Frost National Bank v. Midwest Autohaus, Inc. , 241 F.3d 862 ( 2001 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 99-3872
FROST NATIONAL BANK,
Plaintiff-Appellant,
v.
MIDWEST AUTOHAUS, INC., ROBERT P. GEEKIE, JR.,
FIRST OF AMERICA BANK-ILLINOIS, N.A. n/k/a
NATIONAL CITY BANK OF MICHIGAN/ILLINOIS, and
MICHELLE GEEKIE,
Defendants-Appellees.
Appeal from the United States District Court
for the Central District of Illinois.
No. 95 C 2150--Michael P. McCuskey, Judge.
Argued September 15, 2000--Decided February 23, 2001
Before Flaum, Chief Judge, Kanne and Williams,
Circuit Judges.
Kanne, Circuit Judge. This case arises from the
collapse of a check kiting scheme operated by
account holders at Frost National Bank ("Frost"),
plaintiff-appellant, and First of America Bank-
Illinois ("FOA"), defendant-appellee. Frost asks
us to find that the district court erroneously
granted FOA’s motion for summary judgment,
dismissing Frost’s claims accusing FOA of acting
unlawfully in dealing with the scheme operated by
Robert Geekie ("Geekie") and Peter Parker
("Parker"). Frost disputes the district court’s
ruling generally, arguing that the court
improperly construed the evidence presented in
the light most favorable to FOA when determining
whether to grant FOA’s motion for summary
judgment. Additionally, Frost challenges certain
specific findings of the court, including its
conclusion that FOA did not violate 18 U.S.C.
sec. 1962(d), the conspiracy provision of the
Racketeer Influenced and Corrupt Organizations
Act ("RICO"), and that FOA did not breach its
duty of good faith imposed by section 4-103 of
the Illinois Uniform Commercial Code. We find
that the district court properly construed the
evidence in this case, and we agree with the
court’s determination regarding Frost’s specific
claims. We therefore affirm the decision of the
district court.
I. History
Defendants Geekie and Parker operated a check
kiting scheme through their respective automobile
dealerships, Midwest Autohaus ("Midwest") and
Rovers Southwest ("Southwest"). Geekie, using the
Midwest account at FOA,/1 and Parker, through
the Southwest account at Frost,/2 effectuated
their scheme by continuously repeating a cycle of
writing checks to each other for amounts their
actual account balances could not cover, and then
depositing each other’s checks into their
respective accounts. FOA and Frost would then
provisionally credit Geekie and Parker’s accounts
based on these deposits, thereby covering the
checks they had just written to one another and
enabling them to write other checks as well. This
cycle, until it was eventually detected and
collapsed, allowed Geekie and Parker to borrow
their banks’ money interest free.
While the nature of Frost’s claims requires us
to focus primarily on the relationship between
FOA and Geekie and the steps FOA took to deal
with the suspected kite, we will also discuss
relevant facts relating to the relationship
between Frost and Parker.
FOA’s lending relationship with Geekie and
Midwest began in 1984 and steadily developed to
the point that FOA provided financing for vehicle
purchases of individual Midwest customers. This
line of credit matured in November 1994, however,
and it was not renewed by FOA because Geekie
failed to provide certain financial records
needed to evaluate the credit risk. FOA’s credit
file on Geekie also expressed concerns regarding
the location and identity of some of Midwest’s
automobiles and some overdrafts in the Midwest
account.
Additionally, the Midwest account often showed
negative collected balances. An account’s
collected balance is based on a bank computer’s
estimate of how long it will take to collect
items deposited into the account through the
banking system. Collection usually takes between
one and five days. These negative collected
balances meant that despite the Midwest account’s
positive ledger balance--the balance based on all
deposits made into the account minus checks paid
from the account--the deposits making up that
balance had not been collected through the
Federal Reserve System. Nevertheless, FOA
consistently allowed Geekie to draw on these
uncollected balances. Eventually, FOA told Geekie
that it would charge him interest on the average
uncollected balances because the uncollected
balances were "like an unsecured loan." In spite
of this warning, however, FOA never did charge
the Midwest account any interest.
At the same time, FOA received check-clearing
services from First of America Service ("FAS").
FAS employs the Vector 9 Check Kite Suspect
Computer System in processing each customer’s
account, looking for and identifying suspicious
activity. FAS reviews each account that is
identified as suspicious to determine if the
activity warrants further investigation. When FAS
finds sufficient evidence of a possible kite, it
notifies the bank that holds the account. After
FAS notifies a bank about a specific account,
that bank will sign off on that customer’s
account if it determines that the activity of the
account is legitimate. Once a bank signs off on
a customer’s account, FAS will not refer the
account to that bank again. In the first few
months of 1995, the Midwest account appeared on
the Vector 9 computer system nearly every day.
FAS referred the account to FOA as a possible
kite situation and FOA signed off on the Midwest
account. Frost had a similar detection system in
place. Frost received Kite Research Reports which
can indicate suspicious activity that might be
associated with a check kiting scheme. Parker’s
Southwest account appeared on Frost’s Kite
Research System Reports forty-three times from
January to mid-May of 1995.
