Peoples Bank SB v. Reliable Fast Cash LLC

Filing 42

OPINION AND ORDER: The Court DENIES the Defendant's Motion to Dismiss 21 . Signed by Chief Judge Theresa L Springmann on 7/31/2018. (jss)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF INDIANA
PEOPLES BANK SB,
Plaintiff,
v.
RELIABLE FAST CASE LLC, d/b/a/ KCG,
Defendant.

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CAUSE NO.: 2:16-CV-399-TLS

OPINION AND ORDER
Plaintiff Peoples Bank SB filed a Complaint [ECF No. 1] against Defendant Reliable Fast
Cash asserting claims of conversion, implied bailment, and unjust enrichment. On November 1,
2017, the Defendant filed a Motion to Dismiss [ECF No. 21] for failure to state a claim under
Rule 12(b)(6) of the Federal Rules of Civil Procedure. The Plaintiff responded [ECF No. 22] on
November 15, 2017, and the Defendant replied [ECF No. 25] on November 22, 2017. This
Motion is now fully briefed and ripe for review.

BACKGROUND
The Plaintiff is an Indiana State Savings Bank and an Indiana corporation with its
principal place of business in Munster, Indiana. The Defendant is a New York limited liability
company. Non-party Portage Electric Supply Corporation (“Portage Electric”) is an Indiana
corporation with its principal place of business in Portage, Indiana. Between 2012 and 2016, the
Plaintiff extended credit to Portage Electric in excess of $490,000 via various business loan
agreements and promissory notes. Portage Electric executed a series of security agreements that
granted the Plaintiff a security interest in “all inventory, chattel paper, accounts, equipment and
general intangibles and accounts receivables” of Portage Electric. (Compl. ¶ 8, ECF No. 1.) The

Plaintiff filed a UCC-1 Financing Statement, notifying the public that it held a properly perfected
security interest in the following collateral:
All of debtor’s assets now owned and hereinafter acquired including, without
limitation, all accounts, inventory, equipment, general intangibles, documents,
investment property, instruments, chattel paper and accounts receivable (as those
terms are defined in the Indiana Uniform Commercial Code in effect on the date of
this filing, or as amended or revised from time to time).
(Compl. ¶ 10.)
The Plaintiff maintained a properly perfected, first-priority lien upon all of Portage
Electric’s accounts, assets, and accounts receivable. Unbeknownst to the Plaintiff, Portage
Electric sold a percentage of its accounts receivable to the Defendant through a “Purchase and
Sale of Future Receivables Agreement” in June 2015 (“Purchase Agreement”). Before entering
into the Agreement, the Defendant allegedly performed an Indiana Uniform Commercial Code
lien search, and the Plaintiff’s lien was reported on that search. In October 2015, the Defendant
began to debit Portage Electric’s checking account on a regular basis as a means of collecting
Portage Electric’s accounts receivable and other collateral belonging to the Plaintiff. 1 The
Plaintiff therefore asserts that the Defendant had actual knowledge of the Plaintiff’s lien prior to
entering into the Purchase Agreement. In the alternative, the Plaintiff asserts that the Defendant
was grossly negligent in failing to perform a UCC lien search.
Portage Electric defaulted on its obligations to the Plaintiff. The Defendant collected
$99,297.50 of Portage Electric’s accounts receivable and assets in 2015, and $48,546.00 of
Portage Electric’s accounts receivable and assets in 2016. According to the Plaintiff, the
Defendant “acted willfully and/or with such gross negligence to indicate a wanton disregard” of

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While the Complaint alleges that the Defendant’s debits from the checking account occurred on a
monthly basis, both parties assert in their briefs that the debits occurred daily. For the purpose of this
motion, the Court finds the frequency of the debits to be irrelevant.
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the Plaintiff’s rights to Portage Electric’s accounts receivable and funds collected therefrom. The
Plaintiff therefore brought this case, asserting three tort claims against the Defendant in its
Complaint: conversion, breach of implied bailment, and unjust enrichment.

