Midwest Feeders, Incorporated v. Bank of Franklin , 886 F.3d 507 ( 2018 )

Case: 17-60092 Document: 00514404533 Page: 1 Date Filed: 03/27/2018
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
No. 17-60092
Fifth Circuit
FILED
March 27, 2018
MIDWEST FEEDERS, INCORPORATED, Lyle W. Cayce
Clerk
Plaintiff–Appellant,
v.
THE BANK OF FRANKLIN,
Defendant–Appellee.
Appeal from the United States District Court
for the Southern District of Mississippi
Before HIGGINBOTHAM, PRADO, and HIGGINSON, Circuit Judges.
EDWARD C. PRADO, Circuit Judge:
Plaintiff–Appellant Midwest Feeders, Inc. (“Midwest”) alleges that
Defendant–Appellee The Bank of Franklin (“BOF”) is liable under Mississippi
statutory and common law for its participation in a scheme involving
fraudulent checks. Midwest alleges that BOF customer Robert Rawls, an
individual with whom Midwest had a financing arrangement, orchestrated a
“fictitious payee” scheme. Midwest sued BOF for its alleged participation and
negligence regarding this scheme. The district court ruled against Midwest on
all of its claims; the court dismissed two claims at the motion to dismiss stage
and granted summary judgment with regard to the remaining claims. The
court also denied as moot Midwest’s motion for discovery sanctions. Midwest
appealed. We now AFFIRM.
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I. BACKGROUND
A. Factual Background
Midwest is a Kansas-based cattle feedlot business that also “offers
financing and credit to customers for procurement of livestock.” BOF is a
community bank in Mississippi.
1. The Midwest–Rawls Arrangement
Robert Rawls, individually and doing business as Robert Rawls
Livestock and Rawls Trucking, LLC (collectively, “Rawls”), entered a
contractual financing relationship with Midwest in 2006. Under the terms of
the arrangement, Midwest “provided Rawls secured financing through access
to Deposit Account No. **4167 at Alva State Bank & Trust of Alva, Oklahoma.”
Midwest funded the arrangement by depositing money into the Alva bank
account. The arrangement obligated Rawls to use the deposited funds to
purchase livestock; Midwest would possess a security interest in the livestock.
To this end, Rawls received authorization to write checks drawn on the Alva
account, which was labeled “Robert Rawls Livestock.” When Rawls drew a
check on the account, Midwest would deposit the corresponding amount to the
account. After purchasing livestock, Rawls was responsible for reselling the
livestock to livestock purchasers. Midwest required Rawls to “issue invoices to
livestock purchasers and make arrangements for livestock purchasers to send
their payments for the purchase price of the livestock to the Alva State Bank
Account by delivery to a specified post office box in Alva, Oklahoma.”
In other words, the parties established an arrangement where Rawls
would purchase livestock, sell the cattle in inventory—thus creating an
account receivable—and the proceeds would be paid directly to the Alva
account. The proceeds—the deposits from the purchasers—would cover
Rawls’s outstanding accounts receivable. For its part in funding the
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arrangement, Midwest received compensation through fees and interest on
outstanding funds.
2. BOF’s Involvement
In 2008, BOF Executive Vice President Charles Magee solicited Rawls’s
business. The two had known each other for over thirty years. Despite the
overture, Rawls declined.
In 2010, Rawls asked Magee whether BOF would refinance his Alva
State Bank & Trust loans. After their initial phone call, the two met in person
to discuss. The bank subsequently issued loans to Rawls in the fall of 2010.
One loan involved a $750,000 line of credit, and the other was a $500,000
amortized loan. Both loans were secured by real property.
In September 2010, Rawls opened a checking account at BOF in the
name of Robert Rawls Livestock. Upon opening his account, Rawls filled out a
questionnaire describing the nature of his business. Rawls noted on the
questionnaire that he did not accept third-party checks as payment for goods
and services.
Soon after opening his account, Rawls’s account regularly had
uncollected funds. Magee was responsible for overseeing Rawls’s bank
accounts; he would also process his loans and approve wire transfers when
necessary. On several occasions, Magee approved wire transfers of money from
the account, even when the account had a six-figure negative balance. Magee
believed that he had adequate business justification for approving these
transfers: he would approve these transfers “if there was sufficient funds on
the line of credit. If [he] didn’t think there were sufficient funds on the line of
credit, [he] would call [Rawls’s] office” to inquire about any forthcoming
deposits. Bank employees seeking to wire money from Rawls’s overdrawn
account would only need Magee’s approval in order to wire funds.
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Rawls became one of the top customers at BOF’s Brookhaven,
Mississippi, branch in terms of the dollar amount of his deposits. Rawls also
helped recruit several customers to BOF. Midwest alleges that Rawls received
“favorable treatment” during his time as a customer. As an example, Midwest
points to a December 2011 loan extension vote before the bank’s loan
committee. BOF’s Vice Chairman Edmund Prestridge voted against extending
Rawl’s loan because he worried about Rawls’s uncollected funds. 1 Nonetheless,
the loan committee—including Magee—permitted the extension.
Rawls and Magee also carried on a social relationship during this period.
Magee would occasionally visit Rawls’s livestock facility, drink beer with him,
and watch football games with him. Magee also hunted on property owned by
Rawls’s family. On several occasions, the two traveled together and attended
the same social gatherings. They also exchanged dozens of text messages over
the course of Rawls’s time as a BOF customer. The messages pertained to a
variety of personal and professional matters.
