JOHN HANCOCK FINANCIAL SERVICES, INC., Plaintiff-Appellee/Cross-Appellant,
v.
OLD KENT BANK, Defendant-Appellant/Cross-Appellee,
Michigan National Bank; Patrick W. Sherman; Standard Federal Bank, successor by merger to Michigan National Bank, Defendants.
No. 02-1288.
No. 02-1307.
United States Court of Appeals, Sixth Circuit.
Argued: September 12, 2003.
Decided and Filed: October 10, 2003. Pursuant to Sixth Circuit Rule 206
ARGUED: Molly E. McManus, WARNER, NORCROSS & JUDD, Grand Rapids, Michigan, for Appellant.
Francis R. Ortiz (argued and briefed), Dickinson, Wright, PLLC, Detroit, Michigan, for Plaintiff-Appellee Cross-Appellant.
ON BRIEF: Molly E. McManus (argued and briefed), Nathaniel R. Wolf (briefed), Warner, Norcross & Judd, Grand Rapids, Michigan, for Defendant-Appellant Cross-Appellee.
Francis R. Ortiz, DICKINSON WRIGHT, PLLC, Detroit, Michigan, for Appellee.
Gary J. Galopin, Standard Federal Bank, Legal Department, Troy, MI, Charles E. Chamberlain, Jr., Willey & Chamberlain, Grand Rapids, MI, for Defendants.
Before: MERRITT, MOORE, and GILMAN, Circuit Judges.
OPINION
RONALD LEE GILMAN, Circuit Judge.
John Hancock Financial Services, Inc., a Delaware corporation, sued Old Kent Bank, a Michigan corporation, to recover check proceeds cоnverted by Old Kent and paid to one of John Hancock's agents, Patrick Sherman. The checks were drawn on the accounts of several clients of John Hancock, were made payable to John Hancock, and were entrusted to Sherman to invest. Sherman instead indorsed the checks with his own stamp and deposited them into his personal business account with Old Kent. Over the course of seven years, Sherman used this scheme to embezzle nearly $800,000 from John Hancock and its clients.
The claims against Old Kent were based on common law conversion, statutory conversion under the Uniform Commercial Code (UCC), and negligence. John Hancock filed a motion for summary judgment. Old Kent both responded to John Hancock's motion and filed its own motion for partial summary judgment, arguing that the three-year statute of limitations had run on all checks deposited prior to June 2, 1997.
The district court ruled in favor of John Hancock on the basis of its UCC conversion claim, but also granted Old Kent's motion for partial summary judgment. On appeal, Old Kent argues that the district court erroneously decided that the bank's forgery defense was without merit and that the district court failed to address the bank's contention that the Michigan Tort Reform Act's comparative-fault scheme applied to UCC conversion claims. John Hancock disagrees, and also argues that the discovery rule should be applied so that it can recover on all checks unlawfully converted by Old Kent, some dating back to 1993. For the reasons set forth bеlow, we AFFIRM the judgment of the district court.
I. BACKGROUND
A. Factual background
Sherman was a representative of John Hancock in Michigan, where he sold insurance and investment products. Beginning in 1993, he concocted a scheme to embezzle from three of his John Hancock clients. The clients would write checks payable to John Hancock for investment products or insurance premiums. Sherman was authorized to accept these checks on behalf of John Hancock. He would then indorse the checks with a stamp that read: "Sherman and Associates Financial Services." Sherman maintained a checking account at an Owosso, Michigan branch of Old Kent under the same name as that on his indorsement stamp. Old Kent deposited these checks into Sherman's account, never questioning his authority to deal in this manner with checks clearly made payable to John Hancock. Approximately 71 checks were so indorsed and deposited over a period of seven years. Sherman was able to cover up his embezzlements by generating false accounting statements for his defrauded clients.
The scheme was finally uncovered in March of 2000, by which time Sherman had embezzled nearly $800,000. John Hancock repaid the defrauded clients the money that they had lost plus interest. It then demanded reimbursement from Old Kent.
B. Procedural background
John Hancock sued Old Kent in August of 2000, claiming common law conversion, statutory conversion under the UCC, and negligence. The parties had earlier agreed to toll the applicable threе-year statute of limitations as of June 2, 2000. Old Kent did not dispute John Hancock's factual allegations or that the bank was partially at fault, but argued that John Hancock should bear a portion of the loss. John Hancock filed a motion for summary judgment in the fall of 2001. At the same time, Old Kent filed a motion for partial summary judgment based upon the theory that the statute of limitations barred rеcovery on all checks deposited more than three years prior to the June 2, 2000 tolling agreement.
The district court granted John Hancock's motion for summary judgment on the UCC conversion claims, declining to reach the claims of common law conversion or negligence. It also granted Old Kent's motion, thus limiting John Hancock's award to checks accepted fоr deposit by the bank after June 2, 1997, plus prejudgment interest. This timely appeal followed.
