FIRST FINANCIAL BANK, N.A. v. CITIBANK, N.A. et al

Filing 132

ENTRY granting in part and denying in part Pltf's 86 Motion for Partial Summary Judgment (see Entry for details). Signed by Judge William T. Lawrence on 7/27/2012. (SWM)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION
FIRST FINANCIAL BANK, N.A.,

)
)
Plaintiff,
)
)
vs.
) CAUSE NO. 1:11-cv-226-WTL-DML
)
CITIBANK, N.A., and MISTY Y. McDONALD, )
)
Defendants.
)
ENTRY ON MOTION FOR SUMMARY JUDGMENT
This cause is before the Court on the motion for partial summary judgment filed by
Plaintiff First Financial Bank, N.A. (“First Financial”) against Defendant Misty McDonald (dkt.
no. 86). The motion is fully briefed and the Court, being duly advised, GRANTS IN PART
AND DENIES IN PART the motion as set forth below.
I. SUMMARY JUDGMENT STANDARD
Federal Rule of Civil Procedure 56(a) provides that summary judgment is appropriate “if
the movant shows that there is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” In ruling on a motion for summary judgment, the
admissible evidence presented by the non-moving party must be believed and all reasonable
inferences must be drawn in the non-movant’s favor. Hemsworth v. Quotesmith.com, Inc., 476
F.3d 487, 490 (7th Cir. 2007); Zerante v. DeLuca, 555 F.3d 582, 584 (7th Cir. 2009) (“We view
the record in the light most favorable to the nonmoving party and draw all reasonable inferences
in that party’s favor.”). However, “[a] party who bears the burden of proof on a particular issue
may not rest on its pleadings, but must affirmatively demonstrate, by specific factual allegations,
that there is a genuine issue of material fact that requires trial.” Id.

II. RELEVANT FACTS
This is the third in a trilogy of summary judgment rulings in this case. The Court
assumes that the reader is familiar with its two previous rulings and therefore familiar with the
events out of which this case arises. Therefore, this recitation of facts generally is limited to
those facts that are directly relevant to the issues resolved herein. Those facts, viewed in the
light most favorable to McDonald, the non-moving party, are as follow.
McDonald, an attorney in Terre Haute, Indiana, was contacted on June 23, 2010, by
someone who purported to be seeking legal assistance. Specifically, the person told McDonald
that his Arizona company was seeking an attorney to help collect money it was owed by
Accurate Manufacturing, an Indiana company. They agreed that McDonald would be paid 10%
of whatever money she collected. On July 5, 2010, McDonald was informed by email that upon
being informed that an attorney had been hired to collect the money, Accurate Manufacturing
had agreed to make a partial payment on its debt by July 7th and a second payment by July 23rd.
On July 7th, McDonald received in the mail a letter that purported to be from Accurate
Manufacturing along with a check. The check purported to be Citibank Official Check No.
260356932, dated July 2, 2010, in the amount of $298,750.00; the remitter was listed as
Accurate Manufactured Products Group, Inc., and the check was made payable to “Misty Y.
McDonald, Attorney at Law” (the “Check”). McDonald wrote “For Deposit Only” on the back
of the Check, took it to the local branch of her bank, First Financial, and deposited it into her
IOLTA account. During the course of that transaction, McDonald explained to bank manager
Bill Farris that the check related to a client she had never represented before and did not know.
She inquired of Farris when the bank would know if the check was good. Farris replied that they

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would know by the morning of Friday, July 9th. McDonald replied that she “definitely won’t do
anything with this until I know it’s good.” McDonald Deposition at 27.
McDonald’s purported client in Arizona requested that she wire 90% of the amount of
the Check to the Bank of China in Beijing, China. The client explained that it needed to pay its
supplier in China as quickly as possible so that the supplier did not stop shipping them parts.
On the morning of July 9th, McDonald called First Financial and asked whether the
Check had “cleared.” The person who answered the phone, whose name McDonald does not
know, replied “Well, yeah, it’s here.” McDonald then went to the First Financial branch and,
pursuant to the instructions she had received from her purported client in Arizona, wired 90% of
the amount of the Check–$268,825.00–to the Bank of China. She then transferred the remaining
10%–approximately $29,000–into her own business account as her fee.
The wire transfer request was reviewed by bank manager Farris, who was tasked with
determining whether McDonald’s account had “bonafide funds” in it to cover the wire transfer.
It was then reviewed by another bank employee, who was tasked with confirming that Farris had
conducted the required inquiry.
Citibank determined that no bank account existed for Accurate Manufacturing at
Citibank and refused to pay the Check. First Financial first received notice of Citibank’s
nonpayment of the Check on July 14, 2010; it notified McDonald that same day that there was an
issue with the Check. First Financial also attempted to recall McDonald’s wire transfer, but was
notified by the Bank of China on July 19th that it had paid the beneficiary of McDonald’s wire
transfer on July 12th and the request to return the wire transfer would not be honored. First
Financial set off funds on deposit in McDonald’s accounts at First Financial in the total amount