3. Rawls’s Fraud
Midwest also alleges that during his time as a customer, Rawls began
using his Alva account and BOF account to commit fraud. Midwest alleges that
Rawls raised red flags for “check kiting.” 2 Rawls regularly moved money
between banks; he deposited into his BOF account checks drawn on his Alva
Account. Midwest alleges that several BOF officers and executives were aware
of this. Indeed, in October 2011, Magee became aware that “Robert Rawls was
depositing certain checks payable to sellers into his checking account.” Magee
1 An internal BOF memorandum memorializes BOF’s concerns about Rawls’s
substantial uncollected funds balance.
2 “[T]he practice of kiting checks . . . [involves] drawing checks on such accounts in
excess of the balances therein due, with such excessive withdrawals being covered by checks
drawn on other accounts [] in excess of the balances therein.” Citizens Nat’l Bank v. First
Nat’l Bank, 347 So. 2d 964, 966 (Miss. 1977).
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claims that Rawls, when confronted, explained that this was a “common
practice” in the livestock industry. Magee accepted Rawls’s explanation that
“depositing checks issued to sellers of cattle into his business checking account”
had a legitimate business purpose.
While a BOF customer, Rawls also “created fictitious cattle purchases
and diverted money from the Alva account for his personal use.” He “made out
checks to fictitious payees drawn on the Alva account and endorsed them and
stamped them as payable to his livestock company for deposit only. Rawls then
deposited the checks into his checking account at Bank of Franklin, which
turned them over to Alva for payment.” Rawls created corresponding fictitious
livestock purchase invoices, as well. Midwest alleges that Rawls issued nearly
900 fraudulent checks between October 2013 and March 2014.
On March 17, 2014, Midwest’s President, Jeff Sternberger, spoke with
Rawls over the phone. Rawls told Sternberger that he planned to shut down
his business. The next day, Sternberger met Rawls at his livestock facility
office. Rawls confessed to the scheme. Magee also showed up at Rawls’s facility
on March 18. He did not see Rawls, who had just left for a medical
appointment, but he saw Sternberger; Sternberger told Magee about the
fraudulent checks and invoices.
B. Procedural Background
On September 5, 2014, Midwest filed suit against BOF. Midwest,
demanding a jury trial, alleged six claims against BOF:
(1) Conversion of Instruments (Miss. Code Ann. § 75-3-420);
(2) Failure to Exercise Due Care (Miss. Code Ann. § 75-3-404(d));
(3) Common Law Conversion of Funds;
(4) Common Law Negligence;
(5) Common Law Negligent Hiring and Supervision; and
(6) Common Law Civil Conspiracy.
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The district court dismissed the two conversion-based claims at the motion to
dismiss stage. Subsequently, the court entered summary judgment against
Midwest on all the remaining claims. On January 18, 2017, the district court
entered final judgment, dismissing Midwest’s claims with prejudice. Two days
later, the district court informed counsel via e-mail that Midwest’s pending
motion for sanctions was moot. Midwest timely filed notice of appeal.
II. JURISDICTION
Midwest is a Kansas corporation, and BOF is a Mississippi corporation.
Midwest alleges damages in excess of $30 million. Therefore, the district court
properly exercised diversity jurisdiction under 28 U.S.C. § 1332. We have
jurisdiction to review the district court’s final judgment under
28 U.S.C. § 1291.
III. STANDARD OF REVIEW
A. Substantive Law
Because we sit in diversity jurisdiction, we apply Mississippi’s
substantive law. Krieser v. Hobbs, 166 F.3d 736, 739 (5th Cir. 1999); see also
Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938). And we review de novo the
district court’s conclusions regarding Mississippi law. Krieser, 166 F.3d at 739.
B. Summary Judgment
We review summary judgment de novo. United States v. Lawrence, 276
F.3d 193, 195 (5th Cir. 2001) (citations omitted). “A summary judgment is only
appropriate when, viewing the evidence in the light most favorable to the
nonmoving party, no genuine issue of material fact exists, and the moving
party is entitled to judgment as a matter of law.” Flock v. Scripto–Tokai Corp.,
319 F.3d 231, 236 (5th Cir. 2003) (citation omitted); see Fed. R. Civ. P. 56(a).
All reasonable inferences are drawn in favor of the nonmoving party. Flock,
319 F.3d at 236 (citation omitted). “In determining whether there is a dispute
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as to any material fact, we consider all of the evidence in the record, but we do
not make credibility determinations or weigh evidence.” Id. (citation omitted).
C. Motion to Dismiss
We review de novo the grant of a Rule 12(b)(6) motion. Pub. Emps. Ret.
Sys. of Miss., Puerto Rico Teachers Ret. Sys. v. Amedisys, Inc., 769 F.3d 313,
320 (5th Cir. 2014). During this review, we “accept all well-pleaded facts as
true and view those facts in the light most favorable to the plaintiff.” Toy v.
Holder, 714 F.3d 881, 883 (5th Cir. 2013) (citation omitted). To survive this
motion, “a complaint must contain sufficient factual matter, accepted as true,
to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007)).
D. Discovery Sanctions
We review the imposition of discovery sanctions for abuse of discretion.
See Tollett v. City of Kemah, 285 F.3d 357, 363 (5th Cir. 2002). “An abuse of
discretion occurs where the ‘ruling is based on an erroneous view of the law or
on a clearly erroneous assessment of the evidence.’” Id. (quoting Mercury Air
Grp., Inc. v. Mansour, 237 F.3d 542, 548 (5th Cir. 2001)).