In May of 1995, after months of tolerating
Geekie’s use of the Midwest account, events
transpired causing FOA to respond swiftly to the
suspicious activity surrounding the Midwest
account. On May 11, one of Geekie’s employees
requested a $50,000 cashier’s check from FOA. In
processing this request, the teller assisting the
employee discovered that the Midwest account had
a negative collected balance. Seeing this
uncollected balance, the teller sought approval
from a supervisor on whether to issue the
cashier’s check. Michael Gordon ("Gordon"), the
officer in charge of the Midwest account, was
unavailable, but another officer instructed the
teller to deny the request because of the
uncollected balance. Gordon was subsequently made
aware of this incident by the officer who
instructed the teller to deny the request, and at
that time Gordon proceeded to examine the Midwest
account.
The Midwest account exhibited a frequent and
growing disparity between a large positive ledger
balance and an even larger uncollected balance.
Additionally, Gordon observed checks totaling
unusually large amounts of money being deposited
into the Midwest account in very short periods of
time. Despite previous financial statements
totaling Midwest’s annual sales at $7.2 million,
the Midwest account had received $11 million in
deposits during just the first ten days of May
1995. Furthermore, two days earlier, Frost had
returned eight checks drawn on Parker’s Southwest
account at Frost totaling $701,800, refusing to
pay FOA because of insufficient funds in the
Southwest account. These returned checks were
charged against Midwest’s account at FOA.
Concerned with the state of the Midwest account
and the activity surrounding it, Gordon
approached FOA’s regional bank president, Jeff
Smith ("Smith") with the information he had
compiled. The two officers examined the account’s
activity to determine whether the significant
increase in deposits was the result of legitimate
business transactions. Smith and Gordon
recognized that the uncollected funds balance in
the Midwest account had grown substantially over
the past six months. After reviewing Midwest’s
account information, Smith and Gordon suspected
that $10 million dollars worth of checks
deposited into Midwest’s account were not
legitimate. Almost $5.5 million of the $6.6
million deposited into the Midwest account in
just the four days prior to Smith and Gordon’s
examination came from checks that had been drawn
on the accounts of only three businesses.
Additionally, these same three businesses were
the recent recipients of checks drawn on the
Midwest account totaling some $5.2 million.
Smith worried that Geekie might be running a
check kiting scheme that could potentially harm
FOA. FOA would sustain heavy losses if it were
unable to collect the funds apparently deposited
into the Midwest account that Geekie was in turn
using as a basis to draw and distribute equally
large checks on the Midwest account. The
possibility of this result led Smith and Gordon
to decide that FOA would not pay any checks drawn
on the Midwest account until the deposits
supposedly made into the Midwest account were
actually collected. On May 11, Smith and Gordon
placed a "hard hold" on the Midwest account. This
"hard hold" prevented all activity other than
deposits and caused all transactions to fall out
for review before posting on the account.
Additionally, placing this hold on the account
instructed FAS to return any checks posted that
day or the day before.
While FOA officials were suspicious of Geekie’s
activities, they were still apprehensive of
falsely accusing Geekie of running a check kiting
scheme and possibly putting him out of business.
Thus, Smith and Gordon met with Geekie on May 12
to give him an opportunity to explain the current
state of the Midwest account and the suspicious
activity being conducted through the account.
Phil Carter ("Carter"), FOA’s attorney, took part
in the meeting over the telephone and Geekie was
unwilling to talk about the Midwest account
without his own attorney present once he learned
that Carter was participating. At this time,
Smith and Gordon gave Geekie a letter explaining
that a "hard hold" was being placed on the
Midwest account, and that all funds deposited by
check on or after May 5 would be unavailable
until the eleventh business day following the
date of deposit. Additionally the letter
indicated that the Midwest account would be
closed at the end of business that day. Geekie
did not admit to his participation in a check
kiting scheme.
On May 15, Smith opened up a holding account,
to which he transferred Midwest’s uncollected
funds. Geekie could only access these funds once
they were actually collected. That day, Smith,
Gordon, and Carter met with Geekie and his
attorney, Roger Elliot ("Elliot"), to talk about
the Midwest account. Elliot threatened to sue FOA
for wrongfully interfering with Geekie’s business
and his legitimate business transactions. Elliot
also complained that FOA had always allowed a
negative collected funds balance in the Midwest
account, and that its new policy was arbitrary.
Again, Geekie did not disclose to Smith, Gordon,
or Carter that he was operating a check kiting
scheme.
Carter sent Geekie’s attorney a letter
explaining the terms under which FOA would
release money from the holding account to Geekie.
Geekie agreed to the provisions set forth in the
letter, but again did not disclose that he had
been operating a check kiting scheme. The terms
of the agreement explained that once the
provisional credits in the holding account were
collected through the Federal Reserve System, and
all of the claims through the Federal Reserve
System were settled or to be settled, Geekie
could have access to the remaining funds.
