Opinion
CA No. 3:03-CV-2180-R.
September 17, 2004
MEMORANDUM OPINION AND ORDER
Now before the Court is Defendant's Motion for Summary Judgment filed July 1, 2004. For the reasons stated below, Defendant's Motion for Summary Judgment is GRANTED IN PART and DENIED IN PART.
I. BACKGROUND
This case arises from a very unfortunate series of events. The instant suit is brought by and on behalf of clients of a financial investor, Michael Hill ("Hill"), who gained and then took advantage of his clients' trust, resulting in significant financial loss to these clients (the "Subject Customers"). Hill is currently serving a 10-year prison term for his criminal acts relating to the present case, namely misappropriating his clients' money. Plaintiffs now seek retribution from Compass Bank ("Defendant"), the bank to which Mr. Hill deposited the funds received from the Subject Customers. Plaintiffs' complaint asserts the following causes of action against the Defendant: negligence, conversion, and aiding and abetting of a fiduciary duty.In August 1998, Mr. Hill opened a business checking account at Compass Bank that he would later use to deposit all of the funds received from his trusting clients in his scheme. He opened this account in the name of Financial Investments, his investment company. Compass Bank opened this account for Mr. Hill with the knowledge that he was a financial investor and the understanding that he would use the account as an escrow account to hold funds received from his clients. Although both Hill and Compass Bank understood the account would be used as an escrow account, the account was not opened in strict adherence to Compass Bank's general policies and guidelines regarding "escrow" accounts. Compass Bank was not aware of any part of Mr. Hill's scheme.
Hill's scheme was quite complex. He received checks from Subject Customers under the guise of offering to purchase fictitious certificates of deposit ("CDs") from Defendant, Compass Bank. Hill lured customers to purchase these fictitious CDs by telling them they carried an interest rate higher than real CDs at that time were offering. He explained that he was able to obtain this special interest rate because customers' contributions would be combined to purchase a larger CD, and that each customer, accordingly, would own a part of this large "brokered Compass CD." Some customers transferred money out of their Northstar brokerage accounts to buy the fictitious CDs, while others gave checks to Hill to make the purchases. Hill continuously received checks from his customers beginning in September 1998 through October 2000, all of which he subsequently deposited into the account he had opened at Compass Bank. His clients made their checks payable in some instances by naming the account (Compass Bank-Acct. # 39193248) and in other instances by directly naming Financial Investments, Mr. Hill's company for which the parties agree Hill was authorized to endorse. Once he deposited the checks, Hill then used the money received for means not approved by his clients, which resulted in total losses of the funds entrusted to him.
Once Hill's scheme was discovered, a series of legal actions, both criminal and civil, occurred. Hill was subsequently convicted of his crimes in relation to the above described acts and is currently serving out his conviction in prison. On December 10, 2001, the Securities Investment Protection Corporation ("SIPC") filed a Complaint and Application against Northstar under the Securities Investor Protection Act ("SIPA"), 15 U.S.C. § 78aaa, et seq. The presiding judge issued an Order Commencing SIPA Liquidation Proceeding, which of relevance to this Motion, (a) appointed Michael Quilling as trustee to liquidate Northstar and (b) removed the liquidation of Northstar to the Bankruptcy Court. Quilling ("Trustee") has continued to serve as the liquidating trustee for Northstar since entry of that Order.
This commenced Securities Investor Protection Corp. v. Northstar Securities, Inc., Civil Action No. 3:01-cv-2608 (N.D.Tex.) before Judge Kendall.
The liquidation was removed to the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, Adversary No. 01-3722-HCA.
Subject Customers filed claims in the SIPA case based on Hill's deposits. The Trustee allowed and paid some of these claims and denied others. Using funds advanced from SIPC, Trustee was able to pay Subject Customers for part of the losses suffered. Between July 2002 and August 2003, Subject Customers assigned their claims to the Trustee.
On August 25, 2003, Plaintiffs filed this case against Compass Bank seeking to recover funds lost due to the described transactions that resulted from Hill's deposits to the account at Compass Bank. Plaintiffs include the Trustee ("Trustee Plaintiff"), who asserts those claims and causes of action assigned to him by Subject Customers ("Assignors"), as well as several Subject Customers, in their individual names, for claims and causes of action they retained against Compass Bank ("Individual Plaintiffs"). In their complaint, Plaintiffs based their claims on causes of action for negligence, conversion, breach of warranties, and aiding and abetting breach of fiduciary duty. In addition, Plaintiffs sought attorneys' fees and exemplary damages. Plaintiffs have since dropped their breach of warranties and attorneys' fees claims.
