John Hancock Financial Services, Inc. v. Old Kent Bank

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206 2 John Hancock Fin. Servs. Nos. 02-1288/1307
ELECTRONIC CITATION: 2003 FED App. 0364P (6th Cir.) v. Old Kent Bank
File Name: 03a0364p.06
Before: MERRITT, MOORE, and GILMAN, Circuit
Judges.
UNITED STATES COURT OF APPEALS
_________________
FOR THE SIXTH CIRCUIT
_________________ COUNSEL
JOHN HANCOCK FINANCIAL X ARGUED: Molly E. McManus, WARNER, NORCROSS &
SERVICES, INC., - JUDD, Grand Rapids, Michigan, for Appellant. Francis R.
Ortiz, DICKINSON WRIGHT, PLLC, Detroit, Michigan, for
Plaintiff-Appellee/ - Appellee. ON BRIEF: Molly E. McManus, Nathaniel R.
- Nos. 02-1288/1307
Cross-Appellant, - Wolf, WARNER, NORCROSS & JUDD, Grand Rapids,
> Michigan, for Appellant. Francis R. Ortiz, DICKINSON
,
v. WRIGHT, PLLC, Detroit, Michigan, for Appellee.
-
- _________________
OLD KENT BANK, -
Defendant-Appellant/ - OPINION
Cross-Appellee, - _________________
-
- RONALD LEE GILMAN, Circuit Judge. John Hancock
MICHIGAN NATIONAL BANK; - Financial Services, Inc., a Delaware corporation, sued Old
PATRICK W. SHERMAN; - Kent Bank, a Michigan corporation, to recover check
STANDARD FEDERAL BANK, - proceeds converted by Old Kent and paid to one of John
successor by merger to - Hancock’s agents, Patrick Sherman. The checks were drawn
Michigan National Bank, - on the accounts of several clients of John Hancock, were
- made payable to John Hancock, and were entrusted to
Defendants. -
Sherman to invest. Sherman instead indorsed the checks with
N his own stamp and deposited them into his personal business
Appeal from the United States District Court account with Old Kent. Over the course of seven years,
for the Eastern District of Michigan at Detroit. Sherman used this scheme to embezzle nearly $800,000 from
No. 00-73879—Avern Cohn, Senior District Judge. John Hancock and its clients.
Argued: September 12, 2003 The claims against Old Kent were based on common law
conversion, statutory conversion under the Uniform
Decided and Filed: October 10, 2003 Commercial Code (UCC), and negligence. John Hancock
filed a motion for summary judgment. Old Kent both
responded to John Hancock’s motion and filed its own motion
1
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v. Old Kent Bank v. Old Kent Bank
for partial summary judgment, arguing that the three-year generating false accounting statements for his defrauded
statute of limitations had run on all checks deposited prior to clients.
June 2, 1997.
The scheme was finally uncovered in March of 2000, by
The district court ruled in favor of John Hancock on the which time Sherman had embezzled nearly $800,000. John
basis of its UCC conversion claim, but also granted Old Hancock repaid the defrauded clients the money that they had
Kent’s motion for partial summary judgment. On appeal, Old lost plus interest. It then demanded reimbursement from Old
Kent argues that the district court erroneously decided that the Kent.
bank’s forgery defense was without merit and that the district
court failed to address the bank’s contention that the B. Procedural background
Michigan Tort Reform Act’s comparative-fault scheme
applied to UCC conversion claims. John Hancock disagrees, John Hancock sued Old Kent in August of 2000, claiming
and also argues that the discovery rule should be applied so common law conversion, statutory conversion under the
that it can recover on all checks unlawfully converted by Old UCC, and negligence. The parties had earlier agreed to toll
Kent, some dating back to 1993. For the reasons set forth the applicable three-year statute of limitations as of June 2,
below, we AFFIRM the judgment of the district court. 2000. Old Kent did not dispute John Hancock’s factual
allegations or that the bank was partially at fault, but argued
I. BACKGROUND that John Hancock should bear a portion of the loss. John
Hancock filed a motion for summary judgment in the fall of
A. Factual background 2001. At the same time, Old Kent filed a motion for partial
summary judgment based upon the theory that the statute of
Sherman was a representative of John Hancock in limitations barred recovery on all checks deposited more than
Michigan, where he sold insurance and investment products. three years prior to the June 2, 2000 tolling agreement.
