SFRL Inc. v. Galena State Bank and Trust Co.

Filing 31

WRITTEN Opinion entered by the Honorable Philip G. Reinhard on 7/10/2012: For the reasons stated below, plaintiff's complaint is dismissed in its entirety without prejudice. Plaintiffshall file an amended complaint consistent with this order on or before August 8, 2012.[For further details see text below.] Signed by the Honorable Philip G. Reinhard on 7/10/2012:Electronic notice(pg, )

Order Form (01/2005)

United States District Court, Northern District of Illinois
Name of Assigned Judge
or Magistrate Judge

Philip G. Reinhard

CASE NUMBER

11 C 50277

CASE
TITLE

Sitting Judge if Other
than Assigned Judge

DATE

7/10/2012

SFRL Inc. vs. Galena State Bank and Trust Co.

DOCKET ENTRY TEXT:

For the reasons stated below, plaintiff’s complaint is dismissed in its entirety without prejudice. Plaintiff
shall file an amended complaint consistent with this order on or before August 8, 2012.

O[ For further details see text below.]

Electronic Notices.

STATEMENT - OPINION
Plaintiff, SFRL Inc., brings this action against defendant, Galena State Bank & Trust Co. Jurisdiction
is proper under 28 U.S.C. § 1332 (a) (1). Plaintiff is a South Dakota corporation with its principal place of
business in South Dakota. Defendant is an Illinois banking corporation with its principal place of business in
Illinois. The amount in controversy exceeds $75,000. Defendant moves to dismiss for failure to state a claim
on which relief can be granted. Fed. R. Civ. P. 12 (b) (6).
The complaint has nine counts: 1) conversion; 2) tortious interference with a business relationship or
expectancy; 3) unjust enrichment; 4) civil conspiracy; 5) aiding and abetting tortious conduct; 6) negligence;
7) fraud and deceit; 8) negligent misrepresentation; and 9) equitable estoppel. Defendant moves to dismiss all
of these claims.
The facts are presented as alleged in the complaint. Mississippi Valley Livestock, Inc. (“MVL”)
purchased 157 “fat cattle” (cattle ready to be slaughtered) from plaintiff on March 21, 2007 and tendered a
check, drawn on defendant, to plaintiff in the amount of $173,820.37. The next day, March 22, 2007, MVL
purchased 131 fat cattle from plaintiff and tendered a check, drawn on defendant, to plaintiff in the amount of
$153,808.44. On April 2, 2007, defendant notified plaintiff it was dishonoring these two checks because of
insufficient funds. Between the dates of the cattle sale to MVL and the date defendant dishonored the checks,
MVL sold all 288 fat cattle it had purchased from plaintiff and defendant received the cash proceeds of these
sales.
At the time MVL tendered plaintiff the NSF checks, defendant had terminated MVL’s line of credit,
MVL had already incurred over $13,000 in NSF charges to defendant, and defendant knew MVL was
insolvent. Despite this insolvency, defendant permitted MVL to write approximately $2,000,000 in bad
checks to several livestock barns, including plaintiff, to obtain cattle with the bad checks, to sell the cattle
obtained to slaughterhouses and secondary buyers, and to transfer the cash proceeds of the sales to defendant
to reduce MVL’s debt to defendant. Plaintiff alleges defendant executed a plan intentionally and knowingly
to have MVL write these bad checks to obtain cattle and then sell the cattle and transfer1 the proceeds to
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STATEMENT - OPINION
defendant before defendant was required to provide notice of dishonor to plaintiff and other livestock sales
barns in order to reduce MVL’s debt to defendant. Plaintiff alleges defendant is liable for its own conduct
and also for the conduct of MVL which was acting as defendant’s agent. Each count alleges defendant is
“guilty of oppression, fraud, malice, and misconduct that is intentional, willful, outrageous, reckless, wanton,
inspired by an evil motive or exhibiting an indifference to [plaintiff’s] rights.”
Defendant asserts in its opening brief that Illinois substantive law applies based on the default rule
that a federal court applies the substantive law of the state where it sits. Plaintiff responds that at least one of
its claims is specifically alleged under South Dakota law and that a conflict of laws issue has, therefore, been
raised so that the default rule does not apply. However, plaintiff makes no argument as to why South Dakota
law applies to any or all of the claims but simply states “[plaintiff] does not concede that Illinois law applies
to any of the claims.” Without an explanation as to why the court should apply South Dakota law, the court
will apply Illinois law.
Defendant argues the heightened pleading requirements of Fed. R. Civ. P. 9 (b) apply to plaintiff’s
complaint. Plaintiff contends Rule 9 (b) does not apply except to one of its claims– the fraud and deceit
claim of Count VII. However, plaintiff misapprehends the rule. “In alleging fraud or mistake, a party must
state with particularity the circumstances constituting the fraud or mistake.” Fed. R. Civ. P. 9 (b). This
