Eric Eisenberg v.  Wachovia Bank, N.a.

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 ERIC EISENBERG,
Plaintiff-Appellant,
v. No. 02-1166 
WACHOVIA BANK, N.A.,
Defendant-Appellee. 
Appeal from the United States District Court
for the Western District of North Carolina, at Charlotte.
Graham C. Mullen, Chief District Judge.
(CA-01-39-3-MU)
Argued: June 5, 2002
Decided: August 26, 2002
Before MICHAEL, Circuit Judge, Robert R. BEEZER, Senior
Circuit Judge of the United States Court of Appeals for the Ninth
Circuit, sitting by designation, and Benson E. LEGG, United States
District Judge for the District of Maryland, sitting by designation.
Affirmed by published opinion. Senior Judge Beezer wrote the opin-
ion, in which Judge Michael and Judge Legg joined.
COUNSEL
ARGUED: Richard J.J. Scarola, SCAROLA, REAVIS & PARENT,
New York, New York, for Appellant. John Benton Morris, KIL-
PATRICK STOCKTON, L.L.P., Winston-Salem, North Carolina, for
Appellee. ON BRIEF: Daniel R. Taylor, Jr., Kristin M. Major, KIL-

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PATRICK STOCKTON, L.L.P., Winston-Salem, North Carolina, for
Appellee.
OPINION
BEEZER, Senior Circuit Judge:
Eric Eisenberg ("Eisenberg") appeals the district court’s dismissal
of his complaint alleging two claims of negligence against Wachovia
Bank, N.A. ("Wachovia"). We affirm.
I
The district court dismissed Eisenberg’s complaint pursuant to Fed-
eral Rule of Civil Procedure 12(b)(6). We state the relevant facts as
alleged by the complaint. See Harrison v. Westinghouse Savannah
River Co., 176 F.3d 776, 783 (4th Cir. 1999) ("In its review of Rule
12(b)(6) dismissals, this Court must accept as true all of the Appel-
lant’s allegations and must construe factual allegations in the light
most favorable to the plaintiff.").
Eisenberg was the victim of a fraudulent investment scheme perpe-
trated by Douglas Walter Reid ("Reid"). Reid falsely represented to
Eisenberg that he was a senior vice president of Bear Stearns Compa-
nies, a large financial securities firm, and convinced Eisenberg to
make a putative investment. At Reid’s direction, Eisenberg trans-
ferred $1,000,000 via electronic wire to a Wachovia branch bank in
North Carolina for deposit in an account bearing the name "Douglas
Walter Reid dba Bear Stearns," "For Further Credit to BEAR
STEARNS." The electronic transfer was made through the "Fedwire"
wire service operated by the Federal Reserve Bank. Wachovia
accepted the transfer and deposited the funds to the credit of the spec-
ified account, which had been opened by and was under the control
of Reid. Reid withdrew almost all of Eisenberg’s funds and converted
them to his own use.
Wachovia’s customer agreements do not restrict the name under
which a new customer may open a bank account. The Wachovia
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employee who opened Reid’s account did not verify that Reid was
authorized to operate under the name Bear Stearns. Reid possessed no
such authority and was not in any way affiliated with Bear Stearns.
Eisenberg filed a complaint against Wachovia in federal court on
the basis of diversity jurisdiction, see 28 U.S.C. § 1332, asserting two
claims of negligence. The first claim alleged that Wachovia negli-
gently allowed Reid to establish and operate a fraudulent bank
account and negligently failed to train its employees to detect fraud.
The second claim alleged that Wachovia was vicariously liable for its
employee’s negligence in allowing Reid to open the bank account
without proper verification. Both claims include the allegation that
Wachovia breached a duty of care owed to people like Eisenberg,
who transact with Wachovia customers, to detect and prevent the
fraudulent use of its bank accounts.
Wachovia moved to dismiss the complaint pursuant to Federal
Rule of Civil Procedure 12(b)(6). Wachovia argued that both negli-
gence claims are preempted by Federal Reserve Board Regulation J
("Regulation J"), Subpart B, 12 C.F.R. §§ 210.25-210.32 (2002).
Wachovia also argued, in the alternative, that the claims fail as a mat-
ter of law because Wachovia does not owe Eisenberg a duty of care.
