Mark IV Enterprises, Inc. v. Bank Of America, N.A. ( 2018 )

06/26/2018
IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
March 28, 2018 Session
MARK IV ENTERPRISES, INC., ET AL. v. BANK OF AMERICA, N.A.,
ET AL.
Appeal from the Chancery Court for Davidson County
No. 14-1677-IV Russell T. Perkins, Chancellor
No. M2017-00965-COA-R3-CV
Appellants’ employee embezzled funds from Appellants using the employee’s Bank of
America account. The employee wrote checks on Appellants’ accounts to legitimate
third party vendors but deposited the checks into her own personal account by way of
Bank of America’s ATMs. Appellants filed suit against Bank of America alleging that
the bank’s failure to either prevent this activity or alert Appellants thereto constituted
causes of action for aiding and abetting conversion, aiding and abetting fraud, civil
conspiracy, and negligence. The trial court granted Bank of America’s motion to dismiss
Appellants’ claims for aiding and abetting fraud and conversion and for civil conspiracy
based on Bank of America’s lack of knowledge of Appellants’ employee’s wrongdoing.
The court subsequently granted Bank of America’s motion for summary judgment on the
remaining negligence claim finding that the bank owed no duty to Appellants. We
affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed
and Remanded
BRANDON O. GIBSON, J., delivered the opinion of the court, in which ARNOLD B. GOLDIN
and KENNY ARMSTRONG, J.J., joined.
Jean Dyer Harrison, Nashville, Tennessee, for the appellants, Mark IV Enterprises, Inc.,
Legacy Project Resources, LLC, and Tonya Gale Jones.
Andrea Taylor McKellar and Lyndsay Smith Hyde, Nashville, Tennessee, and Graham
H. Claybrook, Charlotte, North Carolina, Pro Hac Vice, for the appellee, Bank of
America, N.A.
OPINION
I. FACTS & PROCEDURAL HISTORY
Appellant Mark IV Enterprises, Inc. was a construction company in Nashville,
Tennessee, until on or about January 1, 2010. Appellant Legacy Project Resources, LLC
(“Legacy”) is a project management company that manages construction projects in
Nashville. Both entities share one principal, Tonya Jones. Susan Bennett was the
bookkeeper for both companies. Appellants allege that from 2008 through 2010, Ms.
Bennett embezzled funds from their bank accounts by depositing checks drawn on
Appellants’ accounts and made payable to Appellants’ vendors into Ms. Bennett’s own
personal account at Bank of America, N.A. (the “Bank”). These checks were not made
payable to Ms. Bennett, and many of them were unendorsed. At the time, the Bank’s
software did not scan to confirm that the check deposited in the ATM was made payable
to the account holder or that it was endorsed.
On November 15, 2011, Appellants filed suit against the Bank in the Chancery
Court of Davidson County. The case was removed to federal court by the Bank and then
voluntarily nonsuited by Appellants. The case was re-filed in chancery court on
December 3, 2014, then removed to federal court, and remanded back to chancery court
once again. On August 28, 2015, the chancery court (“trial court”) dismissed Appellants’
aiding and abetting conversion, aiding and abetting fraud, and civil conspiracy claims,
finding that Appellants’ Complaint failed to state a claim under any of these theories.
Although it is not clear from the trial court’s written order dismissing these claims, later
court orders appear to show the court’s reasoning rested on the Bank’s lack of notice of
Ms. Bennett’s actions.
Consequently, Appellants’ sole remaining claim against the Bank was common
law negligence. The parties engaged in discovery, and the Bank filed a motion for
summary judgment on Appellants’ negligence claim. The Bank argued that (1)
Appellants’ claim for negligence was preempted by the Uniform Commercial Code, and
(2) in the alternative, Appellants’ negligence claim must fail because the Bank did not
owe a duty to Appellants as non-customers of the Bank. On January 31, 2017, the trial
court granted summary judgment in favor of the Bank on the negligence claim, agreeing
that the Bank owed no duty to appellants.
