Northeast Bank v. Hanover Insurance Group , 796 F.3d 929 ( 2015 )


Menu:
  •                United States Court of Appeals
    For the Eighth Circuit
    ___________________________
    No. 14-2240
    ___________________________
    Northeast Bank
    lllllllllllllllllllll Plaintiff - Appellee
    v.
    The Hanover Insurance Group
    lllllllllllllllllllll Defendant
    Wells Fargo Bank, N.A.
    lllllllllllllllllllll DefendantThird Party Plaintiff - Appellant
    v.
    Percy Pooniwala; Dinaz Pooniwala; Shreekanth Maripally; Ashok Shetty
    lllllllllllllllllllllThird Party Defendants
    ____________
    Appeal from United States District Court
    for the District of Minnesota - Minneapolis
    ____________
    Submitted: February 11, 2015
    Filed: August 6, 2015
    ____________
    Before GRUENDER, SHEPHERD, and KELLY, Circuit Judges.
    ____________
    SHEPHERD, Circuit Judge.
    Hanover Insurance Group (Hanover) issued two checks totaling $350,000 made
    jointly payable to Grand Rios Investments, LLC (Grand Rios), Northeast Bank, and
    Alex N. Sill Company. Without Northeast Bank’s endorsement, knowledge, or
    consent, Wells Fargo Bank, N.A. (Wells Fargo), paid the full amount of the checks
    to Grand Rios. Northeast Bank brought suit against Hanover and Wells Fargo. The
    district court granted Hanover’s motion to dismiss the counts of the complaint
    pertaining to Hanover. Northeast Bank and Wells Fargo both filed motions for
    summary judgment. The district court granted summary judgment in favor of
    Northeast Bank and denied Wells Fargo’s motion for summary judgment. Wells
    Fargo now appeals, arguing that while its payment constituted conversion under the
    Uniform Commercial Code, see Minn. Stat. § 336.3-420, Northeast Bank has not
    suffered any damages because it was subsequently paid the full amount of the debt
    for which the two checks were security. We agree with Wells Fargo, and therefore
    we reverse the district court’s grant of summary judgment to Northeast Bank and
    remand this matter with instructions to enter judgment in favor of Wells Fargo.
    I.
    In 2003, Northeast Bank issued an $18 million construction loan to an entity
    to construct a hotel and waterpark in Brooklyn Park, Minnesota. The hotel and
    waterpark struggled, and eventually that entity defaulted on its obligations. In 2010,
    Grand Rios purchased the hotel and waterpark for $5 million. Part of the purchase
    price included Grand Rios’s assumption of $4.61 million of the debt owed to
    Northeast Bank by the original owner. Grand Rios secured this obligation by, among
    other things, (1) personal guaranties from Grand Rios’s three principals, (2) a
    mortgage of the hotel and waterpark, and (3) Grand Rios’s obligation under the
    mortgage to maintain certain property insurances for Northeast Bank’s benefit. As
    -2-
    relevant here, Grand Rios purchased a property, liability, and business-interruption
    policy from Hanover.
    In December 2010, the roof of the hotel and waterpark was damaged by a
    snowstorm. Grand Rios hired Alex N. Sill Company to prepare, submit, and negotiate
    any claims submitted to Hanover. On February 15, 2011, Hanover issued a check in
    the amount of $100,000 made payable to “Alex N. Sill Company and Grand Rios
    Investment LLC and Northeast Bank” to cover costs associated with mitigating the
    damage caused by the leaking roof. On February 25, Grand Rios presented this check
    to Wells Fargo, and although the check did not contain Northeast Bank’s
    endorsement, Wells Fargo accepted the check for deposit into Grand Rios’s account.
    On March 29, 2011, Hanover issued an additional check, this time for
    $250,000, to the same joint payees. Again, Grand Rios presented the check to Wells
    Fargo without Northeast Bank’s endorsement, and Wells Fargo again accepted the
    check for deposit into Grand Rios’s account. Grand Rios did not notify Northeast
    Bank of the issuance of these checks prior to deposit.
    By April 2011, Northeast Bank was threatening Grand Rios with foreclosure
    due to Grand Rios’s repeated failure to make mortgage payments. In June 2011,
    Northeast Bank, Grand Rios, and the three guarantors entered into a Settlement
    Agreement under which Grand Rios and the three guarantors agreed to a voluntary
    foreclosure, to assign all insurance proceeds to Northeast Bank, to pay $50,000 to
    Northeast Bank, and to allow a state court to appoint a receiver for the hotel and
    waterpark. An escrow account was established to cover operating costs of the hotel
    and waterpark. Grand Rios paid the $50,000 it agreed to pay under the Settlement
    Agreement into the escrow account, and Hanover made additional insurance
    payments of approximately $1.2 million into the escrow account. As of July 31,
    2011, Grand Rios owed Northeast Bank $4,993,226.24. On August 1, 2011,
    Northeast Bank purchased the property in a sheriff’s sale for $4,606,157.21, and this
    -3-
    sale price was credited against the mortgage indebtedness Grand Rios owed to
    Northeast Bank. After the receivership was cancelled, Northeast Bank received
    $596,299.27 from the escrow account. Thus, Northeast Bank received approximately
    $200,000 more than the debt Grand Rios owed. Northeast Bank later sold the
    property to CarMax.
