Opinion
IP 01-0086-C-T/K
September 26, 2003
ENTRY ON PLAINTIFF'S MOTION TO RECONSIDER, DEFENDANT'S MOTION TO STAY AND DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
This Entry is a matter of public record and is being made available to the public on the court's web site, but it is not intended for commercial publication either electronically or in paper form. Although the ruling or rulings in this Entry will govern the case presently before this court, this court does not consider the discussion in this Entry to be sufficiently novel or instructive to justify commercial publication or the subsequent citation of it in other proceedings.
The Plaintiff Agnes N. Conder filed a Motion for Relief from Stay of Other Proceedings, which the court previously indicated would be treated as a motion to reconsider the court's dismissal for lack of standing of the Uniform Commercial Code claims against the Defendant Union Planters Bank, N.A. ("UPB"). UPB filed its brief in opposition to the motion, and Ms. Conder filed a reply. A familiarity with the court's Entry on Motions to Dismiss of September 27, 2002 (the September 27 Entry), is presumed.
Two other motions are also pending: UPB's Motion to Stay Discovery, Class Certification and Answer to First Amended Complaint and UPB's Motion for Summary Judgment. The Plaintiff responded to the motion to stay, and UPB replied. No response to the summary judgment motion has been filed; the time for filing a response has not yet passed.
I. THE FIRST AMENDED COMPLAINT
The assertions in this section of the entry are taken from the Plaintiffs First Amended Class Action Complaint, hereinafter referred to as the Amended Complaint.
A. THE NATURE OF THE ALLEGED PONZI SCHEME
The Plaintiff wrote checks payable to persons or entities affiliated with Heartland for the sole intended purpose of effectuating the purchase of securities or other investments, in amounts totaling millions of dollars. (Am. Compl. ¶ 24). The checks were solicited by persons and entities affiliated with Heartland, who recommended securities and/or other investments to Heartland customers and offered the services of Heartland as a purported means of investing in such securities and other investments. (Am. Compl. ¶ 25.) Potential investors were told that the proceeds of the checks they issued to Heartland would be used to purchase securities and other investments. ( Id. ¶ 27.) In reality, only a very small portion of investor funds were used by Heartland to purchase securities. Instead, most investor funds were spent on the lavish lifestyles of Heartland's principals, namely, Kenneth R. Payne, Johann M. Smith, Daniel G. Danker and Constance Brooks-Kiefer; were used to pay off claims of prior investors in the facilitation of a Ponzi scheme; or were wrongfully diverted to other schemes and purposes. ( Id. ¶¶ 23, 28.) Meanwhile, investors in Heartland and related entities were fraudulently told that their "investments" were earning exemplary returns. ( Id. ¶ 29.)
The Amended Complaint expressly alleges that "Heartland" includes, but is not limited to, Heartland principals Kenneth R. Payne, Johann M. Smith, Daniel G. Danker, and Constance Brooks-Kiefer and the following entities affiliated with Heartland: Heartland Financial Services, Inc.; Aero Technologies Ltd.; Atlas Income Fund, L.L.C.; BMC Investment Group, L.L.C.; Carribean Federal Services, Ltd.; Carribean Financial Services; Carribean Investment International, Ltd.; Celtic Centre II, Ltd.; Dolphin International Development, Ltd.; Dolphin Peninsula Partners; First Fidelity Trust, Ltd.; First International Limited; Heartland International Trust Services, Ltd.; Heartland Money Management of Florida, Inc.; JMS Investment Group, L.L.C.; KJL Ltd. of Belize; Lincoln Fidelity Escrow Services; Lincoln Fidelity Escrow; MDS Investment Group, L.L.C.; MMK, Ltd.; Provident Bank; RMP, Ltd.; Terens, Ltd.; 21st Century Banking Group, Ltd.; 21st Century International Bank Trust, Ltd. of Grenada; 21st Century International Advisors, Inc.; 21st Century International Advisors of Bermuda, Inc.; 21st Century International Advisors of Ireland, Ltd.; 21st Century Personnel, LLC; and Universal Financial Services, Ltd. ( Id. ¶ 23.)
To facilitate the course of this fraudulent and unlawful conduct, the checks solicited by Heartland were not endorsed with endorsements matching the payee of the checks. Instead, the checks were endorsed with the endorsement of "Lincoln Fidelity Escrow" substantially in one of the following ways:
(a) By writing, "For Deposit Only, UP #0001266190" [the Lincoln Fidelity Escrow Account]; or
(b) With a stamp reading, "Pay to the Order of Union Planters Bank, For Deposit Only, Lincoln Fidelity Escrow Account, 0740142130001266190." (hereinafter referred to as the "Stamp").
( Id. ¶ 30.)
The checks were deposited, usually by Smith or Brooks-Kiefer, into the Lincoln Fidelity Escrow Account ("the Lincoln Account"), which was an ordinary business account rather than a true escrow account. (Am. Compl. ¶ 31.) The Plaintiffs checks, however, were not made payable to the order of Lincoln Fidelity Escrow or the Lincoln Account. Instead, the checks were made payable to numerous persons or entities affiliated with Heartland or to specific accounts other than the Lincoln Account, including but not limited to: "Johann M. Smith," "Johann M. Smith, Escrow Agent," "Johann M. Smith, Escrow Account," "JMS Escrow Agent," "Kenneth Payne," "JMS Investment Group," "BMC Investment Group, LLC," "BMC Investment Group, LLC, c/o Johann Smith, Escrow Agent," "Heartland Group," "JMS," "JMS Escrow Account," "Atlas Income Fund, LLC," or "Heartland Financial," all of which were deposited into a slush fund. ( Id. ¶ 32.)