Agreeing that the claims are preempted, the district court granted
Wachovia’s motion and dismissed the complaint with prejudice. The
court did not address Wachovia’s alternative argument for dismissal
based on the absence of a duty of care.
We review de novo the district court’s dismissal of the complaint
and can affirm on any basis fairly supported by the record. Korb v.
Lehman, 919 F.2d 243, 246 (4th Cir. 1990). We hold that Regulation
J does not preempt Eisenberg’s negligence claims but the claims still
fail because Wachovia does not owe Eisenberg a duty of care under
the facts of this case.
II
We discussed the preemptive effect of Regulation J in Donmar
Enterprises, Inc. v. Southern National Bank of North Carolina, 64
F.3d 944 (4th Cir. 1995). Subpart B of Regulation J incorporates Arti-
cle 4A of the Uniform Commercial Code to "provide[ ] rules to gov-
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ern funds transfers through Fedwire." 12 C.F.R. § 210.25(a) (2002);
see id. at § 210.25(a)-(b). The rules adopted from Article 4A serve as
the exclusive means for determining the rights, duties and liabilities
of all parties involved in a Fedwire funds transfer. Comm. on Sec.
210.25(b), 12 C.F.R. Part 210, Subpt. B., App. A (2002). Affected
parties include senders, intermediary banks, receiving banks and ben-
eficiaries. Id. The Federal Reserve Board intended Subpart B to create
a "uniform and comprehensive national regulation of Fedwire trans-
fers." Donmar, 64 F.3d at 949.
By its own terms, Regulation J "supersedes or pre-empts inconsis-
tent provisions of state law." Comm. on Sec. 210.25, 12 C.F.R.
Part 210, Subpt. B, App. A (2002). We held in Donmar that Regula-
tion J preempts any state law cause of action premised on conduct
falling within the scope of Subpart B, whether the state law conflicts
with or is duplicative of Subpart B. 64 F.3d at 949-50. Determining
if a state law claim is preempted by Regulation J turns on whether the
challenged conduct in the state claim would be covered under Subpart
B as well.
Eisenberg’s negligence claims focus on several aspects of
Wachovia’s conduct in establishing Reid’s account and crediting
Eisenberg’s funds transfer to that account. One instance of alleged
negligence involves Wachovia "accepting and crediting the Wire
Transfer to Mr. Reid’s account when the wire instructions designated
‘Bear Stearns’ as the intended recipient." Eisenberg addressed the
Fedwire transfer to "Wachovia Bank," "Beneficiary Account
1861296138," "For Further Credit to BEAR STEARNS." Subpart B
applies here. When a transfer order identifies the beneficiary by an
account number, the receiving bank may rely on the account number
in crediting the account even though the transfer order identifies a
person different from the holder of the account. See 12 C.F.R.
§ 210.27 (2002). Wachovia properly processed Eisenberg’s funds
transfer order under the standards of Subpart B.
Wachovia is not liable under Subpart B for the manner in which
it received and credited Eisenberg’s Fedwire funds transfer. Any state
law claim that is premised on this same conduct would be either
duplicative of or contradictory to Regulation J and is thus preempted.
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Eisenberg’s negligence claims are preempted insofar as they chal-
lenge Wachovia’s Fedwire transfer processing.
Eisenberg contends, however, that his negligence claims primarily
challenge not the wire transfer processing but rather Wachovia’s con-
duct in allowing Reid to open and operate the bank account under the
name "dba Bear Stearns." The Fedwire transfer, according to Eisen-
berg, is only incidental to his negligence claims. Eisenberg thus urges
that his negligence claims are not preempted by Regulation J. We
agree.
Eisenberg’s allegations of negligence are not limited to Wachovia’s
conduct in processing the Fedwire transfer order. Eisenberg also
alleged that Wachovia is negligent by reason of allowing Reid to open
the "dba Bear Stearns" bank account, failing to discover Reid’s
improper use of the account and failing to train its employees to rec-
ognize and prevent fraud. Subpart B has no application to Wachovia’s
conduct in these instances. Subpart B governs only Fedwire funds
transfers, defined as "the series of transactions, beginning with the
originator’s payment order, made for the purpose of making payment
to the beneficiary of the order." Comm. to Secs. 4A-102 & 4A-104,
12 C.F.R. Part 210, Subpt. B, App. B (2002). Subpart B does not
address the duties, obligations and liabilities applicable to bank func-
tions having nothing to do with a Fedwire transfer.