II. ANALYSIS
A. John Hancock's conversion claim
On appeal, Old Kent argues that the district court erred in granting summary judgment to John Hancock because comparative-fault principles allegedly apply to John Hancock's UCC conversion claim. We review the district court's grant of summary judgment de novo. Sperle v. Mich. Dep't of Corr.,
Old Kent contends that the district court erred in not applying Mich. Comp. Laws § 440.3406 (hereafter referred to as UCC § 3-406) to John Hancock's claims. UCC § 3-406 provides in pertinent part that a party whose negligence "substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection." UCC § 3-406(1). As noted above, Sherman indorsed the checks with a stamp that read "Sherman and Associates Financial Services." The district court held that the UCC's preclusion defense did not apply to John Hancock's conversion claim, reasoning that Sherman's indorsement was not a forgery because it "did not appear to be the genuine signature of the payee, John Hancock." Old Kent argues that the district court's definition of "forged signature" is too restrictive.
Because the UCC does not define the term "forged signature," Old Kent looked to Michigan law and the comments to UCC § 3-406 for the meaning of the term. Old Kent cites Pamar Enterprises, Inc. v. Huntington Banks of Michigan,
In advocating for a broad definition of the term "forged signature," Old Kent also relies on the following official comment to UCC § 3-406:
An insurance company draws a check to the order of Sarah Smith in payment of a claim for a policy holder, Sarah Smith, who lives in Alabama. The insurance company also has a policyholder with the same name who lives in Illinois. By mistake, the insurance company mails the check to the Illinois Sarah Smith who indorses the check and obtains payment. Because the payee of the check is the Alabama Sarah Smith, the indorsement by the Illinois Sarah Smith is a forged indorsement.
UCC § 3-406 cmt. 3. Old Kent argues that Sherman's indorsements are analogous to those of Illinois Sarah Smith's because they are both indorsements "by someone other than the intended payee." In rejecting this argument, the district court noted that, unlike the hypothetical in Comment 3, Sherman's indorsement was completely different from the payee's. The district court reasoned that the use of а common name in Comment 3 "supports the argument that a forged signature must appear to be the genuine signature of the intended payee." This analysis is consistent with Comment 2 to UCC § 3-406, which suggests that the drafters intended the term "forged signature" to be construed narrowly. Comment 2 provides:
Section 3-406 refers to "forged signature" rather than "unauthorized signature" that appeared in the former Section 3-406 because it more accurately describes the scope of the provision. Unauthorized signature is a broader concept that includes not only forgery but also the signature of an agent which does not bind the principal under the law of agency. The agency cases are resolved independently under agency law. Section 3-406 is not necеssary in those cases.
UCC § 3-406 cmt. 2.
The district court defined the term "forged signature" within the context of UCC § 3-406 as a signature "substantially similar to the name of the intended signator such that it appears genuine." This definition is consistent with both the common usage of the term "forged" and Comments 2 and 3 above. See also UCC § 3-405 (defining "fraudulent endorsement" as, "in the case of an instrument payable to the employer, a forgеd endorsement purporting to be that of the employer...."). In sum, we agree with the district court's conclusion that Sherman's indorsements were not "forged signatures." The district court therefore properly declined to apply UCC § 3-406's preclusion defense to John Hancock's conversion claim against Old Kent.
As an alternative defense, Old Kent argues that the comparative-fault principles of the Michigan Tort Reform Act, Mich. Comp. Laws § 600.2957(1), were meant to be applied to all claims for conversion, both statutory and common law. No Michigan cases address this question, nor is there any law in the Sixth Circuit that deals with the applicability of a tort-reform scheme to UCC claims. The district court did not reach this issue, and Old Kent cites no relevant authority tо support its argument.
In assessing the merits of Old Kent's alternative defense, we first look to how UCC § 3-406 allocates fault in the case of forged instruments. Subsection 2 of UCC § 3-406 provides as follows:
(2) Under subsection (1), if the person asserting the preclusion fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss, the loss is allocated between thе person precluded and the person asserting the preclusion according to the extent to which the failure of each to exercise ordinary care contributed to the loss.
A reading of the UCC suggests that if the above subsection is triggered, the trier of fact allocates fault between the party whose negligence substantially contributed to the forgery of аn instrument and the party who paid the instrument. The UCC's plain language does not direct the trier of fact to allocate fault to the wrongdoer.