IV. DISCUSSION
There are five issues on appeal: (1) Is Midwest among the class of persons
to whom § 75-3-404(d) provides a cause of action, allowing it to bring a
statutory negligence claim against BOF?; (2) Would the Mississippi Supreme
Court find that a bank owes a duty of care to a non-customer, such that
Midwest could bring a common law negligence claim against BOF?; (3) Is there
a genuine dispute as to a material fact regarding BOF’s participation in a civil
conspiracy, such that summary judgment is inappropriate?; (4) Did Midwest
state a plausible conversion claim under Mississippi Code § 75-3-420?; and (5)
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Did the district court abuse its discretion in dismissing as moot Midwest’s
motion for sanctions? We answer these questions in turn.
A. Midwest Lacks a Cause of Action under Mississippi Code § 75-3-
404(d)
Section 75-3-404(d) reads:
With respect to an instrument to which subsection (a) or (b)
applies, if a person paying the instrument or taking it for value or
for collection fails to exercise ordinary care in paying or taking the
instrument and that failure substantially contributes to loss
resulting from payment of the instrument, the person bearing the
loss may recover from the person failing to exercise ordinary care
to the extent the failure to exercise ordinary care contributed to
the loss.
Miss. Code. Ann. § 75-3-404(d) (emphasis added). According to Midwest, it can
sue BOF for its alleged negligence in handling Rawls’s fraudulent checks.
Midwest focuses on the statute’s plain language: the statute grants a cause of
action to any “person bearing the loss” as a result of a bank’s negligence in
handling a negotiable instrument. Thus, Midwest suggests that any person
who bore a loss due to a bank’s negligence in handling a negotiable instrument
should be able to sue the bank under § 75-3-404(d).
Midwest is correct to focus on the plain language of the statute. See City
of Tchula v. Miss. Pub. Serv. Comm’n, 187 So. 3d 597, 599 (Miss. 2016), reh’g
denied (Apr. 14, 2016) (“No principle is more firmly established . . . than the
rule which declares when a law is plain and unambiguous . . . the Legislature
shall be deemed to have intended to mean what they have plainly expressed,
and, consequently, no room is left for construction in the application of such a
law.” (citation omitted)); see also Davis v. Johnson, 158 F.3d 806, 811 (5th Cir.
1998) (“When the language of a statute is unambiguous we must follow its
plain meaning.”).
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However, Midwest ignores the broader statutory context in which § 75-
3-404(d) fits. See King v. Burwell, 135 S. Ct. 2480, 2492 (2015) (reaffirming
“the fundamental canon of statutory construction that the words of a statute
must be read in their context and with a view to their place in the overall
statutory scheme”) (quoting Util. Air Regulatory Grp. v. E.P.A., 134 S. Ct. 2427,
2441 (2014)). Section 75-3-404(d) is part of Mississippi’s codification of the
Uniform Commercial Code. See Miss. Code Ann. §§ 75-1-101 to 75-11-108.
Specifically, § 75-3-404(d) is located within the chapter that governs the
enforceability of negotiable instruments. See Miss. Code Ann. § 75-3-102(a)
(“This chapter applies to negotiable instruments.”). This chapter contemplates
that only an “aggrieved party” may pursue a cause of action. See Miss. Code
Ann. § 75-1-305(b) (“The remedies provided . . . must 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.”). And a “party” is defined as “a party to an
instrument.” Miss. Code Ann. § 75-3-103(a)(10). Midwest is not a party to any
of the instruments in question—it was not identified on the subject checks, did
not possess the subject checks, and was not entitled to enforce the subject
checks. See Am. Nat’l Ins. Co. v. Citibank, N.A., 543 F.3d 907, 910 (7th Cir.
2008) (“[The plaintiff] appears to be confusing an interest in the funds backing
the checks with an interest in the checks themselves.”). Midwest was not an
aggrieved party, so it cannot seek a remedy under § 75-3-404(d).
The UCC’s Official Comments further support this reading. We agree
with BOF’s reading of the comments, which “illustrate that the remedy
available under section 75-3-404(d) is only available to a party to the
instrument.” Mississippi courts give “significant weight” to those comments.
See Hancock Bank v. Ensenat, 819 So. 2d 3, 10 (Miss. Ct. App. 2001). No
comment contemplates a depository bank’s liability to an entity that is not
party to the negotiable instrument; the comments only provide examples
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where either the drawer of the check or the drawee bank is the injured party. 3
See Miss. Code. Ann. § 75-3-404, cmts. 1–3.
Midwest may very well be a “party bearing the loss” under the ordinary
meaning of that phrase. However, we are unwilling to apply the ordinary
meaning of the phrase when, in context, § 75-3-404(d) only provides a cause of
action to a party to the negotiable instrument. By placing § 75-3-404(d) in this
context in the overall statutory scheme, it is clear that Mississippi’s chapter
governing negotiable instruments does not contemplate the extension of
liability to any party who bore any loss as a result of a depository bank’s
negligence in regard to the handling of a negotiable instrument. Therefore, we
AFFIRM the district court’s summary judgment against Midwest with regard
to its statutory negligence claim. 4
B. BOF Owes a Duty to Midwest
The next issue is whether Midwest can assert common law negligence
claims against BOF, even though Midwest was never BOF’s customer.