State law claims premised on conduct not covered by Subpart B
cannot create a conflict with or duplicate the rules established in Sub-
part B.1 Permitting Eisenberg’s claims to go forward would not create
1Wachovia argues that this case is indistinguishable from National
Council of the Churches of Christ v. First Union National Bank, No. 97-
1851, 1998 WL 416744 (4th Cir. July 22, 1998). First Union applied
Donmar and held that state law claims based on conduct before the Fed-
wire transfer, such as opening an account, are preempted by Subpart B:
[Plaintiffs’] state law claims all arise out of their losses suffered
when [the defendant bank] transferred the [funds]. . . . Were it
not for the alleged unauthorized transfer, [plaintiffs] could not be
heard to complain as they would have suffered no damages. . . .
[Plaintiffs] cannot compartmentalize and detach [their] state
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an obstacle to the fulfillment of Subpart B’s purpose of establishing
a uniform body of federal law to govern Fedwire transfers. See Fidel-
ity Fed. Sav. & Loan Ass’n v. De la Cuesta, 458 U.S. 141, 153 (1982)
(holding state law claim preempted if it "stands as an obstacle to the
accomplishment and execution of the full purposes and objectives of
Congress") (internal quotations and citation omitted). A finding that
Wachovia is negligent in opening Reid’s account would not conflict
with a finding that, under Subpart B of Regulation J, Wachovia prop-
erly credited the Fedwire transfer to the account. The two findings
would touch on distinct and independent conduct by Wachovia.
We hold that Eisenberg’s negligence claims, insofar as they chal-
lenge the opening and management of Reid’s account, are not pre-
empted by Regulation J.
III
Wachovia reasserts on appeal an alternative argument for dis-
missal, not decided by the district court, that Eisenberg fails to allege
one essential element in a negligence claim. Wachovia contends that
it does not owe Eisenberg a duty of care and therefore cannot be held
liable in negligence for Eisenberg’s injury.
Under North Carolina law, "[n]egligence is the failure to exercise
proper care in the performance of a legal duty owed by a defendant
to a plaintiff under the circumstances." Cassell v. Collins, 472 S.E.2d
770, 772 (N.C. 1996). A necessary factor in proving negligence is the
existence of a duty of care owed to the particular plaintiff by the
causes of action simply because certain of [defendant’s] activi-
ties occurred before the transfer when such causes of action
would not have been available minus the resulting transfer.
Id. at *3-*4 (paragraph break omitted). First Union is a nonbinding
unpublished opinion. See 4th Cir. Local Rule 36(c). We moreover find
First Union’s reasoning unpersuasive. We think the better approach to a
question of Regulation J preemption, as Donmar instructs, is to deter-
mine straightforwardly whether a state law cause of action is inconsistent
with or duplicative of the rules established in Subpart B of Regulation
J.
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defendant. Pinnix v. Toomey, 87 S.E.2d 893, 897 (N.C. 1955)
("Actionable negligence presupposes the existence of a legal relation-
ship between parties by which the injured party is owed a duty by the
other, and such duty must be imposed by law."). We consider whether
a bank owes a duty of care to a noncustomer who is defrauded by the
bank’s customer through use of its services. We cannot find an appli-
cable precedent from a North Carolina court and look to case law
from other jurisdictions. We conclude that the North Carolina
Supreme Court, if it were to decide this issue, would hold that
Wachovia did not owe Eisenberg a duty of care under the facts pre-
sented.
Whether Wachovia owes a duty of care to Eisenberg depends on
the relationship between them. See W. Page Keeton et al., Prosser
and Keeton on Torts § 53 at 356 (5th ed. 1984) ("It is better to reserve
‘duty’ for the problem of the relation between individuals which
imposes upon one a legal obligation for the benefit of the other
. . . ."); cf. Newton v. New Hanover Co. Bd. of Educ., 467 S.E.2d 58,
63 (N.C. 1996) (holding nature and scope of duty owed by owner of
land depends upon status of injured person as invitee, licensee or tres-
passer). Eisenberg had no direct relationship with Wachovia. He was
not a Wachovia bank customer and, so far as the allegations indicate,
has never conducted business with Wachovia. Eisenberg instead
transacted with Reid, a Wachovia bank customer.