The Individual Plaintiffs include: Hilda Nelson, John Hill, Swaner Living Trust, John Taylor, Modern Communications, and Elizabeth Hill. Edward Wood, originally an Individual Plaintiff, has withdrawn his claims against the Defendant.
The parties submitted their Joint Motion Submission regarding Defendant's Motion for Summary Judgment on July 1, 2004. Defendant makes several arguments for its Motion, some which Defendant argues would dispose of all claims and others that would only dispose of certain claims or causes of action. Defendant's grounds for its motions include:
(1) Plaintiffs' claims are barred, in whole or in part, by relevant statutes of limitations ("Statute of Limitations");
(2) Common law claims for negligence, conversion, and aiding and abetting breach of a fiduciary duty are displaced or barred by application of the Final Payment Rule ("The Final Payment Rule");
(3) The aiding and abetting breach of a fiduciary duty fails because Compass did not have the required statutory notice of the breach of fiduciary duty ("Aiding and Abetting Breach of a Fiduciary Duty");
(4) The statutory conversion claim fails because the Plaintiffs, Assignors, or their agents issued the checks, and the UCC prohibits the issuer of an instrument from bringing a suit for conversion ("Conversion");
(5) All claims fail because Hill was authorized to deposit the checks into the Financial Investments Escrow Account at Compass ("Hill's Authority to Deposit the Checks"); and,
(6) Summary Judgment is proper on claims by specific Plaintiffs/Assignors based on the evidence ("Claims Brought by Specific Plaintiffs/Assignors").
This Court addresses each of Defendant's arguments in turn.
II. ANALYSIS
A. Summary Judgment Standard
Rule 56(c) of the Federal Rules of Civil Procedure permits summary judgment only when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c). An issue is material if it involves a fact that might affect the outcome of a suit under governing law. The court must decide all reasonable doubts and inferences in the light most favorable to the non-moving party. Lemelle v. Universal Mfg. Corp., 18 F.3d 1268, 1272 (5th Cir. 1994). As long as there appears to be some support for the disputed allegations such that "reasonable minds could differ as to the import of the evidence," the motion must be denied. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
The party moving for summary judgment bears the initial burden of identifying those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with any affidavits, that it believes demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Where the non-moving party bears the burden of proof on a claim upon which summary judgment is sought, the moving party may discharge its burden by showing that there is an absence of evidence to support the non-moving party's case. Id. at 325. Once the moving party has satisfied this burden, the non-moving party may go beyond the pleadings and by its own affidavits or by depositions, answers to interrogatories, and admissions on file set forth specific facts showing a genuine issue for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Summary judgment will be granted "against any party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322.
B. Statute of Limitations
Defendant claims that the relevant statutes of limitations bar Plaintiffs' claims. The statute of limitations under Texas law for both Negligence and Conversion claims is 2 years. Tex. Bus. Com. Code § 3.118(g)(1); Tex. Civ. Prac. Rem. § 16.003(a). This case was filed on August 25, 2003. As such, unless a special provision applies to toll the statutes, only Plaintiffs' claims based on negligence and conversion arising on or after August 25, 2001 would not be barred by the statute of limitations. Plaintiffs' claims regard the deposits of a series of checks. As such, the date any given check at issue was deposited at Compass Bank is the date upon which the claims regarding that check arose.
Because this opinion accepts the Defendant's argument in its Motion for Summary Judgment as to Plaintiffs' Aiding and Abetting Breach of a Fiduciary Duty claims (see section D herein), the statute of limitations argument is not discussed above in relation to those claims. Nonetheless, it should be noted that under Texas law, the statute of limitations for Aiding and Abetting Breach of a Fiduciary Duty is 3 years. Tex. Bus. Com Code § 3.118(g)(3). Accordingly, only Plaintiffs' Aiding and Abetting Breach of a Fiduciary Duty claims arising on or after 8/25/00 would not be barred.
