Summary
denying defendant's motion to dismiss even though the court expressed doubt "that a financial institution the size of Chase could have been aware of the ‘unusual’ nature of the payments at issue"
Summary of this case from Borsheim Builders Supply, Inc. v. Merrick Bank Corp.Opinion
Civ. No. 04-2684 (RHK/AJB).
March 11, 2005
Thomas M. Fafinski, BenePartum Law Group, P.A., Eagan, Minnesota, for Plaintiff.
Eric J. Rucker and Robin Caneff Gipson, Briggs and Morgan, P.A., Minneapolis, Minnesota, for Defendant.
MEMORANDUM OPINION AND ORDER
Background
This case arises from the illegal actions of Daniel DeMarais, former chief financial officer ("CFO") of Plaintiff Apex, IT ("Apex"). Apex is a Minnesota corporation that installs "customer relationship management software." DeMarais had been the CFO of Apex for approximately seven years when, in September 2003, the Minnesota Department of Revenue issued a subpoena seeking his payroll records. Due to the subpoena, Apex discovered that DeMarais had embezzled well over $400,000.00 from the company.
DeMarais embezzled funds from Apex in part by using Apex's corporate checks to pay the amounts due on a personal credit card account he maintained with Defendant Chase Manhattan Bank USA, N.A. ("Chase"). On at least six occasions DeMarais used Apex checks (drawing on Apex funds) to satisfy his personal debt. According to Apex, Chase had notice of Apex's claims to these funds because the payments were "unusual, irregular, and large" and were made using business checks from Apex's corporate accounts. Apex demanded that Chase return all funds it received from DeMarais as of September 29, 2001, which Chase refused to do.
Chase provided the Court with copies of six corporate Apex checks used by DeMarais to pay off his credit card account at Chase. (Rucker Aff. Ex. 1.) The checks are all made payable to Chase and they have the following dates and amounts:
8/29/2003 $22,000.00 8/29/2003 $10,300.00 9/12/2003 $22,000.00 9/12/2003 $10,300.00 9/17/2003 $22,000.00 9/17/2003 $12,000.00
Apex then sued Chase seeking equitable relief in the form of a constructive trust imposed upon the funds in Chase's possession. Chase has now moved to dismiss Apex's Complaint; it contends that Apex's claim must fail because Chase has not been unjustly enriched and because it is a holder in due course. The Court determines that, at this early stage in the litigation, Chase's Motion must be denied.
Standard of Review
Under Rule 12(b)(6), all factual allegations must be accepted as true and every reasonable inference must be made in favor of the complainant. Fed.R.Civ.P. 12(b)(6); see Midwestern Mach., Inc. v. Northwest Airlines, Inc., 167 F.3d 439, 441 (8th Cir. 1999); Carney v. Houston, 33 F.3d 893, 894 (8th Cir. 1994). "[D]ismissal under Rule 12(b)(6) serves to eliminate actions which are fatally flawed in their legal premises and destined to fail, thereby sparing litigants the burden of unnecessary pretrial and trial activity." Young v. City of St. Charles, Mo., 244 F.3d 623, 627 (8th Cir. 2001) (citation omitted). A cause of action "should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff cannot prove any set of facts in support of his claim that would entitle him to relief." Schaller Tel. Co. v. Golden Sky Sys., Inc., 298 F.3d 736, 740 (8th Cir. 2002) (citations omitted).
Analysis
Apex claims that a constructive trust should be imposed upon the funds in Chase's possession that DeMarais embezzled to pay off his personal credit card debt. Chase contends that it takes these funds free of Apex's claim because it was not unjustly enriched by DeMarais's payments and because it is a holder in due course under Minn. Stat. § 336.3-302 (2002). The Court concludes that it cannot proceed with an analysis of Chase's holder in due course status without some factual development of the record. Accordingly, Chase's Motion will be denied.
The Court must consider whether Chase is a holder in due course under Minnesota's codification of the Uniform Commercial Code ("UCC"), Minn. Stat. §§ 336.3-101, et seq., before determining whether Apex is entitled to the imposition of a constructive trust. There is no dispute that the checks at issue here are negotiable instruments under Article 3 of the UCC, and "Article 3 is the exclusive source for evaluating the rights of the holder of a negotiable instrument." Wohlrabe v. Pownell, 307 N.W.2d 478, 482, 483 (Minn. 1981) (holding that it was error for the district court to rely on "general principles of constructive trust law" rather than applying the UCC; stating that "[c]onstructive trust law is only applicable to the extent it is incorporated into Article 3" of the UCC).
Under Minnesota law, "a holder in due course takes [an] instrument free from all claims to it on the part of any person."Wohlrabe v. Pownell, 307 N.W.2d 478, 482 (Minn. 1981) (internal quotation omitted). Thus, a holder in due course is not subject to equitable claims — it is, in fact, "immune from constructive trust claims." Id. at 483. In this case, the only dispute involving Chase's holder in due course status is whether Chase had notice of Apex's claims to the funds used by DeMarais.