STANDARD OF REVIEW
Federal Rule of Civil Procedure 12(b)(6) allows a complaint to be dismissed if it fails to
“state a claim upon which relief can be granted.” To survive a Rule 12(b)(6) motion, the
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 (2009) (quoting Bell Atlantic
Corp. v. Twombly, 550 U.S. 544 (2007)). A plaintiff “must plead some facts that suggest a right
to relief that is beyond the ‘speculative level.’” Atkins v. City of Chi., 631 F.3d 823, 832 (7th Cir.
2011) (citation omitted). “This means that the complaint must contain allegations plausibly
suggesting (not merely consistent with) an entitlement to relief.” Lavalais v. Village of Melrose
Park, 734 F.3d 629, 632–33 (7th Cir. 2013) (internal quotation marks and citations omitted). All
well-pleaded facts must be accepted as true, and all reasonable inferences from those facts must
be resolved in the plaintiff’s favor. Pugh v. Tribune Co., 521 F.3d 686, 692 (7th Cir. 2008).
However, pleadings consisting of no more than mere conclusions are not entitled to the
assumption of truth. Iqbal, 556 U.S. at 678–79. This includes legal conclusions couched as
factual allegations, as well as “[t]hreadbare recitals of the elements of a cause of action,
supported by mere conclusory statements.” Id. at 678 (citing Twombly, 550 U.S. at 555).
When reviewing a motion to dismiss, a court normally considers only the factual
allegations of the complaint and any reasonable inferences that can be drawn from those
allegations. See Gessert v. United States, 703 F.3d 1028, 1033 (7th Cir. 2013). A court may also

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examine “documents attached to the complaint, documents that are critical to the complaint and
referred to in it, and information that is subject to proper judicial notice.” Geinosky v. City of
Chi., 675 F.3d 743, 745 n.1 (7th Cir. 2012) (collecting cases); see also Adams v. City of
Indianapolis, 742 F.3d 720, 729 (7th Cir. 2014) (“[D]ocuments attached to a motion to dismiss
are considered part of the pleadings if they are referred to in the plaintiff’s complaint and are
central to his claim.”). In ruling on a Rule 12(b)(6) motion, if “matters outside the pleadings are
presented to and not excluded by the court, the motion must be treated as one for summary
judgment under Rule 56.” Fed. R. Civ. P. 12(d). In such a circumstance, “[a]ll parties must be
given a reasonable opportunity to present all the material that is pertinent to the motion.” Id. The
court has discretion to either consider matters outside the pleadings and construe a defendant’s
motion as a motion for summary judgment, or exclude those matters from consideration and
proceed pursuant to Rule 12. See Levenstein v. Salafsky, 164 F.3d 345, 347 (7th Cir. 1998)
(district court was within its discretion in choosing to handle the case as a motion to dismiss,
rather than converting it to a motion for summary judgment).

ANALYSIS
In support of its Motion to Dismiss, the Defendant attaches an Affidavit [ECF No. 21-1]
executed by Mendy Chanin and the Purchase Agreement [ECF No. 21-2]. The Plaintiff, in
support of its Response, attaches an Affidavit [ECF No. 22-1] executed by Daniel W. Moser.
The Agreement is specifically referenced in the Complaint, and thus, the Court can consider it
without converting the Motion to one for summary judgment. However, the parties’ Affidavits
were not attached or referred to in the Complaint, and neither party has argued that the Court
should convert this Motion to Dismiss into one for summary judgment. The Court finds little to

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be gained by converting the Defendant's Motion to a motion for summary judgment, and, as
such, the Court will exclude the parties’ Affidavits and proceed to consider the Motion pursuant
to Rule 12(b)(6). Cf. Rutherford v. Judge & Dolph Ltd., 707 F.3d 710, 713 (7th Cir. 2013)
(holding that the district court erred by considering affidavit because it was “not part of the
pleadings” and “not ‘referred to in the plaintiff[s’] complaint’” (quoting 188 LLC v. Trinity
Indus. Inc., 300 F.3d 730, 735 (7th Cir. 2002))).
While the Plaintiff’s claims are common law cause of action, they are all based upon the
theory that the Uniform Commercial Code (“UCC”), codified under Title 26 of the Indiana Code,
barred the transfer of funds to the Defendant. The Defendant argues that the Plaintiff’s theories
of recovery fail as a matter of law because the UCC provides that a party may receive funds from
a deposit account even if a third party holds a security interest in that account:
A transferee of funds from a deposit account takes the funds free of a security
interest in the deposit account unless the transferee acts in collusion with the debtor
in violating the rights of the secured party.
Ind. Code § 26-1-9.1-332(b) (emphasis added); see also Ind. Code. § 26-1-9.1-332 (notes from
UCC comment) (“This section affords broad protection to transferees who take funds from a
deposit account and to those who take money.”). A “deposit account” is defined as “a demand,
time, savings, passbook, or similar account maintained with a bank . . . .” Ind. Code § 26-1-9.1102(29). The Defendant contends that because the checking account from which it deducted
Portage Electric’s funds was a “deposit account,” the Defendant was able to retain Portage
Electric’s funds free of claims by the Plaintiff, absent any collusion between the Defendant and
Portage Electric. The Defendant asserts that the Complaint fails to allege that the Defendant
colluded or otherwise acted in concert with Portage Electric to wrongfully deprive the Plaintiff of
its security interest in the checking account. See Keybank Nat’l Ass’n v. Ruiz Food Prods., Inc.,