Plaintiff argues, first, that Section 108(a) of the Bankruptcy Code applies granting a 2-year extension on all claims brought by the Trustee. In the alternative, Plaintiff argues that the Discovery Rule should apply such that the statute of limitations on all of Plaintiffs' claims would not begin to run until the date the Subject Customers discovered the injury, namely the first date the United States Postal Inspector, NASD, or SIPC informed the Subject Customers of Hill's scheme. Under the Plaintiffs' argument, none of its claims are barred by the statutes of limitations. Each argument is discussed in turn.
Plaintiffs do not specifically identify this date other than stating that it occurred after September 2001, noting 10/1/01 as the earliest date the statutes of limitations could have started running.
1. The Discovery Rule
Plaintiff argues the discovery rule should apply with the result of deferring the accrual of the cause of action until the claimants knew, or by exercising reasonable diligence should have known, the facts giving rise to the cause of action. Accordingly, Plaintiff asserts the statute of limitations should not begin to run until the Subject Customers were informed of Hill's scheme by the US Postal Inspector, NASD, or SIPC after September 2001.
Plaintiff mistakenly asserts that the court in Southwest Bank Trust Company v. Bankers Commercial Life Ins. Co. held that the discovery rule applies to causes of action arising out of check deposits. In Southwest Bank Trust, the Texas court recognized that the discovery rule had not yet been extended to the commercial paper context and proceeded to apply the analysis set out by the three-prong balancing test to determine whether or not the discovery rule should apply. Southwest Bank Trust Co. V. Bankers Comm. Life Ins. Co., 563 S.W.2d 329, 331 (Tex.Civ.App.-Dallas 1978).
That balancing test includes the following factors: (1) the nature of the plaintiff's case, and the type of evidence required to establish and defend the claim; (2) the length of the limitations period in question and the wrongful act's susceptibility to discovery within that period; and (3) the susceptibility of cases to fraudulent prosecution if limitation is tolled. Southwest Bank Trust, 563 S.W.2d at 331.
The facts of Southwest Bank are extremely analogous to the facts of the case presently before the court. In Southwest Bank, E.V. Scott, an officer of the plaintiff corporation in that case, endorsed cashiers checks made out to the plaintiff, first, in his capacity as treasurer of Bankers and, second, in his individual capacity. Scott then deposited the checks into his personal account at Southwest Bank, with whom Scott had been a long time client. Bankers sued the defendant, Southwest Bank, for damages resulting from the alleged conversion by Scott that resulted from the deposit of these checks. Bankers sued on both conversion and negligence grounds, alleging Southwest Bank was negligent in permitting Scott to deposit the checks in his personal checking account at Southwest Bank. The main theme for the plaintiff's claims, as in the case presently before this Court, was that defendant bank never should have allowed its long time client to deposit these checks into his personal account.
Bankers also argued that Southwest Bank and Scott conspired to deposit Bankers' funds into Scott's private account, which is very similar to the Plaintiffs bringing claims against Compass Bank in this case for aiding and abetting of a fiduciary duty.
Applying the three-prong test, the court determined that in suits concerning commercial paper, the determination as to whether the discovery rule applies turns on whether the defendant's alleged wrongful act rendered the resulting injury difficult to discover. Ruling in favor of the defendant bank, the court found:
Nothing in the nature of Southwest Bank's act of conversion rendered the act or the resulting injury difficult to discover; instead, the discovery problems stemmed from Scott's fraudulent concealment of the deposit . . . Since no discovery problems are inherent on the part of Southwest Bank, we hold that the `discovery rule' does not apply to toll the statute of limitations where a bank is sued for conversion on a forged endorsement.Southwest Bank Trust, 563 S.W.2d at 332. Thus, the rule that emerges from Southwest Bank Trust is that where a bank is sued for conversion of a forged endorsement, the `discovery rule' does not apply unless there is proof of the bank's fraudulent concealment of the transaction. Id.
The rule of Southwest Bank Trust applies to the facts of the current case; and so, because the bank did not fraudulently conceal the transactions at issue in this case, the discovery rule does not apply. Just as the plaintiff in Southwest Bank Trust unsuccessfully argued that there was a conspiracy between Scott and Southwest Bank, the Plaintiff in this case argues it was the combined acts of Hill and Compass Bank that made it impossible for the Subject Customers to discover the wrongdoing. It is abundantly clear that Michael Hill in his sole capacity, and not Compass Bank, was responsible for any fraudulent concealment. The similarity between the two cases is striking: Michael Hill is to E.V. Scott, just as Compass Bank is to Southwest Bank. Defendant Compass Bank did nothing to make the wrongdoing more difficult to discover. Accordingly, the discovery rule cannot apply to toll the statute of limitations in this case.