    Northeast Bank initiated this action against Wells Fargo, seeking to recover
    $350,000 on the theory of conversion. The parties agreed that Wells Fargo had
    improperly converted the checks. On cross-motions for summary judgment, the
    district court rejected Wells Fargo’s argument that allowing Northeast Bank to
    recover the $350,000 would constitute a second recovery on the same claim. The
    district court granted Northeast Bank’s motion for summary judgment and denied
    Wells Fargo’s motion for summary judgment. Wells Fargo appeals.
    II.
    We review a district court’s decision on cross-motions for summary judgment
    de novo. See J.E. Jones Constr. Co. v. Chubb & Sons, Inc., 
    486 F.3d 337
    , 340 (8th
    Cir. 2007). “Summary judgment is appropriate when, viewing the facts in the light
    most favorable to the non-movant, there are no genuine issues of material fact and the
    movant is entitled to judgment as a matter of law.” 
    Id. We apply
    the substantive law
    of Minnesota to this action. See Chew v. Am. Greetings Corp., 
    754 F.3d 632
    , 635
    (8th Cir. 2014) (“Because we are a federal court sitting in diversity, we apply the
    substantive law of the forum state.”).
    The parties agree that the relevant statute is Minnesota Statutes section 336.3-
    420 (adopting the Uniform Commercial Code section 3-420), which states that “the
    measure of liability [for conversion] is presumed to be the amount payable on the
    instrument, but recovery may not exceed the amount of the plaintiff’s interest in the
    instrument.” They disagree about what is necessary to rebut the presumption as to
    -4-
    damages. Wells Fargo argues that Northeast Bank’s recovery must be limited to its
    actual damages and because Northeast Bank did not suffer actual damages, it is not
    entitled to recover from Wells Fargo for the conversion. Northeast Bank responds
    that to rebut the presumption, there must be evidence that the proceeds from the
    converted funds reached the intended recipients. In other words, absent evidence that
    Grand Rios paid $350,000 to Northeast Bank towards the loan debt, the presumption
    is not rebutted and the district court’s grant of summary judgment must be affirmed.
    In American State Bank, we explained “the [UCC] and its Commentary give
    no guidance as to how the presumption should be applied to [the] issue [of the
    measure of liability]” and thus “courts applying the UCC have determined when and
    how the presumption may be rebutted in accordance with more general state law
    damage principles.” Am. State Bank v. Union Planters Bank, N.A., 
    332 F.3d 533
    ,
    536-37 (8th Cir. 2003). We then applied Arkansas law to determine “whether the
    conversion plaintiff may recover as damages the face amount of the instrument even
    if that amount exceeds the actual loss.” 
    Id. at 536.
    Ultimately, we remanded the case
    to the district court to determine whether payments made to the conversion plaintiff
    from a third party fell within Arkansas’s collateral source rule as a payment “wholly
    independent of the tortfeasor” or would instead reduce the tortfeasor’s liability. 
    Id. at 538.
    As in Arkansas, Minnesota applies the same Restatement (Second) of Torts that
    was at issue in American State Bank. Under that Restatement:
    A payment made by a tortfeasor or by a person acting for him to a
    person whom he has injured is credited against his tort liability, as are
    payments made by another who is, or believes he is, subject to the same
    tort liability.
    Restatement (Second) of Torts § 920A(1); see VanLandschoot v. Walsh, 
    660 N.W.2d 152
    , 155 (Minn. Ct. App. 2003) (adopting section 920A(1) and holding that payments
    -5-
    from tortfeasor’s insurer are credited to the tortfeasor); see also Leamington Co. v.
    Nonprofits’ Ins. Assn., 
    661 N.W.2d 674
    , 679 (Minn. Ct. App. 2003) (recognizing
    VanLandschoot’s adoption of section 920A(1) and holding that funds received from
    a tortfeasor be applied against any recovery from the tortfeasor’s insurer).
    We agree with Wells Fargo’s argument that the settlement Northeast Bank
    received from Grand Rios, who is a joint tortfeasor in this conversion action, must be
    credited against Wells Fargo’s liability. As we held in American State Bank, “[i]n
    general, ‘payments made by another who is, or believes he is, subject to the same tort
    liability’ are credited against a tortfeasor’s 
    liability.” 332 F.3d at 538
    (quoting
    Restatement (Second) of Torts § 920A(1)). No one disagrees that Grand Rios was
    also liable for conversion of the two checks. Northeast Bank attempts to distinguish
    American State Bank on the basis that Grand Rios never made a mortgage payment
    after the conversion, and thus the converted funds never reached Northeast Bank.
    This difference does not take this matter outside of the reasoning of American State
    Bank and the Minnesota cases adopting the Restatement (Second) of Torts. As of
    July 31, 2011, Grand Rios had paid $50,000 in a guarantor’s payment and still owed
    Northeast Bank $4,993,226.24. Northeast Bank cannot show that it suffered actual
    loss in this conversion because it received a full payment of its debt through a
    combination of the foreclosure sale amount of $4,606,157.21 and the assignment of
    the insurance proceeds, which resulted in Northeast Bank receiving $596,299.27 from
    the escrow account. Thus, Wells Fargo has successfully rebutted the section 336.3-
    420 presumption as to the measure of liability in this conversion and to allow the
    district court’s decision to stand would result in a double recovery to Northeast Bank.
    III.
    Accordingly, we reverse the district court’s grant of summary judgment to
    Northeast Bank and its denial of summary judgment to Wells Fargo. We remand this
    -6-
    matter to the district court with directions to enter judgment in favor of Wells Fargo.
    ______________________________
    -7-