Berkley Insurance Company v. Hawthorn Bank
ORDER. Defendant Hawthorn Bank's motion for summary judgment, Doc. 38, is granted. Signed on 9/29/17 by District Judge Nanette K. Laughrey. (Matthes Mitra, Renea)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF MISSOURI
BERKLEY INSURANCE COMPANY,
BERKLEY REGIONAL INSURANCE
Plaintiffs Berkley Insurance and Berkley Regional Insurance are surety companies 1 that
issued payment and performance bonds on behalf of Jefferson City Industries (JCI), a
construction contractor. Berkley entered into an Indemnity Agreement with JCI, requiring JCI to
repay Berkley if Berkley had to pay on the bonds. Defendant Hawthorn Bank was JCI’s bank,
and made loans to JCI.
JCI began having financial difficulties.
After JCI failed to pay subcontractors and
suppliers, or finish construction projects, Berkley paid claims under the bonds. Prior to that
time, to satisfy some of JCI’s unpaid loan debts due to Hawthorn Bank, Hawthorn Bank applied
funds from JCI’s accounts, including some progress payments that JCI received for its work on
In this lawsuit, Berkley alleges that it is entitled to recover, from Hawthorn, the amount
of the progress payments received by JCI, deposited into JCI’s bank account, and then applied by
Hawthorn to JCI’s loan debts. Hawthorn moves for summary judgment. Doc. 38. Having
The Plaintiffs will be referred to collectively as “Berkley.”
considered the briefing and exhibits, and the oral arguments presented by the parties, the motion
Berkley is a surety company and in the business of issuing surety bonds to contractors.
Among other types of banking activities, Hawthorn Bank provides financial lending services to
In February 2013, Berkley and non-parties Jefferson City Industries (JCI), United HRB
General Contractors, Jeff-Cole Holdings, Raidan Equipment, Anthony R. Adrian, and Onnimaria
Adrian (collectively, Indemnitors) entered into a General Agreement of Indemnity related to any
bonds that Berkley may issue to JCI. The Agreement provided for the assignment of bonds and
contracts, and granted Berkley a general lien and continuing security interest in the Indemnitors’
collateral, which included contracts, subcontracts, accounts, machinery and equipment, general
intangibles, inventory, etc. The Agreement also provided that any funds due under any contract
covered by a bond were trust funds. Berkley did not file UCC statements regarding the
Agreement. Hawthorn Bank was not a party to the Agreement.
Berkley subsequently issued, as surety, payment and performance bonds with effective
dates ranging from February 2013 to August 2014 for 20 mid-Missouri construction projects on
behalf of JCI as bond principal. Despite receiving payments from obligees, JCI failed to pay
numerous subcontractors and suppliers.
Hawthorn Bank provided financial lending services to JCI and filed UCC financing
statements with the Missouri Secretary of State. JCI received progress payments on its contract
work and deposited payments in its Hawthorn Bank, direct deposit accounts. Hawthorn applied
some progress payments to the loan obligations that JCI owed Hawthorn.
The facts set out are those which are supported and not genuinely disputed.
On January 20, 2015, Hawthorn received Berkley’s written demand for “possession of”
progress payments, along with a copy of the General Agreement of Indemnity.
On January 7, 2015 and February 5, 2015, Berkley sent correspondence to JCI vendors
and subcontractors in which Berkley acknowledged its receipt of their proofs of claim, stating
that the vendors and subcontractors would be contacted in due course regarding Berkley’s
investigation of their allegations, and stating that “this letter…should not be construed as an
admission of liability or a promise to pay[.]” Doc. 39-2. Hawthorn Bank was not copied on or
referenced in the correspondence. Berkley made its first payment under a payment or
performance bond on February 10, 2015.
Berkley alleges that as JCI’s surety, it has incurred losses in excess of $2,500,000 in
paying for completion of the work, and resolving claims of the bonded project owners and
obligees, and unpaid subcontractors and suppliers.
Berkley sues Hawthorn Bank under six counts: conversion, tortious interference with
business expectancy, equitable lien, constructive trust, implied indemnity, and unjust enrichment.
Doc. 11, pp. 18-26. For the reasons discussed below, Hawthorn is entitled to summary judgment
on all counts.
The Court will address two evidentiary matters before addressing each of the counts.
1. The date of the last progress payment applied to a JCI loan by Hawthorn
Hawthorn states that January 16, 2015 was the date that the last progress payment from
any of the 20 project owners was deposited into a JCI direct deposit account by JCI, or applied
to a JCI loan by Hawthorn. Doc. 39, p. 6 of 23 (Hawthorn’s Statements of Fact, para. 6, citing
Doc. 39-1, Affidavit of Jason Schwartz, Senior Vice President of Hawthorn Bank, p. 2).
