346 F.3d 727 | 6th Cir. | 2003
RONALD LEE GILMAN, Circuit Judge. John Hancock
M ICHIGAN N ATIONAL B ANK ; (cid:45) Financial Services, Inc., a Delaware corporation, sued Old P ATRICK W. S HERMAN ; (cid:45) Kent Bank, a Michigan corporation, to recover check (cid:45) S TANDARD F EDERAL B ANK , proceeds converted by Old Kent and paid to one of John (cid:45) successor by merger to Hancock’s agents, Patrick Sherman. The checks were drawn (cid:45) on the accounts of several clients of John Hancock, were Michigan National Bank, (cid:45) made payable to John Hancock, and were entrusted to Defendants. (cid:45) Sherman to invest. Sherman instead indorsed the checks with (cid:78) his own stamp and deposited them into his personal business account with Old Kent. Over the course of seven years,
Appeal from the United States District Court Sherman used this scheme to embezzle nearly $800,000 from for the Eastern District of Michigan at Detroit. John Hancock and its clients. No. 00-73879—Avern Cohn, Senior District Judge. The claims against Old Kent were based on common law Argued: September 12, 2003 conversion, statutory conversion under the Uniform Commercial Code (UCC), and negligence. John Hancock
Decided and Filed: October 10, 2003 filed a motion for summary judgment. Old Kent both responded to John Hancock’s motion and filed its own motion
1 Nos. 02-1288/1307 John Hancock Fin. Servs. 3 4 John Hancock Fin. Servs. Nos. 02-1288/1307 v. Old Kent Bank v. Old Kent Bank for partial summary judgment, arguing that the three-year generating false accounting statements for his defrauded statute of limitations had run on all checks deposited prior to clients. June 2, 1997.
The scheme was finally uncovered in March of 2000, by The district court ruled in favor of John Hancock on the which time Sherman had embezzled nearly $800,000. John basis of its UCC conversion claim, but also granted Old Hancock repaid the defrauded clients the money that they had Kent’s motion for partial summary judgment. On appeal, Old lost plus interest. It then demanded reimbursement from Old Kent argues that the district court erroneously decided that the Kent. bank’s forgery defense was without merit and that the district B. Procedural background court failed to address the bank’s contention that the Michigan Tort Reform Act’s comparative-fault scheme
John Hancock sued Old Kent in August of 2000, claiming applied to UCC conversion claims. John Hancock disagrees, common law conversion, statutory conversion under the and also argues that the discovery rule should be applied so UCC, and negligence. The parties had earlier agreed to toll that it can recover on all checks unlawfully converted by Old the applicable three-year statute of limitations as of June 2, Kent, some dating back to 1993. For the reasons set forth 2000. Old Kent did not dispute John Hancock’s factual below, we AFFIRM the judgment of the district court. allegations or that the bank was partially at fault, but argued that John Hancock should bear a portion of the loss. John I. BACKGROUND Hancock filed a motion for summary judgment in the fall of A. Factual background 2001. At the same time, Old Kent filed a motion for partial summary judgment based upon the theory that the statute of Sherman was a representative of John Hancock in limitations barred recovery on all checks deposited more than Michigan, where he sold insurance and investment products. three years prior to the June 2, 2000 tolling agreement. Beginning in 1993, he concocted a scheme to embezzle from three of his John Hancock clients. The clients would write The district court granted John Hancock’s motion for checks payable to John Hancock for investment products or summary judgment on the UCC conversion claims, declining insurance premiums. Sherman was authorized to accept these to reach the claims of common law conversion or negligence. checks on behalf of John Hancock. He would then indorse It also granted Old Kent’s motion, thus limiting John the checks with a stamp that read: “Sherman and Associates Hancock’s award to checks accepted for deposit by the bank Financial Services.” Sherman maintained a checking account after June 2, 1997, plus prejudgment interest. This timely at an Owosso, Michigan branch of Old Kent under the same appeal followed. name as that on his indorsement stamp. Old Kent deposited II. ANALYSIS these checks into Sherman’s account, never questioning his authority to deal in this manner with checks clearly made
A. John Hancock’s conversion claim payable to John Hancock. Approximately 71 checks were so indorsed and deposited over a period of seven years.