Plaintiffs argue that Compass Bank's launching an investigation and monitoring the transaction without freezing the account as well as permitting Hill to name the account as he did amounted to fraudulent concealment. Plaintiffs cite no authority to support such an assertion and the argument simply does not carry credence. Compass Bank simply responded to calls of inquiry from the Subject Customers by launching an investigation and monitoring the account.
Having found that the discovery rule does not apply to the claims in this case, this Court now turns to discuss Defendant's statute of limitations argument regarding Section 108(a) of the Bankruptcy Code.
2. Section 108(a) of the Bankruptcy Code
The parties agree that the liquidation of Northstar Securities is being administered pursuant to the Securities Investor Protection Act ("SIPA") and that as such, the SIPA liquidation trustee for the Northstar estate, under the appropriate circumstances, may utilize the time extension provisions of Section 108(a) of the Bankruptcy Code. The issue between the parties is whether or not the facts of this case create such an appropriate circumstance.
Section 108(a) of the Bankruptcy Code, in relevant part, provides:
If applicable nonbankruptcy law . . . fixes a period within which the debtor may commence an action, and such period has not expired before the date of the filing of the petition, the trustee may commence such action only before the later of —
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) two years after the order for relief.
11 U.S.C. § 108(a). The parties make very different arguments as to how this provision operates. This Court finds that neither parties argument, in full, is an accurate explanation of how
Section 108(a) functions.
By its language, Section 108(a) applies when (i) a trustee assumes the claims of a debtor and (ii) the relevant statute of limitations did not expire extinguishing such claims prior to the date of the filing of the petition. The claim need not have been filed in court prior to the petition date, simply the relevant statute of limitations could not have expired prior to the date of petition. Here, the parties agree that the relevant date, the petition date, is December 10, 2001. Then, because the statute of limitations for both conversion and negligence claims is two years, all claims brought by the trustee arising on or after December 10, 1999 fall within the scope of Section 108(a).
Although it may be obvious, this Court points out that only claims brought by the Trustee may benefit from Section 108(a). Therefore, this provision does not apply to or benefit the claims brought by the Individual Plaintiffs.
"Section 108(a) . . . operates to extend time periods for actions that could have been taken by the debtor prepetition that may then be taken on behalf of the estate by the trustee. Section 108 makes clear that it refers to suits continued by the trustee, in the place of the debtor, in addition to those suits which are initiated post petition." 2 Collier on Bankruptcy, ¶ 108.02 (15th ed. rev. 2003) (emphasis added).
December 10, 2001 is the filing date for the SIPA case, the date SIPC filed suit against Northstar Securities, Inc. in federal district court.
Many, but not all, of the events underlying the causes of action, the deposits, in this case occurred on or after December 10, 1999.
For these applicable claims, those arising on or after December 10, 1999, Section 108(a) operates to allow a trustee to commence the action by the later of the debtor's original statute of limitations or two years after the order of relief. Since the original statute of limitations for all the claims is two years, and because all claims arose prior to the petition date, two years from the date of the order of relief is necessarily the later of the two extended dates under Section 108(a).
Defendant, citing "Collier on Bankruptcy," argues in paragraph 20 of its Brief in Support of Its Motion for Summary Judgment that Section 108(a) cannot apply here because the trustee acquired the claims after the petition was filed. This is a misunderstanding of the treatise. Reviewing both cases cited therein, one will discover that the sentence Defendant cites, properly interpreted, reflects that Section 108(a) does not protect debtor claims that arise post petition or "causes of action unrelated to debtor claims acquired by the trustee post-petition." Waldschmidt v. Edgcomb Metals (In re Ward), 42 B.R. 946, 950 (Bankr. M.D. Tenn. 1984) (emphasis added).
Neither party in its argument identifies an exact date of the order of relief. Defendant explains that under the Bankruptcy Code, in regards to SIPA litigation, the statutes contemplate gap periods between the petition filing date and the date of entry of the order of relief. Therefore, the date of the order of relief could be no earlier than the petition date. Because this case was filed within two years of the earliest possible date of the order of relief, those claims covered by section 108(a) are not barred by applicable the statutes of limitations.
With the earliest possible date for the order of relief being the petition date which was December 10, 2001, two years from that date is December 19, 2003. This case was filed on August 25, 2003, nearly four months prior December 19.