Mississippi requires that the plaintiff establish “the traditional elements of
negligence: duty or standard of care, breach of that duty or standard,
proximate causation, and damages or injury.” Lyle v. Mladinich, 584 So. 2d
397, 398–99 (Miss. 1991). “The important component of the existence of the
duty is that the injury is ‘reasonably foreseeable.’” Id. at 399. “Whether a duty
exists is a question of law.” Id. at 400 (citation omitted).
3 BOF also asserts that a Pennsylvania state court, interpreting an identical statute,
limited recovery to only those who are parties to the negotiable instrument. See Victory
Clothing Co. v. Wachovia Bank, N.A., No. 1397, 2006 WL 773020, at *6 (Pa. Ct. Com. Pl. Mar.
21, 2006) (“[T]he drawer now has the right to sue the depositary bank directly based on the
bank’s negligence.”).
4 BOF does not argue that § 75-3-404(d) pre-empts Midwest’s attempt to pursue
negligence claims based in the common law. BOF only argued that Mississippi law pre-
empted Midwest’s common law conversion claim—a claim that Midwest apparently conceded
on appeal.
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No Mississippi case directly addresses whether a bank may owe a duty
to a non-customer in circumstances resembling this case. Thus, the district
court made an Erie guess as to whether the Mississippi Supreme Court
would—as a matter of law—permit Midwest to bring negligence claims against
BOF. The court analyzed relevant cases from the Mississippi Supreme Court,
but it acknowledged that no case directly addressed the issue. The district
court then assessed cases from intermediate Mississippi courts, in addition to
surveying other jurisdictions. The district court ultimately granted summary
judgment for BOF, finding that Midwest’s negligence-based claims failed as a
matter of law. The district court was “unpersuaded that the Mississippi
Supreme Court would find that the Bank of Franklin owed any duty to
Midwest Feeders, a non-customer whose name did not appear on any of the
checks at issue, and with which the bank had no relationship.” According to
the district court, “a bank does not assume a duty to non-customers by merely
engaging in questionable banking practices or failing to adequately train its
employees.” Thus, the district court found that “[a]bsent any duty owed by the
Bank of Franklin . . . Midwest’s negligence based claims fail as a matter of
law.” The court also expressed concern that finding that BOF owed a duty to
Midwest may expose BOF to “unlimited liability for unforeseeable frauds,”
which would impose dramatic investigatory burdens on banks to ensure the
validity and legality of their customers’ transactions. See Shreveport Prod.
Credit Ass’n v. Bank of Commerce, 405 So. 2d 842, 845–46 (La. 1981). We now
AFFIRM the district court’s determination that Midwest cannot as a matter of
Mississippi law assert a claim of common law negligence against BOF.
***
No Mississippi Supreme Court decision directly addresses whether—and
in what circumstances—a bank owes a duty of care to non-customers.
Therefore, we must make an Erie guess as to whether the Mississippi Supreme
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Court would recognize such a duty. Transcon. Gas Pipe Line Corp. v. Transp.
Ins. Co., 953 F.2d 985, 988 (5th Cir. 1992) (“When there is no ruling by the
state’s highest court, it is the duty of the federal court to determine as best it
can, what the highest court of the state would decide.”).
The only decision by the Mississippi Supreme Court pertaining to this
issue is Citizens Nat’l Bank v. First Nat’l Bank, 347 So. 2d 964 (Miss. 1977).
There, First National Bank discovered that some of its customers were
involved in a “check kiting” scheme, but the bank did not inform Citizens
National Bank of that discovery. Id. at 966. The Mississippi Supreme Court
first assessed “whether First National Bank had a legal duty to notify Citizens
National Bank that it was convinced that [a customer with accounts at both
First National and Citizens National] was kiting checks.” Id. at 967. The
Mississippi Supreme Court noted that the banks were “competitors in the
banking field” and “ordinarily[,] banks deal with each other at arm’s length.”
Id. The court then concluded that “First National Bank had no duty to inform
Citizens National Bank that [the customer] was kiting checks.” Id. The court
reasoned that the plaintiff failed to “allege any circumstances or facts that tend
to show that a confidential or fiduciary relationship existed between these two
banks,” nor did the plaintiff “show that there is any requirement in the banking
field that one bank notify another of its discovery of a customer kiting checks.”
Id.
Citizens National offers us only limited guidance. The Mississippi
Supreme Court emphasized that the two parties were competing banks before
deciding that no legal duty to inform the other bank about fraud may arise
unless a “confidential or fiduciary relationship” existed. Id. Here, the parties
in this case are not competitors, and Midwest is not a bank.
Given the limited guidance from the Mississippi Supreme Court, we may
look to the decisions of a state’s intermediate courts. See Transcon. Gas Pipe
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Line Corp., 953 F.2d at 988. The parties cite two cases from the Mississippi
Court of Appeals: Holifield v. BancorpSouth, Inc., 891 So. 2d 241 (Miss. Ct.
App. 2004), and Delta Chem. & Petroleum, Inc. v. Citizens Bank of Byhalia,
Miss., 790 So. 2d 862 (Miss. Ct. App. 2001). These cases help, but they do not
settle the matter.