On appeal, Old Kent argues that the district court erred in Sherman was able to cover up his embezzlements by granting summary judgment to John Hancock because Nos. 02-1288/1307 John Hancock Fin. Servs. 5 6 John Hancock Fin. Servs. Nos. 02-1288/1307 v. Old Kent Bank v. Old Kent Bank comparative-fault principles allegedly apply to John Michigan, 580 N.W.2d 11, 15 (Mich. Ct. App. 1998), for the Hancock’s UCC conversion claim. We review the district proposition that “[p]ayment of a check with a missing court’s grant of summary judgment de novo. Sperle v. Mich. endorsement is the legal equivalent of payment over a forged Dep’t of Corr ., 297 F.3d 483, 490 (6th Cir. 2002). Summary endorsement.” Pamar , however, gives no persuasive reason judgment is proper where no genuine issue of material fact for this result, and the Michigan Supreme Court has not exists and the moving party is entitled to judgment as a matter opined on the issue. Given the lack of a reasoned basis for of law. Fed. R. Civ. P. 56(c). In considering a motion for treating a missing indorsement as the legal equivalent of a summary judgment, the district court must construe all forged indorsement, we see no justification to extend Pamar reasonable inferences in favor of the nonmoving party. to a case like the present where there is in fact an indorsement Matsushita Elec. Indus. Co. v. Zenith Radio Corp ., 475 U.S. quite distinct from the named payee. 574, 587 (1986). The central issue is “whether the evidence
In advocating for a broad definition of the term “forged presents a sufficient disagreement to require submission to a signature,” Old Kent also relies on the following official jury or whether it is so one-sided that one party must prevail comment to UCC § 3-406: as a matter of law.” Anderson v. Liberty Lobby, Inc ., 477
U.S. 242, 251-52 (1986).
An insurance company draws a check to the order of Sarah Smith in payment of a claim for a policy holder, Old Kent contends that the district court erred in not Sarah Smith, who lives in Alabama. The insurance applying Mich. Comp. Laws § 440.3406 (hereafter referred to company also has a policyholder with the same name as UCC § 3-406) to John Hancock’s claims. UCC § 3-406 who lives in Illinois. By mistake, the insurance company provides in pertinent part that a party whose negligence mails the check to the Illinois Sarah Smith who indorses “substantially contributes to an alteration of an instrument or
the check and obtains payment. Because the payee of the to the making of a forged signature on an instrument is check is the Alabama Sarah Smith, the indorsement by precluded from asserting the alteration or the forgery against the Illinois Sarah Smith is a forged indorsement. a person who, in good faith, pays the instrument or takes it for value or for collection.” UCC § 3-406(1). As noted above,
UCC § 3-406 cmt. 3. Old Kent argues that Sherman’s Sherman indorsed the checks with a stamp that read indorsements are analogous to those of Illinois Sarah Smith’s “Sherman and Associates Financial Services.” The district because they are both indorsements “by someone other than court held that the UCC’s preclusion defense did not apply to the intended payee.” In rejecting this argument, the district John Hancock’s conversion claim, reasoning that Sherman’s court noted that, unlike the hypothetical in Comment 3, indorsement was not a forgery because it “did not appear to Sherman’s indorsement was completely different from the be the genuine signature of the payee, John Hancock.” Old payee’s. The district court reasoned that the use of a common Kent argues that the district court’s definition of “forged name in Comment 3 “supports the argument that a forged signature” is too restrictive. signature must appear to be the genuine signature of the intended payee.” This analysis is consistent with Comment Because the UCC does not define the term “forged 2 to UCC § 3-406, which suggests that the drafters intended signature,” Old Kent looked to Michigan law and the the term “forged signature” to be construed narrowly. comments to UCC § 3-406 for the meaning of the term. Old Comment 2 provides: Kent cites Pamar Enterprises, Inc. v. Huntington Banks of Nos. 02-1288/1307 John Hancock Fin. Servs. 7 8 John Hancock Fin. Servs. Nos. 02-1288/1307
v. Old Kent Bank v. Old Kent Bank Section 3-406 refers to “forged signature” rather than of forged instruments. Subsection 2 of UCC § 3-406 provides “unauthorized signature” that appeared in the former as follows: Section 3-406 because it more accurately describes the
(2) Under subsection (1), if the person asserting the scope of the provision. Unauthorized signature is a preclusion fails to exercise ordinary care in paying or broader concept that includes not only forgery but also taking the instrument and that failure substantially the signature of an agent which does not bind the contributes to loss, the loss is allocated between the principal under the law of agency. The agency cases are person precluded and the person asserting the preclusion resolved independently under agency law. Section 3-406 according to the extent to which the failure of each to is not necessary in those cases.
