Venetian Blind & Floor Covering, Ltd. v. Wells Fargo Bank, N.A.

Filing 105

MEMORANDUM OPINION AND ORDER granting in part and denying in part 49 MOTION for Partial Summary Judgment on Endorsements. (Signed by Magistrate Judge Stephen Wm Smith) Parties notified. (jmarchand)

V e n e t i a n Blind & Floor Covering, Ltd. v. Wells Fargo Bank, N.A.

D o c . 105

UNITED STATES DISTRICT COURT S O U T H E R N DISTRICT OF TEXAS H O U S T O N DIVISION V ENETIAN BLIND & FLOOR COVERING, LTD.,§ D /B /A GULF COAST WINDOW COVERING, § P l a i n t i ff , § § vs. § § W ELLS FARGO BANK, N.A., § D e fe n d a n t. §

C IVIL ACTION H-08-2451

M E M O R A N D U M OPINION AND ORDER T h is banking dispute is before the court on defendant Wells Fargo's motion for partial s u m m a ry judgment on the effectiveness of endorsements (Dkt. 49). The court held a hearing o n January 14, 2010. Defendant's motion is granted in part and denied in part.1 S u m m a r y Judgment Standards S u m m a ry judgment is appropriate if no genuine issues of material fact exist, and the m o v i n g party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c). The party m o v in g for summary judgment has the initial burden to prove there are no genuine issues of m a te ria l fact for trial. Provident Life & Accident Ins. Co. v. Goel, 274 F.3d 984, 991 (5th C ir. 2001). Dispute about a material fact is "genuine" if the evidence could lead a reasonable ju ry to find for the nonmoving party. In re Segerstrom, 247 F.3d 218, 223 (5th Cir. 2001).

1

Plaintiff has filed objections to certain of defendant's summary judgment evidence (Dkts. 69, 93). The court sustains the objections to the portions of Bowers's and Chynoweth's affidavits in which they state ultimate legal conclusions, i.e., "the endorsements are substantially similar," or "Wells Fargo acted in good faith." The remaining objections are overruled for purposes of this motion.

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" A n issue is material if its resolution could affect the outcome of the action." Terrebonne P a r is h Sch. Bd. v. Columbia Gulf Transmission Co., 290 F.3d 303, 310 (5th Cir. 2002). A summary judgment movant who bears the burden of proof on a claim must establish e a c h element of the claim as a matter of law. Fontenot v. Upjohn Co., 780 F.2d 1190, 1194 (5 th Cir. 1986). If the movant meets this burden, "the nonmovant must go beyond the p le a d in g s and designate specific facts showing that there is a genuine issue for trial." L ittlefie ld v. Forney Indep. Sch. Dist., 268 F.3d 275, 282 (5th Cir. 2001) (quoting Tubacex, In c . v. M/V Risan, 45 F.3d 951, 954 (5th Cir. 1995)). If the evidence presented to rebut the summary judgment is not significantly probative, s u m m a ry judgment should be granted. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 2495 0 (1986). In determining whether a genuine issue of material fact exists, the court views th e evidence and draws inferences in the light most favorable to the nonmoving party. Id. a t 255. A n a ly sis P la in tif f Venetian Blind & Floor Covering Shop Ltd., d/b/a Gulf Coast Window C o v e rin g has sued Wells Fargo Bank, N.A. for conversion pursuant to Texas Business and C o m m e rc e Code § 3.420. Plaintiff seeks to recover for conversion of 654 checks: 651 d e p o site d by its former employee, Marcia Sinclair, into an account she opened at Wells Fargo