Beginning in 1993, he concocted a scheme to embezzle from
three of his John Hancock clients. The clients would write The district court granted John Hancock’s motion for
checks payable to John Hancock for investment products or summary judgment on the UCC conversion claims, declining
insurance premiums. Sherman was authorized to accept these to reach the claims of common law conversion or negligence.
checks on behalf of John Hancock. He would then indorse It also granted Old Kent’s motion, thus limiting John
the checks with a stamp that read: “Sherman and Associates Hancock’s award to checks accepted for deposit by the bank
Financial Services.” Sherman maintained a checking account after June 2, 1997, plus prejudgment interest. This timely
at an Owosso, Michigan branch of Old Kent under the same appeal followed.
name as that on his indorsement stamp. Old Kent deposited
these checks into Sherman’s account, never questioning his II. ANALYSIS
authority to deal in this manner with checks clearly made
payable to John Hancock. Approximately 71 checks were so A. John Hancock’s conversion claim
indorsed and deposited over a period of seven years.
Sherman was able to cover up his embezzlements by On appeal, Old Kent argues that the district court erred in
granting summary judgment to John Hancock because
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v. Old Kent Bank v. Old Kent Bank
comparative-fault principles allegedly apply to John Michigan, 580 N.W.2d 11, 15 (Mich. Ct. App. 1998), for the
Hancock’s UCC conversion claim. We review the district proposition that “[p]ayment of a check with a missing
court’s grant of summary judgment de novo. Sperle v. Mich. endorsement is the legal equivalent of payment over a forged
Dep’t of Corr., 297 F.3d 483, 490 (6th Cir. 2002). Summary endorsement.” Pamar, however, gives no persuasive reason
judgment is proper where no genuine issue of material fact for this result, and the Michigan Supreme Court has not
exists and the moving party is entitled to judgment as a matter opined on the issue. Given the lack of a reasoned basis for
of law. Fed. R. Civ. P. 56(c). In considering a motion for treating a missing indorsement as the legal equivalent of a
summary judgment, the district court must construe all forged indorsement, we see no justification to extend Pamar
reasonable inferences in favor of the nonmoving party. to a case like the present where there is in fact an indorsement
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. quite distinct from the named payee.
574, 587 (1986). The central issue is “whether the evidence
presents a sufficient disagreement to require submission to a In advocating for a broad definition of the term “forged
jury or whether it is so one-sided that one party must prevail signature,” Old Kent also relies on the following official
as a matter of law.” Anderson v. Liberty Lobby, Inc., 477 comment to UCC § 3-406:
U.S. 242, 251-52 (1986).
An insurance company draws a check to the order of
Old Kent contends that the district court erred in not Sarah Smith in payment of a claim for a policy holder,
applying Mich. Comp. Laws § 440.3406 (hereafter referred to Sarah Smith, who lives in Alabama. The insurance
as UCC § 3-406) to John Hancock’s claims. UCC § 3-406 company also has a policyholder with the same name
provides in pertinent part that a party whose negligence who lives in Illinois. By mistake, the insurance company
“substantially contributes to an alteration of an instrument or mails the check to the Illinois Sarah Smith who indorses
to the making of a forged signature on an instrument is the check and obtains payment. Because the payee of the
precluded from asserting the alteration or the forgery against check is the Alabama Sarah Smith, the indorsement by
a person who, in good faith, pays the instrument or takes it for the Illinois Sarah Smith is a forged indorsement.
