy Life Ins. Co., 641 N.E.2d
1070, 1072 (N.Y. 1994) (life insurer that administered money
market account). But certainly the common law duty should
extend to enterprises such as Schwab that offer a checking
service in competition with banks. To lift the duty of inquiry
from Schwab’s shoulders would be to give it an arbitrary
cost advantage in competing with banks for capital. Banks
make their money by lending, and they obtain much of that
8                                                  No. 03-1833

money by offering checking services to people looking for
a place to park their money. Schwab wants to obtain capital
from the same source—people who can be induced to
deposit their money with a financial institution in exchange
for the convenience of being able to deposit and withdraw
the money by check. Had Schwab no duty of inquiry, this
would reduce its costs of liability insurance and of scrutiniz-
ing checks submitted to it for payment and it could use its
resulting cost advantage to lure customers from banks that,
though they may be no less efficient than Schwab, cannot
avoid those costs. There is no reason to confer such a
windfall competitive advantage on the brokerage industry.
The common law is flexible enough to permit the modifica-
tion of one of its doctrines when necessary to avoid produc-
ing an anomalous result because of a change in commercial
practice.
  It is true but irrelevant that the common law’s imposition
of a duty of care on a bank which receives a check made out
to it by a drawer who owes the bank no money is unusual
because it creates a form of “good Samaritan” liability,
which the common law normally refuses to impose. See,
e.g., Cuyler v. United States, 362 F.3d 949, 953 (7th Cir. 2004);
Stockberger v. United States, 332 F.3d 479 (7th Cir. 2003);
Restatement (Second) of Torts § 314 (1965); W. Page Keeton et
al., Prosser and Keeton on the Law of Torts § 56, pp. 375-76 (5th
ed. 1984). The drawer in a case such as this, to repeat, is not
a customer of the payee institution (Allianz drew the check
on Wells Fargo, not on Schwab), or anyone else to whom the
payee would owe a duty of care under normal tort princi-
ples. Rather it’s a third party whom the payee is asked to
“rescue” from a possible fraud. But unusual as the rule may
be in our common law system, it is firmly established (as are
many other exceptions to “no ‘good Samaritan’ liability”
reviewed in the Stockberger opinion) and there is no justifica-
tion for confining it to banks that offer checking services.
No. 03-1833                                                  9

  The next question is whether Schwab fulfilled its tort duty
of care to Allianz. The district judge thought it had
by verifying with Wells Fargo that Allianz had enough
money in its account to cover the check. But in doing this
Schwab was protecting itself, not the drawer, Allianz. It
should have tried to find out from Allianz whether the
check had been authorized. Although Allianz’s check listed
no address or phone number, only a P.O. box number in
Milwaukee, it would have taken no more than a minute to
look up Allianz’s phone number and place a call. If having
done so Schwab had found itself entangled in an endless
automated phone menu or otherwise unable to get through
to a responsible employee of the company in a reasonable
amount of time and get a prompt answer to its query, its
duty of care might have been satisfied. Alternatively, it
could have warned Wells Fargo of the unusual deposit; the
warning doubtless would have impelled Wells Fargo to
check the matter with its customer, in order to avoid lia-
bility. Schwab did nothing and there is no evidence that,
had it made a reasonable effort to protect the drawer, even
a minimum effort, the effort would have been fruitless.
Schwab violated its duty of care to Allianz.
   The judge committed two further errors with regard to the
claim against Schwab. The first was to rule that Schwab was
a holder in due course of the $287,653.21 check and there-
fore took free from all defenses that the drawer might have
against other recipients. A payee can, it is true, be a holder
in due course. UCC § 3-302(a)(2), comment 4. And while,
like other holders in due course, it must take in good faith,
it is reasonably clear that “good faith,” as the term connotes,
does not include due care, UCC § 3-103, comment 4; 6B
Anderson on the Uniform Commercial Code, supra, § 3-302:16R,
though some cases say it does. First Federal Savings & Loan
Ass’n of South Carolina v. Chrysler Credit Corp., 981 F.2d 127,
132-33 (4th Cir. 1992); Maine Family Federal Credit Union v.
10                                                  No. 03-1833