II. ISSUES PRESENTED
Appellants present the following issues, as slightly reworded, for review on
appeal:
1. Whether the trial court erred in dismissing Appellants’ aiding and
abetting claims?
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2. Whether the trial court erred in finding that the Uniform Commercial
Code applied to the transaction in this case?
III. STANDARD OF REVIEW
A motion to dismiss for failure to state a claim, pursuant to Rule 12.02(6) of the
Tennessee Rules of Civil Procedure, challenges the legal sufficiency of a complaint and
is determined by an examination of the pleadings alone. See Webb. v. Nashville Area
Habitat for Humanity, Inc., 346 S.W.3d 422, 426 (Tenn. 2011). A defendant who files
such a motion admits the truth of the relevant and material allegations in the complaint
but asserts that those allegations fail to establish a cause of action. Id. “In considering a
motion to dismiss, courts ‘must construe the complaint liberally, presuming all factual
allegations to be true and giving the plaintiff the benefit of all reasonable inferences.’”
Id. (quoting Tigg v. Pirelli Tire Corp., 232 S.W.3d 28, 31-32 (Tenn. 2007)). On appeal,
we review the trial court’s legal conclusions regarding the adequacy of the complaint de
novo with no presumption of correctness. See Cullum v. McCool, 432 S.W.3d 829, 832
(Tenn. 2013).
We review a trial court’s ruling on a motion for summary judgment de novo
without a presumption of correctness. Estate of Brown, 402 S.W.3d 193, 198 (Tenn.
2013). Summary judgment is appropriate 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.” Tenn. R. Civ. P. 56.04. The party moving for summary
judgment may “satisfy its burden of production either (1) by affirmatively negating an
essential element of the nonmoving party’s claim or (2) by demonstrating that the
nonmoving party’s evidence at the summary judgment stage is insufficient to establish
the nonmoving party’s claim or defense.” Rye v. Women’s Care Ctr. of Memphis,
MPLLC, 477 S.W.3d 235, 264 (Tenn. 2015). When a motion for summary judgment is
properly supported as provided in Tennessee Rule of Civil Procedure 56, in order “to
survive summary judgment, the nonmoving party ‘may not rest upon the mere allegations
or denials of [its] pleading, but must respond, and by affidavits or one of the other means
provided in Rule 56, ‘set forth specific facts’ at the summary judgment stage showing
that there is a genuine issue for trial.’” Id. at 265 (quoting Tenn. R. Civ. P. 56.06).
“[S]ummary judgment should be granted if the nonmoving party’s evidence at the
summary judgment stage is insufficient to establish the existence of a genuine issue of
material fact for trial.” Id. (citing Tenn. R. Civ. P. 56.04, 56.06).
IV. DISCUSSION
A. Aiding and Abetting Claims
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The first issue raised by Appellants relates to the trial court’s dismissal of their
“aiding and abetting” causes of action against the Bank. In the complaint, Appellants
asserted that the Bank was complicit in and liable for Ms. Bennett’s fraud and
conversion. As this Court explained in PNC Multifamily Capital Institutional Fund XXVI
Ltd. P’ship v. Bluff City Community Development Corp., 387 S.W.3d 525 (Tenn. Ct. App.
2012):
This alleged cause of action, if stated, would be based on the common law
civil liability theory of aiding and abetting, which requires that “the
defendant knew that his companions’ conduct constituted a breach of duty,
and that he gave substantial assistance or encouragement to them in their
acts.” Carr v. United Parcel Service, 955 S.W.2d 832, 836 (Tenn. 1997)
[overruled on other grounds, Parker v. Warren County Utility Dist., 2
S.W.3d 170 (Tenn. 1999)] (quoting Cecil v. Hardin, 575 S.W.2d 268
(Tenn.1978)).
