Inn Foods, Inc. v. Equitable Co-op Bank ( 1995 )

United States Court of Appeals
United States Court of Appeals
For the First Circuit
For the First Circuit
No. 94-1670
INN FOODS, INC.,
D/B/A U.S. FOOD SERVICE,
Plaintiff, Appellant,
v.
EQUITABLE CO-OPERATIVE BANK,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Torruella, Chief Judge,
Cyr and Stahl, Circuit Judges.
Peter L. Koff with whom Robert J. Diettrich and Davis, Malm &
D'Agostine, P.C. were on brief for appellant.
Antoinette D. Hubbard with whom Judith Gail Dein and Warner &
Stackpole were on brief for appellees.
February 1, 1995
STAHL, Circuit Judge. Plaintiff-appellant Inn
STAHL, Circuit Judge.
Foods, Inc. ("Inn Foods"), secured a default judgment in the
amount of $1,084,524.13 against Atlantic Brands, Inc.
("Atlantic"). During discovery to determine the availability
of assets to satisfy the judgment, Inn Foods learned that
Atlantic's president, Paget T. Hodge ("Hodge"), had indorsed
a $523,744.18 United States Treasury check ("Treasury
check"), payable to Atlantic, for deposit into his personal
account at defendant-appellee Equitable Co-operative Bank
("Equitable"). In the present case, Inn Foods seeks to reach
and apply a never-asserted cause of action for conversion of
the Treasury check that it contends Atlantic has against
Equitable. Atlantic has never filed such a claim nor has it
ever indicated an intent to do so. Following cross-motions
for summary judgment, the district court entered judgment for
Equitable. We affirm.
I.
I.
FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
In the early 1980's, Hodge formed Atlantic, a
closely held corporation based in Boston, Massachusetts, with
Hodge serving as Atlantic's president. The primary business
of Atlantic was food distribution. In 1988, Atlantic
obtained from the Department of Defense Personnel Support
Center ("DOD") a contract to supply frozen vegetables to DOD.
Atlantic subcontracted some of its supply obligations to Inn
-2-
2
Foods, a California-based wholesale food supplier, which
agreed to provide a portion of the contracted-for frozen
vegetables to DOD, thus partially fulfilling Atlantic's
contract obligations with DOD. In November of 1988, Atlantic
breached its contract with Inn Foods by failing to pay Inn
Foods for the vegetables it had delivered to DOD. Inn Foods
then sued Atlantic for the amount due and, in March of 1989,
obtained a default judgment.
In their discovery efforts seeking assets to
satisfy the judgment, Inn Foods learned the following. Hodge
maintained a personal checking account at Equitable, where he
had been a regular customer for more than ten years.
Equitable officials knew that Hodge was president of
Atlantic. On December 8, 1988, Hodge appeared at Equitable's
office in Lynn, Massachusetts, where he indorsed to himself
the Treasury check which was in partial payment to Atlantic
for the vegetables actually supplied to DOD by Inn Foods.
Equitable accepted the check for deposit into Hodge's
personal account. Equitable then issued to Hodge a bank
check payable to the Bank of New England in the amount of
$450,000. Equitable debited Hodge's account accordingly.
The next day, Equitable took the Treasury check directly to
the Federal Reserve Bank of Boston, which credited
Equitable's account. Eventually, Hodge withdrew from his
-3-
3
personal account the balance of the funds obtained from the
Treasury check.
By deposition, Equitable's senior vice president
and treasurer, Arthur E. Horgan, testified that he was
"uncomfortable" about the Hodge transaction in light of both
the sum involved and the fact that Hodge had deposited the
Treasury check into his personal account. As a result,
Horgan "contacted counsel and they suggested we get
something, a certificate of vote from the company indicating
that . . . Hodge has authority to transact business."
Equitable's president, James G. Perkins, then called Hodge
and requested that Atlantic provide a written corporate
resolution stating that Hodge had authority to indorse the
Treasury check and that he was authorized to deposit the
check into his personal account. Thereafter, Perkins
received a resolution ("resolution"), dated December 17,
1988, and signed by Wallace Johnson, the corporation's
secretary, which stated that the Board of Directors of
Atlantic had unanimously:
VOTED: That, Paget Hodge,
President of Atlantic Brands,
Inc. is hereby authorized to
endorse on behalf of the
Corporation any checks to his
order, said checks being drawn
or endorsed payable to said
Corporation, and deposit said
checks to his personal account.
