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concluding that Cannon owed fiduciary duties to the beneficiaries of the escrow accounts
Summary of this case from In re CannonOpinion
Nos. 94-2870-TUA, 94-2871-TUA.
August 19, 1998.
Oscar C. Carr, III, Glankler Brown Gilliland Chase Robinson Raines, Memphis, TN, for Lawyers Title Insurance Corporation.
Rebecca P. Tuttle, Steven C. Brammer, Farris Mathews Branan Hellen, Memphis, TN, William E. Norcross, Norcross Law Firm, Cordova, TN, for United American Bank of Memphis.
John C. Speer, Stephen W. Ragland, Baker Donelson Bearman Caldwell, Memphis, TN, for First American Title Insurance Company.
ORDER ON DEFENDANT'S MOTION TO DISMISS AND PLAINTIFFS' MOTIONS FOR PARTIAL SUMMARY JUDGMENT
Lawyers Title Insurance Corporation ("Lawyers Title") and First American Title Insurance Company ("First American") filed this action against United American Bank of Memphis ("UAB") alleging that UAB's wrongful actions caused various mortgage lenders, all of whom were insured by plaintiffs, to suffer significant financial losses. Plaintiffs, both directly and as subrogees of their insureds, seek compensatory and punitive damages as well as equitable relief under Tennessee law. Presently before the court are the defendant's motion to dismiss and the plaintiffs' motions for partial summary judgment.
I. Standards of Review
A. Motion to Dismiss
When considering a motion to dismiss for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6), all factual allegations of the plaintiff are to be believed and the claims must not be dismissed unless it appears that the plaintiff can prove no set of facts pursuant to his or her allegations which would entitle the plaintiff to relief. Windsor v. The Tennessean, 719 F.2d 155, 158 (6th Cir. 1983), cert. denied, 469 U.S. 826, 105 S.Ct. 105, 83 L.Ed.2d 50 (1984); Chartrand v. Chrysler Corp., 785 F. Supp. 666, 669 (E.D.Mich. 1992).
B. Motion for Summary Judgment
The moving party is entitled to summary judgment where no genuine issue of material fact exists and the party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). When considering a motion for summary judgment, the court's function is not to weigh the evidence or judge its truth; rather, the court must determine whether a genuine issue is presented for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The substantive law governing the case will determine what issues of fact are material. Street v. J.C. Bradford Co., 886 F.2d 1472, 1479 (6th Cir. 1989).
A summary judgment movant "bears the burden of clearly and convincingly establishing the nonexistence of any genuine issue of material fact and the evidence as well as all inferences drawn therefrom must be read in a light most favorable to the party opposing the motion." Kochins v. Linden-Alimak, Inc., 799 F.2d 1128, 1133 (6th Cir. 1986). Once met, the burden shifts to the non-moving party to set forth specific facts showing a genuine issue of triable fact. Fed.R.Civ.P. 56(e). To meet this burden, the non-movant must present sufficient countervailing evidence such that a jury could return a verdict favorable to the non-moving party. Anderson, 477 U.S. at 249-50, 106 S.Ct. 2505.
When relying on an affirmative defense, a defendant who is faced with a summary judgment motion has the same burden as a plaintiff against whom a defendant seeks summary judgment. That burden requires that the non-moving party with the burden of proof on the issue in question produce sufficient evidence upon which a jury could return a verdict favorable to the nonmoving party. Id.
II. FACTUAL BACKGROUND
The claims presented in this case arise out of the actions of former Tennessee real estate attorney William Dunlap Cannon, III ("Cannon"). In connection with his real estate practice, Cannon maintained a bank account at UAB, styled "Dunlap Cannon, III, Real Estate Escrow Account II," in which he deposited funds received from various clients and mortgage lenders. These funds were to be held in trust until closing when Cannon was to disburse those funds in order to pay off existing mortgages on the lands being purchased.Despite the escrow status of the account, Cannon proceeded to misappropriate the funds over the course of several years, using his clients' monies to pay various personal expenses. As a result of Cannon's illegal activities, the UAB escrow account was frequently overdrawn. UAB would call Cannon, often daily, to inform him that the account contained insufficient funds to cover checks he had written. UAB would allow Cannon to write new checks for which they issued accelerated or "super" immediate credit — same day credit rather than immediate credit on the next business day — thereby enabling him to cover the outstanding checks. Essentially, Cannon engaged in a check kiting scheme where he would cover insufficiencies at UAB with checks from accounts at other banks which also contained insufficient funds. Because UAB issued credit before the funds were collected, Cannon was able to float large uncollected balances.