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No. CV 04-296, 2005 WL 2218441, at *7 (D. Idaho Sept. 9, 2005) (“[A]bsent a showing of
collusion, an interest in not disturbing the finality of a completed transaction trumps the interest a
secured creditor may have in tracing proceeds from secured inventory through a checking
account into the hands of a supplier.”); Amegy Bank Nat. Ass’n v. DB Private Wealth Mortg.,
Ltd., No. 2:12-CV-243, 2014 WL 791503, at *7 (M.D. Fla. Feb. 24, 2014) (“[T]he moving party
must show the transferee ‘was affirmatively engaged in wrongful conduct.’”) (quoting UCC § 8503 cmt. 3)). Whether a party acted collusively is generally a question of fact reserved for a jury.
Amegy Bank, 2014 WL 791503 at *8 (denying summary judgment on UCC § 9-332 affirmative
defense). 2
The Plaintiff does not deny that Indiana Code § 26-1-9.1-332(b) applies in the instant
case, nor that it bears the burden of proving that the Defendant colluded with Portage Electric.
The parties agree that to establish collusion, the UCC applies the Restatement of Torts (Second)
§ 876. See Amegy Bank, 2014 WL 791503 at *7 n.7; In re Montagne, 413 B.R. 148, 160 (Bankr. D.
Vt. 2009). The Plaintiff relies on two out of the three alternative tests to demonstrate collusion

identified by the Restatement: a party is subject to liability for acting in concert if (1) he “knows
that the other’s conduct constitutes a breach of duty and gives substantial assistance or
encouragement to the other so to conduct himself” or (2) “gives substantial assistance to the
other in accomplishing a tortious result and his own conduct, separately considered, constitutes a
breach of duty to the third person.” Restatement (Second) of Torts § 876.
While the Complaint does not specifically allege that the Defendant colluded with
Portage Electric, the Plaintiff contends that its allegations are nevertheless sufficient under the

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The Court notes that the cases cited by Defendant address the issue of proving collusion at the summary
judgment stage, rather than the sufficiency of complaint allegations. See, e.g., Amegy Bank, 2014 WL
791503; Keybank, 2005 WL 2218441; In re Montagne, 413 B.R. 148 (Bankr. D. Vt. 2009).
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notice pleading standard. The Court agrees. See Hatmaker v. Mem’l Med. Ctr., 619 F.3d 741,
743 (7th Cir. 2010) (“[P]laintiffs in federal courts are not required to plead legal theories.”)
(citations omitted). As noted above, the Court must accept all well-pleaded facts as true, and
resolve all reasonable inferences from those facts in the Plaintiff’s favor to dispose of the instant
Motion to Dismiss. Pugh, 521 F.3d at 692. “Malice, intent, knowledge, and other conditions of a
person’s mind may be alleged generally.” Fed. R. Civ. Pro. 9(b).
The Complaint alleges that in 2012, the Plaintiff filed a UCC-1 financing statement, and
thus has a superior interest, in Portage Electric’s checking account and the proceeds of Portage
Electric’s accounts receivable in the checking account. 3 The Complaint further alleges that
Portage Electric and the Defendant executed a “Purchase and Sale of Future Receivables
Agreement” in 2015, whereby Portage Electric sold a percentage of its accounts receivable to the
Defendant, which thereafter began to debit Portage Electric’s checking account on a regular basis
as a means of collecting Portage Electric’s accounts receivable. It also alleges that the Defendant
had actual knowledge of the Plaintiff’s lien prior to entering into the Purchase Agreement with
Portage Electric, and that the Defendant’s continued control, dominion and ownership over
Portage Electric’s accounts receivable and proceeds was willful, unauthorized and wrongful.
These allegations are sufficient to draw an inference that the Defendant knew that Portage
Electric’s conduct constituted a breach of duty and gave substantial assistance or encouragement
to Portage Electric to so conduct itself, i.e., that the Defendant colluded or acted in concert with