-4-
4
After Atlantic defaulted, Inn Foods brought the
present action against Equitable and others1 to satisfy its
judgment. As alluded to above, Inn Foods's theory of
recovery against Equitable has two principal elements.
First, Inn Foods argues that Atlantic has a cause of action
for conversion against Equitable under Mass. Gen. L. ch. 106,
3-419(1)(c).2 Second, as a judgment creditor, it seeks to
reach and apply Atlantic's unfiled conversion claim.3 As
noted, Atlantic has never filed such a claim, nor has it ever
indicated an intent to do so.4 The parties entered cross-
motions for summary judgment. After a hearing, the district
court denied Inn Foods's motion and granted Equitable's.
From the bench, the court ruled that "the [i]ndorsement was
not a forgery and [Hodge] had apparent authority and indeed
[Atlantic] ratified his authority." Alternatively, the court
1. Equitable is the only defendant that is a party to this
appeal.
2. This is a diversity-based action and both parties agree
that Massachusetts law applies. This case is, in part,
governed by the Uniform Commercial Code ("the Code") as
adopted by Massachusetts and appearing at Mass. Gen. L. ch.
106. References to this statute will be by section number
only.
3. Mass. Gen. L. ch. 214, 3(6) authorizes an action by
creditors to reach and apply an unsatisfied debt.
4. From the record, it appears that Atlantic ceased to
function as an ongoing enterprise before the default judgment
occurred. As for Hodge, he was a named defendant below, but
failed to answer. Service of process on Hodge was made at
the Wormwood Scrubs prison in London, England.
-5-
5
ruled that Inn Foods could not reach and apply Atlantic's
putative cause of action. This appeal followed.
II.
II.
DISCUSSION
DISCUSSION
Inn Foods now argues that: (1) Atlantic has a
cause of action for conversion against Equitable because (a)
Hodge had neither actual nor apparent authority to indorse
the Treasury check and deposit it into his personal account,
and (b) Atlantic did not ratify Hodge's actions; and (2) it
may assert an action to reach and apply Atlantic's unfiled
cause of action for conversion. Although the appeal raises a
number of interesting issues, some of which involve
apparently unsettled questions of Massachusetts law, we
resolve the appeal by concluding that, as a matter of law,
Atlantic ratified Hodge's indorsement. Before discussing
ratification, we recite the standard of review.
A. Standard of Review
Summary judgment is appropriate when the record
reflects "no genuine issue as to any material fact and . . .
the moving party is entitled to judgment as a matter of law."
Fed. R. Civ. P. 56(c). Our review of an order granting
summary judgment is de novo. See, e.g., Vasapolli v.
Rostoff, 39 F.3d 27, 32 (1st Cir. 1994). We review the
record in the light most favorable to the nonmoving party,
-6-
6
and we indulge all reasonable inferences in that party's
favor. Id.B. Ratification
Inn Foods's conversion theory rests on the premise
that Hodge was not authorized to indorse the Treasury check
to himself for deposit into his personal account. Under the
Code, conversion takes place when an instrument "is paid on a
forged indorsement." 3-419(c)(1). This section has
generally been interpreted to permit actions for conversion
where a negotiable instrument has been paid on either an
"unauthorized" or a "forged" indorsement. D & G Equip. v.
First Nat'l Bank of Greencastle, 764 F.2d 950, 955 (3d Cir.
1985) (collecting cases). Signatures on commercial
instruments are "presumed to be genuine or authorized." 3-
307(1)(b).5 Under the Code, "[a]ny unauthorized signature
may be ratified" by the principal. 3-404(2). We assume
but do not decide that Inn Foods met its initial burden of
establishing that Hodge's signature on the Treasury check was
unauthorized when presented. Thus, we proceed directly to
the question of whether Atlantic ratified Hodge's signature.
Unless they are displaced by a particular
provision, general common law principles, including those of
5. The presumption remains "unless and until evidence is
introduced which would support a finding of its non-
existence." 1-201(31).
-7-
7
agency, supplement the Code. 1-103; see also Terry v.
Kemper Ins. Co., 456 N.E.2d 465, 467 (Mass. 1983) (Code does
not displace settled principles of agency law). Under
Massachusetts law, ratification of an agent's acts may be
express or implied and, as a general proposition, the
principal must have full knowledge of all material facts.