Ultimately, $477,800.93 was released to Geekie,
who subsequently arranged for FOA to wire
transfer the funds to the account of Mid-America
Exotic Auto Sales, Inc. ("Mid-America"), owned by
George Ventura, at Commercial State Bank of
Bonner Springs, Kansas./3
The steps FOA took to deal with the suspected
kite, including refusing to pay checks presented
to FOA for payment that had been drawn on the
Midwest account until sufficient actual collected
deposits had been cleared through the Federal
Reserve System, shifted the losses that usually
accompanies the collapse of a check kiting scheme
to Frost. Before FOA acted on its suspicions,
Parker had deposited checks from Geekie and the
Midwest account into the Southwest account. Based
on these deposits, Frost issued provisional
credits to the Southwest account, and Parker drew
on these credits. On May 12 and May 15, FOA
returned a total of sixteen checks drawn on the
Midwest account that Frost had presented for
payment to the Federal Reserve Bank of Chicago
because of insufficient funds in Geekie’s
account. FOA posted notices of its decision not
to pay these checks on the Electronic Advance
Return Notification System ("EARNS"), a computer
program banks use to notify and receive notice of
non-payment of checks.
When Frost picked up the notice through the
EARNS system indicating the first set of items
that were returned, the account officer for the
Southwest account at Frost notified Parker.
Parker told the officer that he did not know why
the checks were returned. The account officer
instructed her subordinates to resubmit the
checks. When Frost received notice through the
EARNS system of the second set of returns the
account officer again confronted Parker about
these returned checks, and Parker again indicated
that he did not know why FOA was refusing to pay
Midwest’s checks. On May 17, Frost put a hold on
Parker’s account. Additionally, after this second
set of returned checks, an officer from Frost
contacted Smith at FOA inquiring about the
returned checks. Smith refused to discuss the
Midwest account because of FOA’s policy of not
discussing customer account information with
anyone outside of FOA. Frost revoked the
provisional credits it had issued based on the
deposit of these sixteen items, which Parker had
already drawn on, creating an overdraft in the
Southwest account. This overdraft caused Frost to
suffer a loss of $796,552.16.
Parker and Geekie were eventually indicted for
criminal bank fraud and for abetting bank fraud.
Both pleaded guilty, and Geekie admitted
orchestrating the scheme.
On May 26, 1995, Frost filed a Complaint for
damages, declaratory judgment, and equitable
relief against Geekie, Midwest, Parker/4 and FOA
in the United States District Court for the
Central District of Illinois pursuant to 28
U.S.C. sec.sec. 1331, 1332, and 2201. While there
were other legal proceedings involving the
various parties in this case, most relevant to
this appeal are the claims Frost filed against
FOA in its first amended complaint alleging
wrongful dishonor of checks drawn on Geekie’s
account, breach of fiduciary duty, violation of
the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), breach of the duty of
good faith, and violation of the Expedited Funds
Availability Act ("EFA Act"). FOA filed a motion
for summary judgment addressing all of these
claims. Frost sought leave to file a second
amended complaint, in which it altered its
allegation under the RICO statute from a
violation of 18 U.S.C. sec. 1962(c), to a
violation 18 U.S.C. sec. 1962(d), the conspiracy
provision of the RICO statute.
The district court took Frost’s revision of its
RICO claim into account in ruling on FOA’s
motion, but nevertheless, on February 26, 1999,
finding no genuine issue of material fact as to
any of Frost’s claims against FOA, the district
court granted FOA’s motion for summary judgment,
dismissing each of Frost’s five claims against
FOA. Frost filed a timely notice of appeal, and
now challenges the manner in which the district
court construed the evidence in deciding to grant
FOA’s motion as well as the court’s decision
regarding Frost’s claim that FOA violated the
RICO conspiracy statute, and its claim that FOA
breached its duty of good faith under the
Illinois Uniform Commercial Code.
II. Analysis
We review the district court’s decision to
grant FOA’s motion for summary judgment de novo.
See Bekker v. Humana Health Plan, Inc., 229 F.3d
662, 669 (7th Cir. 2000). Summary judgment is
proper when "the pleadings, depositions, answers
to interrogatories, and admissions on file,
together with the affidavits, if any, show that
there is no genuine issue as to any material fact
and that the moving party is entitled to a
judgment as a matter of law." Fed.R.Civ.P. 56(c);
see also Celotex Corp. v. Catrett, 477 U.S. 317,
322-23, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986).
When determining whether a genuine issue of
material fact exists in this case, we must review
the record in the light most favorable to Frost,
drawing all reasonable inferences in its favor.
See Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 255, 106 S. Ct. 2505, 91 L. Ed. 2d 202
(1986). If after having drawn all reasonable
inferences in Frost’s favor we conclude that a
reasonable jury could return a verdict for Frost,
then a genuine issue of material fact exists and
the district court’s decision to grant FOA’s
motion for summary judgment was not proper. See
id. at 249-50; see also United States v. 5 S. 351
Tuthill Rd., Naperville, Ill., 233 F.3d 1017,
1024 (7th Cir. 2000). If, however, we determine
that no reasonable jury could return a verdict in
favor of Frost, then there is no genuine issue of
material fact and the district court’s decision
to grant FOA’s motion for summary judgment was
proper. See Anderson, 477 U.S. at 249-50.
