First American Title Insurance Co. v. APEX TITLE INC et al

Filing 71

ORDER denying 57 Motion to Dismiss; granting 60 Motion to Dismiss; granting 61 Motion to Dismiss. Ordered by Judge Clay D. Land on 08/16/2012. (CGC)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF GEORGIA
COLUMBUS DIVISION
FIRST AMERICAN TITLE INSURANCE
COMPANY,

*
*

Plaintiff,
*
vs.

CASE NO. 4:12-CV-10 (CDL)
*

APEX TITLE INC., et al.,
*
Defendants.
*
O R D E R
This action arises from alleged misappropriation of funds
in

an

attorney’s

trust

escrow

accounts.

Plaintiff

First

American Title Insurance Company (“First American”), which has
been

called

upon

to

clear

up

certain

real

estate

titles

by

making pay-offs that were supposed to be paid from the trust
escrow

accounts,

alleges

that

Defendants

Michael

Eddings

(“Michael Eddings”) and Sonya Eddings (“Sonya Eddings”) diverted
client funds from the trust escrow accounts of Defendant Law
Offices of Michael Eddings (“Eddings Firm”) and Defendant Apex
Title, Inc. (“Apex”) and used them to pay various personal and
business obligations.
claims

against

In this action, First American asserts

Michael

Eddings,

Sonya

businesses owned by the Eddings family.

Eddings

and

various

First American also

asserts a claim against Defendant Columbus Bank & Trust Company
(“CB&T”),

the

bank

where

both

the

Eddings

Firm

and

Apex

maintained their escrow accounts.

First American contends that

CB&T knew that funds from the escrow accounts were mishandled
and misappropriated and yet took no action to protect the actual
owners
Eddings

of

the

and

escrow

the

account

Eddings

funds.

Firm

In

assert

addition,

negligence

Michael

crossclaims

against CB&T, asserting that CB&T honored checks from the escrow
accounts even when there were insufficient funds in the accounts
(thereby creating an overdraft) instead of returning them for
insufficient funds.

Michael Eddings and the Eddings Firm also

allege that CB&T notified Sonya Eddings but not Michael Eddings
and the Eddings Firm when the escrow account was overdrawn.
Presently

pending

before

the

Court

is

CB&T’s

Motion

to

Dismiss First American’s claims against CB&T (ECF No. 57), which
is denied for the reasons set forth below.

Also pending before

the Court are CB&T’s Motions to Dismiss the crossclaims brought
against it by Michael Eddings and the Eddings Firm (ECF Nos. 60
& 61), which are granted for the reasons set forth below.
MOTION TO DISMISS STANDARD
When considering a 12(b)(6) motion to dismiss, the Court
must

accept

complaint

as

and

true
limit

all

facts

its

consideration

exhibits attached thereto.

set

forth
to

in
the

the

plaintiff=s

pleadings

and

Bell Atl. Corp. v. Twombly, 550 U.S.

544, 556 (2007); Wilchombe v. TeeVee Toons, Inc., 555 F.3d 949,
959

(11th

Cir.

2009).

“To

survive

2

a

motion

to

dismiss,

a

complaint must contain sufficient factual matter, accepted as
true, to ‘state a claim to relief that is plausible on its
face.’”

Ashcroft v. Iqbal, 556 U.S. 662, 678 (quoting Twombly,

550 U.S. at 570).

The complaint must include sufficient factual

allegations “to raise a right to relief above the speculative
level.”

Twombly, 550 U.S. at 555.

“[A] formulaic recitation of

the elements of a cause of action will not do[.]”

Id.

Although

the complaint must contain factual allegations that “raise a
reasonable expectation that discovery will reveal evidence of”
the

plaintiff=s

claims,

id.

at

556,

“Rule

12(b)(6)

does

not

permit dismissal of a well-pleaded complaint simply because ‘it
strikes

a

savvy

judge

that

actual

proof

of

those

facts

is

improbable,’” Watts v. Fla. Int’l Univ., 495 F.3d 1289, 1295
(11th Cir. 2007) (quoting Twombly, 550 U.S. at 556).
FACTUAL ALLEGATIONS
First

American

insurance policies.
in

Georgia,

Eddings

and

Firm.

he

is

in

the

business

of

issuing

title

Michael Eddings is licensed to practice law
is

Michael

the

sole

Eddings

owner
has

and

principal

several

other

ventures, including Apex, a title agency.
Michael Eddings’s wife.