Berkley “object[s]” to Hawthorn’s Statement of Fact, para. 6, Doc. 42, p. 3 (citing
Doc. 43-2, Exhibit A-4, Schwartz deposition), and argues that the Court should defer ruling on
this issue because of a discovery dispute. First, Berkley has not shown good cause for failing to
timely raise the discovery dispute, as required under the Scheduling Order, Doc. 17, p. 2
(requiring discovery motions to be filed by 3/22/2017, and discovery disputes to be resolved by
4/21/2017). See Fed. R. Civ. P. 16(b)(4) (modification of scheduling order requires a showing of
good cause and the court’s consent). Nor did Berkley file an affidavit showing why it could not
“present facts essential to justify its opposition,” as required under Fed. R. Civ. P. 56(d). See
Willmar Poultry Co. v. Morton-Norwich Prod., Inc., 520 F.2d 289, 297 (8th Cir. 1975). The
Court will not defer ruling.
Second, Berkley’s exhibits do not show that any progress payments were deposited into
JCI’s accounts after January 16, 2015 or applied to a JCI loan by Hawthorn after that date.
While Berkley submits in its Statement of Additional Material Facts, para. 35, that after January
16, 2015, Hawthorn used “indemnitors’ funds” to pay down debts they owed to Hawthorn, it
cites no evidence to support that statement. Specifically, Berkley’s evidence does not distinguish
between the indemnitors’ funds from contract owners on the bonded projects which are the funds
relevant to this lawsuit, and funds that Hawthorn recovered from a Small Business
Administration guaranty or other collateral which are not. See also Doc. 46-3, Deposition of
Ellen Cavallaro, Berkley’s corporate representative, p. 6 of 17 (testifying that Berkley sought
only to recover proceeds from JCI’s bonded contracts and not, for example, proceeds paid over
from the Small Business Administration loans). Thus, whether some unspecified indemnitor
funds were applied to a loan after January 16, 2015, Berkley has failed to genuinely dispute, by
“citing to particular parts of materials in the record,” Fed. R. Civ. P. 56(c)(1)(A), Jason
Schwartz’s statement that January 16, 2015 was the date that the last progress payment from any
of the 20 project owners was applied to a JCI loan by Hawthorn.
Hawthorn’s knowledge of the Indemnity Agreement
Hawthorn states that it did not have actual knowledge of the Indemnity Agreement until
receiving it on January 20, 2015. Doc. 39, p. 6 of 23, para. 13 (citing Doc. 39-1, Schwartz
Affidavit, p. 3). The statement is not genuinely disputed, for the reasons discussed below.
Berkley states that Hawthorn’s Statement of Fact, para. 13, is controverted because
Hawthorn may be charged with “constructive knowledge” that the contracts were bonded and
that the surety had an equitable right of subrogation upon the contractor’s default. Doc. 44, p. 5
(citing First State Bank v. Reorganized Sch. Dist. R-3, Bunker, 495 S.W.2d 471, 478 (Mo. App.
1973), and Hawthorn’s UCC filings, including an attached construction contract that by its terms
required payment and performance bonds). “Constructive knowledge” is not a matter of fact but
a matter of law, and the parties’ legal arguments about equitable subrogation, First State Bank,
and UCC filings are addressed in Section II.B.1.-.2, below. Furthermore, whether Hawthorn had
any sort of knowledge that the contracts were bonded does not address Hawthorn’s knowledge of
the Indemnity Agreement or its contents, including the trust provision.
Count I, Conversion
“Conversion is the unauthorized assumption of the right of ownership over the personal
property of another to the exclusion of the owner’s rights.” Herron v. Barnard, 390 S.W.3d
901, 908–09 (Mo. App. 2013) (citation omitted). To establish conversion, a plaintiff must show
that: (1) it owned the property or was entitled to possess it; (2) the defendant took possession
of the property with the intent to exercise some control over it; and (3) the defendant thereby
deprived the plaintiff of the right to possession. Id. Berkley alleges that it was entitled to
possession of the progress payments “through contract assignment and equitable subrogation,”
and that the funds represented constructive “trust funds.” Doc. 1, pp. 18-19. The conversion
claim fails because Berkley cannot establish the first element, right of possession.
Berkley’s claim to a security interest in the contract proceeds is subject to the same UCC
filing requirements as Hawthorn Bank’s claim to a security interest in the contract’s proceeds.
See Mo. § 400.9-310(a) (requiring a financing statement to be filed to perfect security interests);
see also In re Kuhn Const. Co., Inc., 11 B.R. 746, 749 (S.D. W.Va. Bankr. 1981) (holding that “a
surety must conform to the Article 9 filing requirements to perfect a consensual security interest
in any funds due or to become due to [the contractor] under its construction contracts”) (citing In
re. J.V. Gleason Co., 452 F.2d 1219 (8th Cir. 1971)). Hawthorn Bank perfected its security
interest in the proceeds by filing a UCC statement. Berkley did not file such statements.