Accordingly, Defendant's Motion for Summary Judgment in regards to its Statute of Limitations defense is GRANTED IN PART and DENIED IN PART. To summarize, in regards to claims brought by the Individual Plaintiffs, Defendant's Motion for Summary Judgment is GRANTED as to those claims arising from checks deposited prior to August 25, 2001. In regards to claims brought by the Trustee Plaintiff, Defendant's Motion for Summary Judgment is GRANTED as to those claims arising from checks deposited prior to December 10, 1999.
C. The Final Payment Rule
Defendant moves for summary judgement on all common law claims for negligence, conversion, and aiding and abetting breach of fiduciary duty arguing they have been displaced by the "Final Payment Rule." Defendant's argument rests in large part on a Texas Court of Appeals opinion that held that when the final payment rule applies, common law causes of action for negligence and conversion (among others) are barred. Texas Stadium Corp. v. Savings of America, 933 S.W.2d 616, 619 (Tex.App. 1996). Although the facts in that case are very analogous, the Defendant's argument is flawed because in Texas Stadium, the court applied the final payment rule that was codified in an old version of section 3.418 of the Texas UCC that has since been amended. As such, in reviewing the Defendant's argument, this Court must look to the current version of the Code and cannot simply rely on Texas Stadium.
The new final payment rule expressly identifies the remedies which may not be asserted once final payment has occurred. The current Section 3.418 states:
The remedies provided by Subsection (a) or (b) may not be asserted against a person who took the instrument in good faith and for value or who in good faith changed position in reliance on the payment or acceptance. This subsection does not limit remedies provided by Section 3.417 or 4.407.
Tex. Bus. Com Code § 3.418(c) (emphasis added). As Plaintiffs point out, the new final payment rule is expressly limited to the remedies provided by subsections (a) and (b) of Section 3.418, and those sections do not apply to the facts of the instant case.
Sections 3.418(a) and (b) provide remedies only for drawees. Because none of the Subject Customers was the drawee on any of the deposits at issue, the new final payment rule cannot apply.
Defendant argues that despite this apparent limit on remedies under the new Section 3.418, the rule of Texas Stadium should apply nonetheless. Defendant's argument rests primarily on Comment 1 to Section 3.418 because the comment states that subsection (c) is consistent with "former Section 3-418 and the rule of Price v. Neal." A complete reading of Comment 1, however, uncovers that the comment speaks solely to actions brought by drawees.
Because the final payment rule was amended in 1995, this Court cannot rely on the rule of Texas Stadium. Furthermore, because the new final payment rule bars certain remedies only to drawees and the Plaintiffs are not drawees, the final payment rule does not bar Plaintiffs' claims. Accordingly, Defendant's Motion for Summary Judgment on these grounds is DENIED.
D. Aiding and Abetting Breach of a Fiduciary Duty
Defendant moves for summary judgment on Plaintiff's Aiding and Abetting Breach of Fiduciary Duty on the evidence. Specifically, Defendant argues that Plaintiffs cannot succeed on these claims, as a matter of law, because the Defendant had no notice any breach of fiduciary duty by Hill. Accordingly, Defendant's argument proceeds, without notice of the fiduciary's alleged breach of duty, Defendant cannot be found guilty of aiding and abetting any such breach.
Section 3.307 of the Texas UCC addresses Notice of Breach of a Fiduciary Duty. Tex. Bus. Com. Code § 3.307. The parties agree that the prerequisite elements for Section 3.307 to apply are met. At issue between the parties is whether Defendant had Notice of Breach of Fiduciary Duty as delineated in Section 3.307(b)(4)(C). Under Section 3.307(b)(4)(C), the Bank should be held to have notice of the breach of fiduciary duty if the Bank deposited the checks into "an account other than an account of the fiduciary as such, or an account of the represented person."
Section 3.307(b) lays out the three prerequisites: "(i) an instrument is taken from a fiduciary for payment or collection or for value, (ii) the taker has knowledge of the fiduciary status of the fiduciary, and (iii) the represented person makes a claim to the instrument or its proceeds on the basis that he transaction of the fiduciary is a breach of fiduciary duty."
