Lee Morof v. United Missouri Bank, Warsaw

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 10a0524n.06
No. 09-1711 FILED
Aug 18, 2010
UNITED STATES COURT OF APPEALS LEONARD GREEN, Clerk
FOR THE SIXTH CIRCUIT
LEE AND TERI MOROF, )
) ON APPEAL FROM THE
Plaintiffs-Appellants, ) UNITED STATES DISTRICT
) COURT FOR THE EASTERN
v. ) DISTRICT OF MICHIGAN
)
UNITED MISSOURI BANK, WARSAW, ) OPINION
)
Defendant-Appellee. )
)
BEFORE: COLE, CLAY, Circuit Judges; KATZ, District Judge.*
COLE, Circuit Judge. Plaintiff-Appellants Lee and Teri Morof appeal the district court’s
decision granting summary judgment to Defendant-Appellant United Missouri Bank (“UMB”) and
denying summary judgment to the Morofs. The Morofs claim the Bank wrongfully paid out
proceeds on several checks that were improperly endorsed. The checks were written to purchase an
interest in four Michigan limited liability companies (“LLCs”) that were to be formed by Edward
May. The LLCs turned out to be part of a Ponzi scheme that May had orchestrated. For the reasons
outlined below, we AFFIRM the decision of the district court.
*
The Honorable David A. Katz, United States District Judge for the Northern District of
Ohio, sitting by designation.
No. 09-1711
Lee Morof, et al. v. United Missouri Bank
I. BACKGROUND
From August 2006 to November 2006, Teri Morof1 entered into Subscription Agreements
to purchase an interest in four Michigan LLCs that were to be formed by May; Lee Morof entered
into an agreement to purchase an interest in one such LLC. Prior to each investment, Teri Morof
(and for the one, both Morofs) received a private offering memorandum, subscription agreement, and
operating agreement from May. The offering memorandums outlined opportunities to purchase
interests in LLCs that would be formed to handle various telecommunication projects. Teri Morof
purchased a two percent interest in H.P. Hawaii LLC for $27,770; a four percent interest in H.P.
Project Thirty One LLC for $34,520; a four percent interest in H.P. Hawaii Two LLC for $34,080;
and a one percent interest in ATL Project One LLC for $28,500. Lee Morof and non-party Jerry
Morof also purchased a one percent interest in ATL Project One LLC for $28,500.
At the times the relevant checks were issued, none of the subject LLCs were in existence;
LLCs with similar names were subsequently formed in some instances. May endorsed all checks,
despite the fact that they were made out to the relevant LLCs. The checks were posted to the
Morofs’ account at UMB and deposited in May’s bank accounts. From February 2007 to July 2007,
the Morofs received distribution payments on their various investments.
In November 2007, the Securities and Exchange Commission filed fraud charges against
May, stemming from the phony telecommunication deals. On February 5, 2008, the Morofs filed
a complaint against UMB seeking to hold it liable for the checks issued in connection with their
1
Teri Morof was formerly known as Teri Cohodes and signed the relevant checks as such.
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investments with May. Nine months later, both parties moved for summary judgment. The district
court granted UMB’s motion and denied the Morofs’ motion.
The Morofs now appeal.
II. ANALYSIS
Specifically, this appeal involves the Morofs’ claim against UMB pursuant to § 4-401 of
Michigan’s Uniform Commercial Code, Mich. Comp. Laws § 440.4401, for UMB’s charges against
the Morofs’ accounts based on several checks that the Morofs allege were not “properly payable.”
Assuming arguendo that the checks at issue were not properly payable, we agree with the district
court that UMB satisfies the requirements of the intended-payee defense and therefore is not liable.
Before addressing the merits of the UCC claim and intended-payee defense, however, we first
must satisfy ourselves that Michigan law is the appropriate law to apply in this case.
A. Choice of Law
Since the parties to this action are from two different states—Michigan and
Missouri—choice-of-law issues are implicated. Yet because the district court applied Michigan law
and the parties have not disputed its applicability, both before the district court and on appeal, the
choice-of-law issue has been waived. Pivnick v. White, Getgey & Meyer Co., 552 F.3d 479, 484 (6th
Cir. 2009) (“[T]he issue [of] choice of law has been waived because the parties never disputed that
Kentucky law should apply . . . .”). We therefore continue to apply Michigan law.
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Lee Morof, et al. v. United Missouri Bank
B. Merits
1. Summary Judgment Standard
This Court reviews de novo a district court’s grant of summary judgment. Cherry Hill
Vineyards, LLC v. Lilly, 553 F.3d 423, 431 (6th Cir. 2008). “Summary judgment should be granted
when the moving party can ‘show that there is no genuine issue as to any material fact and that the
movant is entitled to judgment as a matter of law.’” Geiger v. Tower Auto., 579 F.3d 614, 620 (6th
Cir. 2009) (quoting Fed. R. Civ. P. 56(c)). “An issue of fact is ‘genuine’ if a reasonable person could
return a verdict for the non-moving party.” Farhat v. Jopke, 370 F.3d 580, 587 (6th Cir. 2004)
(citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). “After the moving party has
satisfied its burden, the burden shifts to the non-moving party to set forth ‘specific facts showing that
there is a genuine issue for trial.’” Id. at 587-88 (quoting Matsushita Elec. Indus. Co. v. Zenith
Radio Corp., 475 U.S. 574, 587 (1986)). All evidence and inferences therefrom are read in the light
most favorable to the non-moving party. Hutt v. Gibson Fiber Glass Prods., Inc., 914 F.2d 790, 792
(6th Cir. 1990).