In Holifield, the Mississippi Court of Appeals addressed a situation
where investors in a trust sued a depository bank for its alleged negligence in
handling transactions by its customer, the trustee; the investors were not the
bank’s customers. See 891 So. 2d at 242–45. The non-customers claimed that
the bank owed them a duty of care to scrutinize the trustee’s fraudulent
transactions, so the bank could be liable under common law negligence
principles. See id. at 243–44. The Mississippi Court of Appeals held that the
bank could not be liable in that case because it had no actual knowledge of the
trustee’s fraudulent activity, nor did the bank know of the fiduciary
arrangement between the trustee and the investors. See id. at 249–50. Yet, the
persuasive value of this holding appears limited. The Mississippi Court of
Appeals focused its analysis regarding the bank’s alleged duty on statutory and
common law trust law principles. Id. at 247–50. Moreover, the court held that
“since the bank had no actual knowledge of the customer’s alleged frauds, it
had no liability.” Id. at 242. However, the opinion does not address whether
the bank should have known of the customer’s alleged fraud (and whether that
constructive knowledge may give rise to liability). 5 Thus, Holifield does not
leave us with a clear answer.
5 To the extent Holifield permits a claim to proceed on the basis of the bank’s actual
knowledge, as opposed to what the bank should have known, we read that principle to derive
from the Mississippi law of trusts, not the general law of negligence. Mississippi negligence
law makes clear that a party may owe a duty to one who is injured by a foreseeable
intervening cause. See Southland Mgmt. Co. v. Brown ex rel. Brown, 730 So. 2d 43, 46 (Miss.
1998) (“[U]nder principles of ‘foreseeability,’ a defendant may be held liable for his failure to
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In Delta, the Mississippi Court of Appeals confronted a situation where
a bank was sued by a non-customer for its negligent decision to allow a
customer to open allegedly fraudulent bank accounts. 790 So. 2d at 864–68.
The court did not did not reach the issue of the depository bank’s negligence;
instead, the court focused on whether the customer had the authority as an
agent to open the accounts. Id. at 871–76. Thus, the Court of Appeals did not
reach the question of whether a bank may owe a duty of care to a non-
customer. 6
Thus, we are left to survey other jurisdictions to inform our Erie guess.
See Rogers v. Hartford Life & Acc. Ins. Co., 167 F.3d 933, 940 (5th Cir. 1999);
see also Guilbeau v. Hess Corp., 854 F.3d 310, 312 n.4 (5th Cir. 2017) (noting
the “various sources” to which the court looks when “making an Erie guess”).
We look first to Eisenberg v. Wachovia Bank, N.A., 301 F.3d 220 (4th Cir.
2002), which is the most persuasive case BOF cites. There, the Fourth Circuit
addressed the question of “whether a bank owes a duty of care to a
noncustomer who is defrauded by the bank’s customer through use of its
services.” Id. at 225. The court, applying North Carolina law, made an Erie
guess. Id. The court determined that “[c]ourts in numerous jurisdictions have
held that a bank does not owe a duty of care to a noncustomer with whom the
bank has no direct relationship.” Id. at 225 (citing cases from Colorado, Rhode
Island, Texas, California, Michigan, New Jersey, and New York). The Fourth
anticipate an easily-predicted intervening cause and to properly guard against it.”); Touche
Ross & Co. v. Commercial Union Ins. Co., 514 So. 2d 315, 323 (Miss. 1987) (“In Mississippi,
actionable fault must be predicated upon action or inaction, prompted by knowledge, actual
or implied, of facts which make the result of the defendant’s conduct not only the probable
result but also a result which the defendant should, in view of the facts, have reason to
anticipate.”). Actual knowledge is not required.
6 To the extent that the Delta court discussed a bank’s duties of care and
reasonableness, it did so in the context of a statutory conspiracy to defraud claim. See 790
So. 2d at 875–78. This analysis does not apply to a claim of common law negligence.
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Circuit then analyzed the relationship between the parties. It concluded that
the plaintiff fell “into the undefined and unlimited category of strangers who
might interact with Wachovia’s bank customer.” Id. at 226. Accordingly, the
Fourth Circuit was reluctant to extend a duty of a care to a non-customer in
that situation; the court worried about creating an impermissibly broad scope
of liability for a bank. Id. at 226–27. The Fourth Circuit concluded that
“Wachovia did not owe Eisenberg a duty of care under the facts of this case.”
Id. Other cases echo Eisenberg’s holding. 7
In response, Midwest argues that while banks generally do not owe a
duty of care to non-customers, there are specific circumstances in which such
a duty may exist. Midwest cites our decision in Chaney v. Dreyfus Serv. Corp.,
595 F.3d 219 (5th Cir. 2010). 8 There, we applied New York law to determine a
depository bank’s liability toward a non-customer. Id. at 229–32. Citing Lerner
v. Fleet Bank, N.A., 459 F.3d 273, 286 (2d Cir. 2006), we recognized that banks
7 See, e.g., SFS Check, LLC v. First Bank of Del., 774 F.3d 351, 357 (6th Cir. 2014)
(“The almost-universal law in this country is that banks owe a duty of care only to their own
customers.”); El Camino Res., LTD. v. Huntington Nat’l Bank, 722 F. Supp. 2d 875, 907 (W.D.
Mich. 2010), aff’d, 712 F.3d 917 (6th Cir. 2013) (“Michigan law, in accord with the universal
rule in this country, holds that a bank’s relationship is with its customer and that the bank
owes third parties no duty of care to monitor a customer’s activities.” (citation omitted)). The
Second Circuit in Lerner recognized that, “[a]s a general matter, ‘[b]anks do not owe non-
customers a duty to protect them from the intentional torts of their customers.’” Lerner v.