A. The District Court’s Review of the Evidence
Frost’s first argument on appeal is a general
objection to the manner in which the district
court reviewed the evidence. Frost argues that in
granting FOA’s motion for summary judgment, the
district court turned the summary judgment
process on its head by construing the evidence in
the light most favorable to FOA, the moving
party, rather than in favor of Frost, the non-
moving party. Frost points to specific pieces of
evidence urging us to determine that the trial
court did not draw proper inferences from this
information, and that a proper review dictates a
conclusion that there are genuine issues of
material fact that must be addressed by a trier
of fact.
This claim blends into Frost’s two other claims
included in this appeal. The evidence Frost
contends that the trial court improperly
construed is the same evidence Frost relies on to
assert that the district court erred in granting
summary judgment on Frost’s RICO conspiracy claim
and its claim that FOA breached its duty of good
faith. For example, Frost points to specific
information available to FOA pertaining to the
Midwest account, arguing that if the district
court had properly drawn all inferences in favor
of Frost, then it would have concluded that this
information sufficiently implies FOA had
knowledge of the check kiting scheme so as to
allow Frost’s RICO conspiracy claim to survive
FOA’s motion for summary judgment. Later in its
brief, when specifically contesting the district
court’s decision regarding its RICO conspiracy
claim, Frost again asserts this information as
proof that FOA had knowledge of Geekie’s check
kiting scheme. Thus, we find it more efficient
and appropriate to discuss the district court’s
review of the specific evidence presented in this
claim within the context of our analysis of
Frost’s other two claims. We will say, however,
that we disagree with Frost’s assertion that the
district court improperly drew inferences in
favor of FOA.
As we stated above, it is well established that
as the non-moving party, Frost was entitled to
have the district court review the record as we
do now, drawing all reasonable inferences in
favor of Frost. See Anderson v. Liberty Lobby,
Inc., 477 U.S. at 255. A court’s obligation to
draw all reasonable inferences in favor of a non-
moving party, however, does not require that
court to stretch existing evidence to reach
conclusions or bolster arguments it could not
otherwise support. This is precisely what Frost
has asked us to do here, and therefore, we find
no merit in this claim.
B. Frost’s RICO Conspiracy Claim
Frost’s second claim on appeal alleges that, in
dealing with Geekie’s check kiting scheme, FOA
violated the RICO conspiracy statute, 18 U.S.C.
sec. 1962(d). Section 1962(d) states that "[i]t
shall be unlawful for any person to conspire to
violate any of the provisions of subsection (a),
(b), or (c) of this section." 18 U.S.C. sec.
1962(d). Frost contends that FOA conspired with
Geekie and Parker to violate 18 U.S.C. sec.
1962(c),/5 a crime for which both Geekie and
Parker have already been convicted, thereby
exposing itself to civil liability under sec.
1962(d).
With respect to this claim, the district court
granted FOA’s motion for summary judgment
concluding that "[t]here is simply no evidence of
any conspiratorial agreement between FOA and the
other defendants to carry out the check-kiting
scheme." Frost Nat’l Bank v. Parker, No. 95-2150,
at 19 (C.D. Ill. Feb. 26, 1999). Frost now
asserts that the district court erred by imposing
an overly burdensome standard in evaluating
Frost’s RICO conspiracy claim. Frost argues that
our decision in Brouwer v. Raffensperger, Hughes
& Co., 199 F.3d 961 (7th Cir. 2000), cert.
denied, 120 S. Ct. 2688 (2000), issued subsequent
to the district court’s decision in this case,
articulates a much less stringent standard than
that used by the district court. Frost contends
that our analysis in Brouwer must be applied to
the facts of this case, and that when the
analysis is applied, the district court’s
granting of FOA’s motion for summary judgment
must be reversed because Frost has proven FOA’s
culpability under this standard. While we
acknowledge that our recent explanation of sec.
1962(d) liability is the proper standard by which
Frost’s RICO claim against FOA should be
evaluated, we do not agree that the application
of our analysis in Brouwer leads to a different
result in this case.
Before Brouwer, our long-established, two-part
analysis of subsection (d) looked for two
separate agreements: "an agreement to conduct or
participate in the affairs of an enterprise and
an agreement to the commission of at least two
predicate acts." United States v. Neapolitan, 791
F.2d 489, 499 (7th Cir. 1986). While this second
agreement only requires a person to agree that
someone, not necessarily that person, will
execute the two predicate acts, our decision in
Brouwer clarified the level of personal
participation that is required by the first
agreement in light of two Supreme Court
decisions, Reves v. Ernst & Young, 507 U.S. 170,
113 S. Ct. 1163, 122 L. Ed. 2d 525 (1993), and
Salinas v. United States, 522 U.S. 52, 118 S. Ct.
469, 139 L. Ed. 2d 352 (1997). See Brouwer, 199
F.3d at 961-67. In Brouwer we explained:
To conspire to commit a subsection (c) offense,
one would not need, necessarily, to meet the
Reves requirements: one does not need to agree
personally to be an operator or manager. On the
other hand, one cannot conspire to violate
subsection (c) by agreeing that somehow an
enterprise should be operated or managed by
someone. That would impose a meaningless
requirement and cast a frighteningly wide net.