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in the name of Gulf Coast Window & Drapery Design, and 3 deposited by Sinclair into her p e rso n a l checking account.2 D e f en d a n t moves for a summary judgment ruling that the endorsements on all 654 c h e ck s in issue were effective pursuant to Texas Business and Commerce Code § 3.405. S e c tio n 3.405 provides, in relevant part, as follows: (b ) For the purpose of determining the rights and liabilities of a person who, in good faith, pays an instrument or takes it for value or for collection, if an e m p l o ye r entrusted an employee with responsibility with respect to the in s tru m e n t and the employee or a person acting in concert with the employee m a k e s a fraudulent indorsement of the instrument, the indorsement is effective a s the indorsement of the person to whom the instrument is payable if it is m a d e in the name of that person. If the person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking th e instrument and that failure contributes to loss resulting from the fraud, the p e r s o n bearing the loss may recover from the person failing to exercise o rd in a ry care to the extent the failure to exercise ordinary care contributed to th e loss. (c ) Under Subsection (b), an indorsement is made in the name of the person to w h o m an instrument is payable if: (1) it is made in a name substantially similar to the name of that person; or (2) the instrument, whether or not indorsed, is deposited in a depositary bank to an account in a name substantially similar to the name of that person. Thus, under the UCC's comparative negligence scheme,3 a bank is not responsible for a n employer's loss if (1) the bank acted in good faith; (2) the embezzler was an employee e n tru s te d with responsibility for the checks; (3) the checks were indorsed (i) in the name of

2

Plaintiff seeks recovery for the 654 checks in the amount of $5,298,148.75. Southwest Bank v. Information Support Concepts, Inc., 149 S.W.3d 104, 108 (Tex. 2004) (Revised Article 3 of the UCC "evince[s] a shift away from strict liability for banks that convert checks to a fault based system."). 3

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th e payee, (ii) in a name substantially similar to the name of the payee, or (iii) deposited into a n account having a name substantially similar to the name of the payee; and (4) the bank e x e rc is e d ordinary care in paying the check. Defendant did not move for summary judgment a s to the fourth element above, i.e., whether it exercised ordinary care, and concedes that is s u e must be tried to a jury.4 T h e parties agree that defendant bears the burden of proof to establish the first three e le m e n ts of its § 3.405 defense. If it does so, the burden shifts plaintiff to prove defendant d id not exercise ordinary care. Good faith. The UCC defines good faith as "honesty in fact and the observance of r e a so n a b l e commercial standards of fair dealing." TEX. BUS. & COM. CODE § 1.201(b)(20). T h e Texas Supreme Court has held that "the test for good faith is the actual belief of the p a rty in question, not the reasonableness of that belief." La Sara Grain Co. v. First Nat. B a n k of Mercedes, 673 S.W.2d 558, 563 (Tex. 1984) (emphasis added). The Fifth Circuit in British Caledonian Airways Ltd. v. First State Bank of Bedford, Texas, 819 F.2d 593 (5th C ir. 1987) recognized the possibility that "in some cases a large number of strong 'should h a v e knowns' may support a jury inference of 'did know,'" but made it clear that bad faith re q u ire s something more than simple negligence. Id. at 598. Matters of good faith under the U C C generally present fact questions for a jury. See Bank of Saipan v. CNG Financial

4

Defendant's reply (Dkt. 85), at 10. Counsel confirmed this on the record at the January 14 hearing. 4

C o r p ., 380 F.3d 836, 843 (5th Cir. 2004); Mathis v. Exxon Corp., 302 F.3d 448, 457 (5th Cir. 2 0 0 2 ). T h e re is no evidence in the record that any Wells Fargo teller actually conspired with S in c la ir. In an effort to squeeze in the window left open by British Caledonia, plaintiff has p re se n ted a list of things it characterizes as "should have knowns." For instance, Wells F a rg o knew that Sinclair worked for Gulf Coast Window Covering at the time it allowed her t o open an account in the d/b/a name Gulf Coast Window and Drapery Design; the initial d e p o sit Sinclair made in her fraudulent account exceeded the total amount of prior year sales s h e represented at the time of opening the account; she repeatedly transferred sums from the b u s i n e s s account to cover overdrafts in her personal account; Wells Fargo allowed her to d e p o sit business checks into her personal account on three occasions; tellers did not follow W e lls Fargo procedures when accepting the checks for deposit by, among other things, using a "lack of endorsement" stamp even where an endorsement appeared on the check.5 T h e examples of carelessness or mistakes pointed out by plaintiff do not add to up to a "large number of strong should have knowns." There is simply not enough here from which a reasonable jury could infer actual knowledge as opposed to negligence. The court c o n c lu d e s that Wells Fargo has met its summary judgment burden as to good faith. E n tr u s tm e n t. Defendant contends that this issue is undisputed, relying on plaintiff's v e rif ie d pleadings in its state court lawsuit against Sinclair, including the allegation that
5