Sun Life Assurance Co., 727 A.2d 335, 342-44 (Me. 1999); First
City Federal Savings Bank v. Bhogaonker, 715 F. Supp. 1216,
1220 (S.D.N.Y. 1989). Yet implicit in the common law rule
governing banks’ liability to drawers is the proposition that
a bank presented with a check made out to it by someone
who owes it no money, for deposit in the presenter’s
account, does not take the check in due course. Mutual
Service Casualty Ins. Co. v. Elizabeth State Bank, supra, 265 F.3d
at 621-22; Douglass v. Wones, supra, 458 N.E.2d at 522-23;
Dalton & Marberry, P.C. v. NationsBank, N.A., 982 S.W.2d 231,
235 (Mo. 1998). Otherwise section 3-302(a)(2) would dis-
solve the common law rule, which no one contends it does.
  Second, the judge held that by failing to discover that two
previous checks drawn in its name had been unauthorized,
Allianz was guilty of contributory negligence in also failing
to discover, before Schwab permitted Carden to withdraw
the proceeds of the check, that the third check, the one at
issue in this case, was unauthorized. It is good practice for
a bank to close an account (of course with notice to the
customer, see J. Bailey & Richard B. Hagedorn, Brady on
Bank Checks: The Law of Bank Checks ¶ 22.08 (2004)) as soon
as it discovers that an unauthorized check has been written
on the account. The bank may indeed be required to do so
in the exercise of its duty of ordinary care to the customer.
UCC § 3-103(9). But the customer has a correlative duty, as
we know, under section § 4-406(d) to notify the bank that
unauthorized checks are being written on its account, if
such notification is feasible because the bank has given the
customer a statement of his account that the customer can
compare with his own records and by doing so readily
discover the fraud. The violation of this duty gives the
customer’s bank a defense; does it also give a defense to a
bank, in this case Schwab, that is not the customer’s bank
but instead a bank to which another unauthorized check
drawn on the customer’s bank is presented? It could not be
No. 03-1833                                                  11

a defense under section 4-406(d), but would have to be a
common law defense created by analogy to the defense
created by that section.
  There is some support in case law for such a defense.
Federal Ins. Co. v. Groveland State Bank, 333 N.E.2d 334, 336-
37 and n. 2 (N.Y. 1975); Robbins v. Passaic National Bank &
Trust Co., 160 A. 418, 420 (N.J. 1932); cf. Sun ‘n Sand, Inc. v.
United California Bank, 582 P.2d 920, 940-41 (Cal. 1978). We
do not know whether Illinois courts would recognize the
defense but we do know that if they did it would not be a
complete defense because Illinois like most states has re-
placed contributory with comparative negligence. Alvis v.
Ribar, 421 N.E.2d 886 (Ill. 1981); Williams Electronics Games,
Inc. v. Garrity, 366 F.3d 569, 573 (7th Cir. 2004); Spinozzi v.
ITT Sheraton Corp., 174 F.3d 842, 847 (7th Cir. 1999). Neither
contributory nor comparative negligence is any defense to
an intentional tort, e.g., Williams Electronics Games, Inc. v.
Garrity, supra, 366 F.3d at 573 (Illinois law), but here it
would be asserted against Schwab’s unintentional tort of
negligence.
  Since the case must be remanded, however, we need not
decide whether Schwab has preserved a defense of compar-
ative negligence and if so whether such a defense may,
under Illinois law, be asserted in a case such as this.
   The judgment in favor of the defendants must be re-
versed. All that is certain at this stage is that Schwab vio-
lated its tort duty of care to Allianz and hence to Travelers.
The case must be remanded for a new trial at which the
main issues will be whether the check was authorized and
if not whether Wells Fargo is liable to Travelers for paying
the check and whether Schwab has any (partial) defenses to
its prima facie liability to Travelers. If the trial determines
that the check was authorized, neither defendant is liable to
Travelers, for remember that Travelers does not contend
12                                                No. 03-1833

that the check might have been authorized but stolen or
otherwise misdirected. Whether Travelers should be given
another chance to present admissible evidence that the
check was (as it strongly appears to be) unauthorized is
another issue for resolution by the district judge in the first
instance.
                                  REVERSED AND REMANDED.

A true Copy:
        Teste:

                           _____________________________
                            Clerk of the United States Court of
                              Appeals for the Seventh Circuit




                     USCA-02-C-0072—7-2-04