Despite the fact that the account was entitled "Lincoln Fidelity Escrow Account" and UPB knew or should have known that its customer, Lincoln Fidelity Escrow, was organized to act as an escrow agent for its clients, UPB allowed Lincoln Fidelity Escrow to open and continue to maintain the Lincoln Account as an ordinary business checking account. ( Id. ¶ 33.) UPB also allowed the deposit of checks into the Lincoln Account despite the fact that the vast majority of the checks were expressly made payable to the payee as an escrow agent or were made payable to an escrow account. ( Id. ¶ 34.) Lincoln Fidelity Escrow conducted no legitimate business and did not actually sell or participate in the sale of securities. ( Id. ¶ 35.)
Nearly all of the hundreds or thousands of checks bore writing on the memo line indicating that the drawer intended the check to be used for the purchase of securities. ( Id. ¶ 36.) UPB's actions in allowing the deposit of the checks into the ordinary business checking account of Lincoln Fidelity Escrow, rather than requiring their deposit into the designated account of the named payee, facilitated the scheme by Heartland to defraud Plaintiff. ( Id. ¶ 38.)
In early 2000, the United States Securities Exchange Commission ("SEC") began investigating Heartland's activities. On August 10, 2000, the SEC filed a complaint against the Heartland principals, requesting, among other things, that the court appoint a receiver for Heartland and JMS Investment Group. ( Id. ¶ 39.) James A. Knauer was appointed Receiver for Heartland and JMS Investment Group, and filed a complaint against the Heartland principals and related entities on October 20, 2000. Although the amount of assets potentially recoverable through the receivership proceedings is still uncertain, it is clear that Plaintiff will likely recover through the receivership only a fraction of her "investments." ( Id. ¶ 40.)
B. THE PLAINTIFF'S CLAIMS
Count I alleges that because the checks which were deposited into the Lincoln Account with UPB did not bear the endorsement of the payee of said checks, the checks were not negotiated to Lincoln Fidelity Escrow, and UPB never became a "holder" of the checks. (Am. Compl. ¶ 42.) As a result, UPB could not become a "holder in due course" under Indiana Code § 26-1-3.1-302(a). ( Id. ¶ 43.) The Plaintiff has made claims to the checks or their proceeds against Heartland based in part on Heartland's alleged breach of fiduciary duty and fraud, through the receivership proceedings. ( Id. ¶ 44.) Her claims against Heartland entitle her to a property or possessory right in the checks and/or their proceeds. (Am. Compl. ¶ 45.) Pursuant to Indiana Code § 26-1-3.1-306, UPB is subject to the Plaintiffs claims of property and/or possessory rights in the checks and/or their proceeds arising from Heartland's fraud and breach of fiduciary duty related to the checks. ( Id. ¶ 46.)
Count II alleges that Heartland acted as a "fiduciary" as defined by Indiana Code § 26-1-3.1-307(a)(1) with respect to those checks issued to it by the Plaintiff and made payable to a fiduciary or to a fiduciary account. Heartland owed a fiduciary duty to the Plaintiff to deposit the checks into an escrow account and use the proceeds solely to purchase the securities for which the checks were issued. (Am. Compl. ¶ 48.) The Plaintiff was a "represented person" as defined by Indiana Code § 26-1-3.1-307(a)(2), as she was a person to whom Heartland owed a fiduciary duty. ( Id. ¶ 49.) A large subset of the Plaintiffs checks were made payable to Heartland and related persons and entities as fiduciaries, or to a fiduciary account. A substantial majority of the checks specifically indicated that they were payable to Johann Smith as Escrow Agent. ( Id. ¶ 50.) The checks were taken by UPB from Heartland for payment, collection, or value. ( Id. ¶ 51.) UPB had knowledge of Heartland's and Smith's fiduciary status. ( Id. ¶ 52.) The Plaintiff has made claims to the checks or their proceeds through the receivership proceedings, based in part on the breaches of fiduciary duty by Heartland and/or Smith. ( Id. ¶ 53.)
By depositing the checks into the Lincoln Account, Heartland and Smith deposited the checks into an account other than an account of the named payee of those checks, as fiduciaries, or an account of the represented persons. (Am. Compl. ¶ 54.) By allowing the deposit of checks into an ordinary business checking account of a different entity, rather than requiring deposit of the checks into a fiduciary account of Smith or Heartland, and despite the fact that the checks were made to Smith or Heartland as escrow agents, UPB failed to comply with the customs and standards of the banking industry and demonstrated a lack of observance of reasonable commercial standards of fair dealing. ( Id. ¶ 55.) UPB's actions in receiving the deposits constitute bad faith. ( Id. ¶ 56.) Under Indiana Code § 26-1-3.1-307, UPB had notice of Heartland's and Smith's breach of fiduciary duty and thus had notice of the Plaintiffs claims of breaches of that duty. ( Id. ¶ 57.) Because the checks were not endorsed by the intended payee of those checks, namely Heartland and Smith, UPB was not a holder of the checks and, therefore, could not be a holder in due course. UPB's notice of the Plaintiffs claim of breach of fiduciary duty prevents it from becoming a holder in due course pursuant to Indiana Code § 26-1-3.1-307. ( Id. ¶ 58.) Under Indiana Code § 26-1-3.1-306, UPB is subject to the Plaintiff's claims of property and/or possessory rights in the checks and/or proceeds of the checks arising from Heartland's and Smith's breach of fiduciary duty related to those instruments. ( Id. ¶ 60.)