Scholarly commentary discussing UCC § 3-406 confirms this interpretation. Comparative negligence was incorporated into the UCC as part of the 1990 amendments to Articles 3 and 4. James J. White & Robert S. Summers, Uniform Commercial Code § 19-1 (4th ed.1995). In drafting the revisеd Article 3, the authors "attempted to provide an `underlying policy and rationale ... based on the balanced principles that all parties in the payment and collection process have a responsibility to exercise ordinary care and that the failure by any party to fulfill that responsibility should result in that party bearing an appropriate share оf any [resulting] loss.'" Judy C. Norris, Tips on Litigating Issues of Forgery, Fraud, and Conversation [sic] in a Comparative Negligence Setting, 51 Consumer Fin. L.Q. Rep. 247, 247 (1997).
One legal scholar has explained that UCC § 3-406 seeks to encourage "the free circulation of commercial paper by applying the principle that as between two innocent persons the one who is negligent should bear the loss caused by a third person's wrongdoing." RONALD A. ANDERSON, ANDERSON ON THE COMMERCIAL CODE § 3-406:4 (3d ed.1998) (emphasis added). Another commentator hаs similarly noted that § 3-406(b) "contemplates a splitting of a loss between two negligent parties." JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE § 19-3 (4th ed.1995) (emphasis added).
The fact that UCC § 3-406 does not allocate fault to the wrongdoer — as opposed to the negligent parties — is significant in determining whether Michigan's Tort Reform Act applies in this case. This latter Act, passed in 1995, provides that in actions "based on tort or another legal theory seeking damages for personal injury, property damage, or wrongful death, the liability of each person shall be allocated under this section by the trier of fact, and ... in direct proportion to the person's percentage of fault." Mich. Comp. Laws Ann. § 600.2957(1). The Act also provides that when considering percentages of fault, the trier of fact shall assess "the fault of each person, regardless of whether the person is, or could have been, named as a party to the action." Id. Unlike the UCC, the Tort Reform Act allocates fault to the wrongdoer in actions "based on tort or another legal theory seeking damages for personal injury, property damage, or wrongful death." Id. Tension thus exists between these statutes.
We conclude that this tension must be resolved in favor of not applying Michigan's Tort Reform Act to UCC conversiоn actions. Because the UCC more specifically relates to the allocation of fault with respect to the conversion of instruments than does the Tort Reform Act, the UCC controls. See Hill v. Sacka,
We also note that our decision accords with that of the Eleventh Circuit in Federal Insurance Company v. NCNB National Bank of N.C.,
The district court declined to reach John Hancock's common law conversion claim altogether, holding that its holding on the UCC claim made such consideration unnecessary. As Old Kent points out, however, there is recent case law in Michigan that applies comparative-fault principles to intentional torts. See Lamp v. Reynolds,
B. Old Kent's statute of limitations defense
John Hancock, in its cross-apрeal, argues that the district court erred in granting Old Kent's motion for partial summary judgment, which barred John Hancock's recovery on all checks deposited more than three years before the June 2, 2000 tolling agreement. This reduced John Hancock's recovery from approximately $800,000 to about $444,000.
Application of the "discovery rule" would have deferred the cоmmencement of the three-year statute of limitations until John Hancock actually discovered the conversion, or until it should have discovered the conversion through the exercise of reasonable diligence, whichever first occurred. See Blakely v. U.S.,
John Hancock asserts that because it did not discover the conversion until April of 2000, the district court should have applied the discovery rule to allow it to pursue its claims for all 71 checks converted by Old Kent. In holding that the discovery rule should not apply in this case, the district court reasoned that "there is strong public policy favoring finality on a conversion claim on a negotiable instrument." We agree.
Because jurisdiction in this case is based upon diversity of citizenship between John Hancock and Old Kent, "we apply state law in accordance with the then controlling decision of the highest state court." Bailey Farms, Inc. v. NOR-AM Chemical Co.,
In Brennan, the court held that the discovery rule was inаpplicable to a claim for conversion. Id. at 920. The court reasoned that "strong public policies favoring finality in commercial transactions, protecting a defendant from stale claims, and requiring a plaintiff to diligently pursue his claim outweigh the prejudice to plaintiffs and militate against applying the discovery rule in the context of commercial cоnversion cases." Id. at 920.
Like the Brennan court, the Third Circuit has rejected application of the discovery rule in UCC conversion cases:
Although a few courts apply the discovery rule to negotiable instrument theft on essentially equitable grounds, the tide of case law runs strongly against this approach. Where a party not engaging in fraudulent concealment asserts the statute of limitatiоns defense, most courts have refused to apply the discovery rule to negotiable instruments, finding it inimical to UCC policies of finality and negotiability.
Menichini v. Grant,
We find the reasoning of the Michigan Court of Appeals and the Third Circuit convincing, and anticipate that the Michigan Supreme Court would agree. Accordingly, we affirm the district court's grant of Old Kent's motion for summary judgment, barring John Hancock from collecting on checks deposited more than three years before June 2, 2000.
III. CONCLUSION
For all of the reasons set forth above, we AFFIRM the judgment of the district court.