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of $26,172.21, but has been unable to recover the remaining $272,577.79.
III. DISCUSSION
In its motion for partial summary judgment, First Financial moves for summary judgment
with regard to its claim against McDonald for breach of the transfer warranties set forth in Ind.
Code 26-1-3.1-416(a), which provides, in relevant part:
A person who transfers an instrument for consideration warrants to the transferee
and, if the transfer is by endorsement, to any subsequent transferee that: (1) the
warrantor is a person entitled to enforce the instrument; (2) all signatures on the
instrument are authentic and authorized; (3) the instrument has not been altered.
McDonald concedes, as she must, that she breached these warranties by presenting a counterfeit
check to First Financial for deposit into her account and that the transfer warranties are not
disclaimable. Accordingly, First Financial is entitled to summary judgment on that issue.
McDonald does not concede, however, that First Financial is entitled to any damages for that
breach and, for the reasons set forth below, the Court finds that First Financial is not entitled to
summary judgment on the issue of damages.
Indiana Code 26-1-3.1-416(b) provides that “[a] person to whom the warranties under
subsection (a) are made and who took the instrument in good faith may recover from the
warrantor as damages for breach of warranty an amount equal to the loss suffered as a result of
the breach, but not more than the amount of the instrument plus expenses and loss of interest
incurred as a result of the breach.” McDonald argues that a question of fact exists regarding
whether it was her breach that caused First Financial’s loss or whether it was First Financial’s
own negligence.
First, McDonald argues that First Financial failed to exercise ordinary care when it

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endorsed the Check1 because its endorsement was illegible. In light of the fact that the Court has
ruled as a matter of law that the endorsement was not illegible,2 this argument is without merit.
Next, McDonald, citing Branch Banking & Trust Co. v. Witmeyer, 2011 WL 3297682
(E.D. Va. 2011), argues that First Financial had a common law duty to use ordinary care in its
communications with her, its customer, and that it breached that duty by telling her that the
Check had cleared when it had not. Witmeyer is directly on point and does, indeed, support
McDonald’s argument. The problem is that Witmeyer applies Virginia law, and McDonald
neither points to any case applying Indiana law in which a similar duty has been found nor cites
to any principle of Indiana law which would guide this Court in determining whether the Indiana
Supreme Court would resolve the issue in the same way as the Witmeyer court did. The Court
declines to connect these dots on McDonald’s behalf. See Castro v. United States, 540 U.S. 375,
386 (2003) (Scalia, J., concurring) (“Our adversary system is designed around the premise that
the parties know what is best for them, and are responsible for advancing the facts and arguments
entitling them to relief.”).
Finally, McDonald argues that the facts of record viewed in the light most favorable to
her support the defense of equitable estoppel. First Financial concedes that “it is conceivable
that a party can assert an equitable estoppel defense to bar a transfer-warranty claim” but notes
that “McDonald does not cite to any Indiana cases establishing such a defense.” First Financial
Reply at 1. McDonald does, however, cite to Kacak v. Bank Calumet, N.A., 869 N.E.2d 1239

1

Indiana Code 26-1-4-202 provides that a collecting bank must exercise ordinary care in
presenting an item.
2