See plaintiff's response, at 10-14 and evidence cited therein; see also Affidavit of Micheline Ellas (Dkt. 74-1). 5

S in c la ir had "responsibility for gathering and depositing all customer checks that were physically received by Gulf Coast." 6 Defendant has also presented deposition testimony from p la in tif f 's Controller, William Clayton, describing Marcia Sinclair's duties regarding taking c h e c k s to the bank for deposit.7 P lain tiff 's argument that defendant has not met its burden of proof on this point, w ith o u t presentation of contrary evidence, is unpersuasive. Plaintiff has never contended that S in c lair came into possession of any one of the 654 checks in some way other than as its e m p lo ye e responsible for gathering and collecting them. It did not present any evidence on t h i s point in response to defendant's summary judgment motion. Therefore, defendant's m o tio n for summary judgment that Marcia Sinclair was "entrusted . . . with responsibility w ith respect to" each of the 654 checks is granted, and it will not be required to prove that f a c t at trial. S u b sta n tia l similarity of endorsements. Section 3.405(c) governs the issue of s u b s ta n tia l similarity. An endorsement is effective if it is (1) substantially similar to the n a m e of the payee, or (2) the name of the payee is substantially similar to the name on the a c c o u n t into which it is deposited. The only Texas case defendant cites, Basse Truck Line, Inc. v. First State Bank, B a n d e ra , Texas, 949 S.W.2d 17, 20-21 (Tex. App. ­ San Antonio 1997, pet. denied),

6

Plaintiff's verified original petition, Ex. 1 to defendant's motion, ¶ 8. Defendant's reply, Ex. 20. 6

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a d d re ss e s the legal issue of whether the version of § 3.405 applicable in that case required a "mirror image" endorsement or rather a "substantially similar" endorsement (as in c o r p o r a te d in the 1995 revisions). The plaintiff argued for the former and lost; the case c o n ta in s no discussion of the substantial similarity between the endorsement "Texas In s u ra n c e" and the payee name "Texas Insurance Agency, Inc." In fact, no case cited by the p a rtie s provides helpful guidance on the meaning of the phrase substantially similar.8 The f a ct that plaintiff's legitimate d/b/a Gulf Coast Window Covering and Sinclair's fraudulent d /b /a Gulf Coast Window & Drapery Design are "similar" (as stated in an insurance d o c u m e n t by William Gaul, President and CEO of Venetian Blind, and in an unsworn letter w r i t te n Elizabeth Kamin, a lawyer for Venetian Blind 9 ) does not answer the substantial s im ila rity inquiry. D e f en d a n t has submitted a copy of each check in the summary judgment record.1 0 For s im p lic ity, defendant produced at the January 14 hearing a summary chart identifying the p a ye e and endorsement on each check.11

8

Defense counsel conceded at the hearing that "substantially similar" means something more than similar, as opposed to something less than similar. Motion, Exs. 9, 10. Motion, Ex. 19. After the hearing, plaintiff presented a chart dividing the checks into more subcategories. Ex. 3 to sur-reply (Dkt. 102); see also response to sur-reply (Dkt. 103). The court has noted the variations pointed out by plaintiff within each category above. Defendant has made one small change to its chart since the hearing. Ex. 2 to plaintiff's surreply. In the third category, an endorsement "mystery ­ bad copy" was eliminated and the 7

