First Dakota National Bank v. First National Bank of Plainview

Filing 47

ORDER re: within 30 days from the date of this Order, the parties shall submit briefs addressing issues listed in this Order. Signed by U. S. District Judge Lawrence L. Piersol on 5/31/11. (CMS)

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION

FILED
MAY 3 1 2011

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FIRST DAKOTA NATIONAL BANK,
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CIV.08-4167
Plaintiff,
-vs-

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ORDER

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Defendant.
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FIRST NATIONAL BANK OF
PLAINVIEW,

The Court has detennined that a choice of law analysis might be necessary in this case. In
most jurisdictions, the Unifonn Commercial Code (UCC) is viewed as superseding state common
law relevant to the right of set-off, and South Dakota is in the majority of jurisdictions. See

Consolidated Nutrition, L. C. v. IBP, Inc., 669 N. W.2d 126 (S.D. 2003 ) (adopting majority view that
priority scheme of Article 9 dictates the analysis to be applied in deciding the priority between a
security interest and a set-off in the same collateral); Rushmore State Bank v. Kuryias, Inc., 424
N.W.2d 649 (S.D. 1988) (South Dakota Supreme Court looked to Article 9 ofthe UCC to detennine
which party had priority in the collateral for purposes of deciding whether the defendant converted
the collateral). The Eighth Circuit has recognized that Article 9 ofthe UCC rather than the common
law governs the priority between the right of set-off and a perfected security interest. See In re Apex

Oil Co., 975 F.2d 1365 (8th Cir. 1992) (applying Texas law).l Prior to discovering these South
Dakota cases through its own research, this Court believed South Dakota common law, including

lIn Apex, the Eighth Circuit held that, where millions of dollars are at stake, a company acts
unreasonably ifit sets off a debt to it from another transaction after being given notice of another's
security interest in the amount due. See In re Apex, 975 F .2d at 1370. As explained below, however,
subsequent revisions made to Article 9 of South Dakota's UCC in 2000 now allow a bank to set off
a debt even when it has notice of another's security interest. Assuming Texas has adopted Revised
Article 9, the result in Apex likely would be different today.

the special deposit rule, applied to the priority dispute for purposes of the conversion claim in this
case. The Court now concludes that, if South Dakota law applies, the special deposit rule does not
apply to determining the parties' priority of interests. Rather, the Court must look to Article 9 of
South Dakota's UCC to determine whether First Dakota's interest in the proceeds was greater than
Plainview's interest, the second element of First Dakota's conversion claim. The Court also
concludes that, ifSouth Dakota law applies, SDCL §§ 57A-9-340 and 57A-9-341 govern this priority
dispute. See, e.g., Kentucky Highlands Investment Corp. v. Bank ofCorbin, Inc., 217 S.W.3d 851
(Ky. App. 2006) (applying same sections of Kentucky UCC to determine bank had priority set-off
right to funds in deposit account); cf General Electric Capital Corp. v. Union Planters Bank, NA,
409 F.3d 1049 (8th Cir. 2005) (applying pre-revision Article 9 of Missouri UCC to determine
priority ofinterests in funds swept from account by bank). These UCC provisions govern the rights
of a bank with respect to deposit accounts. 2

It appears that Minnesota follows the minority view that common law is not superseded by
the UCC. See State Bank ofRose Creek v. First Bank ofAustin, 320 N.W.2d 723 (Minn.1982).
Plainview is a Minnesota bank and the money at issue was deposited and set-off in Minnesota. If
conflicts exist between South Dakota and Minnesota law, the Court must decide which state's
substantive law applies to the claim. See Modern Equip. Co. v. Continental Western Ins. Co., Inc.,
355 F.3d 1125, 1128 n. 7 (8th Cir. 2004) ( "If there is not a true conflict between the laws of
Nebraska and Iowa on the pertinent issue, then no choice-of-Iaw is required." (citing Nesladek v.

Ford Motor Co., 46 F.3d 734, 736 (8th Cir. 1995))); Consul General ofRepublic ofIndonesia v.
Bill's Rentals, Inc., 330 F.3d 1041, 1045 (8th Cir. 2003) ("Before considering any issues of conflict

2SDCL §§ 57A-9-340 and 57A-9-341 did not exist when this Court issued its opinion in
Meyerv. NorwestBankIowa, Nat. Ass'n, 924F. Supp. 964, 968 n.2(D.S.D. 1996) (discussing South
Dakota's common law "equitable" rule regarding bank's right of setoff, and noting that the South
Dakota courts had not ruled that the equitable rule was superseded by the UCC), rev'd on other
grounds, 112 F.3d 946 (8th Cir. 1997). Since the Meyer decision in 1996, the South Dakota
legislature adopted Revised Article 9 of the U CC and, in the 2003 Consolidated Nutrition decision,
the South Dakota Supreme Court held that the priority scheme of Article 9 dictates the analysis to
be applied in deciding the priority between a security interest and a set-off in the same collateral.

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oflaws, we must first determine whether 'there actually is a difference between the relevant laws of
the different states.'" (quoting Phillips v. Marist Soc'y o/Washington Province, 80 F.3d 274,276
(8th Cir. 1996))). Accordingly,

IT IS ORDERED that, within 30 days from the date of this Order, the parties shall
submit briefs addressing the following issues:

1. Explain whether there is a difference between the laws of South Dakota and
Minnesota on conversion and unjust enrichment, particularly with regard to
determining priority ofinterests for purposes ofa conversion claim in the context of
bank deposits and set-offs.
2. Ifa conflict oflaw exists, explain which state law governs the dispute in this case.
3. Explain the outcome ofthe conversion and unjust enrichment claims when the law
is applied to the facts of this case.
Dated this

tI'!' day of ~

, 2011.
BY THE COURT:

L wrence L. Piersol
nited States District Judge
ATTEST:

JOSEPH~

BY:

(1

(SEAL)

DEPUTY

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