Opinion
Case No. 1:01-CV-147
February 20, 2003
OPINION
This matter is before the Court on Defendant National City Bank of Indiana's Motion for Summary Judgment.
I. Background
In June 1995, Brent Knapp ("Knapp"), owner of Plaintiffs, Grand Rapids Auto Auction ("GRAA") and Grand Rapids Auto Sales ("GRAS"), hired Katrina Stewart ("Stewart") as a "road rep." In this position, Stewart fostered relationships with car dealers in an effort to have them buy or sell automobiles at GRAA sales. Shortly after hiring Stewart, Knapp learned she previously had been convicted of bank fraud and had served time in prison as a result. By all accounts, Stewart was successful at increasing the number of dealers selling through GRAA and in 1997, Knapp promoted her to General Manager. As General Manager, Stewart had the authority to sign checks on behalf of GRAA. She ran the daily business of GRAA which included paying bills and managing the accounts. Stewart would also transfer or request that the office manager, Flynn Koger, transfer funds between Knapp's business and personal accounts as needed to cover checks. Upon the request of Knapp or his wife, Amie, Stewart occasionally wrote checks to pay the Knapps' personal bills and bills for Desert Sands Arabian ("Desert Sands"), the Knapps' horse farm.
In 1993, Knapp established GRAS as a licensed used car auto dealership. GRAS would purchase unsold cars from GRAA, repair them and resell them, often through GRAA. GRAS would also buy rental cars that rental car companies no longer wanted and resell them at a profit. Stewart assumed responsibility for running GRAS and was given a 50 percent share of its profits. She had the authority to sign checks on GRAS's accounts and withdraw funds from GRAS's accounts on her own behalf in the form of loans or advances. Such payments would be deducted at the end of the year from her share of GRAS's profits. Knapp could also take such advances and have them deducted at the end of the year from his share of the profits. Both Knapp and Stewart regularly took advantage of this arrangement. Knapp would take money from GRAS to cover expenses for any of his other companies. Stewart would write checks to National City Bank or its predecessor for deposit into the Stewarts' account, sometimes designating the money as a loan and/or advance in the check's memo section or ledger. Stewart would also deposit checks payable to GRAS from GRAA or third parties into the Stewarts' account. Again, she would sometimes indicate on the check or in the GRAS check registers and checkbook that she had made a loan or advance to herself Stewart would occasionally deposit money from the Stewarts' account into the GRAS accounts or the GRAA, Desert Sands, and Knapps' personal accounts, as repayment of these loans and advances.
GRAS was incorporated in 1993, but did not engage in business until 1996.
It is possible Stewart's share was only 49 percent, but for purposes of the instant Motion, the Court will accept the 50 percent split.
The Court is unclear whether this was Stewart's husband's business account or if this was a personal account for the Stewarts. The distinction is irrelevant to the issues before the Court and the account will be referenced as the Stewarts' account.
GRAA and GRAS maintained accounts, mortgages and a line of credit with Byron Center State Bank and Huntington National Bank. Both banks notified Knapp of numerous overdrafts and rejections of checks as being written on non-sufficient funds. In early 1999, Byron Center State Bank notified Knapp it would no longer maintain accounts for him or his companies because of the number of unusual transactions on the accounts. At that point, Knapp, with the help of Stewart, began looking for another bank. Stewart recommended National City Bank ("NCB") of Indiana, where the Stewarts' account was. She and Knapp met with Robert Yonto of NCB of Indiana to discuss whether that bank could handle Knapp's business and personal banking needs. Within a few days, Yonto informed Knapp that NCB of Indiana could not handle GRAA's needs, and would be referring the request to NCB of Michigan. Thereafter, GRAA established a line of credit and opened a number of checking accounts at NCB of Michigan. Knapp understood Yonto, however, to be the supervisor on all of Knapp's accounts with NCB. In June 1999, Byron Center State Bank closed GRAS's accounts and GRAS was without a bank account until September 1999 when it opened an account with NCB of Indiana. Stewart continued to have check writing authority on all of GRAA's and GRAS's accounts.
Within months of opening its account at NCB of Indiana, GRAS had problems with overdrafts. Twice the bank's preliminary check-kiting software was triggered in response to transactions on the GRAS account. Investigations concluded no kiting was present. GRAA' s and GRAS' s accounts were eventually closed in May 2000. In August 2000, Knapp terminated Stewart. At that point GRAA and GRAS were in serious financial straits.
