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noting that Delaware law had yet to address the issue, and refusing to hold that a parent cannot conspire with its subsidiary
Summary of this case from Allied Capital v. GC-Sun Holdings, L.P.Opinion
C.A. No. 99C-09-151 WTQ.
Argued: January 21, 2000.
Decided: January 24, 2000.
Letter Opinion and Order on: (1) Allfirst Financial Center, N.A.'s ("Omni") Motion to Dismiss — MOTION GRANTED as to Count I and DENIED as to Counts II, III, and IV; and (2) Allfirst Financial, Inc. ("Bancorp") and Allfirst Bank's ("FNB") Motion to Dismiss — MOTION GRANTED as to Count I and DENIED as to Counts II, III, and IV .
Brett D. Fallon, Esquire, Smith Katzenstein Furlow, 800 Delaware Avenue, P.O. Box 410, Wilmington, DE 19899
Andrew C. Kassner, Esquire, Drinker Biddle Reath, One Logan Square, 18th and Cherry Sts., Philadelphia, PA 19103-6996
Neal J. Levitsky, Esquire, Agostini Levitsky Isaacs Kulesza, 824 N. Market Street, P.O. Box 2323, Wilmington, DE 19899
James T. Heidelbach, Esquire, Gebhardt Smith, The World Trade Center, 9th Floor, Baltimore, MD 21202
Gentlemen:
This is the Court's Letter Opinion and Order on Defendants Omni, FNB, and Bancorp's Motions to Dismiss. For the reasons stated herein, Omni, FNB and Bancorp's Motions to Dismiss are GRANTED as to Count I of the Complaint (the contract claims). The Motions to Dismiss are DENIED as to Count II (fraud), Count III (negligent misrepresentation), and Count IV (civil conspiracy). And, as to lack of damages stemming from Hechinger's bankruptcy, the Court adopts the reasoning of the New York Supreme Court as set forth in Met Frozen Food Corp. v. National Bank of North America, N.Y. Supr., 393 N.Y.S.2d 643, 648 (1977).
FACTS
The facts of this case look like a payment systems hypothetical written by a law school professor. Because the current Motion before the Court arises in the context of a Motion to Dismiss, all allegations in the Complaint must be accepted as true. State Use of Certain-Teed Products Corp. v. United Pacific Ins. Co., Del. Super., 389 A.2d 777, 778 (1978). Therefore, the Court must accept the facts presented to it in the Complaint as set forth below.
Plaintiff Outdoor Technologies, Inc. ("Outdoor") is a manufacturer of garden accessories and related goods. It is a Delaware corporation which maintains its principal place of business in Mississippi.
During the first half of 1999, Outdoor sold accessories to Hechinger, Inc. ("Hechinger"). It appears that the two had an ongoing business relationship. Hechinger would submit purchase orders to Outdoor, and Outdoor would ship the purchase orders under terms that provided that payment of the invoices was to be made by Hechinger. The invoices that are part of the subject matter of this litigation were to be paid by May 15, 1999.
Outdoor did, in fact, receive a purported payment. On June 4, 1999, Outdoor received a check from Hechinger for $706,735.62. The check was made payable to "Outdoor Technologies" as payee and it was signed by Mark Adams. Hechinger was the drawer. The check appears to have been drawn on "First National Bank of MD, Baltimore, MD," ("FNB") as payor/drawee.
Apparently, it was widely reported in the press and in the industry that Hechinger was having financial difficulties and was about to file for bankruptcy. Therefore, Outdoor determined that the check should be presented and negotiated for payment as expeditiously as possible. Outdoor determined that the fastest way to get payment on this check would be to present it directly to the bank upon which the check was drawn. In furtherance of that plan, on June 4, 1999, Outdoor's Controller, John Hurt, traveled from Mississippi to Baltimore to present the check for payment on Monday June 7, 1999. At 9 a.m. on June 7, 1999, Hurt presented the check for payment at the Airport Square branch of FNB in Baltimore. Hurt requested that the check be cashed or certified for payment by FNB. Before certifying or cashing the check, the branch manager of the bank called corporate headquarters and spoke to the corporate attorney, William Thomas. The branch manager then relayed to Hurt the information provided by Thomas, that is, that FNB could not certify or cash the check because the check was not drawn on an account maintained by FNB. Rather, it was drawn on an account maintained by Omni.