Fleet Bank, N.A., 459 F.3d 273, 286 (2d Cir. 2006) (citations omitted). The court justified this
holding in public policy terms. Id. The Second Circuit feared that imposing upon a bank a
duty of care toward non-customers would unreasonably expand the scope of the bank’s duty.
Id. There are billions of banking transactions in New York, and the Second Circuit feared
that a bank could be liable for unforeseen risks. Id.
8 Midwest also cites In re: Liberty State Benefits of Del., Inc., 541 B.R. 219, 251 (Bankr.
D. Del. 2015) (recognizing a common law duty owed to a non-customer because the bank knew
of the non-customer’s interest in a customer’s account), and Miller v. Bennet, No.
13CA010336, 2014 WL 2567925, at *2–4 (Ohio Ct. App. June 9, 2014) (finding that a bank
owed a statutory duty under the UCC to exercise ordinary care toward non-customers in a
situation involving fraudulently-endorsed financing instruments).
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generally owe no due to a non-customer. Chaney, 595 F.3d at 232. However, we
clarified that “this rule is not without exception,” explaining that:
New York courts have recognized that a bank may be held liable for
its customer’s misappropriation where (1) there is a fiduciary
relationship between the customer and the non-customer, (2) the
bank knows or ought to know of the fiduciary relationship, and
(3) the bank has “actual knowledge or notice that a diversion is to
occur or is ongoing.”
Id. (citation omitted). Although we subsequently concluded that the bank in
that case lacked the requisite knowledge of a fiduciary relationship between a
customer and non-customer, id. at 233, Chaney supports Midwest’s argument
that banks are not categorically precluded from owing a duty of care to a non-
customer.
The Eleventh Circuit in Chang v. JPMorgan Chase Bank, N.A., 845 F.3d
1087, 1094–95 (11th Cir. 2017), reached a similar conclusion. Applying Florida
law, the court recognized that banks generally owe no duty of care to a non-
customer with whom the bank has no relationship. Id. at 1094. However, the
Eleventh Circuit clarified that:
[T]here is an exception to this rule: a bank may be liable to a
noncustomer for its customer’s misappropriation when a fiduciary
relationship exists between the customer and the noncustomer,
the bank knows or ought to know of the fiduciary relationship, and
the bank has actual knowledge of its customer’s misappropriation.
Id. at 1094–95 (citations omitted). The court concluded that the plaintiff had
adequately stated a claim for negligence, based in part on this duty. See id. at
1097.
Even the cases BOF cites contemplate that a bank may owe a duty to a
non-customer in certain circumstances. The Fourth Circuit’s Eisenberg
decision looked at the nature of the “relationship” (or the lack thereof) between
the bank and non-customer. See 301 F.3d at 225. Also, the Second Circuit’s
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holding in Lerner is distinguishable. The Second Circuit invoked the argument
that a bank generally owes no duty to a non-customer when discussing the
claims of a certain set of plaintiffs—investors who were defrauded in a Ponzi
scheme, were unknown to the bank, and whose particular funds had never
been deposited at the defendant bank. 459 F.3d at 286–87. Finding that a bank
owes no duty to a non-customer when the non-customer is unknown to the
bank and the bank has not been entrusted with the non-customer’s funds,
however, is consistent with finding that a bank may owe a duty to a non-
customer when the bank is aware of a non-customer’s fiduciary relationship
with one of its customers.
Thus, caselaw supports the idea that while a bank generally owes no
duty to a non-customer, the bank may owe such a duty to a non-customer where
“a fiduciary relationship exists between the customer and the noncustomer,
the bank knows or ought to know of the fiduciary relationship, and the bank
has actual knowledge of its customer’s misappropriation.” Chang, 845 F.3d at
1094–95. These cases strike an appropriate balance between imposing liability
on a bank and the non-customer’s legitimate right to recovery. Banks are
discouraged from willfully ignoring warning signs that its customer may be
committing an intentional tort against the non-customer (with whom the
customer has a fiduciary relationship). Yet, banks are not exposed to liability
to unforeseeable actors (e.g., creditors who may be harmed as a result of the
non-customer’s losses). Nor is a bank automatically liable for negligence even
if a duty exists; a bank could only be liable if it fell below a standard of ordinary
care for a similarly situated, reasonably prudent bank. The bank could also
defend itself on the grounds that the non-customer was comparatively
negligent. See Burton by Bradford v. Barnett, 615 So. 2d 580, 582 (Miss. 1993)
(noting that Mississippi follows the law of comparative negligence).
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***
Despite the merits of this line of cases, we recognize that we cannot use
our Erie guess to impose upon Mississippi a new regime of liability for its
banks. See Keen v. Miller Envtl. Grp., Inc., 702 F.3d 239, 243–44 (5th Cir. 2012)
(“When making an Erie guess, our task is to attempt to predict state law, not
to create or modify it.”) (quoting SMI Owen Steel Co. v. Marsh USA, Inc., 520
F.3d 432, 442 (5th Cir. 2008)). Given the current state of Mississippi’s caselaw,
including Holifield, see supra note 5, we do not predict that the Mississippi
Supreme Court would impose upon BOF a duty of reasonable care to Midwest,
a non-customer. Therefore, we AFFIRM the district court’s summary
judgment.