exercise ordinary care contributed to the loss. UCC § 3-406 cmt. 2. A reading of the UCC suggests that if the above subsection is The district court defined the term “forged signature” triggered, the trier of fact allocates fault between the party within the context of UCC § 3-406 as a signature whose negligence substantially contributed to the forgery of “substantially similar to the name of the intended signator an instrument and the party who paid the instrument. The such that it appears genuine.” This definition is consistent UCC’s plain language does not direct the trier of fact to with both the common usage of the term “forged” and allocate fault to the wrongdoer. Comments 2 and 3 above. See also UCC § 3-405 (defining Scholarly commentary discussing UCC § 3-406 confirms “fraudulent endorsement” as, “in the case of an instrument this interpretation. Comparative negligence was incorporated payable to the employer, a forged endorsement purporting to into the UCC as part of the 1990 amendments to Articles 3 be that of the employer . . . .”). In sum, we agree with the and 4. J AMES J. W HITE & R OBERT S. S UMMERS , U NIFORM district court’s conclusion that Sherman’s indorsements were
C OMMERCIAL C ODE § 19-1 (4th ed. 1995). In drafting the not “forged signatures.” The district court therefore properly revised Article 3, the authors “attempted to provide an declined to apply UCC § 3-406's preclusion defense to John ‘underlying policy and rationale . . . based on the balanced Hancock’s conversion claim against Old Kent. principles that all parties in the payment and collection As an alternative defense, Old Kent argues that the process have a responsibility to exercise ordinary care and comparative-fault principles of the Michigan Tort Reform that the failure by any party to fulfill that responsibility Act, Mich. Comp. Laws § 600.2957(1), were meant to be should result in that party bearing an appropriate share of any applied to all claims for conversion, both statutory and [resulting] loss.’” Judy C. Norris, Tips on Litigating Issues of common law. No Michigan cases address this question, nor Forgery, Fraud, and Conversation [sic] in a Comparative is there any law in the Sixth Circuit that deals with the Negligence Setting , 51 Consumer Fin. L.Q. Rep. 247, 247 applicability of a tort-reform scheme to UCC claims. The (1997). district court did not reach this issue, and Old Kent cites no
One legal scholar has explained that UCC § 3-406 seeks to relevant authority to support its argument. encourage “the free circulation of commercial paper by In assessing the merits of Old Kent’s alternative defense, applying the principle that as between two innocent persons we first look to how UCC § 3-406 allocates fault in the case the one who is negligent should bear the loss caused by a Nos. 02-1288/1307 John Hancock Fin. Servs. 9 10 John Hancock Fin. Servs. Nos. 02-1288/1307
v. Old Kent Bank v. Old Kent Bank third person’s wrongdoing.” R ONALD A. A NDERSON , We also note that our decision accords with that of the A NDERSON ON THE C OMMERCIAL C ODE § 3-406:4 (3d ed. Eleventh Circuit in Federal Insurance Company v. NCNB 1998) (emphasis added). Another commentator has similarly National Bank of N.C. , 958 F.2d 1544, 1551-52 (11th Cir. noted that § 3-406(b) “contemplates a splitting of a loss 1992), where the Eleventh Circuit discussed the possibility of between two negligent parties .” J AMES J. W HITE & R OBERT applying comparative-fault principles to UCC conversion S. S UMMERS , U NIFORM C OMMERCIAL C ODE § 19-3 (4th ed. claims, but then declined to do so. The court quoted the New 1995) (emphasis added). York Court of Appeals at length, including the point that “[i]t
is not for the courts to unsettle the UCC’s carefully drawn The fact that UCC § 3-406 does not allocate fault to the balance by introducing comparative fault principles taken wrongdoer—as opposed to the negligent parties—is from tort law.” Putnam Rolling Ladder Co. v. Manufacturers significant in determining whether Michigan’s Tort Reform
Hanover Trust Co. , 546 N.E.2d 904, 908 (N.Y. 1989). We Act applies in this case. This latter Act, passed in 1995, agree with this analysis. provides that in actions “based on tort or another legal theory seeking damages for personal injury, property damage, or The district court declined to reach John Hancock’s wrongful death, the liability of each person shall be allocated common law conversion claim altogether, holding that its under this section by the trier of fact, and . . . in direct holding on the UCC claim made such consideration proportion to the person’s percentage of fault.” Mich. Comp. unnecessary. As Old Kent points out, however, there is recent Laws Ann. § 600.2957(1). The Act also provides that when case law in Michigan that applies comparative-fault principles considering percentages of fault, the trier of fact shall assess to intentional torts. See Lamp v. Reynolds , 645 N.W.2d 311, “the fault of each person, regardless of whether the person is, 315-16 (Mich. Ct. App. 2002) (applying comparative-fault or could have been, named as a party to the action.” Id. principles where the motocross racetrack owners’ wilful and Unlike the UCC, the Tort Reform Act allocates fault to the wanton conduct in failing to remove a tree stump from the wrongdoer in actions “based on tort or another legal theory edge of their racetrack caused a motocross racer’s injuries). seeking damages for personal injury, property damage, or But Old Kent makes no claim that John Hancock committed wrongful death.” Id. Tension thus exists between these an intentional tort, and Lamp provides no support for Old statutes. Kent’s argument that comparative fault should apply to a