The check itself states that it was drawn on FNB, not Omni Bank. (Compl. at Exhibit A is a copy of the check in question). Nevertheless, the Complaint, p. 7, para. 22, seems to acknowledge Omni's status as the drawee bank. At oral argument, Defendants' counsel represented that confusion was caused by Hechinger, which printed its own checks and named the wrong drawee bank.
Hurt then called Omni to determine how best to present the check for immediate payment. Omni representatives told Hurt that Omni was a subsidiary of Bancorp. Hurt then decided to speak to Bancorp about presenting the check for payment at Omni. Allegedly, he drove to the Bancorp office and spoke with the corporate attorney, Thomas, about how to have the check certified or cashed. Hurt claims that he relayed to Thomas that Hechinger's financial difficulties and the possibility of its impending bankruptcy was the impetus for him needing to present the check for immediate payment. Hurt asked Thomas why Omni could not cash or certify the check, especially considering that FNB (which Bancorp also owned) was the payor. Thomas apparently told Hurt that Bancorp was not required to negotiate the check, but that, if he presented the check to the Omni branch in Delaware with proper authorization, that the bank would make immediate payment on the check. Outdoor alleges that Thomas represented to Hurt that the check was good and there were sufficient funds in the account at Omni to cover the check.
From the record, it appears that Thomas was the attorney that provided guidance to Bancorp, FNB, and Omni in this matter. Bancorp is alleged to be a Maryland holding company which controls the sister national bank subsidiaries, FNB and Omni.
Hurt then traveled from Baltimore to Omni's only branch, which is located in Millsboro, Delaware. He did not make it to the branch before its 3 p.m. closing time on June 7, 1999. Thus, Hurt had to wait until the June 8, 1999, to present the check for payment. While Hurt was biding his time until Omni opened, he received a faxed authorization letter from Outdoor's President, Peter Orebaugh. That letter authorized Hurt to present the check for payment on behalf of Outdoor and requested that Omni either certify the check or wire transfer the check proceeds to Outdoor.
Hurt was at the Omni branch at 9 a.m. on June 8th and presented the check and the authorization letter. An employee at the Omni branch faxed the check and authorization letter to, guess who, Thomas, for his review in his capacity as the "corporate attorney." At approximately 10:30 a.m. on June 8th, Thomas called Hurt at the Omni branch stating the authorization letter was insufficient and that Omni would require a resolution from the entire board of directors of Outdoor in order to negotiate the check for payment. Omni was unable to convene a special board of directors meeting in one day to allow Hurt to present the check for payment.
Stonewalled at their attempts to get the check certified or to have the funds wire-transferred through FNB, Omni, and Bancorp, Outdoor decided to deposit the check through its own bank, Bank One 17k/a First Chicago National Bank of Detroit ("NBD") on an expedited basis. The check was sent by overnight mail on June 8 and the check "cleared" NBD the next morning, June 9, 1999. The check was allegedly cleared through the Federal Reserve System and presented to Omni Bank on June 10th.
Hurt claims that he called Omni on June 11 to see if the check was paid. Hurt alleges that an Omni employee, Ernie Dukes, stated to him that the check was paid on June 10, which turned out to be false.
As luck would have it, Hechinger filed for bankruptcy in the District of Delaware on June 11, 1999, and the check was returned to Outdoor unpaid.
On September 17, 1999, Outdoor filed suit in this Court seeking damages. In Count I, Outdoor alleges damages as an intended third-party beneficiary, claiming that Omni and Hechinger had a contractual relationship where Omni would negotiate and transfer payment of funds for Hechinger, and that failure to negotiate, either by certifying or cashing the check upon presentment, constituted a breach of contract. Counts II, III, IV allege fraud, negligent misrepresentation and civil conspiracy respectively, stemming from Bancorp, Omni, and FNB's failure to pay the check, wire transfer the funds, or certify the check.
