Opinion
No. E2001-00254-COA-R3-CV.
Filed October 8, 2001. July 9, 2001 Session.
Direct Appeal from the Circuit Court for Knox County Nos. 3-541-96 and 3-544-96; Hon. Dale C. Workman, Circuit Judge.
Affirmed.
James S. Tipton, Jr., and W. Morris Kizer, Knoxville, Tennessee, for Plaintiffs-Appellants, Pero's Steak and Spaghetti House and Louis Inn.
Stephen G. Anderson, Knoxville, Tennessee, for Defendant-Appellee, First Tennessee Bank National Association.
Herschel Pickens Franks, J., delivered the opinion of the court, in which D. Michael Swiney, J., joined, and Charles D. Susano, Jr., J., dissented and filed an opinion. .
OPINION
Plaintiffs action against First Tennessee Bank National Association ("Bank") was held to be time-barred by the Trial Judge pursuant to Tenn. Code Ann. § 47-3-118. Plaintiffs have appealed to this Court.
Pero's Steak and Spaghetti House and Louis Inn are businesses located in Knoxville, Tennessee, operated as general partnerships. The partners of the two businesses engaged Elmer Hinkle, as their general bookkeeper to handle Louis Inn and Pero's general bookkeeping, accounting and tax preparation. Hinkle did business under the name of Hinkle Hinkle, a family business including his wife and daughter, Elizabeth Hinkle Lee ("Lee"). Beginning in 1985, Lee handled all of the work for Pero's and Louis Inn.
Between 1988 and 1995, Pero's Steak and Spaghetti House wrote 54 checks for the payment of taxes and Louis Inn wrote 86 checks for the payment of taxes. Pero's checks were drawn on First American Bank, where Pero's did its banking. The Louis Inn checks were drawn on First Tennessee Bank. All 140 checks were made payable to First Tennessee. All checks were given to Defendant Lee by Pero's or Louis Inn in order for her to present them to the Bank.
Some of the 140 checks were presented for payment to the IRS accompanied by an IRS payment coupon. These checks and coupons were set aside by the Bank with similar deposits from other employers and would be deposited in the Bank's Treasury, Tax and Liability account. The Bank would then transmit monies to the IRS with a tape identifying the portion to be credited to each employer's identification number.
Not all of the checks were handled in the stated manner. Sometimes, Lee cashed the checks and used some or all of the proceeds to buy cashier's checks payable to the state or the IRS. Sometimes she deposited the checks in an account called the Hinkle Hinkle Tax Account. Lee would then draw checks on the Hinkle Account to pay taxes owed by Pero's and Louis Inn.
In 1991, Pero's was audited by the IRS. As a result of that audit, Pero's was required to pay approximately $39,000.00 in back taxes, interest and penalties. On or about February 3, 1992, Pero's received another notice from the IRS stating that no tax deposits were received during the fourth quarter of 1990, but four checks had been written by Pero's in the fourth quarter of 1990 each for the amount of $9,500.00, or a total of $38,000.00.
The Complaint against First Tennessee Bank alleged that the Bank had engaged in a joint conversion with Lee, allowing her to cash or deposit a number of checks for her own credit.
Eventually, a trial ensued over this dispute before a jury, and jury verdicts were returned for the plaintiff which were ultimately set aside by the Trial Judge and a new trial granted before another Judge. On August 18, 2000, the Bank filed a Motion for Partial Summary Judgment based upon its affirmative defense, i.e., the statute of limitations. The plaintiffs also filed a joint Motion for Partial Summary Judgment. Acting on the Motions, the Trial Court granted the Bank's Motion for Partial Summary Judgment, but denied plaintiffs' Motion. In light of this decision, there remained no dispute regarding the claims of plaintiffs not time-barred by the Court's holding, and the stipulation of the amount of those claims, together with the grant of partial summary judgment, were reflected in the Court's Order and Final Judgment of October 5, 2000.
Our review of summary judgments involves purely a question of law, with no presumption of correctness of the lower court's judgment, and we are required to review the record to determine if the requirements of Tenn. Code Civ. P. 56 have been met. Staples v. C.B.L. Associates, Inc., 15 S.W.2d 83 (Tenn. 2000).
Prior to 1996, the statute of limitations on actions for conversion of negotiable instruments was not a separate statute, but rather was governed by the statute of limitations for property tort actions.