Count III alleges that UPB owed a duty to the Plaintiff to recognize the danger signals related to Heartland's deposit of the checks, namely:
(a) The amounts of the individual checks deposited in the Lincoln Account were significant, generally ranging anywhere from $1,000 to $150,000;
(b) The aggregate amount of the checks deposited into the Lincoln Account was in excess of $25,000,000;
(c) The checks were deposited into an ordinary business checking account of Lincoln Fidelity despite the fact that most of the checks were payable to Johann Smith or Heartland entities specifically as fiduciaries;
(d) The endorsements on the checks did not match the payee of those checks;
(e) UPB allowed Lincoln Fidelity Escrow to open and maintain the Lincoln Account as an ordinary business checking account despite the fact that it knew or should have known that Lincoln Fidelity Escrow was organized to act as an escrow agent for its clients;
(f) UPB allowed Lincoln Fidelity Escrow to open and maintain the account as an ordinary business checking account despite the fact that the name of the account indicated that it was an "Escrow Account;"
(g) The checks bore on their memo lines designations that the checks were for the purchase of particular securities; and
(h) Some of the checks were payable to specific escrow accounts, namely "JMS Escrow Account" and "Johann M. Smith Escrow Account," yet those checks were deposited into the Lincoln Account with the stamped endorsement described above.
(Am. Compl. ¶ 62.) The potential harm to the Plaintiff resulting from Heartland's improper deposit of her checks was sufficiently foreseeable to UPB to impose a duty to act with reasonable care with respect to the proper deposit and collection of those checks. ( Id. ¶ 63.) By allowing Lincoln Fidelity Escrow to open and continue to maintain the Lincoln Account as an ordinary business checking account and by allowing the deposit of the checks into the Lincoln Account, UPB failed to act with reasonable care and breached its duty to the Plaintiff. ( Id. ¶ 64.) UPB's negligence facilitated Heartland's massive Ponzi scheme and caused her damages. ( Id. ¶ 65.)
Count IV alleges that, based on the danger signals known to UPB, UPB was aware of circumstances sufficient to give it reason to know that a fraudulent scheme was being perpetrated on the Plaintiff. (Am. Compl. ¶ 67.) The Plaintiff has made claims to the checks or their proceeds through the receivership. ( Id. ¶ 68.) Because the checks were not endorsed by the payee of those checks, UPB was not a holder of the checks and, therefore, could not be a holder in due course. UPB's notice of the Plaintiff's fraud claims prevents it from becoming a holder in due course. ( Id. ¶ 69.) The Plaintiff's claims against Heartland entitle her to a property or possessory right in the checks and/or their proceeds. ( Id. ¶ 70.) UPB is subject to the Plaintiff's claims to the checks and/or their proceeds pursuant to Indiana Code § 26-1-3.1-306.
II. RECONSIDERATION OF RULINGS IN THE SEPTEMBER 27 ENTRY
A. STANDARDS
The ruling that Ms. Conder lacked standing to bring the UCC claims against UPB was interlocutory; therefore, the court has discretion to reconsider this ruling. See Fed.R.Civ.P. 54(b); Marconi Wireless Tel. Co. v. United States, 320 U.S. 1, 47-48 (1943).
The court should not exercise that discretion in every situation, however. Under the law of the case doctrine, it is presumed that a court's prior rulings will govern throughout the course of the litigation in that court. See, e.g., Trs. of Funds of IBEW Loc. 701 v. Pyramid Elec., 223 F.3d 459, 468 n. 4 (7th Cir. 2000). But the doctrine is "highly flexible, especially when a judge is being asked to reconsider his own ruling." Pickett v. Prince, 207 F.3d 402, 407 (7th Cir. 2000). A judge may reconsider his own ruling if he "has a conviction at once strong and reasonable that the earlier ruling was wrong, and if rescinding it would not cause undue harm to the party that had benefitted from it." Trs. of Funds of IBEW Loc. 701, 223 F.3d at 468 n. 4 (quotation omitted). The doctrine "does not limit a trial judge's changes of mind during the course of a litigation uninterrupted by an appeal[.]" SmithKline Beecham Corp. v. Apotex Corp., 247 F. Supp.2d 1011, 1014 (N.D. Ill. 2003) (Posner, J.).
When deciding a motion to dismiss for lack of standing, the court accepts as true all material allegations of the complaint and draws all reasonable inferences in the plaintiff's favor. Lee v. City of Chicago, 330 F.3d 456, 468 (7th Cir. 2003). The party asserting jurisdiction bears the burden of establishing the required elements of standing. Id. The elements of standing are that the plaintiff suffered an "injury in fact," the challenged action caused the injury, and the injury likely can be redressed by the cause of action. Krislov v. Rednour, 226 F.3d 851, 857 (7th Cir. 2000). "Complaints need not be elaborate, and in this respect injury (and thus standing) is no different from any other matter that may be alleged generally." Alliant Energy Corp. v. Bie, 277 F.3d 916, 919 (7th Cir. 2002).
The court also has the discretion to reconsider its rulings on UPB's Motion to Dismiss First Amended Class Action Complaint because no judgment has been entered. See Fed.R.Civ.P. 54(b); Marconi Wireless Tel. Co., 320 U.S. at 47-48. When ruling on a motion to dismiss for failure to state a claim, the court accepts the complaint's allegations as true. Hishon v. King Spalding, 467 U.S. 69, 73 (1984). A complaint may be dismissed for failure to state a claim "only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon, 467 U.S. at 73 (citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). If the allegations establish that the claim cannot succeed, "then dismissal under Rule 12(b)(6) follows." S. Austin Coalition Cmty. Council v. SBC Commun. Inc., 274 F.3d 1168, 1171 (7th Cir. 2001), cert. denied, 537 U.S. 814 (2002).
B. DISCUSSION
The court's rulings on the pending motions are based on the applicable law as applied solely to allegations of the Amended Complaint. Thus, even if the Plaintiffs motion to reconsider and supporting briefs attempt to amend that complaint with new, inconsistent allegations (and the court makes no finding that they do), any such attempt has no bearing on the outcome of the pending motions.