Plaintiffs filed their first Complaint on March 5, 2001. A Second Amended Complaint was filed February 21, 2002. In the Second Amended Complaint, Plaintiffs identify five categories of transactions as the basis for their twelve claims. Category I involves checks payable to GRAS, written on GRAA's vehicle account at NCB of Michigan, presented by Stewart for payment to branches of NCB of Indiana during the period June 15, 1999 and September 14, 1999, and that were endorsed "For Deposit Only." Category II involved checks payable to GRAS, but not in Category I, presented by Stewart for payment to branches of NCB of Indiana during the period June 15, 1999 and September 22, 1999. Category III involves checks drawn on Plaintiffs' checking accounts at various banks payable to the order of or endorsed payable to "National City Bank" or its predecessor "Valley American Bank" that were cashed or deposited by Stewart into the Stewarts' account. Category IV includes checks drawn on GRAS's account payable to GRAA and signed by Stewart. Plaintiffs allege Stewart sometimes signed Knapp's name or the office manager's name or had the office manager sign the checks. These checks were written on non-sufficient funds. Category V includes checks on which Plaintiffs contend Stewart forged the officer manager's name or Knapp's name.
GRAA maintained a vehicle account for paying for cars sold at the auction and a payable account to cover expenses.
II. Standard of Review and Applicable Federal Rules
Review of a motion for summary judgment requires the Court to determine if there is no genuine issue as to any material fact such that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The court must consider the record as a whole by reviewing all pleadings, depositions, affidavits, and admissions on file. Matsuhita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). The facts are to be considered in a light most favorable to the non-moving party, and ". . . all justifiable inferences are to be drawn in his favor." Schaffer v. A. O. Smith Harvestore Prod., Inc., 74 F.3d 722, 727 (6th Cir. 1996) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986)) (other citations omitted). Once the movant satisfies his/her burden of demonstrating an absence of genuine issue of material fact, the non-moving party must come forward with specific facts showing that there is a genuine issue for trial. Kramer v. Bachan Aerospace Corp., 912 F.2d 151, 153-54 (6th Cir. 1990). The non-moving party may not rest on its pleadings but must present "specific facts showing that there is a genuine issue for trial." Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986) (quoting Fed.R.Civ.P. 56(e)). It is the function of the Court to decide "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson, 477 U.S. at 251-52. The question is "whether a fair-minded jury could return a verdict for the [non-moving party] on the evidence presented." Id. at 252.
Indiana law governs in this matter per the parties' agreement.
III. Analysis
A. Defendant's Liability to GRAA
Defendant contends it is not liable for Category IV checks (those written on GRAS's account for deposit in GRAA's account that were returned for insufficient funds) because GRAA was not Defendant's client and these claims are for recovery by GRAA of its loss. The Court believes Defendant has a mistaken reading of Plaintiffs' complaint. Counts VII, VIII, and XII address Category IV checks. Each of those Counts seeks damages on behalf of GRAS and Count VIII seeks damages on behalf of GRAA as well, on the ground that Yonto and/or other agents of Defendant had notice that Category IV checks were being written on non-sufficient funds as part of Stewart's check kiting scheme. if Plaintiffs prove Count VIII, the fact that GRAA was not Defendant's client directly does not matter, as discussed in the next section with respect to Plaintiffs' check kiting claim. Therefore, the Court will not grant Defendant summary judgment on Plaintiffs' claims involving Category IV transactions on this basis.
The Court notes that Defendant's argument that somehow Plaintiffs have admitted the consequential damages they seek are related only to GRAA is misguided. Assuming, arguendo, that Plaintiffs have admitted that the consequential damages claim for "lost operating profits" set forth in Marc Gilbert's April 26, 2002 report does only refer to GRAA, Plaintiffs' Counts for consequential damages set forth in the Second Amended Complaint are unaffected. Defendant's Requests for Admission do not address the claims for consequential damages contained in the Second Amended Complaint. Therefore, the Court does not find that Plaintiffs have abandoned their claims for consequential damages on behalf of GRAS.
B. Defendant's Knowledge of Check Kiting
Defendant denies having actual knowledge of a check kiting scheme and contends summary judgment on Plaintiffs' consequential damages claims arising out of the alleged check kiting scheme, Count XII, is appropriate. The parties agree that the central issue in these claims is whether Defendant knew about Stewart's alleged check kiting scheme.
Generally, banks have no higher duty to disclose otherwise authorized transactions or refuse payment of a check. Ohio Cas. Ins. Co. v. Bank One, 1997 WL 428515, *4 (N.D. Ill. 1997). However, if the bank has actual knowledge of kites, it has a duty to disclose a suspected kite to the payor. Id.