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Plaintiff asserts that it has at all times held a properly perfected first priority interest in Portage’s
checking account and, therefore, the proceeds of the accounts receivable held in that account. “A security
interest in a deposit account may be perfected only by control . . . .” Ind. Code § 26-1-9.1-312(b)(1). “A
secured party has control of a deposit account if: (1) the secured party is the bank with which the deposit
account is maintained.” Ind. Code § 26-1-9.1-104(a). Such a secured party “has control, even if the debtor
retains the right to direct the disposition of funds from the deposit account.” Ind. Code § 26-1-9.1-104(b).
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Portage Electric to deprive the Plaintiff of Portage Electric’s collateral. See Restatement
(Second) of Torts § 876.
The Defendant maintains that it had no reason to believe that receiving Portage Electric’s
funds constituted a breach of Portage Electric’s duty because the checking account was available
for use by Portage Electric, and the Plaintiff did not object to the Defendant depositing, or
withdrawing for that matter, money into the account on a regular basis. The Defendant contends
that because the Complaint alleges that the Plaintiff maintained Portage Electric’s checking
account, the Plaintiff was aware of the Defendant’s debits from Portage Electric’s checking
account. At this stage of the litigation, the Court must consider the Complaint allegations, and
inferences drawn therefrom, in the light most favorable to the Plaintiff. Therefore, the Court
cannot draw the inference that the Plaintiff was aware of the Defendant’s debits from Portage
Electric’s checking account as the Defendant urges.
The Defendant argues that Plaintiff “must prove collusion by establishing ‘more than a
defendant's knowledge of a superior interest.’” Amegy Bank, 2014 WL 791503, at *7 (quoting
Gen. Elec. Capital Corp. v. Union Planters Bank, N.A., 409 F.3d 1049, 1056 (8th Cir. 2005)).
The Defendant cites the Supreme Court’s admonition that “a conclusory allegation of agreement
at some unidentified point does not supply facts adequate to show illegality . . . [T]hey must be
placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct
that could just as well be independent action.” Twombly, 550 U.S. at 557. The Defendant argues
that the Plaintiff makes only conclusory statements that the Defendant conspired and colluded
with Portage Electric without alleging any facts that would plausibly suggest conspiracy and
collusion. But unlike Twombly’s allegations of parallel conduct, here the Complaint alleges that
the Defendant and Portage Electric entered into a written agreement whereby the Defendant

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knowingly debited Portage Electric’s checking account as a means of collecting collateral in
which the Plaintiff held a perfected security interest. The Court finds that the Complaint provides
the Defendant with fair notice of what the claims are and the grounds upon which they rest and
therefore defeats a Rule 12(b) motion to dismiss. Whether the Plaintiff can prove that the
Defendant in fact colluded with Portage Electric is an issue for another day. See Smith v. Lake
Cty., No. 2:15-CV-123, 2017 WL 568590, at *7 (N.D. Ind. Feb. 13, 2017) (“[M]aybe when the
record in this case is more developed Buncich will be able to establish that the Plaintiff’s claim
against him is not sustainable as a matter of law . . . [b]ut we are not there yet.”).
The Defendant argues that the protection afforded under Indiana Code § 26-1-9.1-332(b)
defeats the Plaintiff’s state law claims of conversion, equitable bailment, and unjust enrichment.
Because the Court has found that the Complaint adequately alleges collusion under § 26-1-9.1332(b), the Plaintiff also adequately alleges that the Defendant is not entitled to this protection.
Therefore, these arguments necessarily fail.

CONCLUSION
Accordingly, the Court DENIES the Defendant’s Motion to Dismiss [ECF No. 21].

SO ORDERED on July 31, 2018.
s/ Theresa L. Springmann
CHIEF JUDGE THERESA L. SPRINGMANN
UNITED STATES DISTRICT COURT
FORT WAYNE DIVISION

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