2. UCC Claim for Recredit of Plaintiffs’ Checking Account
The Morofs claim that UMB charged their account for several checks that were not “properly
payable” according to § 4-401 of Michigan’s Uniform Commercial Code, Mich. Comp. Laws §
440.4401. Checks not endorsed in the name of a named payee are not properly payable. Travco
Corp. v. Citizens Fed. Sav. & Loan Ass’n of Port Huron, 201 N.W.2d 675, 676 (Mich. Ct. App.
1972). In the context of fraudulent endorsements, an endorsement is in the name of a named payee
if “(i) it is made in a name substantially similar to the name of that person or (ii) the instrument,
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Lee Morof, et al. v. United Missouri Bank
whether or not endorsed, is deposited in a depository bank to an account in a name substantially
similar to the name of that person.” Mich. Comp. Laws § 440.3405(3). Drawers of such checks
retain a remedy against drawee banks.
Under M.C.L. § 440.4401(3); . . ., a bank may charge against the account of its
customer a check or item that is ‘properly payable.’ Implicit in this rule is the notion
that a bank may not charge against the account of its customer a check or item that
is not ‘properly payable.’ Accordingly, the drawer of a check has a remedy against
the drawee bank for recredit of the drawer’s account for the unauthorized payment
of the check in the amount of the improper payment.
Pamar Enterprises, Inc. v. Huntington Banks, 580 N.W.2d 11, 16 (Mich. Ct. App. 1998) (citations
omitted). Drawee banks, however, may assert the intended-payee affirmative defense.
[T]he intended-payee defense provides that a drawee bank is not liable to the drawer
of a check for an improper payment if (1) the proceeds of the check reach the person
the drawer intended to receive them and (2) the drawer suffers no loss proximately
caused by the drawee’s improper payment.
Id. at 17. “This defense is intended to prevent the unjust enrichment of the drawer.” Id.; see also
Meyer v. Comerica Bank, No. 183645, 1996 WL 33324116, at *1 (Mich. Ct. App. 1996)
(unpublished) (“The intended payee defense protects a bank which honored a check with no
endorsement or an improper endorsement if the proceeds ultimately reached the payor’s intended
payee.”); Comerica Bank v. Mich. Nat’l Bank, 536 N.W.2d 298, 300 (Mich. Ct. App. 1995)
(adopting rule that “a bank may escape liability for honoring a check on a faulty or improper
endorsement, or even with no endorsement, if the bank can prove that the intended payee received
the proceeds of the check”).
In this case, assuming arguendo that the checks at issue were not properly payable, there is
no genuine issue as to any material fact that UMB satisfies the requirements of the intended-payee
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Lee Morof, et al. v. United Missouri Bank
defense and therefore is not liable as a matter of law. We address each prong of the intended-payee
defense in turn.
a. Proceeds Reached the Person the Drawer Intended
We find that the proceeds of the Morofs’ checks reached the intended payees for three
reasons.
First, there is no aggrieved intended payee. There is no evidence to suggest that the Morofs
were required, or even asked, to write checks to replace the five checks originally written to the
LLCs, or otherwise paid twice for their investments. Cf. Pamar, 580 N.W.2d at 17 (intended payee
received second check from plaintiff). Further, there is no evidence of any complaint from the LLCs
that the Morofs’s investment funds were not received.
Second, the Morofs were aware that they were investing in LLCs that had not yet been
formed. The signed Subscription Agreements for each LLC indicated that the Morofs were
purchasing interests in LLCs “to be formed.” (Subscription Agreements, Dist. Ct. Docket No. 20
Ex. C, F, I, L, M.) Further, the Operating Agreements for each LLC indicated that Edward May was
authorized to select and administer bank accounts on behalf of each LLC.
The bank account or accounts of the Company shall be maintained in the banking
institution or institutions selected by the Manager [Edward May]. All funds collected
by the Company shall be deposited in those accounts and all checks or other
instruments used to draw Company funds shall be signed by the Manager or his
designee.
(Operating Agreements, Dist. Ct. Docket No. 20, Ex. D, G, J, N.) As the district court concluded,
“[t]his documentary evidence refutes Plaintiffs’ claim that the proceeds of the subject checks failed
to reach the intended payee when they reached Edward May.” (Op. and Order, Dist. Ct. Docket No.
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Lee Morof, et al. v. United Missouri Bank
33 at 14); see also Meyer, 1996 WL 33324116, at *1 (“Evidence that the proceeds were not
ultimately used for their intended purpose is irrelevant because the evidence illustrated that the
moneys were received by the intended payee.”).
Finally, the Morofs received distributions on their investment checks, further refuting the
notion that the intended payees did not receive the investment checks. (Dist. Ct. Docket No. 20, Ex.
S, T, U, V.)
b. Drawer Suffered No Loss Proximately Caused by Drawee’s Payment
The second element of the intended-payee defense is that the drawer suffers no loss
proximately caused by the drawee’s improper payment. As the district court succinctly stated:
“There is nothing to suggest that even if Defendant Bank had performed as Plaintiffs allege they
should have, i.e., required Edward May to endorse Plaintiffs’ checks in the name of the listed payee
LLC, Plaintiffs would not have suffered the losses they seek to recover in this lawsuit.” (Op. and
Order, Dist. Ct. Docket No. 33 at 15.)
III. CONCLUSION
For these reasons, we AFFIRM the district court’s grant of summary judgment to UMB and
denial of summary judgment to the Morofs.
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