The Court finds there is a question of fact with respect to Defendant's knowledge. Defendant's agents testified during depositions that they knew nothing about Stewart's check kiting. However, Defendant's check kiting detection system was triggered twice by activity on GRAS's accounts and Defendant was aware of overdraft problems on GRAS's account that eventually led to closure of the GRAS account. Defendant was also aware of overdraft problems with the Stewarts' account during the same period in which Stewart was depositing checks payable to GRAS and/or drawn on Plaintiffs' accounts into the Stewarts' account Plaintiffs' expert, John Kennedy, testified during his deposition that Defendant's internal procedures were not followed, which allowed Defendant to avoid knowledge of Stewart's suspicious behavior. In light of the above, it is not apparent that Defendant lacked actual knowledge of Stewart's check kiting scheme and so summary judgment on this basis is improper.
The Court agrees with Defendant that Plaintiffs have raised a new basis for liability in their Response to Defendant's Motion for Summary Judgment. Specifically, Plaintiffs are suggesting Defendant is liable as an aider or abettor pursuant to Restatement (Second) of Torts § 876(b). Lawyers Title Ins. Co. v. United Am. Bank of Memphis, 21 F. Supp.2d 785 (W.D. Tenn. 1998). At this point in the proceedings, when discovery is complete, the Court finds it unfair to allow Plaintiffs to raise a new argument. While the issues of proof are virtually identical under either of the theories of liability proposed by Plaintiffs, the Court will not recognize the concert of action theory of liability as a separate basis for Defendant's liability at this time.
C. Category I, II, and III Transactions were Authorized
Defendant claims the Category I. II, and III transactions were authorized; therefore, the bank cannot be held liable for them. Defendant's argument is premised on Stewart's authority to sign checks on behalf of GRAA and GRAS and her authority to withdraw funds from GRAS accounts as loans and/or advance payments which would be repaid or deducted from her 50 percent share of GRAS's profits. Defendant also argues GRAS did not have a bank account between June 1999 and September 1999 when the Category I and II transactions took place and Plaintiffs were using the Stewarts' account to hold GRAS's money. Defendant concludes that if an individual has actual or apparent authority to receive the proceeds of checks, a bank cannot be held liable for any such transactions even if they are allegedly deposited contrary to depositing rules and regulations. According to Defendant, since Stewart was authorized to make loans and advances to herself from GRAS, Plaintiffs have no action for Category I, II, and III transactions.
The Court is aware that companies often do strange things with their funds and so in itself, Stewart's behavior with respect to endorsing GRAS's checks and depositing them in her personal account is not necessarily on its face improper. Grand Rapids Auto Sales, Inc. v. MBNA Am. Bank, 227 F. Supp.2d 721, 728 (W.D. Mich. 2002) (citing a number of cases finding there are legitimate reasons for an employer to pay employees' debts). However, the Court must consider Plaintiffs' specific allegations with respect to these transactions. Plaintiff's claim Defendant permitted Stewart to deposit, into the Stewarts' account, checks payable to GRAS and drawn on Knapps' personal accounts, GRAA's accounts, or third parties' accounts. Defendant also deposited proceeds from checks drawn on Plaintiffs' checking accounts at various banks payable to or endorsed to "National City Bank" or "Valley American Bank" into the Stewarts' account. Plaintiffs contend these transactions constituted conversion, breach of duty to exercise ordinary care in paying Category I and II checks, breach of duty of inquiry with respect to Category III checks, failure to disclose improper transactions and violations of Uniform Fiduciaries Act, Ind. Code § 30-2-4-1 to § 30-2-4-5.