The following actions shall be commenced within three (3) years from the accruing of the cause of action: . . . (2) Actions for the detention or conversion of personal property.
Tenn. Code Ann. § 28-3-105. See McConnico v. Third Nat'l Bank, 499 S.W.2d 874, 891 (Tenn. 1973) (applying general limitation period for conversion of personal property "absent an appropriate limitation in the Uniform Commercial Code"). In applying this general limitation provision to causes of action for the conversion of negotiable instruments, this Court employed the discovery rule and held that the statute of limitations runs from "the time when the plaintiff knew or reasonably should have known that a cause of action existed." Pacific Properties v. Home Federal Bank, 1995 WL 59112, *4 (Tenn.Ct.App. 1995) (citing Stone v. Hinds, 541 S.W.2d 598, 599 (Tenn.Ct.App. 1976).
After the Pacific Properties decision, the legislature adopted § 47-3-118(g) in June of 1995, establishing a specific statute of limitations for conversion of negotiable instruments and placing that statute within the Uniform Commercial Code section of the Tennessee Code. The statute became effective on June 1, 1996 and provides:
(g) Unless governed by other law regarding claims for indemnity or contribution, an action (i) for the conversion or an instrument, for money had and received, or like action based on conversion, (ii) for breach of warranty, or (iii) to enforce an obligation, duty, or right arising under this chapter and not governed by this section must be commenced within three (3) years after the [cause of action] accrues.
Plaintiffs argue that § 118(g) does not apply because it became effective after their cause of action accrued. They argue that their action accrued in March of 1996, after they pursued an investigation of an IRS levy on their bank account, which had required First Tennessee Bank to remit to the IRS $24,386.48 from the accounts of Louis Inn at the Bank, for an alleged underpayment of federal payroll taxes.
The Trial Court found that even if the discovery rule was applicable (which the Court found did not apply), the plaintiffs' action would still be time-barred because they knew or had reason to know of the conversion of the checks by February of 1992, and the action was not brought until August of 1996.
Plaintiffs argue that upon receiving the notice from the IRS on February 3, 1992, that they believed Lee, to whom they gave their checks, when she told them that a mistake had been made and that no additional taxes were actually owed, and contend that they did not discover the conversion of the checks then, because of their reliance upon their long-standing professional relationship with Lee. They claim that they only became aware of the conversion after the IRS placed a levy on their bank account with the Bank in 1995.
Where the discovery rule is applicable, the statute of limitations begins to run when plaintiff knows or in exercise of reasonable care and diligence should know, that an injury has been sustained as a result of wrongful or tortious conduct by the defendant. See Shadrick v. Coker, 963 S.W.2d 726, 733 (Tenn. 1998). The plaintiff is deemed to have discovered the right of action if he is aware of facts sufficient to put a reasonable person on notice that he has suffered an injury as a result of wrongful conduct. See Roe v. Jefferson, 875 S.W.2d 653, 657 (Tenn. 1994).
Against the backdrop of an IRS audit in 1991 where plaintiffs were required to pay back taxes, interest and penalties, the February 3, 1992 notice to plaintiffs stating that no deposits were made for the fourth quarter of 1990 would put a reasonable person on notice that either the Bank had not made payment to the IRS or Lee had not made the deposits.
The Trial Judge held the discovery rule does not apply, but plaintiffs argue that § 118(g) does not apply because it became effective after their cause of action accrued. However, the statute of limitations codified at § 47-3-118 does not shorten any applicable statute of limitations. At all relevant times actions for conversion of negotiable instruments must have been brought within three years of the accrual of the cause of action.