Therefore, Berkley had no superior right of possession through contract assignment.
However, as Berkley argues and Hawthorn Bank does not dispute, equitable subrogation
is not governed or affected by UCC filing requirements. See First State Bank v. Reorganized Sch.
Dist. R-3, Bunker, 495 S.W.2d 471, 477 (Mo. App. 1973). Therefore, the Court turns to the
equitable subrogation issue.
“Subrogation is a right by which the equity of one person is worked out through the legal
rights of another. The right of subrogation accrues to a person who has paid the debt or
obligation for which another is primarily responsible.” Jos. A. Bank Clothiers, Inc. v. Brodsky,
950 S.W.2d 297, 302 (Mo. App. 1997) (citation omitted). “Subrogation should be applied where
justice, based on the dictates of equity and good conscience, demands its application, and where
the rights of the one asking subrogation are more equitable in nature than those who oppose the
subrogation.” Id. (citing In re Jamison’s Estate, 202 S.W.2d 879, 883–84 (Mo. 1947)). See also
Keisker v. Farmer, 90 S.W.3d 71, 75 (Mo. 2002) (“Subrogation exists to prevent unjust
enrichment.”). “ʽDetermination of whether a party has a right to equitable subrogation depends
on the facts of the case.’” Scottsdale Ins. Co. v. Addison Ins. Co., 448 S.W.3d 818, 831 (Mo.
2014) (quoting Ethridge v. TierOne Bank, 226 S.W.3d 127, 134 (Mo. 2007)).
Berkley argues that “[w]hen a surety executes a bond on a construction contract, and then
is required to pay unpaid labor and materials, or to complete the contract, the surety has an
equitable right of subrogation or equitable lien on funds retained by the owner or obligee.”
Doc. 43, p. 8 of 21 (citing First State Bank, 495 S.W.2d at 480-81). Berkley continues: “That
right of equitable subrogation is superior to one who takes by assignment after the date of the
bond’s execution because, inter alia, the subrogation right relates back to the date of the surety’s
bond.” Id. (citing First State Bank). Berkley argues that here, the Indemnitors “defaulted in
paying their subcontractors and suppliers on May 20, 2013” and that it (Berkley) fulfilled its
bond obligations by spending over $2.5 million to complete the bonded projects and pay
subcontractors and suppliers.
Id., p. 9 of 21.
Therefore, Berkley concludes, its “right of
subrogation relates back to the date of the bond[,]” id., which is prior to the date of January 20,
Berkley’s argument fails for at least two reasons. First, the right of equitable subrogation
generally only arises “upon total satisfaction of the underlying obligation.” RESTATEMENT
SURETYSHIP & GUARANTY § 27 (1996); American Surety Co. of New York v.
Westinghouse Elec. Mfg. Co., 296 U.S. 133, 137 (1935) (holding that a prerequisite to equitable
subrogation is the surety’s full satisfaction of any underlying debt or obligation); and
Pennsylvania Nat’l Mut. Cas. Ins. Co. v. City of Pine Bluff, 354 F.3d 945, 951 (8th Cir. 2004)
(citing RESTATEMENT (THIRD) OF SURETYSHIP & GUARANTY § 27 cmt. b). As the Supreme Court
acknowledged in American Surety, full satisfaction is necessary. Otherwise, “the surety would
reduce the protection of the bond to the extent of its dividend in the assets of the debtor.” 296
U.S. at 137. Similarly, under Missouri law, “[t]he surety's right to be subrogated remain[s] only
potential until it satisfie[s] an obligation it was required to satisfy.” First State Bank, 495
S.W.2d at 480. The question of when the right of equitable subrogation arises is important,
because the doctrine does not apply to progress payments already paid. See Capitol Indem.
Corp. v. Citizens Nat. Bank of Fort Scott, N.A., 8 S.W.3d 893, 901 (Mo. App. 2000) (surety must
show “it paid labor and materials claim prior to the city’s payments of progress payments”)
(emphasis added)); and First State Bank, 495 S.W.2d at 481 (the “right of subrogation . . . [that]
relates back to the date of the surety’s bond” extends to “earned but unpaid progress payments . .
. in the hands of the contractee at the time of default”) (emphasis added)). See also Int’l Fid. Ins.
Co. v. U.S., 949 F.2d 1042, 1046 (8th Cir. 1991) (“when sums earned under the contract are paid
generally to the contractor, such funds are thereby freed of any equity or right of subrogation in
Here, it is unclear precisely when Berkley satisfied any underlying obligations in total.