Without question, the Defendant deposited each and every check at issue in this case into the account he had opened at Compass Bank, an account the Bank opened for Hill in his capacity as a fiduciary. When he opened the account, Compass understood Hill would use the account to hold client funds in escrow. The Bank, similar to the Subject Customers, had a standing relationship with Hill, knew he was a financial investor, and had no reason to believe the account would be used for any illegal purposes. Hill, in promoting this fictitious investment opportunity to the Subject Customers explained they would actually be buying into a larger brokered CD and that this is why they were able to get such a high interest rate. He told them the funds would be combined, reasonably in an escrow account of sorts, and that then the larger brokered CD would be purchased. Both the Bank and the Subject Customers understood this account to be an "account of the fiduciary, as such."
In its Response, Plaintiff argues that this account was not in fact an "account of the fiduciary, as such" because the Bank did not strictly adhere to its general internal rules and policies for opening escrow accounts. Even if the Bank did not strictly adhere to its internal rules and policies, this account was opened for the purpose of serving as an escrow account, was titled as an escrow account, and was treated as an escrow account for all intents and purposes. Moreover, there is no authority cited, nor does Plaintiff attempt to make such an argument, that only an "escrow account" can qualify as an "account of the fiduciary, as such."
As a second argument, Plaintiff purposes that even if the Bank did not have Notice of the Breach of Fiduciary Duty under Section 3.307(b)(4)(C), Plaintiffs' "common law claim" for aiding and betting breach of a fiduciary duty should survive summary judgment. At issue, here, is whether there is any inconsistency between the UCC and common law in regards to claims for aiding and abetting breach of a fiduciary duty.
In fact, it is unclear that such a claim, "aiding and abetting a fiduciary duty," exists under Texas law. A thorough review of Texas case law did not result in discovery of a single case in which the Texas courts recognized the claim of "aiding and abetting a fiduciary duty." What is clear is that the Texan courts recognize that one who "knowingly aids and assists in the breach" is considered a joint tortfeasor in and is liable for the breach of a fiduciary duty. See Brewer Pritchard, P.C. v. Johnson, 7 S.W.3d 862, 867 (Tex.App.-Houston 1999, pet. granted); Baty v. Protech Ins. Agency, 63 S.W.3d 841 (Tex.App.-Houston 2001, pet. denied); Kinzbach Tool Co. V. Corbett-Wallace Corp., 160 S.W.2d 509, 514 (Tex. 1942). For the reasons discussed in this opinion, Compass Bank did not knowingly aid or assist in the breach.
Section 1.103 of the Texas UCC states, "Unless displaced by the particular provisions of this title, the principles of law and equity . . . shall supplement its provisions." Tex. Bus. Com. Code § 1.103. Thus, Texas law requires that any conflict between a common law cause of action and the applicable provisions of the UCC be resolved in favor of the UCC. Peerless Ins. Co. V. Texas Commerce Bank-New Braunfels, N.A., 791 F.2d 1177, 1180 (5th Cir. 1986) (interpreting Bryan v. Citizens Nat'l Bank, 628 S.W.2d 761 (Tex. 1982)). Effectively, where inconsistencies between the various elements of the common law action and the particular provisions of the Code exist, those provisions of the Code will apply and displace the inconsistent elements of the common law cause of action. Id.
Because Defendant did not have Notice of Breach of Fiduciary Duty under Section 3.307 of the Texas UCC, Plaintiffs' aiding and abetting breach of fiduciary duty claims cannot survive summary judgment. As such, Defendant's Motion for Summary Judgment on Plaintiffs' claims for Aiding and Abetting Breach of a Fiduciary Duty is GRANTED.
E. Conversion
In regards to the common law causes of action, any variation from or inconsistencies with the Code will be displaced by the Code. Tex. Bus. Com. Code § 1.103. Section 3.420 precludes the issuer of a check from bringing a conversion action. Tex. Bus. Com. Code § 3.420. Therefore, an issuer of a check cannot bring a conversion action, whether it be based in the common law or the UCC.
See also discussion supra Part E.
Plaintiffs argue in their Response that the UCC is "perfectly consistent with the Texas common law cause of action for conversion — it just uses more specific language tailored to negotiable instruments" and that as such, 3.420 is irrelevant to common law cause of action for conversion. Quite the contrary, this case regards conversion of negotiable instruments, checks, and as such where there is an inconsistency between the UCC and the common law, the elements of the UCC will apply. Accordingly, a Plaintiff cannot succeed in any action for conversion of a negotiable instrument, under the UCC or the common law, if she was the issuer of that negotiable instrument.