The discovery rule is an equitable exception to the general rule that the statute of limitations begins to run as soon as the underlying cause of action accrues. See Menichini v. Grant, 995 F.2d 1224, 1229 (3d Cir. 1993); Palmer Mfg. and Supply, Inc. v. BancOhio Nat'l Bank, 637 N.E.2d 386, 389-91 (Ohio Ct.App. 1994). Also see Teeters v. Currey, 518 S.W.2d 512, 517 (Tenn. 1974) (referring to the discovery rule as an "equitable doctrine". The overwhelming weight of authority is to the effect that the discovery rule does not apply to negotiable instrument theft. See, e.g., Menichini; Kuwait Airways Corp. v. American Security Bank, 890 F.2d 456, 461-63 (D.C. Cir. 1989); Stefano v. First Union Nat'l Bank of Virginia, 981 F. Supp. 417, 421 (E.D.Va. 1997); Haddad's of Illinois, Inc. v. Credit Union 1 Credit Union, 678 N.E.2d 322-325-26 (Ill.App.Ct. 1997); Husker News Co. v. Mahaska State Bank, 460 N.W.2d 476, 477-78 (Iowa 1990); Insurance Co. of North America v. Manufacturers Bank of Southfield, 338 N.W.2d 214, 216 (Mich.Ct.App. 1983); Smith v. Franklin Custodian Funds, Inc . , 726 So.2d 144, 148 (Miss. 1998); Gerber v. Manufacturers Hanover Trust Co., 315 N.Y.S.2d 601, 603 (N.Y. Civ. Ct. 1970); Palmer Mfg. and Supply, Inc. v. BancOhio Nat'l Bank, 637 N.E.2d 386, 389-91 (Ohio Ct.App. 1994); Fuscellaro v. Industrial Nat'l Corp . , 368 A.2d 1227, 1231 (R.I. 1977); Wang v. Farmers State Bank of Winner, 447 N.W.2d 516, 518 (S.D. 1989) ; Lyco v. Acquisition 1984, L.P. v. The First Nat'l Bank of Amarillo, 860 S.W.2d 117, 119 (Tex.Ct.App. 1993).
Where a party not engaging in fraudulent concealment asserts the statute of limitations defense, most courts have refused to apply the discovery rule to negotiable instruments, finding it contrary to UCC policies of finality and negotiability. See e.g. Palmer Mfg. and Supply, Inc. v. BancOhio Nat'l Bank, 637 N.E.2d 386, 389-91 (Ohio Ct.App. 1994).
In adopting the UCC in this State, the Legislature codified the purposes and policy of the Code:
to simplify, clarify and modernize the law governing commercial transactions;
to permit the continued expansion of commercial practice through custom, usage and agreement of the parties; and
to make uniform the law among the various jurisdictions.
Tenn. Code Ann. § 47-1-102(2).
Statutory uniformity is a principle to be applied in construing the UCC in Tennessee. Wakefield v. Crawley, 6 S.W.3d 442, 450 (Tenn. 1999).
To be in conformity with other jurisdictions, Tennessee should likewise abandon the use of the discovery rule in actions for conversion of negotiable instruments absent fraudulent concealment on the part of the defendant asserting the statute of limitations defense. However, plaintiffs argue that they should not be prevented from relying upon the discovery rule that was applied in Pacific Properties prior to the codification of the statute of limitations in the U.C.C. While the statute of limitations itself remained at three years, the effect of the new statute is to eliminate the discovery rule from cases of conversions of negotiable instruments. This, in turn, effectively limits the time in which a person has to bring a claim for conversion. However, it is well established that a newly effective statute of limitations cannot extinguish a cause of action that has already accrued, without giving the plaintiff a reasonable opportunity to bring suit after the changes. See Pacific Eastern Corp. v. Gulf Life Co., 902 S.W.2d 946, 956 (Tenn.Ct.App. 1995).
The Legislature adopted the statute of limitations provision for conversion of negotiable instruments in June of 1995, but delayed its effective date until June 1, 1996. Tenn. Code Ann. § 47-3-118. Assuming without deciding that plaintiffs had a constitutionally vested right to the benefit of the discovery rule, plaintiffs concede they learned of the injurious transactions after the IRS levied on their bank account in 1995 and before the statute became effective. Yet they did not bring an action against the Bank during the year in which the Legislature delayed the effective date of the statute and give no valid reason why they waited until August 29, 1996 to bring this action, after the statute had become effective. As we said in Pacific Eastern Corp. v. Gulf Life Co., 902 S.W.2d 946 (Tenn.App. 1995):
[a]n amendment that shortens an existing statute of limitations cannot extinguish a cause of action that has already accrued without giving the plaintiff a reasonable opportunity to bring suit after the effective date of the amendment. (Citations omitted).
Id. 956.