Courts in numerous jurisdictions have held that a bank does not
owe a duty of care to a noncustomer with whom the bank has no
direct relationship. See Weil v. First Nat’l Bank of Castle Rock, 983
P.2d 812, 815 (Colo. Ct. App. 1999); Volpe v. Fleet Nat’l Bank, 710
A.2d 661, 664 (R.I. 1998); Miller-Rogaska, Inc. v. Bank One, 931
S.W.2d 655, 664 (Tex. App. 1996); Software Design & Application,
Ltd. v. Hoefer & Arnett, Inc., 56 Cal. Rptr. 2d 756, 760-63 (Ct. App.
1996); Portage Aluminum Co. v. Kentwood Nat’l Bank, 307 N.W.2d
761, 764-65 (Mich. 1981); Pa. Nat’l Turf Club, Inc. v. Bank of W.
Jersey, 385 A.2d 932, 936 (N.J. Super. Ct. App. Div. 1978); Gesell
v. First Nat’l City Bank, 260 N.Y.S.2d 581, 581-82 (App. Div. 1965).
McCallum v. Rizzo, 1995 WL 1146812 (Mass. Super. Ct. Oct. 13,
1995), presents highly analogous facts. Plaintiff McCallum loaned
money to the Tsongas Committee, an organization advocating the
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election of presidential candidate Paul Tsongas. Id. at *1. Rizzo, the
chief fund raiser for the Tsongas Committee, opened a bank account
at Andover Bank bearing the committee’s name and listed himself as
sole signatory. Id. The bank did not verify that Rizzo was authorized
to transact business on behalf of the Tsongas Committee. Id. Rizzo
used the bank account to convert the proceeds of contributions and
loans to the Tsongas Committee to his own use. McCallum’s funds
were converted by Rizzo. Id.
McCallum sued Andover Bank on a theory of negligence. He
argued that the bank "owed a duty to contributors to the Tsongas
committee to exercise due care in the opening and handling of the
Tsongas Committee account." Id. The McCallum court disagreed and
followed cases in other jurisdictions which held "a bank’s failure to
investigate a customer’s suspicious activity . . . does not give rise to
liability to the third party who is injured by the customer’s fraud." Id.
at *2. The court explained:
The mere fact that a bank account can be used in the course
of perpetrating a fraud does not mean that banks have a duty
to persons other than their own customers. To the contrary,
the duty is owed exclusively to the customer, not to the per-
sons with whom the customer has dealings.
Id.
Beyond the McCallum rule it has been held that banks do not owe
a duty of care to noncustomers even when the noncustomer is the per-
son in whose name an account was fraudulently opened. In Software
Design a financial consultant embezzled money from Software
Design through a bank account he opened bearing the company name.
56 Cal. Rptr. 2d at 759-60. The California Court of Appeal dismissed
Software Design’s negligence claim against the bank. Id. at 760-63.
According to the court, "the primary flaw" in Software Design’s neg-
ligence theory was the lack of a relationship between it and the bank.
Id. at 760. Even though the bank account used to defraud Software
Design bore its own name, the court held that a bank does not owe
a duty of care to protect noncustomers against fraud. Id.; see also
Volpe, 710 A.2d at 664 ("[A] bank is not liable in negligence to a
noncustomer payee for having failed to ascertain whether a check
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paid by it bears the payee’s genuine indorsement."). But see Patrick
v. Union State Bank, 681 So. 2d 1364, 1371 (Ala. 1996) (holding
bank owed duty of care to person in whose name account was opened
to ensure that person opening account is not imposter).2
Eisenberg was neither a Wachovia customer nor the person in
whose name Reid’s fraudulent bank account was opened. Bear
Stearns would be the beneficiary of any duty of care which Wachovia
might owe to a noncustomer. See id. Eisenberg instead falls into the
undefined and unlimited category of strangers who might interact
with Wachovia’s bank customer. In McCallum the Massachusetts
Superior Court noted that the maintenance of a bank account was
intended to benefit the person who opened the account. McCallum,
1995 WL 1146812 at *3. The court reasoned that to extend a duty of
care to strangers like Eisenberg would be contrary to the normal
understanding of the purpose of a bank account and would expose
banks to unlimited liability for unforeseeable frauds. Id.