In moving for reconsideration, the Plaintiff contends that neither the checks nor the funds held in her account on which the checks were drawn were the property of Heartland when UPB accepted the checks for deposit. As a result, according to the Plaintiff, her UCC claims against UPB existed before any interest in the checks or their proceeds passed to Heartland. The Plaintiff also argues that her UCC claims belong only to her and the other makers of the checks, and neither Heartland nor the Receiver has standing to bring these UCC claims against UPB.
The court's ruling that the Plaintiff lacked standing to pursue the UCC claims was based on the conclusion that when the Plaintiff wrote checks to Heartland, the proceeds of those checks became assets or property of Heartland. (September 27 Entry at 12-13.) This conclusion was erroneous. This conclusion was not supported by citation to any judicial decision addressing the question of when the rights or claims to the checks or their proceeds were transferred to Heartland. The authorities cited by the Plaintiff in moving for reconsideration establish that the Plaintiffs UCC claims do not assert claims to the property or assets of Heartland.
Decisions cited by the Plaintiff, though neither directly addressing standing nor involving a receivership, support the conclusion that the Plaintiff has standing to assert her UCC claims against UPB. For example, in Travelers Casualty Surety Co. of America v. Wells Fargo Bank, N.A., 205 F. Supp.2d 920 (N.D. Ill. 2002), a sister district court held that the plaintiff insurer, as assignee and subrogee of a victim of a forged and counterfeit check scheme, stated a UCC claim under § 3-306 against the payee brokerage firm. The plaintiff asserted a claim to a check or its proceeds under § 3-306 of the Illinois version of the Uniform Commercial Code and alleged the payee accepted the check without becoming a holder in due course. Id. at 922. The court denied the defendant's motion to dismiss. Id. at 924.
Another example is found in Douglass v. Wones, 458 N.E.2d 514 (Ill.App.Ct. 1983), which arose from a bad-check scheme. The plaintiff drawer of the checks at issue brought UCC claims against payee banks, alleging that he was fraudulently induced by a schemer, Douglas, to draw the checks and that he had a right to the checks because they were fraudulently obtained from him. The drawer also alleged that the payee banks failed to become holders in due course such that they were liable to him for conversion, rescission of negotiation and unjust enrichment. Douglass, 458 N.E.2d at 518, 520. The court observed the general rule that "one cannot . . . acquire good title to stolen property, and where personal property is wrongfully taken from the owner, the owner has the right to retake possession whenever and wherever the property may be found." Id. at 519. The court noted the exception to this rule for negotiable instruments: if the instrument is taken by a holder in due course, then the holder takes the instrument free of all claims against it. The court then noted the corollary: "Unless one has the rights of a holder in due course he takes the instrument subject to all valid claims and defenses to it on the part of any party." Id. (citing UCC § 3-306). Upon determining that the payee banks were not holders in due course, the court concluded that they took the checks subject to the drawer's claims in rescission and unjust enrichment, and the court allowed the drawer to maintain these claims against the payee banks. Id. at 523.
So, it is here. The Plaintiff alleges that she was fraudulently induced by Heartland to write the checks at issue. Douglass' reasoning supports the conclusion that Heartland's own wrongdoing could not extinguish the Plaintiff's claims of rights in the checks and/or their proceeds. In other words, because of its fraud, Heartland could not acquire an enforceable interest in the checks or their proceeds, and the Plaintiff therefore retained claims in the checks and/or their proceeds. Under UCC § 3-306, if UPB was not a holder in due course, and the Amended Complaint alleges that it was not, then UPB took the checks drawn by the Plaintiff subject to her claims in the checks and/or the proceeds.
ALG, Inc. v. Estate of Eldred, 35 P.3d 931 (Kan.Ct.App. 2001) also supports the proposition that UPB as the bank in which the Plaintiff's checks were deposited may be liable under the UCC for accepting for deposit the checks missing endorsements or without proper endorsements. Id. at 934 (citing UCC § 3-306).
UCC provisions support the conclusion that the Plaintiff's claims do not seek property or assets of Heartland. Under the UCC, a "check" is not a payment of money, but rather, an "order to pay a fixed amount of money . . . payable on demand and drawn on a bank[.]" Ind. Code § 26-1-3.1-104(a), (e), (f)(1); see also II Thomas D. Crandall, et al., Uniform Commercial Code § 15.5 (Little, Brown and Company eds., 1993) (stating that a check is an order rather than an assignment of funds). Under the UCC, if an uncertified check is taken for an obligation, the obligation is merely suspended; the obligation is discharged upon payment or certification of the check. Ind. Code § 26-1-3.1-310(b). Thus, under these provisions, the drawing and delivery of a check is not the delivery of the money represented by the check, but merely an order to the bank to pay a sum of money on demand.
Judicial decisions applying the UCC establish that the delivery of a check is not a transfer of the funds represented by the check. See, e.g., Indiana Ins. Co. v. Margotte, 718 N.E.2d 1226, 1230 (Ind.Ct.App. 1999) ("It is well settled in Indiana law that once a check is paid, it extinguishes the debt for which it is presented.") (citing, inter alia, Ind. Code § 26-1-3.1-310). Decisions of other jurisdictions are in accord. In Barnhill v. Johnson, 503 U.S. 393 (1992), the Supreme Court considered when the transfer of an ordinary check occurs for purposes of § 547(b) of the Bankruptcy Code. The Court stated that "A person with an account at a bank enjoys a claim against the bank for funds in an amount equal to the account balance. Under the U.C.C., a check is simply an order to the drawee bank to pay the sum stated, signed by the maker and payable on demand." Id. at 398. The Court held that the transfer occurs when the drawee bank honors the check by paying on it, since the mere receipt of the check gives the recipient no right to the funds held by the drawee bank on the drawer's account. Barnhill, 503 U.S. at 399. The same conclusion — that delivery of a check does not constitute payment — obtains from decisions under the Indiana common law. See, e.g., Borne v. First Nat'l Bank, 24 N.E. 173, 174-75 (Ind. 1890) (stating that the doctrine that "an ordinary check does not constitute payment . . . is so well settled that it is unnecessary to refer to the authorities"). In fact, long ago the Indiana Supreme Court observed the "well established" rule of law "that the giving of a check is not payment until the money is received on it or the check is accepted by the bank at which it is made payable." Burrows v. State, 37 N.E. 271, 272 (Ind. 1894).