Applied to this case, Plaintiffs conversion claims fail as a matter of law in regards to each check for which a Subject Customer was the issuer. The Code defines "issuer" as the "maker or drawer of an instrument." Tex. UCC 3.105(c). Section 3.103(a)(3) defines "drawer" as "a person who signs or is identified in a draft as a person ordering payment." Tex. Bus Com. Code § 3.103(a)(3). Accordingly, Plaintiffs are barred from bringing any conversion claims based on checks that a Subject Customer (i) signed or (ii) was identified in as a person ordering payment.
While the checks that fall within the first category of barred conversion claims is clear, the parties are at issue as to which, if any, checks fall within the second category (checks that identified any of the Plaintiffs as a person ordering payment). Particularly at dispute are checks made by May Financial, possibly among other financial institutions, that included "FBO" followed by the name of a Subject Customer. Defendant argues that the abbreviation "FBO," which stands for "for the benefit of," evidences that the individual therein named ordered the given payment. To support its assertion, Defendant relies on excerpts from depositions of the claimants. These excerpts clearly support the notion that the claimants trusted Hill and expected Hill to take their checks to use the money they gave him to purchase CDs at Compass Bank.
While this may be sufficient for a reasonable person to believe the person identified as the person "FBO" whom the check was written actually ordered payment of that check, reasonable minds could differ. Defendant fails to cite any authority equating the use of "FBO" on a negotiable instrument with identification of an individual ordering payment, and a thorough search by this Court was unable to find any such authority either. As this Court must decide all reasonable doubts and inferences in the light most favorable to the non-moving party, this Court simply cannot grant Defendant's Motion for Summary Judgment for Plaintiffs' conversion claims in regards to the checks that identified a claimant for whose benefit the checks were written.
For the reasons explained above, Defendant's Motion for Summary Judgment in regards to the Plaintiff's Conversion claims is GRANTED IN PART and DENIED IN PART. Defendant's Motion for Summary Judgment is granted only in respect to Plaintiff's conversion claims on checks signed by any of the Subject Customers.
F. Hill's Authority to Deposit the Checks
While Movant may have adequately established that the Subject Customers gave Hill the authority to deposit the checks into the account, Movant fails to explain why Hill's having such authority would invalidate Plaintiffs' claims. For example, even if a Subject Customer authorized Hill to deposit a check into the escrow account, could not the Bank still be held liable for negligence if it deposited a check into the escrow account that was not properly made out to that account?
In order for the court to grant a motion for summary judgment, the moving party must establish that it is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c). Defendant has simply failed to demonstrate why, even in the absence of any genuine issue of material fact relating to Hill's alleged authority, Defendant is entitled to summary judgment on any of the claims. In neither the Motion nor the Reply does Defendant cite any authority or make any argument to connect this factual matter to the legal claims made against the Bank in this case.
Accordingly, Defendant's Motion for Summary Judgment on the grounds that Hill had the authority to deposit the checks into the escrow account is DENIED.
G. Claims Brought by Specific Plaintiffs/Assignors
Defendant moves for summary judgment based on the evidence on claims made by specific Plaintiffs/Assignors where the checks at issue were made payable to Compass Bank and included mention of the specific account number. Defendant reasons that these claims are barred because the checks were made out to a specific account at Compass Bank, not to Compass Bank itself.
Defendant initially challenged claims brought by the following Plaintiffs/Assignors: George Darling, R.A. Duncan, John Hill, Patricia Langley, Modern Communications, Hilda Nelson, Margaret Stanford, John Taylor, Helen Watkins, and Ed Wood. Defendant's specific arguments in regards to R.A. Duncan, John Hill, Helen Watkins and Ed Wood are moot because (i) Plaintiff R.A. Duncan challenged claims regard a check made payable to Financial Investments and cashiers checks he signed over to Hill, (ii) Plaintiff Ed Wood has since dismissed all of his claims (see Dkt. No. 59), and (ii) Defendant conceded a material issue of fact remains in regards to this grounds for its motion as to the claims brought by Helen Watkins. The remaining claims Defendant herein challenges all regard the same issue: whether checks made payable to Compass Bank including the account number should be considered checks made payable the specific account at Compass Bank.
The parties dispute whether these checks were made out to the specific account at Compass Bank or to the Bank itself. If the checks were made out to the specific account at Compass Bank, as Defendant argues, Plaintiffs would be barred from bringing such claims arising from the deposit of these checks as a matter of law because the Code permits checks be made payable to a specific account number. Tex. Bus. Com. Code § 3.110(c).