Apex asserts that Chase is not a holder in due course because the facts and circumstances surrounding DeMarais's payment of his credit card debts constituted danger signals sufficient to trigger notice of Apex's claims to those funds. Specifically, Apex alleges that Chase "had notice of the constructive trust by the unusual, irregular, and large payments made by" DeMarais, and by "his conduct, including but not limited to, writing and using business checks from the corporate accounts of Plaintiff to pay his credit card accounts." (Compl. ¶¶ 17, 18.)
The Court notes that the use of third-party checks, in and of itself, is not sufficient to provide Chase with notice. See, e.g., Eldon's Super Fresh Stores, Inc. v. Merrill Lynch, Pierce, Fenner Smith, Inc., 207 N.W.2d 282, 288 (Minn. 1973) (use of third-party check did not give rise to notice that check was being credited to improper account); Taves v. Griebel, 363 N.W.2d 73, 75 (Minn.Ct.App. 1985) (use of third-party check did not provide notice). Nor is it unusual for employers to pay the personal debts of their employees. See, e.g., Grand Rapids Auto Sales, Inc. v. MBNA America Bank, 227 F. Supp. 2d. 721, 729 (W.D. Mich. 2002) (in a case very similar to the instant action, noting that "there are a number of legitimate reasons why an employer may pay the credit card debt of its employee"); Gino's of Capri, Inc. v. Chemical Bank (N.A.), 187 A.D.2d 71, 75 (Sup. Ct. App. Div. N.Y. 1993) ("As a practical matter, requiring payees receiving credit card and similar personal payments to make inquiry upon receipt of a check drawn on another's account would impose on these entities an undue burden, which, given the reality that employers' checks are frequently used to pay employee bills, would far outweigh any resulting benefit in detecting the isolated instance of embezzlement.").
Apex also states that it is seeking information from Chase through discovery regarding "Chase's procedures and policies for identifying and handling suspicious transactions, as well as information concerning its training procedures in regards to identifying suspicious payments"; it is also seeking "a full accounting of DeMarais's payment and charge history on his accounts with Chase in order to determine whether the manner and the amounts of his payments to Chase" were out of the ordinary. (Mem. in Opp'n at 6.)
Again, the Court notes that it is unlikely that such information could deprive Chase of its holder in due course status. See, e.g., Eldon's Super Fresh Stores, 207 N.W.2d at 288 ("Failure to make [an] inquiry [about an unknown fact] may be negligence and lack of diligence, but it is not `notice' of what [the payee] might discover." (citation omitted)); see also Valley Bank of Nevada v. JER Mgmt. Corp., 719 P.2d 301, 306-07 (Ariz.Ct.App. 1986) (holding that payee was holder in due course and rejecting argument that loan officer's "admitted violation of bank procedures" showed lack of good faith).
While it seems highly doubtful that a financial institution the size of Chase could have been aware of the "unusual" nature of the payments at issue here, "[t]he holder of an instrument has the burden of proving that he is a [holder in due course] when defenses or claims are shown." Eldon's Super Fresh Stores, Inc. v. Merrill Lynch, Pierce, Fenner Smith, Inc., 207 N.W.2d 282, 287 (Minn. 1973) (citation omitted). Apex's claims necessitate some measure, however small, of factual development. See Wohlrabe, 307 N.W.2d at 481: "We have detailed the facts in this case extensively because we adhere to the proposition that there is no rule of thumb to be automatically applied in determining whether the holder of a note holds it in due course. Each case must rest on its own facts." Because the parties have apparently not commenced discovery and the claims raised are fact intensive, the Court declines to grant Chase's Motion to Dismiss the Complaint at this time. The Court notes, however, that it has serious reservations about the ultimate viability of Apex's claims.
The Court's doubts concerning Apex's claims are consistent with the policy manifested by applicable Minnesota law — specifically, that in determining "which of two relatively innocent persons must suffer a loss due to misconduct of a third person . . . the loss must fall on the drawer rather than upon the payee (or other holder) because it was the drawer who created the situation and opportunity for defalcation by its agents."Eldon's Super Fresh Stores, 207 N.W.2d at 289 (citation omitted); see also Hartford Accident Indem. Co. v. American Express Co., 542 N.E.2d 1090, 1096 (N.Y.Ct.App. 1989) (stating that, in circumstances similar to those in the instant case, holding that payee was a holder in due course promoted "the policy favoring ready negotiability of commercial paper, assuring that good-faith purchasers need not stand as insurers of the honesty of a drawer corporation's employees"; and that such a holding "assign[ed] losses by the relative responsibility of the parties, allocating liability to the party best able to prevent them." (citation omitted)).
Conclusion
Based on the foregoing, and all the files, records and proceedings herein IT IS ORDERED that Chase's Motion to Dismiss (Doc. No. 9) is DENIED.Furthermore, IT IS ORDERED that the parties shall adhere to the current Pretrial Scheduling Order (Doc. No. 8), which provides that fact discovery will be completed by April 15, 2005, and that dispositive motions will be served, filed, and heard by July 1, 2005.