Rather, one’s agreement must be to knowingly
facilitate the activities of the operators or
managers to whom subsection (c) applies. One must
knowingly agree to perform services of a kind
which facilitate the activities of those who are
operating the enterprise in an illegal manner. It
is an agreement, not to operate or manage the
enterprise, but personally to facilitate the
activities of those who do.
Id. at 967. We have subsequently reiterated this
standard. See United States v. Swan, 224 F.3d
632, 635 (7th Cir. 2000), amended by 230 F.3d
1040 (7th Cir. 2000) (explaining that a guilty
jury verdict for a sec. 1962(d) criminal charge
could not provide a "finding relating to
participation in the management or operation of
[an] enterprise" absent from a deficient jury
instruction for a sec. 1962(c) charge because a
sec. 1962(d) conviction only requires a jury "to
find that [an individual] knowingly agreed to
facilitate the activities of those operators or
managers to whom sec. 1962(c) can apply").
In its order granting FOA’s motion for summary
judgment, the district court explained our sec.
1962(d) analysis relying on cases that we noted
in Brouwer as "continu[ing] to describe in a
general way the proper standard." Brouwer, 199
F.3d at 966-67 (referring to Goren v. New Vision
Int’l, Inc., 156 F.3d 721 (7th Cir. 1998), MCM
Partners v. Andrews-Bartlett & Assocs. 62 F.3d
967 (7th Cir. 1995), United States v.
Quintanilla, 2 F.3d 1469 (7th Cir. 1993), United
States v. Neapolitan, 791 F.2d 489 (7th Cir.
1986)). Although our analysis in Brouwer
subsequently clarified the level of participation
required by the agreement "to conduct or
participate in the affairs of an enterprise," a
standard used by the district court, the district
court did not require Frost to show such a level
of participation by FOA in the check kiting
scheme that its decision was inconsistent with
our analysis in Brouwer. The district court
specifically cited cases where we have held that
a conspirator under sec. 1962(d) does not need to
be an operator or manager. See Frost Nat’l Bank,
No. 95-2150, at 17-18 (C.D. Ill. Feb. 26, 1999)
(citing MCM Partners, 62 F.3d at 980).
Additionally, the district court noted that this
court "has stressed that the touchstone of
liability under section 1962(d) is an agreement
to participate in an endeavor that, if completed,
would constitute a violation of the substantive
statute." Id. at 18 (citing Goren, 156 F.3d at
732). Most importantly, however, even if the
district court did require Frost to show that FOA
participated in the check kiting scheme to a
greater extent than our standard in Brouwer
requires, we conclude that an application of our
analysis in Brouwer yields the same result as
that reached by the district court.
For FOA to have violated sec. 1962(d), it had
to have "knowingly agree[d] to perform services
of a kind which facilitate[d]" Geekie and Parker
in the operation of their check kiting scheme.
Brouwer, 199 F.3d at 967. Frost argues that FOA
had knowledge of Geekie’s check kiting scheme and
knowingly agreed to facilitate Geekie in the
operation of the criminal bank fraud.
Specifically, Frost alleges that Geekie
effectuated the check kiting scheme by
transferring the Midwest account into a holding
account and selectively paying checks out of that
account on Geekie’s behalf and at his direction.
Frost also contends that FOA assisted the scheme
by releasing $477,800.93 from the holding account
to Geekie, whom FOA knew was involved in criminal
bank fraud, who in turn transferred that money to
the company of George Ventura, who was later
convicted for participating in the check kiting
scheme. After having reviewed all of the evidence
in the light most favorable to Frost, we find no
such agreement between FOA and Geekie and Parker.
First, Frost mischaracterizes the extent of
FOA’s knowledge of Geekie’s check kiting scheme.
FOA became increasingly suspicious of Geekie’s
use of the Midwest account based on information
compiled regarding the activity of that account.
Frost points to this information as evidence that
FOA had knowledge of the check kiting scheme.
Curiously, Frost received information regarding
the Southwest account similar to the information
which Frost argues is proof that FOA knew that
the Midwest account’s activity met each and every
one of the tell-tale signs of a criminal check
kite. Eventually, FOA acted on its suspicions,
despite being threatened with a lawsuit by
Geekie’s attorney, and took steps which the
district court correctly noted "[i]f anything, .
. . stopped the scheme rather than effectuating
it." Frost Nat’l Bank, No. 95-2150, at 19. While
we agree with the statement made by FOA’s
attorney at oral argument that both parties
should probably have caught this scheme sooner,
we do not believe that FOA knowingly stood by,
allowing the scheme to continue. To the contrary,
FOA’s actions suggest that as it grew more and
more suspicious of a possible scheme, it took
appropriate steps to deal with the situation and
stop the check kiting scheme.