But the evidence shows that January 16, 2015 was the date that the last progress payment from
any of the 20 project owners was deposited into a JCI direct deposit account or applied to JCI
loan obligations, and that Berkley did not make its first payment on a JCI contract until
February 10, 2015.
Berkley’s right to subrogation remained only potential until at least
February 10, 2015 and no progress payments were deposited in Hawthorn Bank or set off by it
thereafter. Equitable subrogation therefore does not establish Hawthorn’s right of possession in
the progress payments applied by Hawthorn, for purposes of the conversion claim.
Berkley cites First State Bank, 495 S.W.2d at 479-80, 484, in support of its argument that
its right to be equitably subrogated dated back to the date of the bond, and that it does not matter
when progress payments were made, only that JCI failed to timely pay a subcontractor or
supplier. See Doc. 43, p. 9 of 21. However, the Missouri Court of Appeals rejected the same,
First State Bank-based arguments in Capitol Indemnity:
First State Bank does say that when a contractor becomes “in
default as a matter of fact” and the surety becomes obligated to pay
under the terms of its bond, that “the surety's right of subrogation
relates back to the date of the execution of the bond.” [495
S.W.2d] at 481. However, this right extends only as to amounts
which are unpaid. Id. The Missouri Supreme Court has said that an
equitable lien may attach to progress payments earned or retained
percentages agreed to under the terms of the contract, but only as
to sums that are unpaid and in the hands of the contractee or placed
under the control or joint control of the surety. National Surety
Corporation v. Fisher, 317 S.W.2d 334, 342 (Mo. banc 1958).
Generally, money paid unconditionally to a contractor for work
done under the contract becomes his “to do with as he pleases” and
is “freed of any equity or right of subrogation in the surety.” Id. at
345. Capitol Indemnity makes no allegation, nor presents any
evidence, that ESI was obligated under its construction contract
with the city to use the payments it received from the city only to
pay the labor and materials claims on the project.
In this instance, Capitol Indemnity seeks to retroactively recover
sums which may or may not have been paid out by the city prior to
the alleged default of ESI in paying its labor and materials claims
on the project. One of the primary difficulties with Capitol
Indemnity's allegation of conversion, is that it fails to state an exact
date when it became entitled to any progress payments paid to ESI
by the city. Capitol Indemnity alleges generally, that ESI was “in
default as a matter of fact” when the bank had difficulty collecting
on its business loan to ESI. However, Capitol Indemnity did not
become entitled to rights to earned, but unpaid progress payments,
until it became obligated to and did pay labor and materials claims
on the construction project. First State Bank, 495 S.W.2d at 480.
Because Capitol Indemnity did not plead or prove by affidavit that
it paid labor and materials claims prior to the city's payment of
progress payments on January 7, and February 4, 1998, Capitol
Indemnity has failed to support its claim of a right of subrogation
to the payments. Thus, it cannot be inferred as a matter of law
that Capitol Indemnity had a right to possession of the payments at
the alleged time of conversion, and its cause of action fails..
8 S.W.3d at 900–01 (emphasis in original). In short, Capitol Indemnity distinguishes First Bank,
and reinforces the rule that a surety’s rights depend on whether surety had become obligated to
pay, and did pay, labor and material claims on the project, and if it had, then the surety would
become entitled only to sums that were unpaid and in the hands of the contractee or under the
control or joint control of the surety. The Capitol Indemnity court did not hold that a surety
could claw back funds already paid.
Berkley also relies on Int’l Fid. Ins. Co. v. U.S., 949 F.2d 1042, 1046 (8th Cir. 1991), and
Mass. Bonding & Ins. Co. v. Ripley County Bank, 237 S.W. 182, 195 (Mo. App. 1921). See
Doc. 43, pp. 9-10 of 21. The cases are inapplicable and do not change the analysis. Berkley
states, quoting from International Fidelity, 949 F.3d at 1046, that “ʽ[i]f the default occurred
before the progress payment was due, then the surety was entitled to the progress payment.’”