This ruling occurred after the instant motion was briefed, so McDonald cannot be faulted
for making the argument.
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(Ind. App. 2007), in which the court noted the following:
We further recognize that the UCC specifically provides that principles of law
and equity supplement the provisions of the UCC. See I.C. § 26–1–1–103. In
other words, where not specifically provided for by statute, a bank may be
accountable for making material misrepresentations under a theory of actual or
constructive fraud or some other principle of law and equity which may be
applicable to the particular situation.
Kacak v. Bank Calumet, N.A., 869 N.E.2d 1239, 1243 (Ind. App. 2007) (footnote omitted). The
Court agrees with McDonald that Indiana law recognizes equitable estoppel as an available
defense to a U.C.C. breach of warranty action such as the one advanced by First Financial in this
case.
First Financial also argues that the facts as alleged by McDonald cannot, as a matter of
law, support an equitable estoppel defense. The Court disagrees. Under Indiana law, “‘The
party claiming equitable estoppel must show its (1) lack of knowledge and of the means of
knowledge as to the facts in question, (2) reliance upon the conduct of the party estopped, and
(3) action based thereon of such a character as to change his position prejudicially.’” Town of
New Chicago v. City of Lake Station ex rel. Lake Station Sanitary Dist., 939 N.E.2d 638, 653
(Ind. App. 2010) (quoting Money Store Inv. Corp. v. Summers, 849 N.E.2d 544, 547 (Ind.2006)).
In this case, the evidence of record viewed in the light most favorable to McDonald are
that she did not have any independent knowledge or means of acquiring knowledge regarding the
status of the Check other than asking First Financial, which satisfies the first element of the
equitable estoppel defense. With regard to the second and third elements, McDonald alleges that
she made it clear to First Financial’s employees that she did not want to “do anything” with the
money from the Check until she knew the Check was good; First Financial’s employees told her
that they would know by Friday if the Check was good; she inquired on Friday and was told by a
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First Financial employee that the check had cleared; and First Financial employees processed the
wire transfer knowing that it was important for McDonald to know that the Check was good
before the funds were transferred. These facts, if credited, would support a finding that
McDonald relied upon the statements of First Financial and, based upon that reliance, changed
her position by wiring the money to China.
First Financial argues that McDonald nevertheless cannot prevail on her equitable
estoppel claim because “‘[e]quitable estoppel requires a showing that the party seeking estoppel
relied to his detriment upon some intentionally misleading statement or conduct of the party to
be estopped,’” First Financial Reply at 8 (quoting Santini v. Town of New Harmony, 624 F.
Supp. 11, 14 (S.D. Ind. 1984)), and McDonald does not allege that First Financial’s employees
intentionally misled her. While First Financial accurately quotes the Santini case, the quoted
language is not an accurate statement of Indiana law. It is true that “[t]he basis for equitable
estoppel is fraud, either actual or constructive, on the part of the person estopped.” Town of New
Chicago v. City of Lake Station ex rel. Lake Station Sanitary Dist. 939 N.E.2d 638, 653 (Ind.
App. 2010). Unlike actual fraud, constructive fraud does not require the intent to mislead;
rather, constructive fraud “arises by operation of law from a course of conduct which, if
sanctioned by law, would secure an unconscionable advantage, irrespective of the existence or
evidence of actual intent to defraud.” Paramo v. Edwards, 563 N.E.2d 595, 598 (Ind. 1990)
(citation omitted) (emphasis added). Therefore “[i]t is well settled that there need not be any
design to defraud in order to constitute an estoppel. It is sufficient if the conduct of the party has
been knowingly such as would make it unconscionable on his part to deny what his conduct had
induced another to believe and act upon in good faith and without knowledge of the facts.” Id.

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“The proper function of equitable estoppel is the prevention of fraud, actual or
constructive, and the doctrine should always be so applied as to promote the ends of justice and
accomplish that which ought to be done between man and man.” 28 Am.Jur.2d Estoppel &
Waiver § 29 (quoted in Town of New Chicago, 939 N.E.2d at 653). The facts of record viewed
in the light most favorable to McDonald would support the application of the equitable estoppel
defense in this case3 to relieve McDonald of her liability for breach of the U.C.C. transfer
warranties because she relied upon incorrect information provided to her by First Financial in
deciding to wire the money when she did and it was that decision that led to the bulk of the funds
from the Check being lost.4 Accordingly, the Court finds that First Financial is not entitled to
summary judgment on the issue of whether it is entitled to any damages as a result of
McDonald’s breach of the U.C.C.’s transfer warranties.
IV. CONCLUSION
First Financial’s motion for partial summary judgment is GRANTED IN PART in that
the Court finds, as a matter of law, that McDonald breached the U.C.C.’s transfer warranties
when she presented the Check for deposit. First Financial’s motion is DENIED in all other
respects.
_______________________________

SO ORDERED: 07/27/2012

Hon. William T. Lawrence, Judge
United States District Court
Southern District of Indiana

3

Neither party did a particularly thorough job of discussing the requirements of the
equitable estoppel defense under Indiana law. The Court has addressed only the arguments made
by the parties and does not profess to have made a thorough examination of Indiana law on the
subject.
4

Neither party addresses the fact that First Financial has lost a few thousand dollars more
than the amount of the wire transfer; the Court is unaware of when those additional funds were
withdrawn by McDonald.
8

Copies to all counsel of record via electronic notification

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