value or for collection.” UCC § 3-406(1). As noted above,
Sherman indorsed the checks with a stamp that read UCC § 3-406 cmt. 3. Old Kent argues that Sherman’s
“Sherman and Associates Financial Services.” The district indorsements are analogous to those of Illinois Sarah Smith’s
court held that the UCC’s preclusion defense did not apply to because they are both indorsements “by someone other than
John Hancock’s conversion claim, reasoning that Sherman’s the intended payee.” In rejecting this argument, the district
indorsement was not a forgery because it “did not appear to court noted that, unlike the hypothetical in Comment 3,
be the genuine signature of the payee, John Hancock.” Old Sherman’s indorsement was completely different from the
Kent argues that the district court’s definition of “forged payee’s. The district court reasoned that the use of a common
signature” is too restrictive. name in Comment 3 “supports the argument that a forged
signature must appear to be the genuine signature of the
Because the UCC does not define the term “forged intended payee.” This analysis is consistent with Comment
signature,” Old Kent looked to Michigan law and the 2 to UCC § 3-406, which suggests that the drafters intended
comments to UCC § 3-406 for the meaning of the term. Old the term “forged signature” to be construed narrowly.
Kent cites Pamar Enterprises, Inc. v. Huntington Banks of Comment 2 provides:
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v. Old Kent Bank v. Old Kent Bank
Section 3-406 refers to “forged signature” rather than of forged instruments. Subsection 2 of UCC § 3-406 provides
“unauthorized signature” that appeared in the former as follows:
Section 3-406 because it more accurately describes the
scope of the provision. Unauthorized signature is a (2) Under subsection (1), if the person asserting the
broader concept that includes not only forgery but also preclusion fails to exercise ordinary care in paying or
the signature of an agent which does not bind the taking the instrument and that failure substantially
principal under the law of agency. The agency cases are contributes to loss, the loss is allocated between the
resolved independently under agency law. Section 3-406 person precluded and the person asserting the preclusion
is not necessary in those cases. according to the extent to which the failure of each to
exercise ordinary care contributed to the loss.
UCC § 3-406 cmt. 2.
A reading of the UCC suggests that if the above subsection is
The district court defined the term “forged signature” triggered, the trier of fact allocates fault between the party
within the context of UCC § 3-406 as a signature whose negligence substantially contributed to the forgery of
“substantially similar to the name of the intended signator an instrument and the party who paid the instrument. The
such that it appears genuine.” This definition is consistent UCC’s plain language does not direct the trier of fact to
with both the common usage of the term “forged” and allocate fault to the wrongdoer.
Comments 2 and 3 above. See also UCC § 3-405 (defining
“fraudulent endorsement” as, “in the case of an instrument Scholarly commentary discussing UCC § 3-406 confirms
payable to the employer, a forged endorsement purporting to this interpretation. Comparative negligence was incorporated
be that of the employer . . . .”). In sum, we agree with the into the UCC as part of the 1990 amendments to Articles 3
district court’s conclusion that Sherman’s indorsements were and 4. JAMES J. WHITE & ROBERT S. SUMMERS , UNIFORM
not “forged signatures.” The district court therefore properly COMMERCIAL CODE § 19-1 (4th ed. 1995). In drafting the
declined to apply UCC § 3-406's preclusion defense to John revised Article 3, the authors “attempted to provide an
Hancock’s conversion claim against Old Kent. ‘underlying policy and rationale . . . based on the balanced
principles that all parties in the payment and collection
As an alternative defense, Old Kent argues that the process have a responsibility to exercise ordinary care and
comparative-fault principles of the Michigan Tort Reform that the failure by any party to fulfill that responsibility
Act, Mich. Comp. Laws § 600.2957(1), were meant to be should result in that party bearing an appropriate share of any
applied to all claims for conversion, both statutory and [resulting] loss.’” Judy C. Norris, Tips on Litigating Issues of
common law. No Michigan cases address this question, nor Forgery, Fraud, and Conversation [sic] in a Comparative
is there any law in the Sixth Circuit that deals with the Negligence Setting, 51 Consumer Fin. L.Q. Rep. 247, 247
applicability of a tort-reform scheme to UCC claims. The (1997).