Several other courts have relied on similar policy considerations in
rejecting an argument that banks owe a duty to noncustomers. See
Software Design, 56 Cal. Rptr. 2d at 763 ("Better that the one contem-
plating the services of a financial advisor do the background check
and then monitor the services. It is that person who has the most con-
trol and the most to win or lose, and with whom the investigative
2Contrary to Eisenberg’s arguments, Sun ’n Sand, Inc. v. United Cali-
fornia Bank, 148 Cal. Rptr. 329 (Cal. 1978), is not analogous to this case.
In that case a Sun ’n Sand employee fraudulently deposited company
checks into a personal bank account at United California Bank ("UCB").
Id. at 335. Sun ’n Sand sued the bank for negligently allowing the
employee, who was not the payee on the checks, to deposit the checks
into her account. Although Sun ’n Sand was not a UCB customer, the
California Supreme Court held that the bank had a limited duty of
inquiry based on the highly suspicious acts of the employee. Id. at 344-
45. The court stressed that the duty it was recognizing was "narrowly cir-
cumscribed: it is activated only when checks, not insignificant in amount,
are drawn payable to the order of a bank and are presented to the payee
bank by a third party seeking to negotiate the checks for his own bene-
fit." Id. at 346. There are no such special circumstances in this case. The
act of opening a bank account under a "dba" name is not in itself suspi-
cious enough to give rise to a duty of inquiry.
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tasks should rest."); Weil, 983 P.2d at 814 ("It would be unreasonable
to require banks to make an independent investigation of their cus-
tomers’ authority to use any particular unregistered trade name; and
a duty to inquire only of the customer would not prevent the kind of
harm plaintiff suffered."); Pa. Nat’l Turf Club, 385 A.2d at 936
("Plaintiff was the party who assumed the risk associated with that
hazardous activity . . . [and] cannot recoup by attempting to shift
responsibility to the bank which had no relationship with it.").
We are persuaded by the reasoning articulated in the numerous
cases holding that a bank does not owe noncustomers a duty of care.
The reasoning and result in McCallum are particularly persuasive as
the McCallum facts are indistinguishable from the facts of this case.
We have no doubt that the North Carolina Supreme Court would
reach a similar conclusion as that in McCallum and hold that
Wachovia does not owe Eisenberg a duty of care.
A North Carolina Court of Appeals decision supports our view. In
Carlson v. Branch Banking & Trust Co., 473 S.E.2d 631 (N.C. Ct.
App. 1996), plaintiffs executed a $500,000 letter of credit to help fund
a stockbroker’s purchase of a mutual fund company. Id. at 632-34.
Plaintiffs intended that the stockbroker would use the letter of credit
to obtain a loan to be used solely for the contemplated purchase. Id.
at 632-33. The stockbroker obtained a loan from the defendant bank
but did not use the proceeds as intended. Id. at 634. When the stock-
broker defaulted on the loan, the bank drew from plaintiffs’ letter of
credit. Id. Plaintiffs sued the bank, alleging a negligent failure to mon-
itor the proper use of the loan proceeds. Id. The North Carolina Court
of Appeals denied the negligence claim, holding that the bank did not
owe plaintiffs a duty of care to monitor the disbursement of the loan
proceeds. Id. at 636. The court reasoned that, absent a contractual
obligation arising from the letter of credit itself, there was no relation-
ship between the bank and the plaintiffs to give rise to a duty of care.
Id. at 637. Carlson suggests that the North Carolina Court of Appeals
would not find a duty of care in this case, where there was no direct
relationship at all between Eisenberg and Wachovia, much less a con-
tractual obligation.
We hold that Wachovia did not owe Eisenberg a duty of care under
the facts of this case. Eisenberg consequently cannot maintain a claim
of negligence against Wachovia.
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IV
The district court properly dismissed Eisenberg’s complaint with
prejudice. Eisenberg’s negligence claims are not preempted by Sub-
part B of Regulation J. The negligence claims are instead dismissed
because Wachovia does not owe Eisenberg a duty of care.
AFFIRMED
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