Sonya

of

the

business

Eddings is

Sonya Eddings performed administrative

and accounting duties for both the Eddings Firm and Apex, and
she had full access to the escrow and operating accounts.

3

Both the Eddings Firm and Apex maintained their escrow and
operating accounts with CB&T.

In October 2011, First American

was informed that the Eddings Firm and Apex “failed to disburse
hundreds

of

thousands

of

dollars

intended

for

loan

payoffs

and/or seller proceeds from multiple closings they conducted.”
Am. Compl. ¶ 15.

First American conducted an investigation of

Apex and the Eddings Firm and discovered “wrongful diversion of
escrow funds” and the alteration of banking records.

Id. ¶ 16.

During the investigation, Sonya Eddings admitted that she had,
since at least 2007, “regularly diverted funds intended for loan
payoffs or seller proceeds out of the escrow account to the
operating account” so she could pay debts and expenses of other
companies

operated

by

the

Eddings

family,

business and personal loans from CB&T.

including

various

Id. ¶ 17.

The diversion of funds from the escrow accounts resulted in
a “negative balance on numerous occasions.”

Id. ¶ 20.

CB&T was

aware of the repeated overdrafts on the escrow accounts but did
not perform an investigation or take other action.
First American alleges that because of the diversion of the
escrow funds, “sellers, lenders and others never received payoff
funds from closings [Michael] Eddings conducted and have filed
title insurance claims with First American.”
American

makes

various

claims

against

Id. ¶ 24.

Michael

Eddings,

First
Sonya

Eddings, the Eddings Firm, Apex, and other companies owned by

4

the Eddings family.

First American also brought a negligence

claim against CB&T, contending that CB&T had a duty to monitor
the escrow accounts for suspicious activity but did not take
action
Michael

in

response

Eddings

crossclaims

to

and

against

irregular
the

CB&T,

activity

Eddings
alleging

Firm
that

on

the

assert
the

accounts.
negligence

bank

permitted

overdrafts on the escrow accounts instead of returning checks
for insufficient funds.

Michael Eddings and the Eddings Firm

also allege that CB&T notified Sonya Eddings but not Michael
Eddings

and

the

Eddings

Firm

when

the

escrow

account

was

overdrawn.
DISCUSSION
I.

First American’s Claim Against CB&T
First American asserts that CB&T is liable to it based on

misappropriations of trust funds by Michael and Sonya Eddings.
Under Georgia law, a bank may be liable for a breach of trust
based on improper withdrawal of trust funds, but only if the
bank has notice or knowledge that the breach of trust is being
committed.

E.g., Tattnall Bank v. Harvey, 186 Ga. 752, 753, 198

S.E. 724, 725 (1938).

Banks “have long been protected from

liability for misuse of trust funds by fiduciaries where the
bank was without knowledge of the wrongdoing.”

Trust Co. of Ga.

v. Nationwide Moving & Storage Co., 235 Ga. 229, 231, 219 S.E.2d
162, 165 (1975).

This rule is codified in a statute: “Whenever

5

any . . . fiduciary, whether bona fide or mala fide, shall
deposit any money in any bank to his credit . . . fiduciary
. . . such bank shall be authorized to pay the amount of such
deposit,

or

fiduciary,

any

part

signed

thereof,

with

the

upon

name

the

in

order

which

of

such

such . . .
deposit

was

entered, without being accountable in any way to the principal,
cestui que trust, or other person or corporation who may be
entitled

to

or

interested

O.C.G.A. § 7-1-352.

in

the

amount

so

deposited.”

“It is clear that the statute is designed

to protect a bank from liability where an agent or fiduciary
misappropriates funds of the owner in breach of his agency or
trust without the bank’s knowledge. The bank is not required to
scrutinize every check written by a fiduciary or agent to see if
the check is written in compliance with the agent’s authority.”
Nat’l Bank of Ga. v. Weiner, 180 Ga. App. 61, 65, 348 S.E.2d
492,

497

(1986)

(emphasis

added)

(internal

quotation

marks

omitted).
Here, First American alleges that Sonya Eddings withdrew
funds from the escrow accounts and then did not use the funds
for their intended purpose.

First American also alleges that

Sonya Eddings was an authorized signatory on the trust accounts.
See

Am.