Secondly, Frost’s allegations that FOA
facilitated the scheme by operating the holding
account and returning the $477,800.93 to Geekie
are misplaced remnants of its other claims upon
which the district court granted FOA’s motion for
summary judgment. All of Frost’s claims return to
one central point: Frost lost money when FOA took
steps leading to the collapse of Geekie and
Parker’s check kiting scheme. Now Frost is trying
to recoup this money by accusing FOA of acting
unlawfully in dealing with the suspected kite.
There is no doubt that FOA acted in its own
interest in dealing with Geekie and the Midwest
account. FOA attempted to protect itself and
avoid incurring substantial losses from the
suspected kite even though other financial
institutions such as Frost might therefore end up
losing money. Specifically relevant in this case
are the sixteen checks totaling $1,248,550
presented by Frost that FOA returned in a timely
manner so as to avoid having to pay on those
checks. The return of these checks created an
overdraft in Parker’s account causing Frost to
sustain a loss of $796,552.16. While Frost is
understandably frustrated with the losses it has
incurred, its RICO claim against FOA is without
merit. FOA did not agree to facilitate any of
Geekie’s illegal actions. Furthermore, the manner
in which FOA proceeded, including its decisions
to set up a holding account and return the
remainder of collected funds to Geekie after
paying all outstanding amounts for which FOA was
liable, did not violate any laws. The district
court rightly determined that "[t]he only
reasonable inference this court can draw from
FOA’s actions is that FOA wanted to dissolve its
association with Geekie as quickly as possible."
Frost Nat’l Bank, No. 95-2150, at 19 (C.D. Ill.
Feb. 26, 1999). Thus, we conclude that the
district court correctly granted FOA’s motion for
summary judgment regarding Frost’s RICO claim.
C. Frost’s Breach of Good Faith
and Fair Dealing Claim.
Frost’s final argument on appeal disputes the
district court’s decision to grant FOA’s motion
for summary judgment on Frost’s claim that FOA
breached its duty of good faith imposed by
section 4-103 of the Illinois Uniform Commercial
Code (the "UCC") in its dealings with Frost.
Frost asserts that the district court erred in at
least two respects in granting FOA’s motion for
summary judgment on this claim. Both of these
alleged errors relate to the district court’s
reliance on First Nat’l Bank v. Colonial Bank,
898 F. Supp. 1220 (N.D. Ill. 1995).
Frost first asserts that the district court,
following the analysis of Judge Grady in First
National Bank, erroneously equated compliance
with applicable banking laws and Federal Reserve
Regulations with the adherence of the duty of
good faith required by Article 4 of the UCC. 810
Ill. Comp. Stat. Ann. 5/4-104(c) (West Supp. 2000).
Article 4 of the UCC (Banking Deposits and
Collections) adopts the definition of good faith
in Article 3, requiring "honesty in fact and the
observance of reasonable commercial standards of
fair dealing." 810 Ill. Comp. Stat. Ann. 5/3-103(1)(4)
(West 1993). Frost argues that this duty of good
faith is independent of a bank’s obligation to
adhere to applicable banking laws and
regulations, and that FOA violated this duty.
Subsection (a) of section 4-103 states that
"[t]he effect of the provisions of this Article
may be varied by agreement, but the parties to
the agreement cannot disclaim a bank’s
responsibility for its lack of good faith or
failure to exercise ordinary care." 810 Ill. Comp.
Stat. Ann. 5/4-103(a) (West 1993). Subsection (b)
then explains that "Federal Reserve regulations
and operating circulars, clearing-house rules,
and the like have the effect of agreements under
subsection (a), whether or not specifically
assented to by all parties interested in items
handled." 5/4-103(b). Frost argues that these two
statements taken together imply that a duty of
good faith is imposed upon a bank in its actions
or non-actions taken pursuant to Federal Reserve
regulations or other like rules, and that a bank
cannot disclaim responsibility for its lack of
good faith through compliance with such
regulations or rules.
Frost contends that comment 3 to section 4-103
provides further support for this interpretation.
Comment 3 notes that while the official or quasi-
official rules of collection set out in
subsection (b) can "vary the effect of the
provisions of Article 4," they are "subject to
the good faith and ordinary care limitations."
5/4-103 cmt. 3. Finally, Frost points to
subsection (c) of section 4-103 which states that
"[a]ction or non-action approved by this Article
or pursuant to Federal Reserve regulations or
operating circulars is the exercise of ordinary
care." 5/4-103(c). Frost argues that the absence
of any affirmative statement equating compliance
with Article 4 or Federal Reserve regulations
with adherence to one’s duty of good faith,
similar to subsection (c)’s statement regarding
the exercise of ordinary care, is evidence that
such compliance is not sufficient to satisfy
one’s duty of good faith under the UCC.
We do not disagree with Frost’s argument that
section 4-103 of the UCC implies that a bank’s
duty of good faith is not satisfied by compliance
with Federal Reserve regulations or Article 4
provisions alone. In fact, we do not think that
the decision in First National Bank is at odds
with this aspect of Frost’s argument. In our
view, Frost mischaracterizes the analysis
employed by the court in First National Bank and
followed by the district court in this case.