The Legislature gave such parties a reasonable time to bring their action, i.e., one year from the passage of the statute before it became effective. Accordingly, indulging the plaintiffs' right to apply the discovery rule, they had a reasonable time to bring their action, which they failed to do before the statute became effective.
Finally, plaintiffs argue that the fraudulent concealment doctrine tolled the statute of limitations regardless of whether they should have discovered their cause of action, or not.
In Shadrick v. Coker , 963 S.W.2d 726 (Tenn. 1998), the Supreme Court addressed the issue of fraudulent concealment:
To establish fraudulent concealment, a plaintiff must prove (1) that the defendant took affirmative action to conceal the cause of action or remained silent and failed to disclose material facts despite a duty to do so and, (2) the plaintiff could not have discovered the cause of action despite exercising reasonable care and diligence.
. . .
The third essential element of fraudulent concealment is knowledge on the part of the defendant of the facts giving rise to the cause of action. In other words, the defendant must be aware of the wrong.
. . .
The fourth and final essential element of fraudulent concealment is a concealment of material information from the plaintiff. Concealment "may consist of withholding information or making use of some device to mislead" the plaintiff in order to exclude suspicion or prevent inquiry.
We hold that the plaintiffs have neither pled nor offered evidence to establish a prima facie case of fraudulent concealment.
We affirm the judgment of the Trial Court, and remand with the cost of the appeal assessed to plaintiffs Pero's Steak and Spaghetti House and Louis Inn.
I cannot concur in the majority's holding that summary judgment is appropriate in these consolidated cases. The majority's holding is bottomed on its determination that, even if the plaintiffs' causes of action accrued in 1995 or 1996 (pre-June 1 of that year), those actions had to be filed before June 1, 1996, in order to avoid the bar of the statute of limitations. I believe (1) that the date of the accrual of these causes of action is critical; (2) that, based upon the material now before us, there is a factual dispute as to when the causes of action accrued, with dates in 1992 and 1995 — and maybe dates in other time frames — being possibilities; (3) that, assuming the trier of fact finds that the causes of action accrued less than three years prior to the plaintiffs' filings of their complaints, the applicable three-year statute of limitations is T.C.A. § 28-3-105 (2000), with the computation of time under it being impacted by the discovery rule, see Pacific Properties v. Home Federal Bank, F.S.B ., C/A No. 03A01-9410-CH-00393, 1995 WL 59112, at *4 (Tenn.Ct.App. E.S., filed February 14, 1995); and (4) that, if the foregoing assumption turns out to be true, these causes of action are not time-barred. The crux of my disagreement with the majority is this: assuming the trier of fact determines, under the discovery rule, that the subject causes of action accrued in 1995 or later, but prior to June 1, 1996, I do not believe — as the majority does — that T.C.A. § 47-3-118(g) (1996), a statute of limitations first effective on June 1, 1996, can be constitutionally applied to those causes of action so as to bar suits filed on August 29, 1996 and August 30, 1996.
Pero's complaint was filed August 29, 1996; Louis Inn's complaint was filed August 30, 1996.
Stone v. Hinds , 541 S.W.2d 598, 599 (Tenn.Ct.App. 1976).
Before I expound upon my belief that summary judgment is inappropriate in these cases, I want to express my agreement with the majority that T.C.A. § 47-3-118(g), being a part of the UCC, should be construed in harmony with the decisions of those other UCC jurisdictions — a clear majority — which have held that the discovery rule is not implicated in an analysis involving this particular statute of limitations, absent fraudulent concealment on the part of the defendant asserting the limitations defense. My disagreement with the majority as it pertains to this statute is that I do not believe that it can be applied to a cause of action that accrued before its effective date of June 1, 1996.
Generally speaking, the ascertainment of the date of the accrual of a cause of action is the first step in any statute of limitations analysis. This is because, again generally speaking, the period of limitations does not begin to run until the cause of action has accrued. See McCroskey v. Bryant Air Conditioning Co ., 524 S.W.2d 487, 491 (Tenn. 1975); Wyatt v. A-Best Produsts Co ., 924 S.W.2d 98, 103 (Tenn.Ct.App. 1995).