See, e.g., Puritan Medical Ctr. v. Cashman, 596 N.E.2d 1004,
1008 (Mass. 1992); Perkins v. Rich, 415 N.E.2d 895, 898
(Mass. App. Ct. 1981), aff'd, 429 N.E.2d 1135 (Mass. 1982).
Massachusetts courts, however, do not always require that the
principal have actual knowledge. There may be ratification
when the principal "purposely shut[s] his eyes to means of
information within his own possession and control." Torpey
v. Interstate Equip. Leasing Corp., 760 F.2d 364, 365 (1st
Cir. 1985) (quotation omitted); see also Puritan, 596 N.E.2d
at 1008 (ratification may be implied where corporation
directors have "knowledge of such facts or circumstances as
would put a reasonable person on inquiry and which would lead
to full discovery") (quotation omitted).
Inn Foods argues that because the record is devoid
of any indication that Atlantic had full knowledge of the
facts, no ratification occurred. We do not agree. We think
the only reasonable conclusion to be drawn from the record is
that Atlantic ratified the transaction with knowledge at
least sufficient to satisfy the "deliberate ignorance"
-8-
8
standard recited above. The language of the resolution
itself speaks directly to the two critical elements of the
Treasury check transaction. The resolution authorizes Hodge
to both indorse checks on behalf of the corporation, and to
deposit those checks into his personal account. Moreover,
the resolution was dated nine days after Hodge presented the
Treasury check to Equitable. At a minimum, the terms of the
resolution as well as the surrounding circumstances should
have alerted Atlantic's directors that "something was afoot,"
Perkins, 415 N.E.2d at 898 (quotation omitted), especially in
light of the directors' duty to keep themselves informed of
the corporation's affairs. See, e.g., Puritan, 596 N.E.2d at
1008;6 Perkins, 415 N.E.2d at 898.
Inn Foods makes the additional argument that the
resolution does not ratify the Treasury check transaction
because its language is cast in prospective terms only. Even
if we were to agree, Massachusetts law makes clear that
ratification can be implied when a principal with knowledge
6. The Puritan court noted that the failure of directors to
discharge their duty of supervision does not always lead to
ratification. Puritan, 596 N.E.2d at 1008. In Puritan, a
corporation's director sought to interpose ratification as a
defense to self-dealing. The present case involves an
entirely different set of circumstances as a third party,
Equitable, sought assurances from Atlantic as to the
authority of Hodge, an Atlantic agent. Under these facts, we
think Atlantic would be estopped from denying the
applicability of the duty to supervise.
-9-
9
makes no effort to repudiate a transaction.7 Irving Tanning
Co. v. Shir, 3 N.E.2d 841, 842 (Mass. 1936); see also
Restatement of Agency 2d 94 ("An affirmance of an
unauthorized transaction can be inferred from a failure to
repudiate it."). The rationale for this rule is plain. When
a principal fails to disavow promptly an act of his agent,
such a failure both thwarts a damaged third party's ability
to mitigate the effects of an unauthorized act and
perpetuates an inference of authority reposed in the would-be
agent. See Boice-Perrine Co. v. Kelley, 137 N.E. 731, 733
(Mass. 1923). Again, we do not think there can be reasonable
dispute that Atlantic had sufficient knowledge for
ratification and, there is no indication in the record that
Atlantic ever sought to repudiate this transaction.
In short, Atlantic had sufficient knowledge to
ratify by either acting (as it purported to do in the
resolution) or not acting (thereby acquiescing in the
Treasury check transaction). Either route leads to the same
conclusion: Atlantic ratified Hodge's indorsement and
deposit. Because Hodge's signature was authorized, Atlantic
7. On this point, we disagree with Inn Foods's contention
that Puritan, 596 N.E.2d at 1008, should be read as requiring
that a benefit accrue to the principal from the disputed
transaction before an implied ratification can be found.
While benefits received are certainly strong evidence that
the principal acquiesced in the agent's transaction, other
Massachusetts cases make clear that ratification can take
place in the absence of such a benefit. See, e.g., Boice-
Perrine Co. v. Kelley, 137 N.E. 731 (Mass. 1923).
-10-
10
has no conversion cause of action against Equitable and,
thus, Inn Foods's claim must fail.
III.
III.
CONCLUSION
CONCLUSION
For the reasons discussed above, the decision of
the district court is
Affirmed. Costs to appellee.
Affirmed Costs to appellee
-11-
11