Contrary to Frost’s assertion, we find that the
court in First National Bank did not simply
equate compliance with applicable banking
regulations with adherence to one’s duty of good
faith under the UCC. While First National Bank
supports Frost’s argument that there is a duty of
good faith under the UCC that requires more than
just mere compliance with banking regulations,
Frost finds itself in a precarious situation.
Like the current case, First National Bank
involved two banks trying to pick up the pieces
after the collapse of a check kiting scheme. See
First Nat’l Bank, 898 F. Supp. at 1223. First
National Bank of Harvey ("First National")
suspected that one of its customers was involved
in a check kiting scheme and therefore decided
not to pay checks drawn on that customer’s
account. See id. at 1224. Instead, First National
decided to return those checks to the Federal
Reserve Bank of Chicago (the "Reserve Bank"), the
clearinghouse through which these checks were
processed, and to notify Colonial Bank
("Colonial"), who had presented those checks for
payment, that it was returning the checks. See
id. First National did not notify Colonial that
it was suspicious of a kite, however, as its
stated reason for returning the checks was simply
"refer to maker." Id. Upon receiving this notice,
Colonial investigated the situation and
recognized that it stood to lose a significant
amount of money if it did not return similar
checks drawn on a Colonial account that First
National had presented for payment. See id. After
hesitating at first, Colonial returned these
checks to the Reserve Bank and notified First
National. See id. First National protested this
attempted return, arguing that Colonial had not
returned the checks by the midnight deadline
imposed by Article 4 of the UCC./6 Id. Over
First National’s objections the Reserve Bank
accepted the return and debited First National’s
account. See id. at 1224-25.
 First National filed suit against Colonial and
the Reserve Bank, continuing to argue that
Colonial was strictly liable for the face amount
of the checks that First National had presented
because Colonial had wrongfully returned them
after the midnight deadline imposed by Article 4
of the UCC, and that the Reserve Bank had
wrongfully accepted the late return. See id. at
1225. Colonial argued that First National was not
entitled to recover any of the losses it suffered
from the collapsed check kiting scheme because
First National had acted in bad faith by failing
to notify Colonial of the scheme and by
"deliberately caus[ing] confusion in returning
the First National Checks, . . . caus[ing]
Colonial to miss the midnight deadline." Id. at
1229.
The district court agreed with First National
that Colonial appeared to be strictly liable for
the checks it had failed to return by the
midnight deadline. See id. at 1228. The court
explained, however, that it had to determine
whether First National’s lawful return of the
checks presented by Colonial, First National’s
lawful presentation of checks to Colonial for
payment, and Colonial’s late return of these
checks, all of which seemingly dictated strict
liability for Colonial under section 4-302 of the
UCC, could be defeated on a theory of bad faith
on the part of First National. See id. at 1230 n.
11. The court dismissed First National’s argument
that "introducing the concept of bad faith will
muddy the concepts of certainty and finality,
which are central to the treatment of kites by
Article 4," noting that "the UCC itself . . .
injects notions of good faith into every
transaction covered by it, and we cannot simply
ignore the statute." Id. at 1229. Thus,
acknowledging First National’s compliance with
Article 4 and Federal Reserve rules regarding
presentation and return, the court proceeded to
determine what level of conduct was required by
banks in this type of a situation in order to
avoid breaching the required duty of good faith.
See id.
The court analyzed this question by addressing
two more specific questions: first, is there a
good faith duty for a depository bank to disclose
its suspicions of a check kiting scheme to a
payor bank? And second, is it bad faith for a
depository bank that discovers or suspects a
check kiting scheme to attempt to shift the
unavoidable loss associated with the collapse of
a check kiting scheme to some other financial
institution? See id. at 1229. The court in First
National Bank reviewed the decisions of other
courts that had considered similar check kiting
situations. See id. at 1229-31 (examining
Citizens Nat’l Bank v. First Nat’l Bank, 347 So.
2d 964 (Miss. 1977), and Cumis Ins. Soc’y, Inc.
v. Windsor Bank & Trust Co., 736 F. Supp. 1226
(D. Conn. 1990), and citing Alta Vista State Bank
v. Kobliska, 897 F.2d 930 (8th Cir. 1990), Mid-
Cal Nat’l Bank v. Federal Reserve Bank, 590 F.2d
761 (9th Cir. 1979) and Schwegmann Bank & Trust
Co. v. Bank of La., 595 So. 2d 1185 (La. Ct. App.
1992)). The majority of these courts concluded
that with the exception of four specific
instances,/7 "a bank has no good faith
obligation to disclose a suspected kite or to
refrain from attempting to shift the kite loss."
Id. at 1230. Agreeing with the approach of these
courts, and determining that none of the four
possible exceptions applied to the facts in that
case, the First National Bank court concluded
that First National did not violate its duty of
good faith under the UCC. Id. at 1231. Instead,
that court concluded that First National’s
conduct, at most, amounted to a permissible
attempt to shift the loss that someone would
incur as a result of the collapse of the check
kiting scheme. Id.
We agree with and endorse the First National
Bank court’s determination as to what level of
good faith is required by the Illinois Uniform
Commercial Code of banks when dealing with a
check kiting situation. We also approve of the
district court’s reliance on the First National
Bank court’s analysis for guidance in this case.