district court did not reach this issue, and Old Kent cites no
relevant authority to support its argument. One legal scholar has explained that UCC § 3-406 seeks to
encourage “the free circulation of commercial paper by
In assessing the merits of Old Kent’s alternative defense, applying the principle that as between two innocent persons
we first look to how UCC § 3-406 allocates fault in the case the one who is negligent should bear the loss caused by a
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v. Old Kent Bank v. Old Kent Bank
third person’s wrongdoing.” RONALD A. ANDERSON, We also note that our decision accords with that of the
ANDERSON ON THE COMM ERCIAL CODE § 3-406:4 (3d ed. Eleventh Circuit in Federal Insurance Company v. NCNB
1998) (emphasis added). Another commentator has similarly National Bank of N.C., 958 F.2d 1544, 1551-52 (11th Cir.
noted that § 3-406(b) “contemplates a splitting of a loss 1992), where the Eleventh Circuit discussed the possibility of
between two negligent parties.” JAMES J. WHITE & ROBERT applying comparative-fault principles to UCC conversion
S. SUMMERS , UNIFORM COMMERCIAL CODE § 19-3 (4th ed. claims, but then declined to do so. The court quoted the New
1995) (emphasis added). York Court of Appeals at length, including the point that “[i]t
is not for the courts to unsettle the UCC’s carefully drawn
The fact that UCC § 3-406 does not allocate fault to the balance by introducing comparative fault principles taken
wrongdoer—as opposed to the negligent parties—is from tort law.” Putnam Rolling Ladder Co. v. Manufacturers
significant in determining whether Michigan’s Tort Reform Hanover Trust Co., 546 N.E.2d 904, 908 (N.Y. 1989). We
Act applies in this case. This latter Act, passed in 1995, agree with this analysis.
provides that in actions “based on tort or another legal theory
seeking damages for personal injury, property damage, or The district court declined to reach John Hancock’s
wrongful death, the liability of each person shall be allocated common law conversion claim altogether, holding that its
under this section by the trier of fact, and . . . in direct holding on the UCC claim made such consideration
proportion to the person’s percentage of fault.” Mich. Comp. unnecessary. As Old Kent points out, however, there is recent
Laws Ann. § 600.2957(1). The Act also provides that when case law in Michigan that applies comparative-fault principles
considering percentages of fault, the trier of fact shall assess to intentional torts. See Lamp v. Reynolds, 645 N.W.2d 311,
“the fault of each person, regardless of whether the person is, 315-16 (Mich. Ct. App. 2002) (applying comparative-fault
or could have been, named as a party to the action.” Id. principles where the motocross racetrack owners’ wilful and
Unlike the UCC, the Tort Reform Act allocates fault to the wanton conduct in failing to remove a tree stump from the
wrongdoer in actions “based on tort or another legal theory edge of their racetrack caused a motocross racer’s injuries).
seeking damages for personal injury, property damage, or But Old Kent makes no claim that John Hancock committed
wrongful death.” Id. Tension thus exists between these an intentional tort, and Lamp provides no support for Old
statutes. Kent’s argument that comparative fault should apply to a
statutory conversion claim based upon a lack of due care. We
We conclude that this tension must be resolved in favor of therefore reject Old Kent’s comparative-fault defense, and
not applying Michigan’s Tort Reform Act to UCC conversion affirm the grant of summary judgment to John Hancock on its
actions. Because the UCC more specifically relates to the statutory conversion claim.
allocation of fault with respect to the conversion of
instruments than does the Tort Reform Act, the UCC controls. B. Old Kent’s statute of limitations defense
See Hill v. Sacka, 666 N.W.2d 282, 291 (Mich. Ct. App.