Doc. 43, p. 9 of 21. However, the Eighth Circuit was not addressing progress payments already
paid, but retainages and when a surety’s interest in earned, undisbursed, progress payments
would arise, as determined by the date of default. 949 F.2d at 1046. The Eighth Circuit then
considered whether 26 U.S.C. § 6323(c), which governs priority of tax liens, gave a surety’s
claim to progress payments priority over the IRS’ tax levy, an issue controlled by the timing of
the filing of the IRS’ tax lien and the contractor’s date of default. The Eighth Circuit did not
hold that upon a contractor’s default, a surety was entitled to claw back funds already paid to a
contractor. The Eighth Circuit in fact acknowledged “Missouri[ʼs] general rule that ‘when sums
earned under the contract are paid generally to the contractor, such funds are thereby freed of any
equity or right of subrogation in the surety.’” Id. (quoting Fisher, 317 S.W.2d at 345)). Section
6323(c), however, “[enables] claimants to bring wrongful-levy actions against the government,”
and the Eighth Circuit held that it would not eliminate that statutory right by holding that the
IRS’ levy had “[brought] the funds within the constructive possession of the government[.]” Id.,
949 F.2d at 1047, n.3. Neither § 6323(c) nor any analogous statute applies here.
Massachusetts Bonding, 237 S.W. 182, is also unpersuasive, because it pertains to
monies reserved under a contract as security. In that case, a contractor had a building contract
with a school. The contract required some funds due the contractor to be held back by the
school. The contractor defaulted in the payment of various claims against the job and the surety
for the project paid these claims. At some point, the school board paid a part of the retained
funds to a bank which had loaned money to the contractor.
The contractor had assigned his
interest in the retainage to the bank The surety sued the bank, and successfully recovered on the
theory of a superior right by subrogation “in and to the funds which by the contract were
required to be reserved as security for the payment of unpaid bills[.]” Id., at 185 (citing
Hardaway v. Nat. Sec. Co., 211 U.S. 552 (1909), Henningsen v. U.S. Fidelity & Guar. Co., 208
U.S. 404 (1908), and Prairie State Bank v. United States, 164 U.S. 227 (1896) 3).
Massachusetts Bonding, there was no question of a deposit by the contractor being used by the
bank to satisfy a debt obligation.
The Missouri Supreme Court subsequently explained the outcome in Massachusetts
Bonding as follows: “Since the suit involved a percentage expressly required to be reserved
under the contract as security, the [Court of Appeals] seems to have considered the payment to
the bank as wrongful and, therefore, to be disregarded.” Fisher, 317 S.W.2d at 343–44. The
Court of Appeals likewise distinguished Massachusetts Bonding as a case “that did not involve
payments made to contractors, but reserved percentages retained under the construction
contract,” and as having “no application to money not reserved as a security but paid over to the
contractor.” Audrain City ex rel. and to the Use of First Nat. Bank of Mexico v. Walker, 155
S.W.2d 251, 261 (Mo. App. 1941). Retainages are not at issue here, and Massachusetts Bonding
therefore does not change the analysis.
As discussed above, equitable subrogation does not establish Berkley’s right to
possession for purposes of its conversion claim.
Similar to the Massachusetts Bonding case, the Hardaway, Henningsen, and
Prairie State Bank cases involved retained funds.
Berkley alleges that in addition to being entitled to possess the progress payments as an
equitable subrogee, it was entitled to possess them as a trust beneficiary. The allegation fails.
The General Agreement of Indemnity, executed by Berkley and the Indemnitors, states:
ARTICLE VI—TRUST FUND
The Indemnitors agree and hereby expressly declare that all funds
due or to become due under any Contract covered by a Bond are
Trust Funds, whether in the possession of an Indemnitor or
another, for the benefit and payment of all persons to whom the
Indemnitor incurs obligations in the performance of a Contract for
which the Surety would be liable under the Bond and for the
benefit of Surety for any liability or loss it may sustain or incur by
reason of or in consequence of the execution of such Bonds. Upon
notice from the Surety to an Obligee, Indemnitors hereby authorize
and direct the Obligee of any such Bond to pay to the Surety any
and all Funds due or to become due on any Contract bonded by
Surety, and upon payment of such funds the Obligee is released
and discharged from any and all liability to Indemnitors in
connection with the payments.
Doc. 43, p. 4 of 14. The Agreement further provides that it is governed by New York law. Id.,
p. 6 of 14 (Article XX—General Provisions, section 20.03). Hawthorn Bank was not a party to
The parties vigorously dispute whether New York law establishes a valid trust under the
circumstances. Assuming, without deciding, that the Agreement did establish a trust, Hawthorn’s
set-off did not constitute conversion because the undisputed evidence shows that Hawthorn did
not have notice that the funds were trust funds until January 20, 2015.
Missouri law does not provide for the unwinding of a bank’s set-off based on a trust
theory, absent evidence that the depositor intended to create a trust or special deposit subject to
use for a specific purpose, or that the bank understood the depositor intended to do so. See
Killoren v. First Nat. Bank in St. Louis, 127 F.2d 537, 542 (8th Cir. 1942). In Killoren, the
Commercial Factors Corporation was financing the Hamilton-Brown Shoe Company by making
loans to it against the pledge of its accounts receivable. Shoe Company from time to time
deposited funds that it received from Commercial Factors, into its accounts at First National
Bank. At some point, there was a conversation between representatives of Commercial Factors
and the Bank about whether Shoe Company would meet its payroll, but there was no agreement
between any of them that any part of the funds deposited by Shoe Company would be treated as
a special deposit. 127 F.2d at 539-40. The Bank subsequently applied a $19,000 deposit made
by Shoe Company to reduce the amount Shoe Company owed it. When Shoe Company went
bankrupt, the bankruptcy trustee sought to impress a trust on the funds, but the Eighth Circuit
affirmed the trial court’s dismissal. The Eighth Circuit held that in making the deposit, Shoe
Company “did … not indicate an intention to create a trust or a special deposit subject to use for
a specific purpose, [and] the evidence show[ed] the bank did not understand that [Shoe
Company] intended to do so, or … intended to enter into a special relationship” when the deposit
was made. Id. at 542. See also Landwher v. Moberly, 93 S.W.2d 935 (Mo. 1936) (Div. 1)
(holding that for a deposit in a bank to be regarded to have been made for a special purpose, “that
purpose must be evidenced by a mutual understanding or agreement on the part of the depositor
and the bank and the intention or purpose, merely on the part of the depositor, that it should
become a special deposit is not sufficient to make it so.”); and Central Coal 7 Coke Co. v. State
Bank, 44 S.W.2d 188, 191 (Mo. App. 1931) (special deposit was established where there was
written direction and verbal agreement between the parties that deposits made in a certain
manner should be used for the specific purpose of meeting pay roll checks which were written at
the time of the deposits, the testimony of both plaintiff and defendant showed this understanding,
and it was followed in practice for a period of about six years).
Similarly here, there is no evidence that Hawthorn knew about the trust fund provisions
of the Indemnity Agreement any earlier than January 20, 2015 when Berkley sent it a copy.
Even if, as Berkley states, Hawthorn knew JCI was in financial difficulty, no duty was imposed
upon Hawthorn to inquire into JCI’s conduct in order to protect others with whom the bank was
not in privity. See U.S. Fid. & Guar. Co. v. Mississippi Valley Trust Co., 153 S.W.2d 752, 759
(Mo. App. 1941) (stating that in the absence of notice to the contrary, a bank may assume a
customer-trustee will appropriate trust monies to the proper use; “[t]he mere fact … that a bank
knows that moneys deposited with it have by a [customer] been acquired in a fiduciary capacity
does not impose on it the duty, or give it the right, to institute an inquiry into the conduct of its
customer in order to protect those for whom he may hold the fund, but between whom [they] and
the bank there is no privity”). The Eighth Circuit also acknowledged in Killoren that Missouri
“has not adopted [the] so-called equitable rule,” which is a minority rule that bars a bank from
making a set-off even when it does not know that funds are held in trust. 127 F.2d at 542.
Hawthorn is entitled to summary judgment on Count I.
Count II, Tortious Interference with Business Expectancy
To establish a claim for tortious interference, a plaintiff must prove: (1) a contract or
valid business expectancy; (2) defendant's knowledge of the contract or relationship; (3) a breach
induced or caused by defendant's intentional interference; (4) absence of justification; and
(5) damages. Rice v. Hodapp, 919 S.W.2d 240, 245 (Mo. 1996). A plaintiff who “fails to
establish substantial evidence of any one element” has failed to meet its burden of proof for the
claim. Hibbs v. Berger, 430 S.W.3d 296, 318 (Mo. App. 2014). Berkley cannot meet its burden
with respect to the second element because Hawthorn did not have knowledge of the Indemnity
Agreement until January 20, 2015, after the last progress payment was applied to a loan.
Hawthorn is entitled to summary judgment on Count II.
Count III, Equitable Lien
Berkley alleges that under the terms of the Bonds and Indemnity Agreement, the
express intent was for all funds paid on JCI’s projects bonded by Berkley to serve as
security for payment of Berkley, completion of the projects, and payment of subcontractors
and suppliers. Doc. 11, p. 22. Berkley alleges that “[f]rom the moment Berkley executed
the Bonds in favor of JCI, [Berkley] acted as JCI’s surety and held an equitable lien on the
Bonded Projects and trust funds.” Id.
The requirements for establishing an equitable lien are: “1) a duty or an obligation owing
by one person to another; 2) a res to which that obligation fastens, which can be identified or
described with reasonable certainty; and 3) an intent, express or implied, that the property serve
as security for the payment of the debt or obligation.” Ethridge v. TierOne Bank, 226 S.W.3d
127, 134 (Mo. 2007) (internal quotation and citation omitted). In Ethridge, a bank sought an
equitable lien on property against a widow who possessed the property. Some years earlier, her
husband had refinanced the property, which they owned as tenants by the entirety, but she had
not signed an agreement that purported to grant the bank an interest in the property. Id. at 12930. The Missouri Supreme Court held that the bank’s equitable lien “argument fails for the
simple reason that [the widow] did not owe an obligation to the [bank]. She did not sign the
promissory note. Since [she] did not owe an obligation, the first essential element for equitable
estoppel [was] not present.” Id.