The Court applied the UCC as adopted by New Mexico and said that it was unaware of any material differences between New Mexico's version of the UCC and those adopted by other states. Barnhill, 503 U.S. at 398 n. 5.
Moreover, under the UCC and Indiana common law, the drawing of a check does not operate as an assignment of funds in the hands of the drawee. This rule is expressly stated in the UCC § 3.1-408: "[a] check . . . does not of itself operate as an assignment of funds in the hands of the drawee available for its payment[.]" Ind. Code § 26-1-3.1-408; see also 1 Barkley Clark Barbara Clark, The Law of Bank Deposits, Collections and Credit Cards ¶ 4.01 (A.S. Pratt Sons, eds., rev. ed. 2002). This principle was recognized by the Indiana Supreme Court in the 1800s. In Harrison v. Wright, No. 11456, 100 Ind. 515, 1885 WL 8693 (Ind. Mar. 17, 1885), the court addressed whether the drawing and delivery of an ordinary check operated as an equitable assignment to the check-holders, pro tanto, of the funds of the drawer in the hands of the drawees. Id. at *1. The court held that the execution of an ordinary check is not by itself an appropriation or equitable assignment of the funds of the drawer to the payee. Id. at *14. One consideration upon which this holding was based was the drawer's right to cancel the payment of checks. Id.; see also Ind. Code § 26-1-4-403 (establishing a customer's right to stop payment on a check). The right of the drawer to stop payment on a check would be inconsistent with the conclusion that the execution of a check is a pro tanto assignment of the funds of the drawer on deposit with the drawee. Firstar Bank, N.A. v. Faul Chevrolet, Inc., No. 00 C 4061, 2003 WL 548365 (N.D. Ill. Feb. 25, 2003), even though not involving an action under the UCC, supports the conclusion that the Plaintiff has a claim in the checks and/or their proceeds. In that case, the plaintiff, a national banking association, brought various claims including breach of contract, fraud, fraudulent conveyance and conversion against the defendants, a car dealership and a sole shareholder. The dealership owed the association money for improper drafts and dishonored checks. Id. at *1-2. The court concluded that the dealership was entitled to summary judgment on the conversion claim based on the deposit of improper drafts. Id. at *4. In so ruling the court rejected the dealership's argument that once it deposited the drafts, the money became its property and, therefore, the association could no longer claim a right to the drafts. The court reasoned: "One element of a claim for conversion is that a defendant wrongfully and without authorization assumed control, dominion, or ownership over plaintiff's property. If that same control, dominion, or ownership could extinguish a plaintiffs cause of action there would never be a claim for conversion." Id. at *5.
Firstar's reasoning extends to the Plaintiffs claims to the checks and/or proceeds of the checks in this case. The Plaintiff alleges that she was fraudulently induced by Heartland to write the checks and that she has a claim in the checks or their proceeds because of that fraud. If Heartland's fraud could extinguish the Plaintiff's claim to the checks or their proceeds, a drawer could never have a claim against a payee based on fraudulent inducement.
The court concludes that the Plaintiff's UCC claims against UPB are not claims to or against Heartland property. Because these claims are not to or against Heartland's property, the claims do not interfere with the taking of control, possession or management by the Receiver of Heartland property or interfere with or harass the Receiver, or interfere with the exclusive jurisdiction of the court over Heartland property. The Receivership does not give the Receiver the right to bring the claims of Heartland investors which are not claims to Heartland property or which are not themselves claims of the receivership entities.
Furthermore, the Receiver lacks standing to assert claims on behalf of the defrauded investors such as the Plaintiff in this case; he has standing only to assert claims on behalf of the receivership entities, Heartland and JMS. See Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 429 (1972); Scholes v. Lehmann, 56 F.3d 750, 754-55 (7th Cir. 1995). The receivership entities could not have brought the Plaintiff's UCC claims against UPB. The Plaintiff's UCC claims allege that Heartland obtained the Plaintiff's checks through its fraud; Heartland could have no claim against UPB based on its own fraud. Heartland was not injured by UPB's alleged conduct giving rise to the Plaintiff's claims; if anything, Heartland benefitted from such conduct. Indeed, the Amended Complaint alleges that UPB's actions in allowing the deposit of the Plaintiffs checks facilitated the scheme by Heartland to defraud the Plaintiff and other investors, causing them damages. (Am. Compl. ¶ 38, 65.) Though the Receiver would have standing to assert claims arising from an alleged mishandling by UPB of the Lincoln account or another account of a Heartland entity, the Plaintiffs claims do not arise from the mishandling of such an account. Rather, the Plaintiff's claims arise from UPB's actions in accepting her checks for deposit and depositing those checks into the Lincoln account.
Neither Scholes v. Lehmann nor Troelstrup v. Index Futures Group, Inc., 130 F.3d 1274 (7th Cir. 1997), supports UPB's claim that only the Receiver has standing to bring the Plaintiffs UCC claims. These cases stand for the general proposition that a receiver lacks standing to assert claims on behalf of the defrauded investors and has standing only to assert claims on behalf of the receivership entities. These cases do not address whether a receiver has standing to assert the types of claims that are asserted by the Plaintiff in the instant case. No UCC claims were asserted in either Scholes or Troelstrup, and the defendants in those cases were not despository banks. Neither case addresses the question of when the Plaintiffs check became assets or property of Heartland. And, as stated, under the allegations of the Amended Complaint, UPB's actions upon which the Plaintiff's claims are based caused no injury to the receivership entities.
