Thomas J. O'Neal v. SW MO Bank , 118 F.3d 1246 ( 1997 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 96-2357
___________
In re: Broadview Lumber Co., Inc., *
*
Debtor, *
---------------------------------------- *
*
Thomas J. O’Neal, Trustee, *
*
Plaintiff-Appellant, *
* Appeal from the United
States
v. * District Court for the
* Western District of
Missouri.
Southwest Missouri Bank of *
Carthage; Mercantile Bank of *
Joplin; Richard Mansfield; *
Jenny Mansfield, *
*
Defendants-Appellees. *
___________
Submitted: March 10, 1997
Filed: July 8, 1997
___________
Before McMILLIAN and HANSEN, Circuit Judges, and
MAGNUSON,1 District Judge.
1
The HONORABLE PAUL A. MAGNUSON, Chief Judge, United States
District Court for the District of Minnesota, sitting by designation.
HANSEN, Circuit Judge.
Thomas J. O’Neal (Trustee), as Chapter 7 trustee for
the bankruptcy estate of Broadview Lumber Company, Inc.
(Broadview), appeals the district court’s2 decision
affirming certain rulings of the bankruptcy court3 in
favor of Southwest Missouri Bank of Carthage, Missouri
(SMB) and Mercantile Bank of Joplin (Mercantile), in the
Trustee’s adversary proceeding based on transactions
undertaken by Broadview’s former president, Richard
Mansfield (Mansfield).4 At issue in this appeal is
whether the district court erred in affirming the
bankruptcy court’s ruling in favor of Mercantile on the
Trustee’s claims for conversion and postpetition
transfer, and whether the district court erred in
affirming the bankruptcy court’s findings in favor of SMB
and Mercantile on the Trustee’s claims for an equitable
lien or constructive trust. We affirm.
I.
This case involves a complicated series of
transactions undertaken by Mansfield to transfer
Broadview's corporate assets to his personal accounts;
only one of these transactions is involved here. The
2
The Honorable Joseph E. Stevens, Jr., United States District Judge for the
Western District of Missouri.
3
The Honorable Arthur B. Federman, United States Bankruptcy Judge for the
Western District of Missouri.
4
While Richard Mansfield and his wife Jenny are appellees in this case, their
failure to file briefs on appeal waived any arguments on their behalf.
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facts as relevant to this appeal are as follows.
Broadview--a wholesale lumber brokerage firm --was
established in 1905. In 1990, Mansfield enjoyed a
position as president and fifty-percent stockholder.
Broadview’s
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corporate checking account was maintained at SMB, and its
financing was provided by Fidelcorp, which advanced funds
against Broadview’s accounts receivable. Fidelcorp was
acquired by CIT Group (CIT) sometime before January 1,
1991; CIT refused to advance further funds beginning
January 2, 1991, and Broadview was left without funds to
support over $400,000 in checks previously written. As
a result, Broadview was forced to cease operations almost
immediately.
Between January and May 1991, Mansfield liquidated
inventory and collected accounts receivable sufficient to
pay money due to CIT. Mansfield overpaid the debt to CIT
by $17,303.37, and that amount was refunded to Broadview
by check. An involuntary bankruptcy petition was filed
against Broadview on November 12, 1991. On November 25,
1991, Mansfield purchased a cashier’s check from SMB in
the amount of $19,303.37 payable to “Broadview Lumber,”
with the $17,303.37 check from CIT and $2,000 drawn on
Broadview’s account at SMB.
Mansfield and his wife maintained a personal account
at Mercantile. On January 21, 1992, Mansfield endorsed
the $19,202.27 cashier’s check “Broadview Lumber Co.,
Inc., Richard Mansfield, President,” and presented the
check to Mercantile for deposit in this personal account;
the accompanying deposit slip described the account as
“Richard T. or Jenny P. Mansfield Construction Account.”
Funds from that account--which included other corporate
funds transferred into it by Mansfield--were used for
construction of the Mansfields’ home in Carthage,
Missouri. Mercantile, who had previously agreed to loan
the Mansfields $180,000 for the construction, extended
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permanent financing for the repayment of the loan in
April 1992. Mercantile holds a deed of trust to the
Mansfields’ property securing the repayment of the loan.
The Trustee filed this adversary proceeding against SMB, Mercantile,
and the Mansfields under 28 U.S.C. § 157(b)(2)(E) and (F) to recover funds
inappropriately transferred out of Broadview’s account. The Trustee
asserted, inter alia, that Mercantile had knowledge that Mansfield acted
in breach of his fiduciary duty,
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violating Missouri’s Uniform Fiduciaries Law (UFL), and that Mercantile
took the $19,303.37 check subject to all claims that might exist and not
as a holder in due course under the Uniform Commercial Code (UCC). The
Trustee alleged Mercantile became liable in conversion by crediting the
check’s proceeds to the Mansfields’ personal account. The Trustee sought
judgment against Mercantile in the amount of $19,303.37 and a constructive
trust or equitable lien upon the Mansfields’ Carthage property for funds
converted by Mansfield and used for construction of the Mansfields’ home.
