Northeast Bank v. Wells Fargo Bank, N.A. et al

Filing 50

ORDER : IT IS ORDERED THAT:1.Hanovers motion to dismiss Counts II and III of the Second Amended Complaint [Docket No. 42] is GRANTED.2.Counts II and III of the Second Amended Complaint are DISMISSED.(Written Opinion). Signed by Judge Joan N. Ericksen on July 9, 2012. (slf)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Northeast Bank,
Plaintiff,
v.

Civil No. 11-3233 (JNE/JJG)
ORDER

Wells Fargo Bank, N.A., and The Hanover
Insurance Group,
Defendants.

Bradley A. Kletscher, Esq., and Sheldon M. Clark, Esq., Barna, Guzy & Steffen, Ltd., appeared
for Plaintiff Northeast Bank.
Amy L. Schwartz, Esq., Lapp Libra Thomson Stoebner & Pusch, Chartered, appeared for
Defendant Wells Fargo Bank, N.A.
Lawrence D. Mason, Esq., Segal McCambridge Singer & Mahoney, Ltd., appeared for
Defendant The Hanover Insurance Group.

In response to a loss claim, The Hanover Insurance Group (Hanover) issued checks made
payable to Grand Rios Investment, LLC, Northeast Bank, and Alex N. Sill Company, the
insured, the loss payee, and the public adjuster, respectively. Without Northeast Bank’s
endorsement, knowledge, or consent, Wells Fargo Bank, N.A., paid the full amount of the checks
to Grand Rios Investment. After Wells Fargo Bank refused Northeast Bank’s payment demands,
Northeast Bank brought this action. In its Second Amended Complaint, Northeast Bank asserted
a claim against Wells Fargo Bank for conversion under Minn. Stat. § 336.3-420 (2010).
Northeast Bank also asserted claims against Hanover for breach of contract as a third-party
beneficiary and for enforcement of a lost, destroyed, or stolen instrument under Minn. Stat.
§§ 336.3-309 to -310 (2010). The case is before the Court on Hanover’s motion to dismiss for
failure to state a claim. For the reasons set forth below, the Court grants the motion.

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I.

BACKGROUND

Grand Rios Investment had an insurance policy with Hanover through one of Hanover’s
companies, Massachusetts Bay Insurance Company. The policy covered real property located in
Brooklyn Park, Minnesota. Northeast Bank, as the mortgagee of the property, was named as a
loss payee in the policy, which contained the following loss payable clause:
For Covered Property in which both you and a Loss Payee shown in the
Schedule or in the Declarations have an insurable interest, we will:
1.

Adjust losses with you; and

2.

Pay any claim for loss or damage jointly to you and the Loss Payee, as
interests may appear.

After a loss at the property, Grand Rios Investment submitted a claim to Massachusetts
Bay Insurance, which responded by issuing two checks. The first, a check for $100,000, was
dated February 15, 2011, drawn on an account with Deutsche Bank Trust Company, and made
payable to “Alex N. Sill Company and Grand Rios Investment LLC and Northeast Bank.”
Without Northeast Bank’s endorsement, knowledge, or consent, the check was tendered at Wells
Fargo Bank for payment to Grand Rios Investment. Although the check was unambiguously
made payable to joint payees, the check did not bear the endorsement, forged or otherwise, of
Northeast Bank when tendered. Wells Fargo Bank nevertheless paid $100,000 to Grand Rios
Investment. Having received no benefit from the check, Northeast Bank demanded $100,000
from Wells Fargo Bank. The demand was refused.
The second check was made out in the amount of $250,000. That check was dated March
16, 2011, drawn on an account with Deutsche Bank Trust, and made payable to “Grand Rios
Investment LLC and Northeast Bank and Alex N. Sill Company.” Again, without Northeast
Bank’s endorsement (forged or otherwise), knowledge, or consent, the check was tendered at
Wells Fargo Bank for payment to Grand Rios Investment. And again, Wells Fargo Bank paid

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the full amount of the check, $250,000, to Grand Rios Investment. Having received no benefit
from the check, Northeast Bank demanded $250,000 from Wells Fargo Bank. The demand was
refused.
After its demands were refused, Northeast Bank brought this action against Wells Fargo
Bank and Hanover. Northeast Bank’s Second Amended Complaint contains three counts. Count
I is the conversion claim against Wells Fargo Bank, Count II is the claim against Hanover for
breach of contract, and Count III is the claim against Hanover for enforcement of a lost,
destroyed, or stolen instrument. Hanover’s motion to dismiss Counts II and III is before the
Court.
II.

DISCUSSION

In ruling on a motion to dismiss for failure to state a claim under Rule 12(b)(6) of the
Federal Rules of Civil Procedure, a court accepts the facts alleged in the complaint as true and
grants all reasonable inferences in favor of the plaintiff. Crooks v. Lynch, 557 F.3d 846, 848 (8th
Cir. 2009). Although a pleading is not required to contain detailed factual allegations, “[a]
pleading that offers ‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause
of action will not do.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555 (2007)). “To survive 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.’”
Id. (quoting Twombly, 550 U.S. at 570). “The court may consider the pleadings themselves,
materials embraced by the pleadings, exhibits attached to the pleadings, and matters of public
record.” Mills v. City of Grand Forks, 614 F.3d 495, 498 (8th Cir. 2010). “Documents
necessarily embraced by the pleadings include ‘documents whose contents are alleged in a
complaint and whose authenticity no party questions, but which are not physically attached to the

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pleading.’”1 Ashanti v. City of Golden Valley, 666 F.3d 1148, 1151 (8th Cir. 2012) (quoting
Kushner v. Beverly Enters., Inc., 317 F.3d 820, 831 (8th Cir. 2003)).
Hanover asserts that Count II should be dismissed because it issued two checks made
payable to Grand Rios Investment, Northeast Bank, and Alex N. Sill Company, and the checks
were tendered at Wells Fargo Bank for payment to Grand Rios Investment. Northeast Bank
argues that Hanover did not satisfy its obligations under the insurance policy because Northeast
Bank did not endorse the checks and received no funds.
Hanover issued checks made payable to Grand Rios Investment, Northeast Bank, and
Alex N. Sill Company. Delivery to one of the payees constituted delivery to all: “If a check is
payable to more than one payee, delivery to one of the payees is deemed to be delivery to all of
the payees.” Uniform Commercial Code § 3-420 cmt. 1 (2002). Without Northeast Bank’s
endorsement, knowledge, or consent, the checks were tendered at Wells Fargo Bank for payment
to Grand Rios Investment, and Wells Fargo Bank paid the full amount of the checks to Grand
Rios Investment.
Under Minnesota law, a bank should not pay a check made payable to two or more
persons jointly without endorsements of all payees: “If an instrument is payable to two or more
persons not alternatively, it is payable to all of them and may be negotiated, discharged, or
enforced only by all of them.” Minn. Stat. § 336.3-110(d) (2010). Ordinarily, “if a note or an
uncertified check is taken for an obligation, the obligation is suspended to the same extent the
obligation would be discharged if an amount of money equal to the amount of the instrument
were taken.” Id. § 336.3-310(b). “If the payor bank pays a person not entitled to enforce the

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Northeast Bank did not attach copies of the insurance policy or the two checks to its
Second Amended Complaint. Hanover submitted copies of the policy and the checks. The
contents of the documents are not disputed.
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instrument . . . the suspension of the underlying obligation continues because the check has not
been paid. The payee’s cause of action is against the depositary bank or payor bank in
conversion under Section 3-420 or against the drawer under Section 3-309.”2 Uniform
Commercial Code § 3-310 cmt. 4 (2002) (citation omitted). “The payee cannot merely ignore
the instrument and sue the drawer on the underlying contract.” Id. The Court dismisses Count
II.3
Next, Hanover maintains that Count III should be dismissed because the checks were not
lost, stolen, or destroyed. Northeast Bank asserts that it sufficiently alleged that the checks were
lost, stolen, or destroyed.4 Under certain circumstances, a person not in possession of an
instrument may be entitled to enforce it:

2

As noted above, Count I is Northeast Bank’s claim against Wells Fargo Bank for
conversion under Minn. Stat. § 336.3-420. Comment 1 to Uniform Commercial Code § 3-420
provides the following example of conversion in the case of an instrument payable to two or
more persons not alternatively:
[The second sentence of Section 3-420(a)] covers cases in which an instrument is
payable to two persons and the two persons are not alternative payees, e.g. a
check payable to John and Jane Doe. Under Section 3-110(d) the check can be
negotiated or enforced only by both persons acting jointly. Thus, neither payee
acting without the consent of the other, is a person entitled to enforce the
instrument. If John indorses the check and Jane does not, the indorsement is not
effective to allow negotiation of the check. If Depositary Bank takes the check
for deposit to John’s account, Depositary Bank is liable to Jane for conversion of
the check if she did not consent to the transaction. John, acting alone, is not the
person entitled to enforce the check because John is not the holder of the check.
3