Even with this practice, however, the account remained overdrawn on a consistent basis. In March of 1991, UAB set up a $150,000 credit line, guaranteed by Cannon's father, William Dunlap Cannon II, to be advanced as overdrafts were created in the account. Within two weeks of the issuance of this credit line, the entire $150,000 had been advanced. Despite many reports documenting the continued overdrafts in Cannon's account, the extra work required to monitor his account, and numerous threats to stop accepting uncollected checks and issuing accelerated credit, UAB considered Cannon to be a good customer who both generated large monthly fees for the bank and had outstanding personal loans. As a result, UAB continued these accommodations with respect to the escrow account.
Eventually, however, Cannon's elaborate scheme of misappropriation and check kiting unraveled. On February 3, 1994, UAB informed Cannon that it would no longer pay overdrafts or give him accelerated credit on check deposits, that it would not transfer funds between his checking accounts, and that checks drawn on his UAB accounts would only be paid if the accounts contained sufficient collected funds. Cannon's business subsequently fell apart on February 15, 1994, and shortly thereafter, UAB closed all of Cannon's accounts. Around that time, Cannon voluntarily suspended his license to practice law in the State of Tennessee; he ultimately was disbarred by order of the Supreme Court of Tennessee effective August 1, 1994. Cannon filed a voluntary Chapter 7 Bankruptcy petition on February 25, 1994. On June 2, 1995, Cannon pleaded guilty to charges of embezzlement, mail fraud, wire fraud, and bank fraud.
Prior to the collapse of his practice, Cannon was an "approved attorney" for both Lawyers Title and First American. Because of Cannon's approved attorney status, Lawyers Title and First American issued title commitments, title insurance policies, and closing protection letters to various mortgage lenders and purchasers for Cannon's real estate closings based on Cannon's certification that he had paid the existing mortgages. When Cannon's check kiting scheme failed, numerous purchasers and mortgage lenders who were dealing with Cannon lost the funds that they had entrusted to him; as a result, Lawyers Title and First American were required to indemnify their insureds based on the title insurance commitments, policies, and closing protection letters each had issued in connection with the closings. It is these losses that they seek to recover from UAB.
III. PROCEDURAL BACKGROUND
Lawyers Title and First American each filed this action against UAB on October 26, 1994. Given the similarity of the allegations, issues, and facts in the two cases, this court consolidated the actions by order on February 3, 1995. The plaintiffs seek to recover from UAB the monies paid pursuant to the closing protection letters and title insurance policies under various theories. Essentially, their arguments rest on the assertion that UAB had actual knowledge that Cannon was misappropriating funds from the escrow account and that UAB aided Cannon in his misappropriation. Lawyers Title and First American assert that UAB engaged in such conduct in order to continue receiving the monthly transaction fees generated by Cannon's account, which were among the largest at the bank, and because Cannon had large outstanding loans at UAB that the bank wanted to recover. Furthermore, the plaintiffs assert that Cannon received this special treatment because he was married to Derenda Cannon, niece of William B. Tanner who was then owner of all the voting stock in the holding company which owns UAB.
Jurisdiction over this case is based upon diversity of citizenship pursuant to 28 U.S.C. § 1332. Lawyers Title is a Virginia corporation with its principal place of business in Richmond, Virginia; First American is a California corporation with its principal place of business in Santa Ana, California; and UAB is a federally insured state banking corporation chartered under the laws of the State of Tennessee with its principal place of business in Memphis, Tennessee. Additionally, the matter in controversy exceeds $50,000. (At the time this action was filed, 28 U.S.C. § 1332 had not yet been amended to raise the amount in controversy requirement to $75,000.)