STANDARD OF REVIEW
In evaluating a Motion to Dismiss under Superior Court Civil Rule 12(b)(6), the Court must assume all well pleaded facts in the Complaint to be true. Nix v. Sawyer, Del. Super., 466 A.2d 407, 410 (1983) (citing Laventhol, Krekstein, Horwath Horwath v. Tuckman, Del. Supr., 372 A.2d 168 (1976)). For purposes of a Motion under Rule 12(b)(6), all allegations in the Complaint must be accepted as true. State Use of Certain-Teed Products Corp., 389 A.2d at 778. A Complaint will not be dismissed unless the Plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof Nix, 466 A.2d at 410 (citing Diamond State Tel. Co. v. University of Del., Del. Supr., 269 A.2d 52 (1970)). A Complaint may not be dismissed unless it is clearly without merit, which may be a matter of law or fact. Diamond State, 269 A.2d at 58.
CHOICE OF LAW
Outdoor claims that Maryland law covers this action, while Defendants claim that Delaware law applies. At this time, it is premature for the Court to decide which law applies. For one thing, there are no documents before the Court relating to the bank account relationships between Omni, FNB, Bancorp and Hechinger. For the purposes of this Motion, the provisions of the UCC and the common law doctrines relied upon are virtually identical in both States. Thus, the Court will save the choice of law determination for a later date, if needed.
OMNI'S MOTION TO DISMISS
A. Count I — Contractual Claims as a Third-Party Beneficiary
The Code states that "[a] check or other draft does not of itself operate as an assignment of funds in the hands of a drawee available for its payment, and the drawee is not liable on the instrument until the drawee accepts it." UCC § 3-408. The Court understands that the statute is intended to be a statement of public policy as a matter of law and that the legal statutory policy should not be undermined by the Courts. In this case, it is clear that Omni never accepted the check, as the term "accepted" is defined under the Code. Therefore, under the statute, the Court holds there can be no legal breach of the bank contract between Hechinger and Omni. It necessarily follows given the statute there cannot exist a third-party beneficiary claim by Outdoor. It is the intention, as well as the policy, of this Court to give full effect to this provision of the Uniform Commercial Code.
See James J. White Robert S. Summers, Uniform Commercial Code § 16-6 (4th ed. 1995) ("Even if the drawee arbitrarily dishonors a check, the payee or holder has no cause of action against the drawee bank on the instrument.") see also Henry J Bailey Richard B. Hagedorn, Brady on Bank Checks § 22.13 (7th ed. 1993) ("If a bank without just cause refuses to honor a check drawn by one of its depositors, the bank faces possible liability to the depositor in damages for its act. Normally, however, this liability runs only in favor of the depositor or customer and not in favor of the payee or holder. This arises from the rule that the payee has no cause of action against a drawee or payor bank on a check, unless the bank has accepted or certified the instrument, or has in some other manner agreed to pay it. But it would seem that, even in such a circumstance, the bank should be liable only on its promise or engagement relating to the instrument, and not liable in a tortious sense for wrongful dishonor."). § 4-402 speaks in terms of liability for wrongful dishonor only to the customer. Id.
Neither did Bancorp or FNB.
As a gut abstract issue, without considering the statute, the Court has difficulty on the face of the matter saying blanketly that the payee cannot be a third-party beneficiary between the bank and the customer. It seems to the Court that at least one purpose of a checking account is to benefit third parties. But, given the provisions and the policy of the UCC noted in UCC § 3-408, further supported by the provision (UCC § 4-402) that the bank is only liable "to its customer" for wrongful dishonor, the UCC provisions override any third-party beneficiary claim. Thus, the Court will not allow recovery here for a breach of contract. The provisions of the UCC not only defeat the breach of contract claims, but would defeat any other claims that would necessarily violate any policy of the Code. Therefore, Omni's Motion to Dismiss the claims for breach of contract in Count I is GRANTED.