UPB's claim that the Receiver has admitted that he and only he has standing to bring the Plaintiff's UCC claims in this case on behalf of Heartland is wrong. ( See Resp. of Receiver to Agnes N. Gender's Mot. for Relief from Stay of Other Proceedings and Mot. to Intervene filed on Dec. 18, 2002, in the case of United States Securities Exch. Comm'n v. Payne, IP00-1265-C-T/K (S.D. Ind.).) To the contrary, the Receiver takes no position regarding whether the Plaintiffs UCC claims against UPB are her claims or claims which are property of the Receivership.
Therefore, the court concludes that the Plaintiffs UCC claims are not properly claims of the receivership entities. Consequently, the Receiver could not bring the Plaintiffs UCC claims against UPB.
The court further finds that the Plaintiff has standing to assert her UCC claims against UPB. Taking the allegations of the Amended Complaint as true and drawing all reasonable inferences in favor of the Plaintiff, as the court must, the Plaintiff has alleged that she suffered an injury in fact, that is, that she was wrongfully deprived of her checks and/or their proceeds causing her damages; that UPB caused her injury by facilitating Heartland's scheme to defraud her; and that her injury can be redressed by her causes of action. Accordingly, the Plaintiffs motion to reconsider is GRANTED; the portion of the September 27 Entry granting UPB's Motion to Dismiss for Lack of Standing with respect to Plaintiffs UCC claims is VACATED; and the Motion to Dismiss for Lack of Standing is hereby DENIED.
The court found in its September 27 Entry that the Plaintiff has standing to assert the negligence claim against UPB. That ruling is unchanged by this entry.
Given the denial of the motion to dismiss, the court now must address UPB's arguments that the Plaintiff has failed to state a claim for relief under the UCC which were raised in its Motion to Dismiss First Amended Class Action Complaint. UPB contends that the Amended Complaint fails to state a claim with respect to all counts because UPB did not proximately cause the Plaintiff's losses as a matter of law. UPB also raises other arguments, but for reasons which will become apparent, they need not be discussed.
UPB contends that no act or omission on its part proximately caused the Plaintiff's alleged loss, requiring the dismissal of all claims against it. According to UPB, any loss to the Plaintiff was the fault of Heartland and its various operatives.
The Plaintiff argues that a proximate cause analysis is inapplicable to her UCC claims. Franklin v. Benock, 722 N.E.2d 874 (Ind.Ct.App. 2000), trans. denied, does not support UPB's position that a proximate cause analysis is applicable to UCC claims. However, other decisions do. In Kaskel v. Northern Trust Co., 328 F.3d 358 (7th Cir. 2003), a depositor sued her bank which had cashed a check drawn on her account for breach of contract. Kaskel wrote a check payable to MLS, and an agent of MLS, Forrester mailed the check to Shook, who was supposed to use it for investment purposes. Shook deposited the check in his personal account at his bank, which then presented the check for payment to Kaskel's bank. MLS had not endorsed the check, but the bank paid it anyway. Kaskel, 328 F.3d at 359. The district court granted summary judgment for the bank because the plaintiff failed to prove causation and had ratified the transaction. Id. at 359-60.
On appeal, the plaintiff argued that if the bank had refused to pay Shook, he would not have gotten her money, and, therefore, the bank's conduct was a cause of her loss. The Seventh Circuit concluded that her premise was incorrect:
Had the bank refused to pay Shook it would have returned the check to him and he in turn would have returned it to Forrester for endorsement. Forrester would have endorsed the check to Shook (his authority to do so is not questioned) because he wanted Shook to be able to cash the check. Mrs. Kaskel would have been in exactly the same pickle that she is in today.Kaskel, 328 F.3d at 360. The court then held that "[n]ot having been harmed by the bank's breach of contract, Kaskel cannot recover damages . . . for the breach." Id.
In support of its holding, the Kaskel court cited, among other decisions, Ambassador Financial Services, Inc. v. Indiana National Bank, 605 N.E.2d 746 (Ind. 1992) and Sanwa Business Credit Corp. v. Continental Illinois National Bank Trust Co., 617 N.E.2d 253 (Ill.App.Ct. May 18, 1993), in which the plaintiffs alleged claims based on the UCC. The Kaskel court cited to the Ambassador Financial Services' discussion of proximate cause, albeit in the context of the intended payee defense. The opinion stated that "[a] bank will escape liability for a drawer's damages that were not caused by the bank's improper payment." Ambassador Fin. Servs., 605 N.E.2d at 754. The court explained that the "[l]ack of causation can be proved by showing that the bank's improper payment of a check carried out (or did not interfere with the accomplishment of) the drawer's purpose with respect to that check." Id. The citation to Sanwa was to that court's conclusion that the lower court correctly granted summary judgment to the defendant bank because the plaintiff could not prove that the bank caused its losses. Sanwa, 617N.E.2d at 260.
Another illustrative example of a case applying a causation analysis to UCC claims is County of Pierce v. Suburban Bank, 815 F. Supp. 1124 (N.D. Ill. 1993). There the County alleged that the defendant bank violated the warranty of good title provision of the Illinois UCC. The County alleged damages caused by the bank's failure to obtain the endorsement of all payees on a check issued by the County and deposited in an account with the bank. The bank moved for summary judgment on the ground that the missing endorsement was not the cause of the County's loss. The court granted the motion. Id. at 1125. The court concluded that even though the bank technically violated the UCC provision, the bank did not cause the County's damages. Id. at 1126-27. The court reasoned that the check missing the endorsement was deposited into the account as intended by the County and the bank therefore did not prevent the check from reaching the proper account. Because the funds were diverted only once they were in the proper account, the court held that the County's damages were not caused by the bank's failure but by the individual who subsequently misappropriated the funds in the account. Id. at 1126. Thus, the County of Pierce is another decision in which a causation analysis was applied to a UCC claim.