C. Midwest Failed to Allege the Existence of a Civil Conspiracy
Mississippi law provides that “[a] conspiracy is a combination of persons
for the purpose of accomplishing an unlawful purpose or a lawful purpose
unlawfully.” Levens v. Campbell, 733 So. 2d 753, 761 (Miss. 1999). “To establish
a civil conspiracy, the plaintiff must prove (1) an agreement between two or
more persons, (2) to accomplish an unlawful purpose or a lawful purpose
unlawfully, (3) an overt act in furtherance of the conspiracy, (4) and damages
to the plaintiff as a proximate result.” Bradley v. Kelley Bros. Contractors, Inc.,
117 So. 3d 331, 339 (Miss. Ct. App. 2013) (footnote and citations omitted). The
agreement between the parties “need not extend to all details of the scheme
and may be express, implied, or based on evidence of a course of conduct.” Id.
at 339. Moreover, “the alleged confederates must be aware of the fraud or
wrongful conduct at the beginning of the agreement.” Id. “Conspiracies are
predominantly proved with circumstantial evidence since direct evidence of an
explicit agreement rarely exists.” Cooper Tire & Rubber Co. v. Farese, No.
3:02CV210-SA, 2008 WL 4285546, at *3 (N.D. Miss. Sept. 12, 2008).
“[I]nferences favorable to the plaintiff must be within the range of reasonable
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probability and it is the duty of the court to withdraw the case from the jury if
the necessary inference is so tenuous that it rests merely upon speculation and
conjecture.” Harris v. Miss. Valley State Univ., 873 So. 2d 970, 981 (Miss. 2004)
(citation omitted).
The district court concluded that the evidence presented “offer[ed] no
more than speculation and conjecture insufficient to create a genuine issue of
material fact.” The court noted that “to accept the conspiracy theory advanced
by Midwest Feeders would require the fact-finder to pile inference upon
inference, namely that Magee knew of Rawls’[s] fraudulent scheme, that he
agreed to conspire with Rawls, and that he acted on behalf of the Bank of
Franklin in furtherance of that agreement.” The district court focused its
analysis on the personal relationship between Rawls and Magee, finding that
a personal relationship alone cannot establish the existence of a conspiracy.
See Delta Chem., 790 So. 2d at 878.
Midwest argues that the district court failed to consider circumstantial
evidence regarding the existence of an agreement between BOF and Rawls.
Midwest alleges that the district court failed to give weight to “BOF eagerly
pursuing Rawls’[s] business, overlooking Rawls’[s] high uncollected funds
balance, approving wires from Rawls’[s] account when overdrawn by hundreds
of thousands of dollars, and accepting numerous Fraud Checks from Rawls
with no endorsement.” Midwest argues that this course of performance—
coupled with the “unprofessionally close relationship between Rawls and
Magee”—suffices to permit a juror to infer the existence of a civil conspiracy.
BOF responds by arguing that that Midwest “did not demonstrate a
genuine issue of material fact on its claim for civil conspiracy,” despite
“[e]xtensive discovery.” BOF cites Delta for the proposition that even if one
party receives “some favorable loans and other items of compensation due to
their personal relationship with [the alleged co-conspirator] [does] not ipso
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facto create the existence of a conspiracy.” See Delta Chem., 790 So. 2d at 878.
The Delta court affirmed the district court’s conclusion with regard to one
alleged co-conspirator. Id.
However, the Delta court also reversed a directed verdict regarding
another alleged co-conspirator. Id. The Delta court focused on “specific acts”
committed by a bank employee to determine whether he may have been part
of the alleged conspiracy. Id. The court concluded that “differing conclusions,
as to the activities of [an alleged co-conspirator], as an employee of [the
defendant bank], could be reached on the issue of his involvement in the
alleged conspiracy.” Id. Thus, the court found it appropriate to send that issue
to a jury trial, as opposed to deciding the issue on a directed verdict. Id.
Yet, BOF argues that the overt acts in Delta, which justified reversing
the directed verdict, are a far cry from the circumstantial evidence that
Midwest produced in this case. The acts by the alleged co-conspirator bank
employee in Delta included: (1) opening sham accounts for the co-conspirator;
(2) acting as the only employee reviewing banking statements related to those
accounts; and (3) retaining and using endorsement stamps for those sham
accounts. Delta, 790 So. 2d at 877.
We conclude, following Delta, that the evidence presented fails to
establish the plausible existence of a civil conspiracy. Although civil conspiracy
can be—and often is—established through circumstantial evidence, the
evidence of the close personal relationship between Rawls and Magee does not
rise to the level necessary to establish that a civil conspiracy existed. Such an
inference would “rest[] merely upon speculation and conjecture,” and thus it is
our duty to “withdraw the case from the jury.” Harris, 873 So. 2d at 981
(citation omitted). Therefore, we AFFIRM the district court’s summary
judgment against Midwest with regard to the civil conspiracy claim.
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D. Midwest Failed to Plausibly Allege a Conversion Claim under
Mississippi Code § 75-3-420
Midwest alleged two conversion claims: one under Mississippi Code and
another under Mississippi common law. At the motion to dismiss stage, the
district court correctly determined that Mississippi code preempted Midwest’s
common law conversion claim. See Berhow v. The Peoples Bank, 423 F. Supp.
2d 562, 567–68 (S.D. Miss. 2006) (“[Miss. Code Ann.] § 75-3-420 displaces [the
plaintiff’s] common law claims insofar as her common law claims relate to the
conversion of the instruments.”). After assessing the party’s arguments, the
district court subsequently dismissed the statutory conversion claim. The court
reasoned that Midwest “can show nothing more than an interest in the funds
behind the forged checks, [so] it cannot maintain an action in conversion
against Bank of Franklin.” The question on appeal is whether the district court
erred in dismissing Midwest’s § 75-3-420 conversion claim due to Midwest’s
lack of interest in the instruments. We AFFIRM the district court’s dismissal.