We have previously held that "[t]he phrase `from the accruing of the cause of action,' as set forth in T.C.A. § 28-3-105, `means from the time when the plaintiff knew or reasonably should have known that a cause of action existed.'" Pacific Properties , 1995 WL 59112 at *4 (citing Stone v. Hinds , 541 S.W.2d 598, 599 (Tenn.Ct.App. 1976)). In Pacific Properties , we held that an alleged conversion of a certificate of deposit was governed by the three-year statute of limitations for conversion under T.C.A. § 28-3-105 and that there was a dispute in the record as to when the plaintiff's managing partner "knew or reasonably should have known" about the alleged conversion and that the dispute meant it was unclear as to whether the three-year statute of limitations, i.e., T.C.A. § 28-3-105, had expired before suit was brought. Id . Because of this, we reversed the trial court's grant of summary judgment and remanded for further proceedings. Id . at *5.
T.C.A. § 28-3-105 provides, in pertinent part, as follows:
The following actions shall be commenced within three (3) years from the accruing of the cause of action:
* * *
(2) Actions for. . .conversion of personal property. . . .
If the trier of fact in the instant case accepts as true the facts underlying the plaintiffs' theory of this case, the accrual of the causes of action, under the rationale of Pacific Properties , did not occur until 1995 at the earliest. In my judgment, a reasonable jury could conclude that the plaintiffs' quantum of knowledge prior to 1995 was not sufficient to put a reasonable person on notice that there had been a conversion by the Bank. Construing the evidence in this summary judgment analysis as we must — in the light most favorable to the plaintiffs — I find a genuine dispute as to when the plaintiffs knew or reasonably should have known about the alleged conversion.
In 1995 through 1996, but prior to June 1, 1996 — during which time frame the plaintiffs' causes of action arguably accrued — the applicable statute of limitations was T.C.A. § 28-3-105. The new statute — T.C.A. § 47-3-118(g) — while passed in June, 1995, was not effective until June 1, 1996. Thus, if the plaintiffs' causes of action accrued in 1995 or in 1996, but prior to June 1, 1996, they accrued prior to the effective date of the new statute.
As a general proposition, a litigant has a vested right in the statute of limitations in effect and applicable to its cause of action on the date that the cause of action accrues. See Tenn. Const. Art. I, § 20; Watts v. Putnam Co ., 525 S.W.2d 488, 492 (Tenn. 1975); Wyatt , 924 S.W.2d at 103.
The majority relies upon the case of Pacific Eastern Corp. v. Gulf Life Holding Co ., 902 S.W.2d 946 (Tenn.Ct.App. 1995), for the proposition that a change in the applicable statute of limitations "that shortens an existing statute of limitations cannot extinguish a cause of action that has already accrued without giving the plaintiff a reasonable opportunity to bring suit after the effective date" of the new statute. Id . at 956. While I agree that Pacific Eastern Corp . stands for this proposition, I do not agree that the principle enunciated in that case is implicated by the facts of the instant case.
In the case before us, it is clear to me that the new statute "shortened" the period of limitations. This is because the applicable period was changed from a span of three years with the discovery rule to a three-year period without the discovery rule. As pertinent to my dissent, the change in the period of limitations is significant in at least two respects. First, the new statute does not expressly provide that the accrual of a cause of action subject to its terms would occur at the time of the conversion and not when the conversion was discovered or should have been discovered. In fact, it was not until the majority interpreted the statute in the more restrictive manner in this very case — and, again, I agree with that interpretation — that one was put on notice that there had been, in effect, a shortening of the period within which an aggrieved party could file suit.
The second important aspect of the new statute is that there is no express statement in the statute putting a person on notice that the claimant has a certain period of time to bring suit after the effective date of the new statute of limitations. I do not believe the one-year delay in the effective date of the statute satisfies the requirement that before a new shortened period of limitations can be applied to an accrued cause of action, the new statute must put a claimant on notice that the claimant has a specified period of time within which to file suit. In my judgment, this requirement could have been met — but was not — had the new statute provided that all causes of action accruing prior to the effective date of the statute had to be filed on or before a reasonable specified date in the future. In my judgment, this is the type of provision contemplated by cases such as Pacific Eastern Corp .
I would reverse the grant of summary judgment and remand for further proceedings. I believe we should let the jury decide the critical facts impacting the accrual issue. Regardless of how the jury resolves this issue, I believe the applicable period of limitations is T.C.A. § 28-3-105 since no one in this case contends that the causes of action barred by the trial court's judgment accrued on or after June 1, 1996.