2003) (noting that when statutes conflict concerning the John Hancock, in its cross-appeal, argues that the district
allocation of fault, the statute “more specific to the subject court erred in granting Old Kent’s motion for partial summary
matter than the general statutes regarding allocation of fault judgment, which barred John Hancock’s recovery on all
. . . controls.”). checks deposited more than three years before the June 2,
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v. Old Kent Bank v. Old Kent Bank
2000 tolling agreement. This reduced John Hancock’s otherwise be denied a reasonable opportunity to bring suit due
recovery from approximately $800,000 to about $444,000. to the latent nature of the injury or the inability to discover the
causal connection between the injury and the defendant’s
Application of the “discovery rule” would have deferred the action.” Id. (internal quotation marks omitted).
commencement of the three-year statute of limitations until
John Hancock actually discovered the conversion, or until it In Brennan, the court held that the discovery rule was
should have discovered the conversion through the exercise inapplicable to a claim for conversion. Id. at 920. The court
of reasonable diligence, whichever first occurred. See Blakely reasoned that “strong public policies favoring finality in
v. U.S., 276 F.3d 853, 861, 869-70 (6th Cir. 2002) (noting that commercial transactions, protecting a defendant from stale
the discovery rule could apply to Blakely’s claim for fraud claims, and requiring a plaintiff to diligently pursue his claim
against the Oxford Bank for allegedly facilitating the outweigh the prejudice to plaintiffs and militate against
wrongful taking of Blakely’s assets by the government in a applying the discovery rule in the context of commercial
civil-forfeiture action, but holding that Blakely’s claim failed conversion cases.” Id. at 920.
for other reasons).
Like the Brennan court, the Third Circuit has rejected
John Hancock asserts that because it did not discover the application of the discovery rule in UCC conversion cases:
conversion until April of 2000, the district court should have
applied the discovery rule to allow it to pursue its claims for Although a few courts apply the discovery rule to
all 71 checks converted by Old Kent. In holding that the negotiable instrument theft on essentially equitable
discovery rule should not apply in this case, the district court grounds, the tide of case law runs strongly against this
reasoned that “there is strong public policy favoring finality approach. Where a party not engaging in fraudulent
on a conversion claim on a negotiable instrument.” We agree. concealment asserts the statute of limitations defense,
most courts have refused to apply the discovery rule to
Because jurisdiction in this case is based upon diversity of negotiable instruments, finding it inimical to UCC
citizenship between John Hancock and Old Kent, “we apply policies of finality and negotiability.
state law in accordance with the then controlling decision of
the highest state court.” Bailey Farms, Inc. v. NOR-AM Menichini v. Grant, 995 F.2d 1224, 1229-30 (3d Cir. 1993).
Chemical Co., 27 F.3d 188, 191 (6th Cir. 1994). Where the
state supreme court has not yet addressed the issue presented, We find the reasoning of the Michigan Court of Appeals
we must anticipate how that court would rule. Id. Although and the Third Circuit convincing, and anticipate that the
the Michigan Supreme Court has not decided the issue of Michigan Supreme Court would agree. Accordingly, we
whether the discovery rule applies to UCC conversion claims, affirm the district court’s grant of Old Kent’s motion for
the Michigan Court of Appeals addressed this issue in summary judgment, barring John Hancock from collecting
Brennan v. Edward D. Jones & Co., 626 N.W.2d 917, 919 on checks deposited more than three years before June 2,
(Mich. Ct. App. 2001), where the court noted that statutes of 2000.
limitations are designed to “promote judicial economy and
protect defendants’ rights.” The discovery rule has been
applied “to prevent unjust results when a plaintiff would
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v. Old Kent Bank
III. CONCLUSION
For all of the reasons set forth above, we AFFIRM the
judgment of the district court.