B. Fraud
Count II alleges fraud and misrepresentation in that Outdoor claims that all the Defendants willfully and intentionally defrauded it out of the proceeds of the check. To begin with, it appears that a payee of a check can bring a fraud claim against the bank. See generally, C K Petroleum Products Inc. v. Equibank, 3d Cir., 839 F.2d 188, 191(1988). The elements of fraud in Maryland are illustrative of the general law:
In order to recover damages in an action for fraud or deceit, a plaintiff must prove (1) that the defendant made a false representation to the plaintiff, (2) that its falsity was either known to the defendant or that the representation was made with reckless indifference as to its truth, (3) that the misrepresentation was made for the purpose of defrauding the plaintiff, (4) that the plaintiff relied on the misrepresentation and had the right to rely on it, and (5) that the plaintiff suffered compensable injury resulting from the misrepresentation.Nails v. S R Inc., Md. App., 639 A.2d 660, 669 (1994) (extensively citing Maryland precedent); see also Stephenson v. Capano Development Inc., Del. Supr., 462 A.2d 1069 (1983).
Outdoor alleges that the Defendants engaged in a fraudulent scheme not to honor presentment of the check in light of Hechinger's financial condition. The facts alleged in the Complaint certainly show a pattern of what could be construed as fraudulent behavior under the fraud factors. At the very least, there is a possibility that Omni acted with the intention to defraud Outdoor. What Omni intended is a "question of fact for each particular case." Comptroller of the Treasury, Income Tax Division et al. v. Haskin et al., Md. App. 472 A.2d 70, [ 572 A.2d 70], 75 (1984). As such, it cannot be decided on a Motion to Dismiss. Therefore, the Motion to Dismiss as to Count II of the Complaint, alleging fraud, is DENIED.
C. Negligent Misrepresentation
Count III alleges negligent misrepresentation against all Defendants.
In order to sustain a claim for negligent misrepresentation under Delaware law, plaintiffs must prove (1) a pecuniary duty to provide accurate information, (2) the supplying of false information, (3) failure to exercise reasonable care in obtaining or communicating information, and (4) a pecuniary loss caused by justifiable reliance upon the false information. If plaintiffs fail to prove any of the four required elements, their claim for negligent misrepresentation must fail.Darnell v. Myers, Del. Ch., No. 14859-NC, Steele, V.C. (May 27, 1998) (citing Ward v. Hildebrand, Del. Ch., C.A. No. 13582, Chandler, V.C. (July 8, 1996) (citing Wolf v. Magness Constr. Co., Del. Ch., C.A. No. 13004, Chandler, V.C. (Sept. 11, 1995) Mem.Op. at 3.))
In Maryland, the elements of negligent misrepresentation are:
(1) the defendant, owing a duty of care to the plaintiff, negligently asserts a false statement; (2) the defendant intends that his statement will be acted upon by the plaintiff; (3) the defendant has knowledge that the plaintiff will probably rely on the statement, which, if erroneous, will cause loss or injury; (4) the plaintiff, justifiably takes action in reliance on the statement; (5) the plaintiff suffers damage proximately caused by the defendant's negligence.Biser v. Deibel, Md. Spec. App., 739 A.2d 948, 954 (1999) (citing Martens Chevrolet, Inc. v. Seney, Md. App., 439 A.2d 534 (1982)).
Omni argues that absent contractual privity or the equivalent, it cannot be liable in negligence for economic loss. Jacques v. First National Bank of Md., Md. App., 515 A.2d 756, 761 (1986). Citing Delaware law, Outdoor cites Restatement (Second) of Torts § 552 for the proposition that the privity requirement is abolished where the plaintiff is seeking purely economic damages for negligent misrepresentation. See Guardian Construction Co. v. Tetra Tech Richardson, Del. Super., 583 A.2d 1378 (1990).
Restatement (Second) of Torts § 552 provides recovery for:
[o]ne who, in the course of his business, profession or employment, or in any other transaction where he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for their pecuniary loss caused to them by their justifiable reliance upon the information.