9

10

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T h e summary chart below identifies the payee and endorsement on each check: # checks 169 P a ya b le to G u lf Coast (includes Gulfcoast, G o lf c o a s t, Gulf Coast-SA, G u lf Coast-Builder Account) G u l f Coast Window(s) G u lf Coast Window C o v e r in g ( s ) (in c lu d e s Gulf Coast W.C., G u lf c o as t Window C o v e r in g ( s) , Gulf Coast W in d o w Co., Gulf Coast W in d o w Cov., Gulf Coast W in d o w Coverin, Gulf Cost W in d o w Covering, Gulf C o ast Windowcovering) No payee G u lf Coast Window Fashions E n d o rse d G u l f Coast G u lf Coast Window N one # checks 38 130*12 1

14 470

G u l f Coast G u lf Coast Window Gulf Coast G u lf Coast Window N one

3 11 111 357* 2

1 1

G u lf Coast Window G u lf Coast

1 1

number of checks endorsed "Gulf Coast Window" was increased from 356 to 357. Because plaintiff's sur-reply does not list any check with a "mystery" endorsement, the court accepts this change and has incorporated it into the chart above. The courts notes that defendant's original chart contained another discrepancy not corrected by defendant or plaintiff. There are actually 470 checks in the third category, not 469, making the total number of checks reflected on the chart 655 instead of 654. This problem is not clarified by plaintiff's submission, which actually lists only 650 checks. This minor discrepancy likely is immaterial the court's analysis and the court is confident the parties can address each check consistent with this rulings in this Order.
12

One check made payable to Gulf Coast and endorsed Gulf Coast Window was deposited into Sinclair's personal account, as were two checks made payable to Gulf Coast Window Covering and endorsed Gulf Coast Window. 8

P la in tif f first argues that the "name of the person to whom an instrument is payable" is the party actually entitled to payment, i.e., Gulf Coast Window Covering, not the name ac tually written on the check. Under this theory, the "payable to" column in the above chart is irrelevant, and the appropriate inquiries are whether Gulf Coast Window Covering is su b stan tially similar to the endorsement on each check, or to Gulf Coast Window & Drapery D e sig n . Plaintiff has not presented any authority for this interpretation of the statute.1 3 The c a se s that have been brought to the court's attention focus on the name written on the check. S e e In re McMullen Oil Co., 251 B.R. 558, 575-76 (Bankr. C.D. Ca. 2000) (noting that bank is protected where there is a minor variation between "the name shown as the payee on the ch ec k " and the endorsement); British Caledonian Airways Ltd. V. First State Bank of B e d fo rd , TX, 819 F.2d 593, 599-600 (5th Cir. 1987) (reasoning that it should not change a s u b s ta n tia l similarity analysis whether a minor spelling mistake appears on the front or the b ac k of a check); Auto-Owners Ins. Co. v. Bank One, 852 N.E.2d 604, 614-15 (Ind. 2006). T h e court concludes that the plain meaning of the phrase "name of the person to whom an in s tru m e n t is payable" is the name actually written on the "payable to" line of the check.1 4 C o u n s e l for plaintiff conceded at the hearing that if the court rejects its argument

13

Counsel was granted leave to file supplemental authority on this point after the January 14 hearing. He has not done so. In any event, because the majority of checks were made payable to some variation of Gulf Coast Window Covering, this issue has only limited impact on the outcome of the motion for summary judgment. 9