statutory conversion claim based upon a lack of due care. We We conclude that this tension must be resolved in favor of therefore reject Old Kent’s comparative-fault defense, and not applying Michigan’s Tort Reform Act to UCC conversion affirm the grant of summary judgment to John Hancock on its actions. Because the UCC more specifically relates to the
statutory conversion claim. allocation of fault with respect to the conversion of instruments than does the Tort Reform Act, the UCC controls. B. Old Kent’s statute of limitations defense See Hill v. Sacka , 666 N.W.2d 282, 291 (Mich. Ct. App. John Hancock, in its cross-appeal, argues that the district 2003) (noting that when statutes conflict concerning the court erred in granting Old Kent’s motion for partial summary allocation of fault, the statute “more specific to the subject judgment, which barred John Hancock’s recovery on all matter than the general statutes regarding allocation of fault checks deposited more than three years before the June 2, . . . controls.”). Nos. 02-1288/1307 John Hancock Fin. Servs. 11 12 John Hancock Fin. Servs. Nos. 02-1288/1307
v. Old Kent Bank v. Old Kent Bank 2000 tolling agreement. This reduced John Hancock’s otherwise be denied a reasonable opportunity to bring suit due recovery from approximately $800,000 to about $444,000. to the latent nature of the injury or the inability to discover the
causal connection between the injury and the defendant’s Application of the “discovery rule” would have deferred the action.” Id. (internal quotation marks omitted). commencement of the three-year statute of limitations until John Hancock actually discovered the conversion, or until it In Brennan , the court held that the discovery rule was should have discovered the conversion through the exercise inapplicable to a claim for conversion. Id. at 920. The court of reasonable diligence, whichever first occurred. See Blakely reasoned that “strong public policies favoring finality in v. U.S. , 276 F.3d 853, 861, 869-70 (6th Cir. 2002) (noting that commercial transactions, protecting a defendant from stale the discovery rule could apply to Blakely’s claim for fraud claims, and requiring a plaintiff to diligently pursue his claim against the Oxford Bank for allegedly facilitating the outweigh the prejudice to plaintiffs and militate against wrongful taking of Blakely’s assets by the government in a applying the discovery rule in the context of commercial civil-forfeiture action, but holding that Blakely’s claim failed conversion cases.” Id. at 920. for other reasons).
Like the Brennan court, the Third Circuit has rejected John Hancock asserts that because it did not discover the application of the discovery rule in UCC conversion cases: conversion until April of 2000, the district court should have Although a few courts apply the discovery rule to applied the discovery rule to allow it to pursue its claims for negotiable instrument theft on essentially equitable all 71 checks converted by Old Kent. In holding that the grounds, the tide of case law runs strongly against this discovery rule should not apply in this case, the district court approach. Where a party not engaging in fraudulent reasoned that “there is strong public policy favoring finality concealment asserts the statute of limitations defense, on a conversion claim on a negotiable instrument.” We agree.
most courts have refused to apply the discovery rule to Because jurisdiction in this case is based upon diversity of negotiable instruments, finding it inimical to UCC citizenship between John Hancock and Old Kent, “we apply policies of finality and negotiability. state law in accordance with the then controlling decision of
Menichini v. Grant , 995 F.2d 1224, 1229-30 (3d Cir. 1993). the highest state court.” Bailey Farms, Inc. v. NOR-AM Chemical Co. , 27 F.3d 188, 191 (6th Cir. 1994). Where the
We find the reasoning of the Michigan Court of Appeals state supreme court has not yet addressed the issue presented, and the Third Circuit convincing, and anticipate that the we must anticipate how that court would rule. Id. Although Michigan Supreme Court would agree. Accordingly, we the Michigan Supreme Court has not decided the issue of affirm the district court’s grant of Old Kent’s motion for whether the discovery rule applies to UCC conversion claims, summary judgment, barring John Hancock from collecting the Michigan Court of Appeals addressed this issue in on checks deposited more than three years before June 2, Brennan v. Edward D. Jones & Co. , 626 N.W.2d 917, 919 2000. (Mich. Ct. App. 2001), where the court noted that statutes of limitations are designed to “promote judicial economy and protect defendants’ rights.” The discovery rule has been applied “to prevent unjust results when a plaintiff would Nos. 02-1288/1307 John Hancock Fin. Servs. 13
v. Old Kent Bank
III. CONCLUSION
For all of the reasons set forth above, we AFFIRM the judgment of the district court.