Specifically, the plaintiffs have alleged claims of aiding and abetting; violation of § 47-3-304 of the Tennessee Code Annotated; unjust enrichment and restitution; constructive trust; and money had and received. Additionally, Lawyers Title asserts a claim for the late return of certain checks in violation of § 47-4-302 of the Tennessee Code Annotated.
UAB filed a motion to dismiss the plaintiffs' complaints on November 29, 1995. UAB asserts that the aiding and abetting claim should be dismissed because UAB owed no duty to the plaintiffs. UAB also asserts that the plaintiffs' claim for punitive damages should be dismissed because, as subrogees, they lack standing to assert such a claim. The defendant moves to dismiss the claims based on Tenn. Code Ann. § 47-3-304 because Cannon was not a fiduciary vis-á-vis UAB, or, in the alternative, because UAB was not a "purchaser" of checks payable to third parties. Additionally, UAB contends that the claims for unjust enrichment, constructive trust, restitution, and money had and received should be dismissed because UAB did not wrongfully retain money belonging to plaintiffs, was not in privity with the plaintiffs, and was properly owed all money received. Finally, UAB asserts that Lawyers Title's claim for violation of Tenn. Code Ann. § 47-4-302 should be dismissed for lack of standing because, as a subrogee and assignee, Lawyers Title does not have standing to assert such a claim.
On November 29, 1995, Lawyers Title and First American filed motions for partial summary judgment with respect to UAB's liability to the plaintiffs, and with respect to UAB's liability and resulting damages to Lawyers Title for violation of the midnight deadline under Tenn. Code Ann. § 47-4-302. In response, UAB contests the plaintiffs' use of "undisputed facts," and asserts that highly disputed factual issues exist that render summary judgment inappropriate, including whether the plaintiffs are entitled to subrogation. Additionally, with respect to each of the plaintiff's claims, UAB reasserts the arguments contained in its motion to dismiss.
IV. PRELIMINARY CONSIDERATIONS
A. Plaintiffs' Right to Subrogation
In its response to plaintiffs' motions for partial summary judgment, UAB asserts that summary judgment is inappropriate in the instant action because issues of fact exist regarding the plaintiffs' right to subrogation. Specifically, UAB asserts that a jury must determine whether the plaintiffs were sufficiently negligent so as to bar application of subrogation principles and the plaintiffs must establish that the equities are in their favor. In response, the plaintiffs argue that they are pursuing a claim for conventional subrogation rather than equitable subrogation and, as a result, a balancing of the equities is not required. Furthermore, the plaintiffs assert that with respect to the intentional tort of aiding and abetting, any negligence on the plaintiffs' part would not be a defense.
In Castleman Constr. Co. v. Pennington, 222 Tenn. 82, 432 S.W.2d 669 (1968), the Supreme Court of Tennessee discussed the equitable nature of subrogation: "To entitle one to subrogation, his equity must be strong and his case clear, since it will not be enforced where the equities are equal, or the rights are not clear, or where it will prejudice the legal or equitable rights of others." Id. at 675 (quoting Couch on Insurance 2d, Subrogation § 61:21). Additionally, the court found the distinction between conventional and legal subrogation to be as to the source of the right, and stated that "regardless of the source of the right of subrogation, the right will only be enforced in favor of a meritorious claim and after a balancing of the equities." Id. at 676. Therefore, the plaintiffs' contention that an inquiry into the respective equities is unnecessary in the instant case is incorrect; regardless of the source of the plaintiffs' asserted subrogation rights, a balancing of the equities is required to determine whether the plaintiffs are in fact entitled to be subrogated to their insureds' claims.
Conventional subrogation is that "which arises from a contract or agreement," Tennessee Farmers' Mut. Ins. Co. v. Rader, 219 Tenn. 384, 410 S.W.2d 171, 173 (1966), whereas legal subrogation is that "which arises by operation of law based on general principles of equity and justice." Wimberly v. American Cas. Co., 584 S.W.2d 200, 203 (Tenn. 1979).