Most courts have found that when a drawer makes a check payable to a payee bank, to which the drawer is not indebted, the drawer intends to place the proceeds of the check into the custody and control of the payee bank. Thus, the payee bank is authorized to pay the proceeds of the check only to persons specified by the drawer, ad the payee bank is under a duty to inquire into the authority of one other than the drawer to receive the proceeds. However, these general principles are not without exceptin. Each case is factually distinct, and liability is not automatically imposed on the payee bank. For example, the payee bank may be deemed not liable in cases where the drawer of the check clothed the presenter with actual or apparent authority to receive the proceeds. Further, the payee bank is not bound to have knowledge of side agreements or contingencies relating to the proceeds of the check.Fields v. Roark, 630 So.2d 1359, 1363 (La.Ct.App. 1994) (citing Fed. Sav. Loan Ins. Corp. v. First Nat'l Bank, 164 F.2d 929 (8th Cir. 1947); Mayo Bros. Chem. Corp. v. Capital Nat'l Bank, 5 So.2d 220 (1941)); see also Dalton Mayberry, P.C. v. Nationsbank, N.A., 982 S.W.2d 231 Mo. 1999) (stating a bank can avoid liability for failure to inquire "by proving that the agent has actual or apparent authority from the drawer-depositor"). "Apparent authority exists only to the extent that it is reasonable for a third person dealing with the agent to believe that the agent is authorized." Dalton Mayberry, 982 S.W.2d at 235. In order to prove a breach of duty to inquire i accepting checks made payable to the bank, the plaintiff must show the bank had knowledge the party was using the check proceeds for personal benefit. Id.
I. Counts I, II and III
In Counts I, II, and III, Plaintiffs allege conversion of Category I, II, and III checks. Defendant claims Stewart had signing authority and so Defendant was not wrong to cash or deposit the proceeds of these checks into the Stewarts' account. At first glance, it appears that Defendant breached the restrictive endorsement "for deposit only" by depositing the proceeds from Categoty I checks into the Stewarts' account when the named payee was GRAS. U.C.C. §§ 3-205(c), 3-206(4), 3419(3); Mid-Atlantic Tennis Courts v. Citizens Bank Trust Co., 658 F. Supp. 140, 143 (D. Md. 1987). However, in this case, Stewart, an authorized signator, wrote checks to GRAS payable on GRAA's account and directed deposit of the proceeds into the Stewarts' account at a time when GRAS did not have an account. According to Seventh Circuit Court of Appeals' precedent, a bank has not violated the terms of the restrictive endorsement, "for deposit only," if the bank deposits the proceeds of a check according to the request of an authorized signator. Western Assurance Co., Inc. v. Star Fin. Bank of India, 3 F.3d 1129, 1131-33 (7th Cir. 1993). "[A] bank acts in a commercially reasonable manner whenever it negotiates a check endorsed by an authorized person." Id. at 1132. Since GRAS did not have a bank account at the time Category I and II checks were deposited and the checks were written and/or endorsed by an authorized signator, Defendant was not incorrect to deposit the proceeds of the checks as directed by Stewart. With respect to Category III checks, those written by Stewart, drawn on Plaintiffs' checking accounts and payable to Stewart's bank, again, Stewart was an authorized signator for GRAA and GRAS. Defendant was authorized to pay the proceeds of the checks in accordance with the direction of the drawer. Fields, 630 So.2d at 1363. Therefore, the Court finds summary judgment appropriate on Counts I, II and III.
2. Counts IV, V and VI
Plaintiffs allege Defendant breached a duty to exercise ordinary care in paying the Category I and II checks and breached a duty of inquiry with respect to Category III checks. Plaintiffs have shown there were overdraft problems on GRAS's account, two kiting triggers occurred and yet, Defendant did not contact Knapp. Defendant contends the triggers resulted in a finding of no kiting activity and Plaintiffs were made aware of the overdrafts in bank statements and cancelled and returned checks. Furthermore, Defendant contends it had no elevated duty when dealing with Stewart, an authorized signator.
The Indiana Court of Appeals cited with approval two cases that held there was no duty of inquiry on the part of the payee bank with respect to deposit of checks payable to the bank unless it is reasonably foreseeable that the third party seeking the proceeds is misappropriating them. Franklin v. Benock, 722 N.E.2d 874, 880 n. 9 (Ind.Ct.App. 2000) (citing Sun `n Sand, Inc. v. United California Bank, 582 P.2d 920, 936-37 (1978) and PWA Farms, Inc. v. North Platte State Bank, 371 N.W.2d 102, 105 (1985)). Even if a check is drawn payable to the bank, the bank may not be liable if it deposits the check in accordance with the directions of an authorized signator. "There must be objective indicia from which the bank could reasonably conclude that the party presenting the check is authorized to transact in the manner proposed. In the absence of such indicia the bank pays at its peril." Id. (citing Sun `n Sand, Inc., 582 P.2d at 936-37); see also Grand Rapids Auto Sales, Inc., 227 F. Supp.2d at 724-27 (stating the bank's duty of inquiry is triggered by suspicious circumstances).