pleading requirement applies to allegations of fraud not claims of fraud “so whether the rule applies depends
on the plaintiffs’ factual allegations.” Borsellino v. Goldman Sachs Group, Inc., 477 F.3d 502, 507 (7th Cir.
2007). “A claim that ‘sounds in fraud’- in other words, one that is premised upon a course of fraudulent
conduct” is subject to the heightened pleading requirements of the rule, whether or not the claim is for fraud.
See id. This rule is designed to compel a plaintiff making allegations of fraud “to do more pre-complaint
investigation to assure that the claim is responsible and supported, rather than defamatory and extortionate.”
Id.
The allegations against defendant here are clearly “premised upon a course of fraudulent conduct.”
Plaintiff says in effect that defendant defrauded it by getting MVL to take cattle from plaintiff knowing
defendant would not honor the checks MVL tendered in payment. Defendant then is alleged to have seized
the proceeds of MVL’s resale of the cattle from MVL’s account at defendant in order to reduce MVL’s debt
to defendant. “A complaint alleging fraud must provide the who, what, when, where, and how” to meet the
pleading standard of Rule 9 (b). Id. Plaintiff’s allegations fall short of this standard. Who at defendant spoke
with whom at MVL and told that person or persons to issue NSF checks and to sell the purchased cattle and
deposit the funds with defendant so defendant could seize them? When and where did these conversations
occur? The answer to these questions must be alleged because the underlying factual scenario of this case
(bank customer in financial trouble, bank concerned about repayment of customer’s loan, large deposit enters
customer’s account, bank sets-off deposit to reduce customer’s loan to bank) is a fairly common scenario and
such set-offs are usually lawful. Plaintiff must allege more facts that show defendant was acting to fleece
plaintiff rather than simply prudently acting to collect its outstanding loan to MVL. Because the requirements
of rule 9 (b) are not met, plaintiff’s complaint will be dismissed without prejudice.
There are also deficiencies in some of plaintiff’s claims beyond the Rule 9 (b) issue which must be
addressed in any amended complaint. Count I asserts conversion of plaintiff’s property. Plaintiff contends it
had an interest in the cattle sold and in the proceeds of the sale of the cattle which was greater than the
interest of defendant and that defendant deprived plaintiff of its interest in the cattle and the money payable to
plaintiff by virtue of the sale of the cattle by MVL. “In order to state a claim for conversion, a plaintiff must
establish that it has a right to certain property, that it has a present and unconditional right to immediate
possession of the property, that it made a demand for the return of that property, and that the defendant
wrongfully and without authorization refused to return it.” Safeco Ins. Co. v. Wheaton Bank & Trust Co., No.
07 C 2397, 2008 WL 216396 * 2 (N.D. Ill. Jan. 24, 2008). “Under Illinois law, when money is deposited
with a bank, the bank takes title and becomes a debtor to the depositor, who then becomes the bank’s
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STATEMENT - OPINION
creditor.” Id. Only the depositor has an immediate and unconditional right to possess the amount deposited.
Id. A conversion action may be maintained by a depositor when bank account funds are specifically
identifiable from a general debt owed to an account holder. Travelers Casualty & Surety Co. v. Paderta, No.
10 C 0406, 2010 WL 5419065 * 4 (N.D. Ill. Dec. 23, 2010). “Deposits are separable from the general debt
owed to an account holder when the deposits are identifiable and issue from an outside source.” Id. A
subrogee of a depositor can assert the depositor’s right to such identifiable funds. Id. at *5.
Plaintiff alleges identifiable funds from an outside source– the payments from MVL’s sale of the
cattle. However, plaintiff is not the depositor, MVL is, and plaintiff is not the subrogee of MVL. Plaintiff
has not alleged a basis for it to have a present and unconditional right to the funds and, therefore, fails to state
a claim for conversion.
Count II asserts defendant tortiously interfered with plaintiff’s business relationship or expectancy
with MVL. The elements of a claim for tortious interference with an existing contractual relationship are “(1)
the existence of a valid enforceable contract between the plaintiff and another; (2) the defendant’s awareness
of the relationship; (3) the defendant’s intentional and unjustified inducement of a breach of the contract
which causes a subsequent breach by the other, and (4) damages.” Premier Transport, Ltd. v. Nextel
Communications, Inc., No. 02 C 4536, 2002 WL 31507167, * 1 (N.D. Ill. Nov. 12, 2002). The elements for
interference with a business expectancy are “(1) a reasonable expectation of entering into a valid business
relationship; (2) the defendant’s knowledge of the plaintiff’s expectancy; (3) purposeful interference by the