Relevant to the equitable balancing is the degree of negligence, if any, of the party asserting a claim for subrogation. The Castleman court noted that a party's culpable negligence may bar subrogation rights, although ordinary negligence, mistakes, and ignorance will not. Id. at 676 (citing 83 C.J.S. Subrogation § 6). Thus, "where the mistake is wholly caused by the want of that care and diligence in the transaction which should be used by every person of reasonable prudence, and the absence of which would be a violation of a legal duty, a court of equity will not interpose its relief." Id. at 677 (quoting Dixon v. Morgan, 154 Tenn. 389, 285 S.W. 558 (1926)). However, "ordinary negligence alone will not be held as a complete bar to subrogation where in spite of such negligence the equities are still in favor of the subrogee." Id.
UAB points to several factors which, it contends, prevent the plaintiffs from being entitled to subrogation: the plaintiffs concede they had no minimum standards for approved attorneys and did no background check before granting that status; the plaintiffs concede that misappropriation by an approved attorney is a known risk; Cannon had numerous recorded judgments and tax liens filed against him; the plaintiffs' increased business with Cannon in 1992 and 1993 should have put them on notice as to Cannon's illegal activity; three other title companies in Memphis either stopped doing business with Cannon or required him to use a special escrow account; and the plaintiffs knew that Cannon was a shareholder in Stewart Title Company which should have made the plaintiffs suspicious about the increase of business. UAB also avers that Lawyers Title had notice that Cannon might have been misappropriating funds through a call report by Robert Applebaum ("Applebaum"), a sales representative of Lawyers Title, documenting a conversation with Phil Kaminsky and Mike Hewgley in which Hewgley voiced a suspicion that Cannon had intentionally not paid the mortgage for one of his closings and pocketed escrow funds. No follow-up investigation was conducted.
In their depositions, neither Kaminsky nor Hewgley remembered the conversation; Applebaum remembered it only vaguely.
In response to UAB's assertions regarding knowledge of Cannon's misappropriation, Lawyers Title and First American assert that the increase in business in 1992 and 1993 was not suspicious because it was due to lower interest rates and, at that time, the title companies each did business with new attorneys. The plaintiffs also point to the fact that UAB offers no evidence that Lawyers Title or First American knew that other title companies stopped doing business with Cannon or required him to use a special account; rather, UAB merely asserts that the plaintiffs were likely to know because of the interconnection between the title companies. Lawyers Title also disputes UAB's reliance on Applebaum's call report because there is no evidence that Applebaum shared that report with anyone, and furthermore, he retired in November of 1991, a year and a half after writing that report, and before the increased business with Cannon in 1992 and 1993.
UAB's assertions fail to establish that either Lawyers Title or First American had actual knowledge of Cannon's misappropriation of funds. For example, the fact that the plaintiffs experienced an increase in business with Cannon in 1992 and 1993 in the face of lower interest rates does not give notice of improper conduct with respect to the escrow account. Additionally, there is no evidence that either plaintiff had knowledge of other title companies' policies with respect to Cannon, or that those policies were instituted as a result of improper conduct by Cannon. Indeed, it seems apparent that neither plaintiff had actual knowledge of Cannon's misappropriation. The plaintiffs each issued title insurance policies and closing protection letters in reliance on Cannon's assertions that he was disbursing the money as required; his failure to handle the money appropriately would expose the plaintiffs to significant financial liabilities. Any actual knowledge of misappropriation would have most likely ended the relationship between the plaintiffs and Cannon.
Thus, at most, UAB's assertions raise the possibility that the plaintiffs were negligent in their dealings with Cannon and risked liability to its insureds by failing to have minimum standards for its approved attorneys and failing to do a background check on Cannon despite the known risk of misappropriation by closing attorneys. This negligence in seeking out such information, however, is insufficient to bar, as a matter of law, the plaintiffs from being subrogated to the insureds' claims against UAB. See Castleman, 432 S.W.2d at 676-77 (finding that title company was subrogated to insureds' claim despite the company's negligence in failing to discover defects in title); Shelby Mut. Ins. Co. v. Clark-Holmes, Inc., 57 Tenn. App. 42, 414 S.W.2d 650, 655 (1966) (granting relief to insurance company by way of subrogation despite agent's negligence in failing to demand issuance and delivery of policy prior to accident at issue) (citing Dixon v. Morgan, 154 Tenn. 389, 285 S.W. 558 (1926)). Furthermore, any negligence on the part of the plaintiffs injured themselves and did not prejudice the bank. See Dixon, 154 Tenn. at 404-05, 285 S.W. 558 ("All negligence, to be culpable, necessarily implies the failure to perform some duty. . . . It is not a failure of duty to one's self, but to another, that constitutes culpable negligence."). Compare Castleman, 432 S.W.2d at 676-77 (finding the plaintiff entitled to subrogation despite negligence in failing to discover title defects) with Old Nat'l Bank v. Swearingen, 167 Tenn. 529, 72 S.W.2d 545, 548-49 (1934) (finding that bank acting as guardian for minor children was guilty of culpable negligence precluding subrogation where bank lent its wards' money secured by property with defective title, which would have been disclosed by a casual inspection of the title) (distinguishing Dixon). Accordingly, even if found to be negligent based on UAB's assertions, the plaintiffs were not sufficiently negligent to preclude them from subrogation as a matter of law.