The Plaintiff offers two cases in support of her position that a causation analysis is inapplicable to UCC claims. The first is Knight Publishing Co. v. Chase Manhattan Bank, N.A., 479 S.E.2d 478 (N.C.Ct.App. 1997). The case involved UCC § 3-405, the rule regarding imposters and signatures in the name of the payee, which contains its own loss causation and risk shifting provision. It is, therefore, distinguishable from the instant case. In addition, the case does not hold that a causation analysis is improper in respect to all UCC claims, particularly claims like that asserted by the Plaintiff in this case. The second case is Hartford Fire Ins. Co. v. Maryland National Bank, N.A., 671 A.2d 22 (Md. 1996), which addressed two certified questions regarding whether a drawer can bring an action directly against the depository bank. Id. at 24. The case did not directly address the appropriateness of a causation analysis in the UCC context. The Plaintiffs cases therefore are unavailing.
Hartford Fire, however, does support the Plaintiffs claim to standing to bring the UCC claims against UPB.
Moreover, the court concludes that application of a proximate cause analysis to the UCC claims in this case is consistent with the provisions of the UCC itself. The UCC provides that "[u]nless displaced by the particular provisions of [the UCC], the principles of law and equity . . . shall supplement the provisions of [the UCC]" and the remedies provided by the UCC "shall be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed[.]" Ind. Code § 26-1-1-103, -106(1). The Indiana court of appeals has remarked that § 1-103 "emphasizes the continued applicability to commercial contracts of all supplemental bodies of law except insofar as they are explicitly displaced by the provisions of the UCC." Ind. Glass Co. v. Ind. Mich. Power Co., 692 N.E.2d 886, 889 (Ind.Ct.App. 1998) (citing Ind. Code § 26-1-1-103, cmt. 1).
Another district court in this circuit has stated that the conclusion that a defendant cannot be held liable to a plaintiff for damages under the UCC where the defendant's conduct was not the legal cause of the plaintiff's loss is consistent with the intent of the UCC's general damages provision — to place an aggrieved party in the same position as if the other party had fully performed. Kaskel v. N. Trust Co., No. 99 C 2421, 2001 WL 1135102, at *5 (N.D. III. Sept. 24, 2001), aff'd, 328 F.3d 358 (7th Cir. 2003); accord Sanwa, 617 N.E.2d at 258 (relying on the general damages provision of the UCC for support for the conclusion that where the damages suffered would have occurred even if the breaching party had fully performed, there can be no recovery from the breaching party). The undersigned agrees with these decisions that such a conclusion is consistent with the UCC's general remedies provision. In this court's view, the general remedies provision suggests by implication that the aggrieved party should not be put in a better position than he or she would have been in had the other party fully performed. Application of a proximate cause analysis to this case will further that end.
An act or omission "is the proximate cause of an injury if the injury is a natural and probable consequence which, in light of the circumstances, should reasonably have been foreseen or anticipated." Franklin v. Benock, 722 N.E.2d 874, 880 (Ind.Ct.App. 2000), trans. denied. "Where harmful consequences are brought about by intervening and independent forces which were not reasonably foreseeable at the time of the defendant's conduct, the chain of causation is broken and the intervening cause may serve to cut off the defendant's liability." Id.
The issue of proximate cause often may not be resolved by a dispositive motion. See id.; see also Guidry v. Bank of La Place, 740 F. Supp. 1208 (E.D. La. 1990) (concluding on motion to dismiss for failure to state a claim that the defendant's actions and omissions were not a proximate cause of the plaintiffs losses), aff'd as modified in other part by, 954 F.2d 278 (5th Cir. 1992). However, where the plaintiff can prove no facts consistent with the allegations of the complaint which would establish or raise a genuine issue as to proximate cause, then the issue may properly be resolved as a matter of law. See Franklin, 722 N.E.2d at 880; see also County of Pierce v. Suburban Bank, 815 F. Supp. 1124, 1127 (N.D. Ill. 1993) (granting summary judgment where defendant bank's technical violation of UCC in depositing plaintiff's check without endorsements of all payees did not cause the plaintiffs damages); Kleen v. Homak Mfg. Co., 749 N.E.2d 26, 29-31 (Ill.App.Ct. 2001) (reversing denial of defendant's motion to dismiss upon finding that the plaintiff could never establish proximate cause).
In Franklin, a little girl was bitten by a dog and suffered severe facial injuries. Her attorneys filed suit and eventually recovered $90,000 from an insurance company. Her parents then hired another attorney, Bradley Catt ("Catt"), to obtain a guardianship for her and to secure court approval of the settlement. The funds were deposited into the Knox County Clerk's trust account. The Knox County Circuit Court later approved the settlement, and the clerk issued a check made payable to Citizens Bank ("Citizens") for over $57,000. The little girl was listed as the sole obligee on the check's detachable stub. The clerk gave the check to Catt, who presented the check to Citizens and deposited it into his own trust account. Catt later stole the money from the account, and was eventually prosecuted for theft. Franklin, 722 N.E.2d at 876-877.
The girl's parents sued Citizens, alleging that it owed a duty to ascertain the true intent of the clerk and to pay the money to the intended payee, and that it violated its duty to exercise ordinary care and to act in a commercially reasonable manner. Franklin, 722 N.E.2d at 877. The Indiana Court of Appeals ultimately found, however, that Citizens' actions were not the proximate cause of the little girl's injuries:
The undisputed facts lead but to one inescapable conclusion: `that the reason why [the little girl] does not have her $57,833.29 is because her attorney, Bradley Catt, stole the money intended for her.' Even assuming, arguendo, that Citizens failed to exercise reasonable care in depositing the clerk's check into Catt's trust account, it could not have reasonably foreseen that he would callously and contemptibly breach numerous legal, ethical, and moral obligations to his client by stealing and ultimately squandering the proceeds that were intended to pay for [the little girl's] reconstructive surgeries.Id. at 881.