Id. at 552. As provided in Section 876 of the Restatement (Second) of Torts:
For harm resulting to a third person from the tortious conduct of another, a
person is liable if he:
(a) orders or induces such conduct, knowing of the conditions under which
the act is done or intending the consequences which ensue, or
(b) knows that the other’s conduct constitutes a breach of duty and gives
substantial assistance or encouragement to the other so to conduct himself,
or
(c) gives substantial assistance to the other in accomplishing a tortious
result and his own conduct, separately considered, constitutes a breach of
duty to the third person.
Restatement of Torts § 876 (1934 & 2004 Supp.). “Civil liability for aiding and abetting
requires affirmative conduct. Failure to act or mere presence during the commission of
a tort is insufficient for tort accomplice liability.” Carr, 955 S.W.2d at 836 (emphasis
added).
On appeal, Appellants’ argument focuses on subsection (c) of Section 876, which
would impose liability if the Bank gave “substantial assistance” to Ms. Bennett in
accomplishing a tortious result and the Bank’s own conduct, separately considered,
constituted a breach of duty to the Appellants. However, the Appellants did not properly
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raise this argument in the trial court. In fact, the trial court entered its order granting the
Bank’s motion to dismiss Appellant’s aiding and abetting claims on August 28, 2015. It
was not until approximately eighteen months later, on March 2, 2017, that Appellants
raised the argument regarding the application of subsection (c) for the first time in their
motion to alter or amend. “A Rule 59.04 motion to alter or amend a judgment, however,
may not be used to raise issues or legal arguments that previously were not tried or
asserted.” Van Grouw v. Malone, 358 S.W.3d 232, 236 (Tenn. Ct. App. 2010) (citing In
re M.L.D., 182 S.W.3d 890, 895 (Tenn. Ct. App. 2005)). Moreover, “it is well-settled
that issues may not be raised for the first time upon appeal.” Id. (citing In re M.L.D., 182
S.W.3d at 895). Therefore, since Appellants did not properly raise the argument
regarding subsection (c) in the trial court, we will not consider this issue on appeal.
Instead, Appellants’ aiding and abetting fraud and conversion claims presented in
the trial court were based on subsection (b), which would impose liability on the Bank if
it knew about Ms. Bennett’s fraud and/or conversion and gave substantial assistance or
encouragement to Ms. Bennett in furtherance of these torts. Since the underlying torts of
Appellants’ aiding and abetting claims are fraud and conversion, the allegations of the
complaint must satisfy the particularity requirements of Rule 9.02 of the Tennessee Rules
of Civil Procedure. See PNC Multifamily Capital Inst. Fund XXVI Ltd. P’ship, 387
S.W.3d at 547, 554.
Appellants’ complaint alleges that the Bank aided and abetted fraud and
conversion by “ignor[ing] the misconduct of Ms. Bennett . . .”; “by turning a blind eye to
[Ms. Bennett’s] activities and doing nothing to close a known security flaw”; “ignor[ing]
its knowledge or constructive knowledge of Ms. Bennett’s misconduct . . .”; “fail[ing] to
close Ms. Bennett’s account . . .”; “fail[ing] to stop Ms. Bennett . . .”; “by allowing [Ms.
Bennett] to use a known security flaw without impediment”; and “by turning a blind eye
to [Ms. Bennett’s] activities . . . .” These allegations speak to the failure of the Bank to
act as a result of its alleged constructive knowledge of Ms. Bennett’s activities. We hold
that these allegations do not amount to the “affirmative conduct” required by the Bank to
form the basis of a claim for aiding and abetting. See Carr, 955 S.W.2d at 836.