Berkley’s equitable lien claim fails for the same reason the claim failed in Ethridge.
The basis for Berkley’s claim is the contractual arrangement between Berkley and the
Indemnitors, to which Hawthorn was not a party. Hawthorn simply did not owe a duty or
obligation to Berkley. See also Hartford Fire Ins. Co. v. Columbia State Bank, 334 P.3d 87,
93-94 (Wash. App. 2014) (no equitable lien claim against bank where progress payment made
before surety paid any claim); Acuity Mut. Ins. Co. v. Planters Bank, Inc., 362 F.Supp.2d 885,
894-95 (W.D. Ky. 2005) (noting that surety has no equitable lien or equitable subrogation claims
for “already paid, not retained contract proceeds” that were applied to contractor’s bank loans).
Hawthorn is entitled to summary judgment on Count III.
Count IV, Constructive Trust
Hawthorn argues it is entitled to summary judgment on Count IV because “ʽconstructive
trust’ is not a cause of action, but rather a remedy.” Neher v. eBanker USA.Com, Inc., 2005
WL 1006417, at *6 (W.D. Mo. Apr. 1, 2005) (citing Fix v. Fix, 847 S.W.2d 762, 765 (Mo.
1993)); see also Secure Energy, Inc. v. Coal Synthetics, LLC, 2010 WL 1691184, at *3 (E.D. Mo.
Apr. 27, 2010) (granting summary judgment on grounds that constructive trust is a remedy and
not an independent cause of action).
Berkley concedes that constructive trust is not an
independent cause of action, and instead is derivative of its other substantive claims to some
right of possession or ownership. Doc. 43, p. 18 of 21. Count IV therefore fails.
Count V, Implied Indemnity
Berkley seeks to recover under a theory of implied, or non-contractual, indemnity. To
prove such a claim, a plaintiff must show:
the discharge of an obligation by the plaintiff;
that the obligation discharged by the plaintiff is identical to an
obligation owed by the defendant; and
that the discharge of the obligation by the plaintiff is under
such circumstances that the obligation should have been
discharged by the defendant, and defendant will be unjustly
enriched if the defendant does not reimburse the plaintiff to the
extent that the defendant's liability has been discharged.
Beeler v. Martin, 306 S.W.3d 108, 111 (Mo. App. 2010) (citing 35 MISSOURI PRACTICE:
CONTRACTS, EQUITY, AND STATUTORY ACTIONS HANDBOOK § 41:2 (2009)).
Under the second prong, duties are not identical or coextensive when “the underlying
bases” for the duties differ. Global Petromarine v. G.T. Sales & Mfg., Inc., 577 F.3d 839, 846
(8th Cir. 2009) (quoting State ex rel. Manchester Ins. & Indem. Co. v. Moss, 522 S.W.2d 772,
774 (Mo. 1975)). In State ex rel. Manchester, an insurer intervened in an action brought by its
insured motorist against an uninsured motorist defendant. The insurer cross-claimed against the
defendant motorist for indemnity. The insurer asserted that if the uninsured defendant’s
negligence was found to be the cause of the plaintiff's injuries, then defendant should indemnify
insurer, who would be required to pay the plaintiff on its contract of insurance. The trial court
dismissed the insurer’s cross-claim and the insurer filed a petition for writ of prohibition. The
Missouri Supreme Court held that the trial court properly dismissed the cross-claim. The
Missouri Supreme Court acknowledged that although the defendant motorist’s negligence may
have precipitated the insurer’s liability to the insured plaintiff, the insurer’s payments to the
insured were “separate and distinct from the obligations owed by an uninsured defendant.” 522
S.W.2d at 775. The insurer’s obligation to the plaintiff arose out of its contract of insurance with
the plaintiff and thus was not co-extensive with the duty owed to plaintiff by the uninsured
defendant, which arose out of the latter's negligence. The court held that the doctrine of implied
indemnity was inapplicable because the insurer’s duty to the plaintiff was not identical to the
defendant driver’s duty to the plaintiff. Id. at 775.