The court finds the same to be true here. The court's earlier conclusion that it could not rule out the possibility that the Plaintiff could prove facts consistent with the allegations of the Amended Complaint which would establish proximate cause was mistaken. On closer examination, the Plaintiffs allegations, even when viewed most favorably to her, foreclose any chance that she could ever establish that UPB proximately caused her losses.
Even assuming, without deciding, that UPB violated the UCC by allowing the Plaintiffs checks to be deposited into the wrong account, that was not the cause of her harm. Indeed, the Plaintiff intended to write the checks to Heartland and its related entities, and Lincoln Fidelity — the owner of the account into which the checks were deposited — was a related entity, at least according to the Amended Complaint. It was what happened after the deposit of those checks that caused the Plaintiffs harm. It was only after the checks were deposited into the Lincoln account that the Plaintiff suffered any losses. It was then, after the deposit, that Heartland used the proceeds of the checks to pay fraudulent returns and dividends to investors, spent on the lavish lifestyles of Heartland's principals, or wrongfully diverted to other schemes and purposes. (See Am. Compl. ¶¶ 1, 5, 24, 28, 31.)
It was not reasonably foreseeable to UPB, even if some of the Plaintiffs checks contained improper endorsements, that Heartland's principals were perpetrating a Ponzi scheme. Because the Plaintiffs damages were brought about by intervening and independent forces — which were not reasonably foreseeable at the time of UPB's conduct — the chain of causation was broken and the intervening cause served to cut off UPB's liability. Thus, even when the First Amended Complaint is viewed most liberally in the Plaintiff's favor as the federal dismissal standard requires, the court finds that UPB's alleged conduct was not the proximate cause of the Plaintiffs losses.
Case law from other jurisdictions supports the court's conclusion that UPB's actions and omissions were not the proximate cause of the Plaintiff's losses. In Guidry, an investor in a Ponzi scheme sued the defendant bank where the schemer kept his bank account and through which he operated his scheme. The investor alleged that the bank permitted the schemer to operate the Ponzi and check kiting scheme out of his account. The bank moved to dismiss the plaintiff's claims for failure to state a claim. Guidry, 740 F. Supp. at 1210. The court concluded that the alleged failure of the bank to act was not a proximate cause of the alleged losses of the plaintiff investor, despite the fact that the schemer used his account at the bank to further his fraudulent schemes. Id. at 1218. As a result, and because the bank owed no duty to the investor, the court dismissed the investor's negligence claim against the bank. Id. at 1219. Other decisions similarly conclude that the acts or omissions of a bank used by one to facilitate a fraudulent scheme is not the proximate cause of any loss to the investors in the scheme. See FDIC v. Imperial Bank, 859 F.2d 101, 103 (9th Cir. 1988) (holding that bank which negligently handled a wire transfer from a transferor bank was not the proximate cause of the letter's loss because the loss resulted from the fraudulent activity and irresponsible activity of third parties as well as the transferor bank's board's failure to act on notice); Hutton Mortg. Corp. v. Equitable Bank, N.A., 678 F. Supp. 567, 583 (D. Md. 1988) (holding that bank's failure to discover or report its suspicions of customer's fraud was not a proximate cause of losses suffered by mortgage company and granting summary judgment on mortgage company's negligence claim).
Because the Plaintiff can prove no set of facts consistent with the allegations of the Amended Complaint which would establish or raise a genuine issue that UPB's actions or omissions were the proximate cause of her damages, her Amended Complaint fails to state a claim upon which relief can be granted. Accordingly, the court now VACATES its prior denial of UPB's Motion to Dismiss First Amended Class Action Complaint as to the Plaintiff's negligence claim and GRANTS UPB's Motion to Dismiss in its entirety.
The court was not asked to reconsider its ruling that UPB's motion to dismiss should be denied as to the negligence claim. Nonetheless, the court's consideration of UPB's proximate cause argument applies to all claims asserted by the Plaintiff. Therefore, the court finds that it is proper and necessary to reconsider the denial of the motion to dismiss the negligence claim. See, e.g., Trs. of Funds of IBEW Loc. 701 v. Pyramid Elec., 223 F.3d 459, 468 n. 4 (7th Cir. 2000).
III. UPB'S MOTION TO STAY AND MOTION FOR SUMMARY JUDGMENT
The conclusion that UPB's motion to dismiss should be granted as to all claims of the Amended Complaint brings an end to the litigation of this case in this court. As a result, the court has no occasion to address the matters raised by UPB's motion to stay or its motion for summary judgment. Accordingly, these motions are DENIED as moot.
IV. CONCLUSION
The court GRANTS the Plaintiff's motion to reconsider its ruling that the UCC claims should be dismissed for lack of standing, VACATES the granting of UPB's Motion to Dismiss for Lack of Standing with respect to the Plaintiff's UCC claims, and now DENIES the Motion to Dismiss for Lack of Standing. The court, on its own motion, RECONSIDERS its denial of UPB's Motion to Dismiss First Amended Class Action Complaint as to the Plaintiffs negligence claim and VACATES its prior denial of the motion to dismiss as to that claim.
The court further finds that UPB's Motion to Dismiss First Amended Class Action Complaint should be GRANTED as to the Plaintiffs Amended Complaint. An appropriate judgment dismissing the Amended Complaint will be entered. Dismissal of the Plaintiff's claims renders moot UPB's motion to stay discovery, class certification and answer as well as UPB's motion for summary judgment; therefore, these motions are DENIED AS MOOT.