Section 75-3-420 establishes, in relevant part, that:
An instrument is also converted if it is taken by transfer, other
than a negotiation, from a person not entitled to enforce the
instrument or a bank makes or obtains payment with respect to
the instrument for a person not entitled to enforce the instrument
or receive payment. An action for conversion of an instrument may
not be brought by (i) the issuer or acceptor of the instrument or (ii)
a payee or indorsee who did not receive delivery of the instrument
either directly or through delivery to an agent or a co-payee.
Miss. Code. Ann. § 75-3-420(a). Midwest reiterates its statutory conversion
claim on appeal, and it asserts that it possessed a sufficient interest in the
converted negotiable instruments to bring a conversion claim.
BOF argues that Midwest lacked any interest in the negotiable
instrument; Midwest was not a person entitled to enforce the instrument, it
had no rights in the instrument, and it was not an entity recognized on the
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instrument itself. Therefore, it lacked any property interest in the check that
could be converted.
BOF relies on the Seventh Circuit’s opinion in American National
Insurance Co. v. Citibank, N.A., 543 F.3d 907 (7th Cir. 2008). There, the
Seventh Circuit found that, under a similar Illinois statute, a party “cannot
sue for conversion, because its only interest [was] a derivative claim to the
funds, not a claim to the instruments themselves.” Am. Nat’l, 543 F.3d at 910.
The Seventh Circuit emphasized that in order to bring a conversion claim, a
party would need to have a property interest in the instrument itself. Id.
(concluding that the plaintiff had “no property interest in the checks at issue
here: it [was] not a payee, indorsee, or any other entity recognized upon the
instruments themselves”). Instead, the plaintiff had only an equitable interest
in the checks. See id. According to BOF, the situation here is analogous because
Midwest only has an equitable interest in the checks; it has no property
interest in the checks themselves. Thus, asserts BOF, Midwest cannot bring a
conversion claim.
Midwest attempts to distinguish American National on the grounds that
the plaintiff in that case lacked any direct interest in the instruments. Midwest
alleges that in this case, it had a direct interest in the instruments because it
had “deposited funds into the account upon which BOF drew the Fraud
Checks.” Thus, Midwest argues, it had a property interest in the checks—as
opposed to merely an equitable interest.
However, as BOF and the district court recognized, Midwest’s conception
of conversion would place an undesirable burden on banks. As the Seventh
Circuit found,
Instead of being able to look at the payee line and to verify that the
person presenting the check was indeed entitled to do so, banks in
[the plaintiff’s] world would need to conduct a full-blown
investigation every time to make sure that a party with an
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equitable interest in the check was not lurking in the background.
Such a system would bring commercial transactions to a grinding
halt.
Am. Nat’l, 543 F.3d at 909–10. Thus, we agree with the Seventh Circuit that
Midwest cannot bring a conversion claim because it lacks a property interest
in the checks; Midwest merely has an interest in the funds behind the checks.
Midwest, citing Mississippi Code § 75-3-306, also argues that it
maintained an interest in the negotiable instrument’s proceeds. Section 75-3-
306 states in relevant part that “[a] person taking an instrument, other than a
person having rights of a holder in due course, is subject to a claim of a property
or possessory right in the instrument or its proceeds.” Miss. Code Ann. § 75-3-
306. Midwest asserts this means that it had an interest in the instruments’
proceeds, thus it stated a plausible claim for conversion. However, Midwest
raised this specific argument for the first time on appeal. Thus, we reject this
new theory as forfeited. See Leverette v. Louisville Ladder Co., 183 F.3d 339,
342 (5th Cir. 1999).
We AFFIRM the district court’s decision to dismiss the conversion claim.
Midwest lacks a cognizable interest in the negotiable instruments for the
purposes of § 75-3-420.
E. The District Court Did Not Abuse Its Discretion by Dismissing as
Moot Midwest’s Motion for Sanctions
Midwest asserts that the district court erred by never ruling on a motion
for sanctions. Midwest filed the motion for sanctions—alleging that BOF acted
improperly during the course of discovery—hours before the district court
issued its ruling on the motion for summary judgment. Days after the ruling,
counsel e-mailed the district court regarding the status of the motion for
sanctions. The district court responded that: “In light of [its] Order and Final
Judgment, Midwest’s Motion for Sanctions is moot. No further response is
needed.”
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Midwest asserts that dismissal was improper, and the court incorrectly
applied the doctrine of mootness to the issue. In support of its position,
Midwest cites an out-of-circuit case for the proposition that “the district court
must address BOF’s conduct to maintain compliance with the rules and public
confidence in the judicial system.” See Anchondo v. Anderson, Crenshaw &
Assocs., No. CV 08–202 RB/WPL, 2011 WL 4549279, at *6 (D. N.M. Sept. 29,
2011). In response, BOF asserts that it was within the district court’s
discretion to dismiss the motion.
We conclude that the district court did not abuse its discretion by
denying the imposition of discovery sanctions. See Tollett, 285 F.3d at 363.
Even if the district court imprecisely used the word “moot,” we are not
persuaded that such minor error constitutes an abuse of discretion that
justifies our intervention. And Midwest cites no case to the contrary.
CONCLUSION
For the foregoing reasons, we AFFIRM the judgment of the district court
on all issues.
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