Northeast Bank cited Quintana v. Allstate Insurance Co., 378 N.W.2d 40 (Minn. Ct. App.
1985), for the proposition that “[a]n insurance company is in breach of its contract for failing to
pay on a claim if only one party endorses a check and cashes a check that is delivered payable to
both parties.” In Quintana, the Minnesota Court of Appeals concluded that the aggrieved copayee could maintain a suit against the insurance company under a conversion theory because
the insurance company was both drawer and drawee. 378 N.W.2d at 44; see id. at 45 (holding
insurance company liable on the negotiable instruments).
4

Relying on the magistrate judge’s order that granted its motion to amend to add Count III,
Northeast Bank also asserts that the Court should not dismiss Count III under the law-of-the-case
5

A person not in possession of an instrument is entitled to enforce the
instrument if
(1) the person seeking to enforce the instrument (A) was entitled to
enforce the instrument when loss of possession occurred, or (B) has
directly or indirectly acquired ownership of the instrument from a person
who was entitled to enforce the instrument when loss of possession
occurred;
(2) the loss of possession was not the result of a transfer by the person or a
lawful seizure; and
(3) the person cannot reasonably obtain possession of the instrument
because the instrument was destroyed, its whereabouts cannot be
determined, or it is in the wrongful possession of an unknown person or a
person that cannot be found or is not amenable to service of process.
Minn. Stat. § 336.3-309(a); see id. § 336.3-310(b)(4) (“If the obligee is the person entitled to
enforce the instrument but no longer has possession of it because it was lost, stolen, or destroyed,
the obligation may not be enforced to the extent of the amount payable on the instrument, and to
that extent the obligee’s rights against the obligor are limited to enforcement of the instrument.”).
Faced with arguments similar to those made by Northeast Bank and Hanover, courts have
reached different conclusions. Compare Crystaplex Plastics, Ltd. v. Redevelopment Agency, 92
Cal. Rptr. 2d 197, 204 (Cal. Ct. App. 2000) (“[W]e agree with Crystaplex that its use of the
phrases ‘illegally taken,’ ‘unlawful negotiation’ and ‘without Plaintiff’s knowledge, consent or
endorsement’ are the functional equivalents of alleging that the check was stolen and the
endorsement was forged.”), with Bank of Am. Nat’l Trust & Sav. Ass’n v. Allstate Ins. Co., 29 F.
Supp. 2d 1129, 1145 (C.D. Cal. 1998) (“The instrument in question was not lost or destroyed—it
was cashed. Further, there is no showing that the Tangs cannot be found or served.”).
doctrine. “The [law-of-the-case] doctrine applies to decisions made by appellate courts and final
decisions made by district courts that have not been appealed. The doctrine does not apply to
interlocutory orders.” Gander Mountain Co. v. Cabela’s, Inc., 540 F.3d 827, 830 (8th Cir. 2008)
(citation omitted); see, e.g., Murphy v FedEx Nat’l LTL, Inc., 618 F.3d 893, 905 (8th Cir. 2010);
Mosley v. City of Northwoods, 415 F.3d 908, 911 (8th Cir. 2005). Thus, the Court rejects
Northeast Bank’s law-of-the-case argument.
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In this case, Hanover issued two checks made payable to Grand Rios Investment,
Northeast Bank, and Alex N. Sill Company. The checks were not destroyed. They were not lost.
And they are not in the wrongful possession of an unknown person or a person who cannot be
found or is not amenable to service of process. Instead, the checks were tendered to Wells Fargo
Bank for payment to one of the payees, Grand Rios Investment, and Wells Fargo Bank paid
Grand Rios Investment. The Court dismisses Count III.
III.

CONCLUSION

Based on the files, records, and proceedings herein, and for the reasons stated above, IT
IS ORDERED THAT:
1.

Hanover’s motion to dismiss Counts II and III of the Second Amended Complaint
[Docket No. 42] is GRANTED.

2.

Counts II and III of the Second Amended Complaint are DISMISSED.

Dated: July 9, 2012
s/ Joan N. Ericksen
JOAN N. ERICKSEN
United States District Judge

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