In light of the foregoing, it is necessary to determine whether the balance of equities lies in favor of the plaintiffs, entitling them to subrogation. See Castleman, 432 S.W.2d at 677 ("We do not say that ordinary negligence of the subrogee cannot be taken into consideration in ascertaining whether he be entitled to the equitable relief of subrogation. What we do say is that ordinary negligence alone will not be held as a complete bar to subrogation where in spite of such negligence, the equities are still in favor of the subrogee."). Essentially, the plaintiffs' basis for subrogation, as well as for their claims against UAB, is that UAB had knowledge that Cannon was misappropriating funds in breach of his fiduciary duty. If such knowledge is found to exist, the equities could be found to lie in the plaintiffs' favor, despite the alleged negligence on their part. See Castleman, 432 S.W.2d at 678-79 (finding that despite the plaintiff's negligence, the defendant's "want of care and diligence . . . demands that the equity" would not prevent the plaintiff from being subrogated to the claims). If, however, UAB is found to be an innocent party with respect to Cannon's misconduct, the balance of equities might weigh against the plaintiffs. See Bank of Fort Mill v. Lawyers Title Ins. Corp., 268 F.2d 313, 315 (4th Cir. 1959) ("[I]t is the general view that a paid surety has fewer equities than an innocent bank, since the surety company is paid to assume the specific risk."). Accordingly, a question of fact exists as to the balance of the equities, and the court cannot determine as a matter of law whether the plaintiffs are entitled to subrogation.
B. Affidavits Submitted in Opposition to Motion for Summary Judgment
In response to the plaintiffs' motions for summary judgment, UAB submitted several affidavits, all of which essentially state that the affiants had no knowledge of Cannon's misappropriation of funds from the escrow account. The plaintiffs contest consideration of these affidavits for the purposes of this motion, asserting that the affidavits contradict prior sworn testimony and therefore cannot be used to create an issue of fact for trial.
These affidavits include those of Barry G. Smith, Kay C. Hill, Thomas L. Lamb, John R. Koch, Martin A. Grusin, and David E. Browning.
"[I]t is `accepted precedent' that after a motion for summary judgment has been filed, thereby testing the resisting party's evidence, a factual issue may not be created by filing an affidavit contradicting earlier deposition testimony." Davidson Jones Dev. Co. v. Elmore Dev. Co., 921 F.2d 1343, 1352 (6th Cir. 1991) (quoting Gagné v. Northwestern Nat'l Ins. Co., 881 F.2d 309, 315 (6th Cir. 1989)). The affidavits submitted by UAB, however, do not squarely contradict the prior testimony of the affiants. Throughout the affiants' deposition testimony, those individuals admitted that they experienced problems with the Cannon account due to his continuous overdrafts; nevertheless, they either maintained that they did not know of any misappropriation or did not testify regarding their knowledge of misappropriation. In fact, the depositions do not clearly reveal what the knowledge of each deposed person was. Thus, the affidavits do not contradict the depositions; the fact that they were filed for the purpose of opposing summary judgment bears on the overall credibility of those affidavits, but does not bar them from being considered. See Kelly v. BASF Corp., No. 95-1851, 1997 WL 137382, at *6 (6th Cir.Mar.25, 1997) (considering affidavits filed in response to a motion for summary judgment