In the case at hand, Defendant paid the checks as indicated by an authorized signator. The Category III checks, those made payable to Defendant, were signed by Stewart. The Category I and II checks were made payable to GRAS, which did not have a bank account with NCB of Indiana while Stewart did. Stewart was authorized to write checks on behalf of GRAS and GRAA and to manage the companies' finances. Defendant acted reasonably in depositing checks into the Stewarts' account when it did so in accordance with the directions of one endowed with the authority to make such decisions. Plaintiffs cannot expect Defendant to assume the responsibility for insuring employees are acting within their apparent authority. All Plaintiffs can expect Defendant to do is recognize suspicious activity. It is Plaintiffs' responsibility to review bank statements and cancelled checks to insure nothing improper is occurring. Grand Rapids Auto Sales, Inc., 227 F. Supp.2d at 727. In this case, nothing Stewart did should have aroused Defendant's concern. Stewart had the authority to write checks on behalf of GRAA and GRAS, to maintain both companies' account, and to give herself advances as needed. As a result, the Court finds summary judgment for Defendant on these claims appropriate.
3. Count VIII
Plaintiffs allege Defendant had notice that Stewart was performing transactions with respect to Category I, II, and III checks in breach of her fiduciary duties to GRAA and GRAS. Defendant had a duty to disclose this information and failed to disclose it. Because Stewart was authorized to sign and conduct financial business on behalf of Plaintiffs, Defendant had no idea of any breach of her duties by Stewart.
With respect to Category IV checks, Defendant had the authority to decide whether to pay on overdraft checks or return them for insufficient funds. Defendant informed Plaintiffs of its decision via monthly statements and return of cancelled checks and notice of non-sufficient finds. Because the parties do not dispute that Stewart had the authority to sign checks on behalf of GRAA and GRAS and handle all of the financial business of both companies, the Court finds there is no question of fact with respect to Count VIII. Plaintiffs have not demonstrated Defendant breached its duty to disclose information to Plaintiffs.
4. Counts X and XI
Through Counts X and XI, Plaintiffs allege violations of Uniform Fiduciaries Act. To prove a violation of Uniform Fiduciaries Act, Plaintiffs must show Defendant had actual knowledge that the fiduciary was breaching her obligations as a fiduciary. At best, it appears Defendant was negligent, which is not enough to show actual knowledge. "Mere suspicious circumstances are not enough to require a creditor to inquire about the fiduciary's actions." Hosselton v. K's Merch. Mart, Inc., 617 N.E.2d 797, 799 (Ill.App.Ct. 1993). Therefore, even though there was an overdraft problem on GRAS's account and on the Stewarts' account and Defendant's check kiting system was triggered twice, Plaintiffs have not shown Defendant had actual knowledge that Stewart's deposits were for her own benefit. If a fiduciary has the power to indorse for any purpose, and if the limitations on that power have not been communicated to the indorsee bank, then actual notice of misappropriation or conduct amounting to bad faith on the part of the bank must be shown in order for the principal to recover. Southern Agency Co. v. Hampton Bank of St. Louis, Mo., 452 S.W.2d 100, 105 (1970) (internal citations omitted). Stewart was authorized to handle the GRAS account. Defendant did not benefit from her transactions and, as Defendant points out, it had every reason to investigate any wrongdoing so as to avoid any loss. Plaintiffs have not demonstrated that there is a genuine issue of fact with respect to Counts X and XI. The Court finds a jury could not conclude Defendant had actual knowledge Stewart was breaching her fiduciary duties and grants Defendant summary judgment on these claims.
5. Statute of Limitations
Defendant alleges claims regarding Category III transactions before March 5, 1998, are time barred under the U.C.C. as adopted by the Indiana Legislature, Ind. Code § 26-1-3.1-118. Defendant also argues Category III transactions which occurred prior to March 5, 2000, are contractually time barred under Defendant's Business Account Agreement with GRAS. While the Court agrees that the statutory statute of limitations applies, it finds the issue moot as the Category III claims have already been dismissed. Therefore, the Court will not address Defendant's statute of limitations claims.
6. Amount of Damages
In light of the Court's decision to grant summary judgment to Defendant on many of Plaintiffs' claims, it finds the parties' calculations of how much money Stewart repaid no longer accurate. Furthermore, the Court finds there is a factual dispute over how much money in damages is at issue in light of the fact that Stewart did repay some of the money she allegedly borrowed and was owed a certain amount as her share of GRAS's profits.
IV. Conclusion
Therefore, the Court will grant in part and deny in part Defendant's Motion. A Partial Judgment consistent with this Opinion will be entered.