The relevant provision of the Code states: "If an instrument is payable to an account identified by number and by name of the person, the instrument is payable to the named person, whether or not that person is the owner of the account identified by number." Tex. Bus. Com. Code 3.110(c)(1). Also relevant to the discussion is the official comment: "For example, a check is payable to `X Corporation Account No. 12345 in Bank of Podunk.' Under the last sentence of subsection (c)(1), this check is payable to `X Corp' even if Account No. 12345 is some other person's account." Tex. Bus. Com. Code 3.110, com. 2.
Plaintiff argues that the checks at issue here perfectly mirror the example of Comment 2, and that as such, the law is clear that these checks were made payable to Compass Bank. As Defendant points out, however, the two scenarios are not quite as alike as Plaintiff would like this Court to believe. The example of Comment 2 regards a check made payable to a corporation's specific account and instructs that if the two identifiers are contradictory — if the name of the corporation does not match the account number, the name of the corporation governs as payee. In the case now before this Court, the checks were not made payable to a specific account belonging to Compass Bank, but rather to an account at Compass Bank. Thus, comparing the checks at issue to the example in Comment 2, Compass Bank parallels Podunk Bank, not X Corporation. Defendant's argument makes logical sense.
If this Court were to accept Plaintiffs' argued interpretation, it would create an illogical result because then, as Defendant points out in its Reply, ". . . it would not be possible to make a check payable to an account number at a specific bank because placing the bank's name on the face of the check would cause the check to become payable only to the bank itself." However, it makes sense to identify both the bank and the account number in question, when making a check out to an account, because otherwise the check could be deposited in an account of that number at any bank — it then would have no definitive payee. Consequently, any check that is made payable to an account number and identifies the financial institution without identifying a contradictory holder of the account must be considered made payable to the specific account.
If the check was made payable to an account number at a specific financial institution and also named a person or corporation as holder of that account, then the facts would mirror the example of comment 2 and the name of the holder of the account (not the specified financial institution) would control.
Because the checks at issue were made payable to an account number and identified the financial institution without identifying a contradictory holder of the account, Defendant's Motion for Summary Judgment is GRANTED as to all claims on these specific checks.
For sake of clarity, Defendant's Motion for Summary Judgment on this ground is granted as to all claims as specified in Defendant's Motion made by the following Subject Customers: George Darling, Patricia Langley, Modern Communications, Hilda Nelson, Margaret Stanford, and John Taylor. It should also be noted that this Court is grating Defendant's Motion for Summary Judgment on the claims arising from several of these checks also as being barred by the statute of limitations as explained in this opinion.
III. CONCLUSION
For the foregoing reasons, Defendant's Motion for Summary Judgment is DENIED IN PART and GRANTED IN PART. More specifically, this Court draws the following conclusions to each of Defendant's grounds for its Motion:
1. Statute of Limitations. In regards to claims brought by the Individual Plaintiffs, Defendant's Motion for Summary Judgment is GRANTED as to those claims arising from checks deposited prior to 8/25/01. In regards to claims brought by the Trustee Plaintiff, Defendant's Motion for Summary Judgment is GRANTED as to those claims arising from checks deposited prior to 12/10/99.
2. Final Payment Rule. Defendant's Motion for Summary Judgment on the grounds of the Final Payment Rule is DENIED.
3. Conversion. Defendant's Motion for Summary Judgment in regards to the Plaintiff's Conversion claims is GRANTED IN PART and DENIED IN PART. Defendant's Motion for Summary Judgment is granted only in respect to Plaintiffs' conversion claims on checks signed by any of the Subject Customers.
4. Aiding and Abetting Breach of a Fiduciary Duty. Defendant's Motion for Summary Judgment on Plaintiffs' claims for Aiding and Abetting Breach of a Fiduciary Duty is GRANTED.
5. Claims Brought by Specific Plaintiffs/Assignors. Defendant's Motion for Summary Judgment is GRANTED as to all claims on these specific checks that were made payable to an account number and identified the financial institution for that account without identifying a contradictory holder of the account.
6. Hill's Authority to Deposit the Checks. Defendant's Motion for Summary Judgment on the grounds that Hill had the authority to deposit the checks into the escrow account is DENIED.
It is so ORDERED.