In a situation like the one before us, we find
there to be "no duty between competing
institutions to inform one another of the
existence of a check kiting scheme because these
institutions deal at arms length, [and] have
their own means of detecting check kiting
[schemes]." Cumis Ins. Soc’y, Inc., 736 F. Supp.
at 1233. While we might have reached a different
conclusion if one of the four exceptions
previously mentioned were found in this case,
i.e., if there had been a fiduciary or
confidential relationship between Frost and FOA,
if there were a contractual relationship between
the two banks, if a more stringent duty had been
created by law, or if FOA had committed fraud in
dealing with Frost, we find no such exceptions
here. Therefore, FOA’s duty of good faith did not
require it to disclose to Frost that it suspected
that Geekie was running a check kiting scheme.
Likewise, FOA did not have to refrain from
attempting to shift the inevitable loss away from
itself and onto the other financial institutions
victimized by Geekie and Parker.
In its second criticism of the district court’s
decision, Frost argues that even if the district
court correctly relied on the legal analysis set
out in First National Bank, there are glaring
factual distinctions between the two cases that
render the district court’s reliance on that
court’s decision erroneous. Frost contends that
FOA took steps beyond the actions of the
depository bank in First National Bank, and that
these steps constitute bad faith. Once again
Frost attacks the manner in which FOA collapsed
the kite. As evidence of FOA’s bad faith, Frost
points to FOA’s use of a holding account, and
FOA’s refusal to tell Frost of the kite, both in
the manner in which it returned checks, and by
declining to inform Frost of the kite even when
Frost directly contacted FOA seeking information.
Frost also argues that FOA breached its duty of
good faith by representing to the banking
community that the Midwest Autohaus account was
a traditional deposit checking account, when in
fact it was the functional equivalent of a line
of credit from FOA.
Having already found that FOA’s duty of good
faith under the UCC did not require it to either
disclose to Frost that it suspected a check
kiting scheme or refrain from attempting to shift
the loss from the kite on to Frost, we are able
to dispose of this final claim in short order.
Despite Frost’s insistence to the contrary, the
manner in which FOA returned checks, its failure
to disclose its suspicions to Frost, its use of
a holding account, and its representations to the
banking community as to the nature of Geekie’s
account do not constitute bad faith. Our de novo
review of the actions taken by FOA to collapse
the suspected kite support only one conclusion,
that "[a]t worst, the facts in this case
demonstrate that FOA successfully shifted to
Frost the loss from Geekie and Parker’s kite."
Frost Nat’l Bank, No. 95-2150, at 22 (C.D. Ill.
Feb. 26, 1999).
III. Conclusion
Because we find that the district court
properly construed the evidence in ruling on
FOA’s motion for summary judgement, and we agree
with its determination that FOA neither violated
the RICO conspiracy statute nor breached its duty
of good faith under the Illinois Uniform
Commercial Code in dealing with Geekie and
Parker’s check kiting scheme, we AFFIRM the
decision of the district court granting FOA’s
motion for summary judgment.
/1 At the time of the events surrounding this case
FOA was a national banking association duly
chartered under the laws of the United States
with its principal place of business in Oak
Brook, Illinois. FOA is now known as National
City Bank of Michigan/Illinois.
/2 Frost is a national banking association duly
chartered under the laws of the United States,
whose principal place of business is in Bexar
County, Texas.
/3 George Ventura, the owner of Mid-America, was
convicted for participating in the check kiting
scheme, however, his conviction on these counts
was overturned on appeal.
/4 Peter Parker is not a part of this appeal because
a default judgment was entered against him for
failing to appear and answer Frost’s complaint.
/5 Section 1962(c) states:
It shall be unlawful for any person employed by
or associated with any enterprise engaged in, or
the activities of which affect, interstate or
foreign commerce, to conduct or participate,
directly or indirectly, in the conduct of such
enterprise’s affairs through a pattern of
racketeering activity or collection of unlawful
debt.
18 U.S.C. sec. 1962(c).
/6 With regard to a bank’s ability to return a
check, section 4-302 explains that:
(a) If an item is presented to and received by
a payor bank, the bank is accountable for the
amount of:
(1) a demand item, other than a documentary
draft, whether properly payable or not, if the
bank . . . does not pay or return the item or
send notice of dishonor until after its midnight
deadline.
810 Ill. Comp. Stat. Ann. 5/4-302 (West Supp. 2000).
"Midnight deadline" under Article 4 of the UCC
"with respect to a bank is midnight on its next
banking day following the banking day on which it
receives the relevant item or notice or from
which the time for taking action commences to
run, whichever is later." 810 Ill. Comp. Stat. Ann.
5/4-104(a)(10) (West Supp. 2000).
/7 These four exceptions to this general rule were
identified as: "(1) where a fiduciary or
confidential relationship exists; (2) where a
contractual relationship exists; (3) where there
is a duty created by law; and (4) where there was
fraud or misrepresentation by the defendant
bank." First National Bank, 898 F. Supp. at 1231
(citing Cumis Ins. Soc., Inc., 736 F. Supp. at
1233).