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a b o v e , plaintiff cannot dispute substantial similarity as to the first two categories appearing o n the summary chart ­ those payable to Gulf Coast and Gulf Coast Window.15 T h u s , the court turns to the bulk of this dispute, the 470 checks made payable to Gulf Coast W in d o w Covering. The court first considers whether the payee name Gulf Coast Window Covering is s u b s ta n tia lly similar to any of the listed endorsements. The court finds as a matter of law that th e endorsement Gulf Coast Window is substantially similar to Gulf Coast Window C o v e rin g . The former is a substantial subset of the latter and contains no differentiating or lim itin g words. The variations noted by plaintiff in the spelling or abbreviation of Gulf Coast W in d o w Covering are within the type of minor variations that cases such as Basse and Shane S m ith Enter., Inc. v. Bank of America, N.A., No. 4:06CV00376, 2007 WL 1880201 (E.D. A r k . June 29, 2007), have found acceptable. As to the 357 checks payable to Gulf Coast W in d o w Covering and endorsed Gulf Coast Window, defendant has met its burden of proof o n the substantial similarity element of its § 3.405 defense. As for those 111 checks endorsed simply "Gulf Coast," however, such a generic en d o rsem en t is not necessarily substantially similar to Gulf Coast Window Covering. There a re innumerable business in the Houston area with the phrase Gulf Coast at the start of their n a m e s . Where no other distinguishing word is present, reasonable persons could disagree
15

This concession is with one exception: the check made payable to Gulf Coast and having no endorsement. In keeping with the court's ruling that Gulf Coast is too generic to be substantially similar to either Gulf Coast Window Covering or Gulf Coast Window & Drapery Design, summary judgment is denied as to this particular check. See infra at 10-11. 10

w h e th e r the generic phrase "Gulf Coast" is substantially similar to another business name.1 6 O f course, there cannot be substantial similarity regarding the payee name Gulf Coast W in d o w Covering where the check has no endorsement at all. Therefore, for these remaining 113 checks, the issue becomes whether the payee name G u lf Coast Window Covering is substantially similar to the name on the deposit account, G u lf Coast Window & Drapery Design. The differences between the two names reflect more t h a n minor variation or misspelling ­ they involve different words that are not entirely s yn o n ym o u s . One name is not simply a shortening or subset of the other. None of the cases d e f en d a n t uses for comparison address this type or degree of variation.1 7 The court finds the d iffe ren ce between Gulf Coast Window Covering and Gulf Coast Window & Drapery D e s ig n sufficient to put the issue to the jury. As to the final two categories on the summary chart, the parties' positions are unclear. H o w ev er, it appears obvious that there can be no § 3.405(c) substantial similarity where there is no payee name at all. And as to Gulf Coast Window Fashions, endorsed simply Gulf C o a st, the reasoning set forth in the above paragraph regarding Gulf Coast Window Covering a p p lie s. Therefore, summary judgment on substantial similarity of endorsements is denied a s to those two checks as well.

16

By analogy, it would be as if in the Basse case the court found an endorsement of only "Texas" to be substantially similar to Texas Insurance or Texas Insurance Agency, Inc. See motion, at 15. 11

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C o n c lu s io n and Order For the reasons discussed above, defendant's motion for partial summary judgment o n endorsements (Dkt. 49) is granted in part and denied in part. Specifically, summary ju d g m e n t is granted as to the elements of good faith and entrustment. Summary judgment is granted as to the substantial similarity of endorsements as to 168 of the 169 checks payable to Gulf Coast;1 8 the 14 checks payable to Gulf Coast Window; and the 357 payable to Gulf C o a s t Window Covering and endorsed Gulf Coast Window (a total of 539 checks). Summary judgment is denied on the substantial similarity of endorsements as to the o n e (1) check payable to Gulf Coast having no endorsement; the 111 checks payable to Gulf C o a s t Window Covering and endorsed Gulf Coast; the two (2) checks payable to Gulf Coast W in d o w Covering having no endorsement; the one (1) check with no payee; and the one (1) c h e c k payable to Gulf Coast Window Fashions (a total of 116 checks). The issue of defendant's exercise of ordinary care remains for trial as to all checks. Signed at Houston, Texas on February 9, 2010.

18

See supra n.15. 12