Comp.

¶

11

(alleging

that

Sonya

Eddings

performed

administrative and accounting duties for the Eddings Firm and
Apex

“and

had

full

access

to

6

the

escrow

and

operating

accounts”).

The remaining question is whether First American

alleges sufficient facts to create an inference that CB&T knew
that

Sonya

Eddings

withdrew them.
actual

was

misappropriating

the

funds

after

she

“Thus the question is, did the bank have either

knowledge

of

the

misapplication,

or

were

the

circumstances such as to raise a presumption of knowledge, or
did the circumstances reasonably support the sole inference that
a breach of trust was intended?”

Nat’l Factor & Inv. Corp. v.

State Bank of Cochran, 224 Ga. 535, 163 S.E.2d 817 (1968).
First American alleges that “CB&T was on notice of the
Eddings’

mishandling

and

misappropriation

funds.”

Am. Compl. ¶ 22.

of

escrow

account

First American further alleges that

CB&T had knowledge of an “extensive pattern of malfeasance”:
“repeated

overdrafts

and

negative

account

balances.”

Pl.’s

Resp. to Def.’s Mot. to Dismiss 8, ECF No. 64; accord Am. Compl.
¶ 63 (alleging that “CB&T was aware of the repeated negative
escrow

account

balance,

but

took

no

reasonable

steps

investigate or report this irregular account activity”).
purposes
taken

of

as

reasonably

the

true

pending

as

support

motion

required
the

sole

at

to

dismiss,

this

stage

inference

the

of

that

to
For

allegations,

the

Sonya

litigation,
or

Michael

Eddings intended to divert funds from the escrow accounts and
that CB&T under the circumstances would have been aware of the
misappropriation

of

the

trust

funds.

7

At

this

stage

of

the

proceedings and in light of First American’s allegations, it is
reasonable to conclude that CB&T would certainly understand the
significance of an overdraft on a trust account; the funds do
not belong to the account holder but are held in trust by the
account holder for the true owners of the funds.

Because the

funds in a trust account are sums certain that are specifically
allocated to the true owners of the funds, an overdraft in such
an account means that someone’s funds have been misappropriated.
While

an

isolated

overdraft

bookkeeping

or

pattern

overdrafts.

of

careless

could

arithmetic,
For

be

caused

First

purposes

of

by

American

sloppy

alleges

determining

a

whether

First American’s claim should survive a motion to dismiss, the
Court

finds

that

allegations

of

such

a

pattern

support

the

conclusion that CB&T under these circumstances would be aware
that the trust funds

were being misappropriated.

The Court

concludes that First American has alleged sufficient facts to
state

a

claim

for

relief,

and

therefore,

CB&T’s

motion

to

dismiss First American’s claims against it is denied.
II.

Crossclaims by Michael Eddings and the Eddings Firm Against
CB&T.
In a remarkable display of chutzpah, Michael Eddings and

the Eddings Firm bring crossclaims against CB&T, contending that
CB&T should not have paid checks presented to it for payment
when there were insufficient funds in the account to cover the

8

checks.

They

withdrawals
balance.
They

from

allege
the

that

Sonya

escrow

Eddings

accounts,

made

creating

improper

a

negative

E.g., Am. Answer of Eddings Firm ¶¶ 78-79, ECF No. 53.

further

allege

that

when

Sonya

Eddings

made

improper

withdrawals, CB&T honored checks against the accounts instead of
returning the checks for insufficient funds, thus creating an
overdraft on the escrow accounts.
Eddings

and

the

Eddings

Firm

E.g., id. ¶ 80.

also

allege

that

Michael

while

CB&T

“undertook to notify Sonya Eddings of the overdrafts,” CB&T did
not notify Michael Eddings or the State Bar of Georgia of the
overdrafts.

Id. ¶¶ 80-81.

Finally, Michael Eddings and the

Eddings Firm assert that CB&T’s actions kept Michael Eddings
“ignorant

of

the

diversions

of

funds”

and

resulted

in

this

action by First American “for which Michael Eddings is facing
substantial liability.”
Michael

Eddings

Id. ¶ 85.

and

the

Eddings

Firm

contend

that

CB&T

should not have honored checks presented to it for payment when
there

were

insufficient

funds

in

the

account

to

cover

the

checks, but Michael Eddings and the Eddings Firm point to no
contractual or legal basis for such a duty.