Omni has cited Maryland authority that, where the failure to exercise due care creates a risk of loss only, Courts have generally required an "intimate nexus" between the parties as a condition to the imposition of tort liability. Jacques, 515 A.2d at 759. That nexus is satisfied by contractual privity or its equivalent. Id at 760. But that does not end the story. Since the Jacques decision in 1985, it appears that Maryland Courts have at least applied, if not adopted, the language of the Restatement (Second) of Torts § 552. See Shofer v. Stuart Hack Co., Md. Spec. App., 723 A.2d 481, 488 (1999), cert. denied, Md. App., 731 A.2d 440 (1999); Village of Cross Keys Inc. v. United States Gypsum Co., Md. App., 556 A.2d 1126, 1133 (1989); Giant Food, Inc. v. Ice King, Inc., Md. Spec. App., 536 A.2d 1182, 1185 (1986), cert. denied, Md. App., 542 A.2d 844 (1988).
Today in Maryland, the tort of negligent misrepresentation will lie for the recovery of pecuniary losses, as well as for physical harm. Village of Cross Keys, Inc., 556 A.2d at 1133 (citing Martens Chevrolet, 439 A.2d at 534; Brack v. Evans, Md. App., 187 A.2d 880 (1963). Outdoor has alleged that Omni has a pecuniary interest in not negotiating the check and that Omni and the other Defendants have supplied false and misleading information to Outdoor in advising Outdoor as to where and how to present the check. These allegations are sufficient to survive a Motion to Dismiss. At this time, the Court cannot determine as a matter of law that the allegations are clearly without merit. Therefore, the Motion to Dismiss as to the negligent misrepresentation claims is DENIED.
D. Civil Conspiracy
Count IV of the Complaint alleges a cause of action for conspiracy. In Maryland, a civil conspiracy is defined as:
a combination of two or more persons by an agreement or understanding to accomplish an unlawful act or to use an unlawful means to accomplish an act not in itself illegal with the further requirement that the act or the means employed must result in damages to the plaintiff. . . . No action in tort lies for conspiracy to do something unless the acts actually done, if done by one person, would constitute a tort.Robb v. Wancowicz, Md. Spec. App., 705 A.2d 125, 132 (1998), cert denied, Md. App., 711 A.2d 869 (1998) (internal citations omitted).
"Delaware law imposing liability for civil conspiracy is well settled. Plaintiffs must prove: (1) A confederation or combination of two or more persons; (2) An unlawful act done in furtherance of the conspiracy; and (3) Actual damage." Nicolet, Inc. v. Nutt, Del. Supr., 525 A.2d 146, 149-50 (1987) (citing McLaughlin v. Copeland, D. Del., 455 F. Supp. 749, 752 (1978), aff'd, 3d Cir., 595 F.2d 1213 (1979)).
In the current Motion to dismiss the civil conspiracy claims, Defendant Omni alleges that, as a matter of law, a subsidiary cannot conspire with its parent or sister corporation. Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 771 (1984). Many authorities have noted that the U.S. Supreme Court's decision in Copperweld Corp. was limited to claims under the Sherman Antitrust Act. See Borden Inc. v. Spoor Behrins Campbell Young, Inc., D.N.Y., 828 F. Supp. 216, 223-24 (1993) (citing cases where the Copperfield Corp. reasoning was not applied to RICO conspiracies); see also Shared Communications Services of 1800-80 JFK Boulevard, Inc. v. Bell Atlantic Properties Inc., Pa. Super., 692 A.2d 570, 573 (1997), app. denied, Pa. Supr., 723 A.2d 673 (1998) (holding that there is no per se rule ignoring the legal corporate form in the civil conspiracy context). This Court has not found, nor has Omni cited, any Maryland or Delaware specific case law prohibiting civil conspiracy claims that arise from conduct that occurs between sister and parent corporations. Therefore, the Motion to Dismiss the Civil Conspiracy claims is DENIED.
E. Damages (or lack thereof)
Certainly the most interesting question in this Motion to Dismiss is whether or not Outdoor has suffered any damage as a result of Omni's refusal to cash this check. According to Outdoor, the check represented payment for goods that Outdoor previously delivered to Hechinger. If Omni would have paid the check, Outdoor would have received payment on an antecedent debt within 90 days of Hechinger's bankruptcy. Thus, Omni argues that as a preferential transfer, Outdoor would have been required to return this money to Hechinger's bankruptcy estate under 11 U.S.C. § 547.