In sum, the allegations of Appellants’ complaint are insufficient, as a matter of
law, to state a claim for aiding and abetting fraud or conversion. At most, the allegations
of Appellants’ complaint set forth vague instances of inaction or failures to act on the part
of the Bank that are insufficient to state a claim for aiding and abetting under Tennessee
law. See Carr, 955 S.W.2d at 836 (“civil liability for aiding and abetting requires
affirmative conduct. Failure to act or mere presence during the commission of a tort is
insufficient for tort accomplice liability.”). We therefore affirm the trial court’s dismissal
of Appellants’ aiding and abetting claims.
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B. Negligence Claim
Finally, Appellants argue that the trial court erred in granting summary judgment
in favor of the Bank on their common law negligence claim. While the trial court granted
summary judgment based upon its conclusion that no duty of care was owed by the Bank
to the Appellants, our analysis begins and ends before tackling that issue. “This Court
may affirm a trial court’s award of summary judgment on grounds different from those
which provided the basis for the trial court’s decision.” Najo Equip. Leasing, LLC v.
Comm’r of Revenue, 477 S.W.3d 763, 773 (Tenn. Ct. App. 2015) (citing Hill v.
Lamberth, 73 S.W.3d 131, 136 (Tenn. Ct. App. 2001)).
The case at hand centers around checks drawn on Appellants’ business bank
accounts. These checks were made payable to Appellants’ vendors but ultimately
deposited in Ms. Bennett’s account by virtue of the Bank’s ATMs. Article 3 of the UCC
governs “Negotiable Instruments,” and Article 4 governs “Bank Deposits and
Collections.” This Court has previously explained that the UCC creates a nearly
comprehensive system for dealing with the allocation of loss related to check negotiation:
Courts determining whether common-law or other non-UCC claims and
remedies have been displaced by the UCC have emphasized the policies
favoring certainty and uniformity. Thus, the prevailing view is now that
when the UCC provides a comprehensive remedy for the parties to the
transaction, common-law and other non-Code claims and remedies should
be barred.
Articles 3 and 4 of the UCC embody a delicately balanced statutory scheme
governing the endorsement, negotiation, collection, and payment of checks.
They provide discrete loss-allocation rules uniquely applicable to banks.
While this scheme is not comprehensive, it is nearly so. Therefore, courts
dealing with “hard cases” should be hesitant to recognize common-law or
non-UCC claims or to employ common-law or non-UCC remedies in the
mistaken belief that they are dealing with one of the rare transactions not
covered by the UCC.
The weight of the case law comes down against permitting common-law
actions to displace the UCC’s provisions regarding transactions covered by
Articles 3 and 4. Accordingly, a large number of courts have refused to
recognize common-law or non-UCC claims in general, and specifically
common-law or non-UCC negligence claims or conversion claims, arising
from transactions governed by Articles 3 or 4.
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C-Wood Lumber Co. v. Wayne Cty. Bank, 233 S.W.3d 263, 281-82 (Tenn. Ct. App. 2007)
(Internal citations omitted).
We determine that the allegations that form the basis of Appellants’ common law
negligence claim are governed by Articles 3 (“Negotiable Instruments”) and Article 4
(“Bank Deposits and Collections”) of the UCC. See Tenn. Code Ann. §§ 47-3-101 et
seq., 47-4-101 et seq., and more particularly Tenn. Code Ann. § 47-3-404 “Imposters;
Fictitious Payees” and/or § 47-3-405 “Employer’s Responsibility for Fraudulent
Endorsement by Employee.” We heed the warning found in C-Wood Lumber Co. and
decline to hold that this is one of the rare transactions not covered by the UCC. As a
result, Appellants’ common law negligence claim was preempted by the remedies
afforded in the UCC for losses associated with the negotiation of checks. The judgment
of the trial court is, therefore, affirmed in all respects.
IV. CONCLUSION
For the foregoing reasons, we affirm the judgment of the trial court. Costs of this
appeal are taxed to the Appellants, Mark IV Enterprises, Inc., Legacy Project Resources,
LLC, and Tonya Gale Jones, and their surety, for which execution may issue if necessary.
_________________________________
BRANDON O. GIBSON, JUDGE
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