Moreover, under

O.C.G.A. § 11-4-401, a bank “may charge against the account of a
customer an item that is properly payable from that account even
though the charge creates an overdraft.

An item is properly

payable if it is authorized by the customer and is in accordance

9

with any agreement between the customer and bank.”
11-4-401(a).

O.C.G.A. §

For these reasons, to the extent Michael Eddings

and the Eddings Firm base their crossclaims on CB&T’s decision
to honor checks against the escrow accounts instead of returning
them for insufficient funds, such a crossclaim clearly fails.
The contention of Michael Eddings and the Eddings Firm that
the State Bar Rules provide the basis for a cause of action
against CB&T is meritless and approaches frivolousness.

Georgia

law does not create a duty on a bank to notify the State Bar of
Georgia when it pays a check drawn on a trust account even
though the payment of the check is made when insufficient funds
exist in the account to cover the check.

The Georgia Rules of

Professional Conduct provide that a financial institution that
offers trust accounts for attorneys shall file a report with the
Bar “in every instance where a properly payable instrument is
presented against a lawyer trust account containing insufficient
funds and said instrument is not honored within three business
days

of

presentation.”

1.15(III)(c)(2)(i),

Ga.

available at

R.

of

Prof’l

Conduct

http://www.gabar.org/barrules/

handbookdetail.cfm?what=rule&id=47 (last visited Aug. 16, 2012)
(emphasis added).
CB&T

under

the

It is unclear how this rule creates a duty on
allegations

of

the

crossclaims,

particularly

given that Michael Eddings and the Eddings Firm allege that CB&T
actually honored checks creating overdrafts instead of returning

10

them for insufficient funds.

Am. Answer of Eddings Firm ¶ 80.

Moreover, the rule itself specifically states that it “shall not
be deemed to create a duty to exercise a standard of care or a
contract with third parties that may sustain a loss as a result
of lawyers overdrawing attorney trust accounts.”
Prof’l

Conduct

1.15(III)(d).

Accordingly,

the

Ga. R. of
crossclaims

cannot be based on CB&T’s failure to notify the Bar of the
overdrafts.
With

no

citation

to

any

supporting

authority,

Michael

Eddings asks the Court to recognize a cause of action based on
CB&T’s alleged failure to notify Michael Eddings personally when
his trust accounts were overdrawn.
argument

even

though

the

Michael Eddings makes this

person

who

wrote

the

checks

and

received notice of the overdrafts was authorized by him to write
the checks and receive such notices.
alleges

that

Sonya

Eddings

The Complaint specifically

“performed

administrative

and

accounting duties” for the Eddings Firm and Apex “and had full
access

to

the

escrow

and

operating

allegations have been admitted.
Eddings Firm ¶ 11.

and

those

Am. Compl. ¶ 11, Am. Answer of

The crossclaims allege that CB&T notified

Sonya Eddings of the overdrafts.
80.

accounts,”

Am. Answer of Eddings Firm ¶

Noticeably absent from the crossclaims is any allegation

that CB&T knew or should have known that Sonya Eddings, acting
alone and not on behalf of or in concert with Michael Eddings,

11

was

engaged

in

unauthorized

use

of

any

of

the

Eddings

bank

accounts in such a manner that it would give rise to a duty owed
to Michael Eddings and/or the Eddings Firm.

The Court concludes

that the crossclaims of Michael Eddings and the Eddings Firm
fail to state a claim against CB&T.
CONCLUSION
As

discussed

American’s

claims

above,
against

CB&T’s
CB&T

Motion

(ECF

No.

to
57)

Dismiss
is

First

denied,

and

CB&T’s Motions to Dismiss the crossclaims against it brought by
Michael Eddings and the Eddings Firm (ECF Nos. 60 & 61) are
granted.
The Court previously stayed discovery and the deadline for
the parties to submit a joint proposed scheduling order.
stay

is

proposed

hereby

lifted.

The

scheduling/discovery

parties
order

shall

in

Court’s Rules 16/26 Order (ECF No. 41).
scheduling/discovery

order

is

due

on

or

submit

accordance

a

That
joint

with

the

The joint proposed
before

September

6,

2012.

IT IS SO ORDERED, this 16th day of August, 2012.
S/Clay D. Land
CLAY D. LAND
UNITED STATES DISTRICT JUDGE

12