Conversely, Outdoor responds in a two-sentence footnote that, if recovery is obtained by Outdoor from Defendants, the treatment of that recovery will be for the Bankruptcy Court to decide. Met Frozen Food Corp. v. National Bank of North America, N.Y. Supr., 393 N.Y.S.2d 643, 648 (1977). In that case, the New York Supreme Court discussed a similar problem to the case at bar.
In a rather intriguing argument . . . defendant contends that plaintiffs cannot establish that they have been damaged. It argues that due to the short period of time between dishonor and . . . bankruptcy, plaintiffs would have been unable, assuming a timely return, to have obtained a judgment . . . and . . . plaintiffs would not have been able to retain the monies received since payment would represent a voidable preference . . . against . . . other creditors.
The issue of whether payment by defendant of the checks in question would result in plaintiffs' obtaining preference over . . . other creditors is not properly before this Court. It has not been established that the defendant is a creditor . . . nor are these actions the appropriate forum for making such a determination. That issue may become relevant if and when a recovery is obtained.Id. (emphasis supplied).
So, as to damages, the Court will adopt the above reasoning from the Met Frozen Food Corp. case and hold that this is not the appropriate forum to make such a determination at this time.
BANCORP AND FNB'S MOTION TO DISMISS
As to Count I, dealing with the breach of contract claims, this Court has already held that Omni does not have third-party beneficiary standing in this situation to assert a contract action. Because Omni, who was the account holder, cannot be held liable for breach of contract with Outdoor because of the UCC provisions, it is axiomatic that the same claims cannot be brought against the non-account holders, FNB and Bancorp. Therefore, the Motion to Dismiss dealing with the breach of contract claims against FNB and Bancorp is GRANTED.
Counts II and III allege a cause of action against FNB and Bancorp for fraud and negligent misrepresentation, respectively. FNB and Bancorp argue that the fact that Thomas served as in-house counsel for them and for Omni does not render them liable for his statements while making representations on behalf of Omni. This Court, however, agrees with Outdoor, that the Complaint alleges a significant fraudulent scheme by the Defendants not to honor the presentment of the check in light of Hechinger's financial condition. If proved, the alleged actions of all three of the entities (Omni, Bancorp and FNB) could play a part in delaying the payment of the check. Certainly there is behavior alleged that amounts to much more than a single misrepresentation by Thomas. Whether and to what extent fraud was committed or negligent misrepresentations were made will have to be fleshed out at a later date. For now, Outdoor has stated a cause of action against all three Defendants for fraud and negligent misrepresentation.
As to Count IV, which alleges civil conspiracy, FNB and Bancorp argue that the Complaint does not allege any agreement between the three entities to commit an unlawful act. Defendants further argue that separate corporate officers cannot conspire with each other through the same corporate officer. See Windsor Theater Co. v. Wallbrook Amusement Co., D. Md., 94 F. Supp. 388 (1950), aff'd, 189 F.2d 797 (1951). Contrary to FNB and Bancorp's assertions, the conduct alleged implicates far more that just the statements of the in-house counsel, Thomas. Outdoor alleges that several employees of various companies participated in this conspiracy. The allegations are certainly enough to survive a Motion to Dismiss. Therefore, the Motion to Dismiss on the claims of civil conspiracy is DENIED.
CONCLUSION
For the foregoing reasons, Omni, FNB and Bancorp's Motions to Dismiss are GRANTED as to Count I of the Complaint (the contract claims). The Motions to Dismiss are DENIED as to Count II (fraud), Count III (negligent misrepresentation), and Count IV (civil conspiracy). And, as to lack of damages stemming from Hechinger's bankruptcy, the Court adopts the reasoning of the New York Supreme Court as set forth in Met Frozen Food Corp. v. National Bank of North America, N.Y. Supr., 393 N.Y.S.2d 643, 648 (1977). IT IS SO ORDERED.
Sincerely,
William T. Quillen