In Merchants Bonding Co. v. Noland, 2010 WL 3584017, at *1 (W.D. Mo. Sept. 7,
2010), Plaintiff Merchants Bonding alleged that the Defendants, as the attorneys for the
conservator of an Estate, were liable to the Estate for professional legal negligence and that
Defendants’ legal malpractice caused Merchants Bonding to pay the Estate $200,000.00 on its
surety bond and incur significant attorney fees, costs, and expenses. Merchants Bonding sought
to recover the $200,000.00 from Defendants under an implied indemnity theory. The Court
dismissed the claim, because Merchants Bonding’s duties were not identical to the Defendants’
duties. The Court held that even if the Defendants’ alleged professional legal negligence had
triggered Merchants Bonding’s liability on behalf of the conservator, any payment under the
surety contract would not in any way discharge Defendants’ duty of care to their client. Because
Merchants Bonding and Defendants’ duties did not share the same underlying bases, the claim
for implied indemnity failed. Id. at *2.
Here, too, Berkley’s obligations were not identical to or coextensive with Hawthorn’s
obligations. Berkley’s obligations with respect to JCI arose from Berkley’s issuance of the
payment and performance bonds for JCI’s construction projects. Hawthorn had no obligation to
pay or perform with respect to JCI’s construction contracts. Even if Hawthorn’s actions in
setting off the progress payments to satisfy JCI’s loan debts to Hawthorn effectively resulted in
Berkley paying out more than it otherwise would have on its bond obligations, Berkley’s
payments would not discharge any obligation running between Hawthorn and JCI.
Hawthorn is entitled to summary judgment on Count V.
Count VI, Unjust Enrichment
Berkley’s final claim is for unjust enrichment. Specifically, Berkley alleges that it
conferred a benefit on Hawthorn by paying JCI’s subcontractors, suppliers, and project owners
so that those entities did not make demands on Hawthorn for JCI’s funds which were in the
nature of trust funds. Doc. 1, pp. 25-26 of 27. Berkley further alleges that Hawthorn recognized
the benefit conferred on it by Berkley, did not pay value for the benefit despite Berkley’s
demands, and was enriched at Berkley’s expense, and that allowing Hawthorn to retain the
benefit conferred on it by the “taking of the … trust funds of Berkley” would be unjust. Id. at
p. 26 of 27.
An unjust enrichment claim requires a plaintiff to prove that (1) it conferred a benefit on
the defendant, (2) the defendant appreciated the benefit, and (3) the defendant accepted and
retained the benefit under inequitable or unjust circumstances. Howard v. Turnbull, 316 S.W.3d
431, 436 (Mo. App. 2010) (citation omitted). Further, even if a benefit is conferred and
appreciated, if no injustice results from the retention of the benefit, then no cause of action for
unjust enrichment will lie. Id. “Mere receipt of benefits is not enough when there is no showing
that it would be unjust for defendant to retain the benefit received.” Farmers New World Life
Ins. Co. v. Jolley, 747 S.W.2d 704, 706 (Mo. App. 1988). See also Inauen Packaging Equip.
Corp. v. Integrated Indus. Servs., Inc., 970 S.W.2d 360, 366 (Mo. App. 1998) (“[T]he focus is
not on the loss sustained by the plaintiff but on the benefit conferred upon the defendant for
which it would be inequitable for him to retain.”).
Berkley did not confer a benefit on Hawthorn.
The evidence does not show that
Hawthorn was liable for covering JCI’s losses or paying subcontractors, suppliers, or project
owners. Nor does the evidence show that the subcontractors, suppliers, or project owners could
have recovered, or at any point sought to recover, trust funds from Hawthorn.
However, even if Berkley did confer a benefit on Hawthorn, the retention of the benefit
was not unjust. The evidence does not show that Berkley paid the subcontractors, suppliers, or
project owners to protect Hawthorn from claims; that Berkley made such a representation to
Hawthorn; or that Hawthorn agreed to compensate Berkley for such benefit. Rather, Berkley, as
surety, was obligated to pay the subcontractors, suppliers, and project owners pursuant to its
contract with JCI, and did so.
If Hawthorn benefited from Berkley’s payments, it did so
passively. Where a benefit was retained by a passive beneficiary, unjust enrichment will not lie.
Hunt v. Estate of Hunt, 348 S.W.3d 103, 112 (Mo. App. 2011).
Berkley cites Fed. Ins. Co. v. Fifth Third Bank, 867 F.2d 330 (6th Cir. 1989). Doc. 43,
p. 20. The case is inapplicable because it applies the minority rule under which a bank’s
knowledge of the trust fund nature of funds may be implied. As discussed, above, Missouri
follows the contrary, majority rule. Killoren, 127 F.2d at 542. Berkley’s remaining citations do
not persuade the Court that an unjust result has been reached under the circumstances presented
Hawthorn is entitled to summary judgment on Count VI.
Defendant Hawthorn Bank’s motion for summary judgment, Doc. 38, is granted.
s/ Nanette K. Laughrey
NANETTE K. LAUGHREY
United States District Judge
Dated: September 29, 2017
Jefferson City, Missouri
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