defendant that prevents the plaintiff’s legitimate expectancy from ripening into a valid business relationship;
and (4) damages to the plaintiff resulting from such interference.” Id.
Plaintiff argues that the “act that forms the basis of the tortious interference- the seizure of the
proceeds- was directed at a third party, [MVL].” However, defendant’s seizure of the proceeds from MVL’s
account is not an inducement of a breach. Defendant did not persuade MVL not to perform its end of the
bargain with plaintiff. Defendant prevented MVL’s performance from occurring by seizing the funds in
MVL’s account and applying them to MVL’s debt to defendant. In the absence of inducement of MVL by
defendant to not perform under MVL’s agreement with plaintiff, a tortious interference claim cannot stand.
Count III is for unjust enrichment. To state a claim for unjust enrichment, “plaintiff must allege that
the defendant has unjustly retained a benefit to the plaintiff’s detriment, and that defendant’s retention of the
benefit violates the fundamental principles of justice, equity, and good conscience.” Radioactive Energy of
Illinois, L.L.C. v. GZ Gourmet Foods & Beverage, Inc., No. 08 C 311, *4 (N.D. Ill. Feb. 24, 2009). (Internal
quotation marks and citation omitted). Plaintiff alleges defendant retained the benefit of the proceeds
received by MVL from the slaughter of the cattle to plaintiff’s detriment because the seizure of the proceeds
prevented payment to plaintiff by MVL of the purchase price of the cattle. But for plaintiff supplying MVL
with the cattle, no proceeds would have been generated from their slaughter and defendant would not have
been able to seize the funds to reduce MVL’s outstanding obligation to defendant. In cases such as this,
where plaintiff is seeking recovery for a benefit not conferred directly on defendant by plaintiff but where the
benefit was transferred to defendant by a third party (MVL) retention of the benefit by defendant is unjust
where “(1) the benefit should have been given to the plaintiff, but the third party mistakenly gave it to the
defendant instead, (2) the defendant procured the benefit from the third party through some type of wrongful
conduct, or (3) the plaintiff for some other reason [has] a better claim to the benefit than the defendant.” HPI
Health Care Services, Inc. v. Mt. Vernon Hospital, Inc., 545 N.E.2d 672, 679 (Ill. 1989).
Plaintiff does not argue that its complaint alleges any of the three bases set forth in HPI for finding
unjust enrichment where the benefit was transferred to defendant by a third party. Assuming plaintiff’s basis
for this claim is “wrongful conduct,” plaintiff will need to be mindful of Rule 9 (b) in it’s amended
complaint.
Count VI asserts a claim for negligence and Count VIII a claim for negligent misrepresentation.
Plaintiff alleges, in Count VI, that defendant “had a duty to act reasonably to avoid or to prevent injury, harm,
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STATEMENT - OPINION
damages, financial losses, and economic damages to [plaintiff] in [defendant’s] dealings with and involving
[plaintiff.] Plaintiff does not identify the source of the duty in it’s complaint. In its brief, plaintiff does not
differentiate between its negligence and its negligent misrepresentation counts but argues generally that
defendant’s liability is premised on “a negligent misrepresentation by a defendant in the business of supplying
information for the guidance of others in their business transactions” citing Catalan v. GMAC Mortgage
Corp., 629 F.3d 676, 693 (7th Cir. 2011). However, nothing alleged in the complaint indicates defendant was
in the business of supplying information for the guidance of plaintiff or any other non-customer of defendant.
Count VI and Count VIII fail to state claims for negligence or negligent misrepresentation.
Count IX claims equitable estoppel. Defendant argues equitable estoppel is not a cause of action
recognized in Illinois and plaintiff makes no response to this argument in its brief. Illinois appears to
recognize equitable estoppel only as a defense. See Newton Tractor Sales, Inc. v. Kubota Tractor Corp., 906
N.E.2d 520, 526 (Ill. 2009) (equitable estoppel is available only as a defense, while promissory estoppel can
be used as the basis of a cause of action for damages.)
Defendant also challenges plaintiff’s prayer for punitive damages in all counts. The request for
punitive damages falls with the dismissal of the complaint as set forth above. A determination of the
propriety of punitive damages must await the more specific re-pleading required by this order and will be revisited prior to trial.
For the foregoing reasons, plaintiff’s complaint is dismissed in its entirety without prejudice. Plaintiff
shall file an amended complaint consistent with this order on or before August 8, 2012.

1. In its memorandum in opposition to defendant’s motion to dismiss, plaintiff says defendant
seized “the proceeds from the slaughter of the cattle [making] it impossible for [MVL] to pay.”

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