The Trustee raised a number of allegations against SMB as well.5
Following a one-day trial, the bankruptcy court entered a money
judgment against the Mansfields. The bankruptcy court found in
Mercantile’s favor on the conversion claims against it, concluding that
Mercantile did not have actual knowledge that Mansfield breached his
fiduciary duty or that it knew of such facts that the failure to inquire
constituted bad faith. The bankruptcy court noted that even though the
teller was negligent in allowing the deposit and Mercantile’s vice
president knew Broadview had closed its doors, these facts did not “add up
to knowledge” that Mansfield was breaching his fiduciary duty; nor were the
facts sufficient to put Mercantile on notice that such a breach might be
taking place. (Appellant’s Adden. at 26.) Because the Trustee did not
meet his burden of establishing that Mercantile had actual knowledge or
acted in bad faith, the bankruptcy court concluded the Trustee could not
recover against Mercantile for conversion.
As to the request for a constructive trust or an equitable lien, the
bankruptcy court noted that such remedies are available only when there is
no adequate remedy at
5
SMB filed the original notice of appeal in this court; the Trustee filed a notice
of appeal as well. SMB and the Trustee thereafter reached a compromise settlement
of the claims raised in SMB’s appeal. The settlement was approved by the bankruptcy
court and we granted SMB’s motion to dismiss its appeal. SMB has notified this court
that it intends no further action on appeal but has adopted those portions of
Mercantile’s brief which address issues of constructive trust and equitable lien.
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law. In this case, because the bankruptcy court granted the Trustee
judgment against the Mansfields (which exceeded the amount of Broadview’s
property that the Trustee had shown was used for the Mansfields’ home), the
bankruptcy court concluded the Trustee’s remedy at law was adequate.
Further, the Trustee failed to establish that the Mansfields were
insolvent. The district court affirmed the bankruptcy court’s decision for
the reasons expressed by the bankruptcy court.
The Trustee timely appeals, asserting that because Mercantile
stipulated that it had notice of Mansfield’s fiduciary status, and because
Mansfield--identified by his endorsement as the president of Broadview--
deposited the corporation’s check in his personal account, Mercantile did
not become a holder in due course. The Trustee further argues that
Mercantile acted in bad faith contrary to the UFL (Mo. Ann. Stat. § 456.310
(West 1992)), and that even though he need not show an inadequate remedy
at law for equitable relief, such remedy is inadequate.
Mercantile, on the other hand, asserts that the teller was unable to
determine whether the instrument payable to “Broadview Lumber” was payable
to a corporation; that the Trustee failed to establish that the teller had
actual knowledge of Mansfield’s breach of fiduciary duty; and that the
Trustee’s remedy is adequate, thus barring equitable relief.
II.
This court reviews the bankruptcy court’s factual findings for clear
error and its legal conclusions de novo. See First Nat’l Bank of Olathe
v. Pontow, 111 F.3d 604, 609 (8th Cir. 1997). State law controls issues
concerning the nature and extent of a debtor’s interest in property.
See Natkin & Co. v. Myers (In re Rine & Rine Auctioneers, Inc.), 74 F.3d
848, 851 (8th Cir. 1996). As all the events herein occurred in the state
of Missouri, we apply Missouri law and review de novo the lower court’s
determinations of state law. See Nangle v. Lauer (In re Lauer) , 98 F.3d
378, 382 (8th
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Cir. 1996) (citing Salve Regina College v. Russell, 499 U.S. 225, 231
(1991)).
III.
A. Uniform Fiduciaries Law
The applicable UFL provision states in relevant part:
If a fiduciary makes a deposit in a bank to his personal
credit of checks . . . payable to his principal and endorsed by
him, if he is empowered to endorse such checks, or if he
otherwise makes a deposit of funds held by him as fiduciary,
the bank receiving such deposit is not bound to inquire whether
the fiduciary is committing thereby a breach of his obligation
as fiduciary; and the bank is authorized to pay the amount of
the deposit or any part thereof upon the personal check of the
fiduciary without being liable to the principal, unless the
bank receives the deposit or pays the check with actual
knowledge that the fiduciary is committing a breach of his
obligation as fiduciary in making such deposit or in drawing
such check, or with knowledge of such facts that its action in
receiving the deposit or paying the check amounts to bad faith.
Mo. