Clarifying the Burden of Proof and Loss Allocation under UCC §3-404(4)
Commentary on Schultz Excavating & Asphalt of Ludington, LLC v. Smyrna Ready Mix Concrete, LLC, 6th Cir., 25-1038 (2025)

1. Introduction

Between 2019 and 2022, Schultz Excavating & Asphalt of Ludington, LLC (“Schultz”) and Smyrna Ready Mix Concrete, LLC (“Smyrna”) conducted routine, high-value business by exchanging e-mailed invoices and mailing physical checks. A fraudster exploited that routine by sending spoofed e-mails (some from genuine company addresses, others from near-miss domains) requesting that payments be mailed to a new payee at a Florida address. Smyrna complied twice, mailing checks totalling $267,658.50, which the impersonator promptly deposited.

Schultz sued to recover the lost sums. After a bench trial, the United States District Court for the Western District of Michigan allocated 100 % of the loss to Smyrna under Michigan’s adoption of UCC Article 3-404 (Mich. Comp. Laws § 440.3404), finding that Smyrna’s failure to exercise ordinary care was the sole legally cognizable cause of the loss. Smyrna appealed, contending principally that the district court misapplied the burden-of-proof scheme embedded in § 3-404(4).

On 23 July 2025, a Sixth Circuit panel (Cole, Gibbons & Bush, JJ.; opinion by Bush, J.) affirmed. In doing so, it supplied important clarification on:

• How the burden of persuasion and production operates under UCC § 3-404(4);
• The distinction between commercially unreasonable conduct and conduct that actually contributes to the loss;
• The evidentiary consequences once a plaintiff makes a prima facie showing of the defendant’s negligence; and
• The limited appellate scope for re-weighing factual determinations after a bench trial.

2. Summary of the Judgment

The panel unanimously affirmed the district court’s allocation of full liability to Smyrna for the following reasons:

1. Section 3-404(1) gives a payor (Smyrna) a complete defense if it paid in good faith a person falsely purporting to be the payee (Schultz). Section 3-404(4), however, creates an exception where the payor fails to exercise ordinary care, in which case the loss shifts to the extent the failure contributed.
2. Once Schultz adduced evidence that Smyrna failed ordinary care, the burden of production shifted to Smyrna to show (a) Schultz’s own negligence or (b) that Smyrna’s negligence did not contribute to the loss.
3. Smyrna’s evidence—principally that Schultz used a shared Yahoo e-mail account—failed to persuade the district court that Schultz’s conduct contributed to the loss. The district court found phishing through genuine Smyrna addresses was sufficient to commit the fraud; Schultz’s server vulnerabilities were speculative.
4. On appeal, Smyrna did not argue clear factual error; it instead alleged legal misallocation of burdens. The Sixth Circuit rejected that argument, emphasizing:

   Schultz had no obligation to disprove every alternative cause or to trace the fraudster (“Russell’s Teapot” analogy). It only needed to establish a prima facie case of Smyrna’s failure of care.

5. Because Smyrna’s mere quibbles with fact-finding cannot overcome the clear-error standard, the district court’s judgment stands.

3. Analysis

3.1 Precedents and Authorities Cited

• MCL § 440.3404 / UCC § 3-404 – The central statutory framework governing impostor and fictitious payee scenarios.
• Dillon v. Cobra Power Corp., 560 F.3d 591 (6th Cir. 2009) – Articulated de novo review of legal questions and clear-error review of facts in mixed bench-trial appeals.
• Teodorescu v. Bushnell, Gage, Reizen & Byington, 506 N.W.2d 275 (Mich. Ct. App. 1993) – Described Michigan’s view on sufficiency of evidence at the close of proofs.
• Kusens v. Pascal Co., 448 F.3d 349 (6th Cir. 2006) – Choice-of-law rule that state standards govern sufficiency challenges in diversity matters.
• Perkins v. Standard Oil Co., 395 U.S. 642 (1969) – Deference owed to fact-finder’s permissible inferences.
• Beau Townsend Ford Lincoln, Inc. v. Don Hinds Ford, Inc., 759 F. App’x 348 (6th Cir. 2018) – Earlier Sixth Circuit decision remanding a similar e-mail-fraud dispute for trial at the summary-judgment stage; distinguished here because Schultz was post-trial.

3.2 Legal Reasoning

1. Structure of § 3-404: Subsection (1) gives a default defense to the drawee/payor who in good faith pays an impostor. Subsection (4) claws back that defense to the extent the payor’s failure of ordinary care contributed to the loss.
2. Burdens Clarified:
   • Plaintiff (Schultz) bears the burden of persuasion that defendant’s negligence caused its loss. That includes showing Smyrna’s failure of ordinary care and a causal nexus.
   • Smyrna attempted to shift comparative fault back to Schultz. The district court found those arguments speculative, therefore allocating 0 % fault to Schultz.
3. No Negligence-in-the-Air Doctrine: The court reiterated that evidence of generally poor cybersecurity practices is insufficient unless tied causally to the specific fraudulent payment.
4. Appellate Restraint: Smyrna’s appeal addressed legal allocation of burdens, but the panel noted that factual allocation of percentages of fault is quintessentially for the trier of fact, reversible only for clear error.

3.3 Potential Impact

This opinion, though unpublished, furnishes persuasive authority across the Sixth Circuit and beyond in several respects:

• Burden-shifting roadmap: Businesses litigating email-spoof fraud claims under UCC § 3-404 now have clearer guidance on who must prove what, and when.
• Posture sensitivity: The juxtaposition with Beau Townsend warns litigants that arguments potent at the summary-judgment stage may evaporate after a bench trial if not buttressed with concrete, causation-based proof.
• Commercial practices: The decision encourages payors to institute verification protocols (e.g., call-back requirements for payee changes) because failure to do so may yield 100 % liability.
• Cybersecurity defenses: Companies defending against negligence claims must move beyond merely pointing to the counter-party’s lax practices; they must link those practices to actual causation.

4. Complex Concepts Simplified

Impostor Rule (UCC § 3-404)

When a person fraudulently impersonates the payee, the drawee or drawer may be protected if it acted in good faith. The rule shifts who bears the risk of loss.

Ordinary Care

The level of care a reasonably prudent person would exercise in similar circumstances. In commercial paper law, it often tracks industry standards such as call-back verification or dual-control approval.

Burden of Production vs. Burden of Persuasion

Production: Duty to produce enough evidence for an issue to go to the fact-finder.
Persuasion: Duty to convince the fact-finder that the asserted fact is more likely true than not.

Clear-Error Review

An appellate court will not disturb factual findings unless left with a definite and firm conviction that a mistake has been made. Mere disagreement is not enough.

Russell’s Teapot Analogy

Referencing philosopher Bertrand Russell’s hypothetical orbiting teapot to illustrate that the burden rests on the party asserting a fact; one need not prove a negative—in this case, Schultz need not prove it was not hacked.

5. Conclusion

Schultz Excavating & Asphalt v. Smyrna Ready Mix Concrete reinforces that under UCC § 3-404(4) the party whose negligence causally contributes to an impostor fraud may shoulder all resulting losses, and that plaintiffs are not required to trace the precise origin of a cyber-intrusion to obtain recovery. The Sixth Circuit’s opinion clarifies allocation of evidentiary burdens, emphasizes causation over abstract reasonableness, and illustrates the deferential clear-error standard governing appellate review of bench-trial findings. Practically, it signals to commercial actors that verifying payee-change requests—“a very, very simple fix,” in the district court’s words—can prevent catastrophic liability, while pointing counsel to the type of concrete, causation-oriented proof necessary to apportion loss in future digital-fraud disputes.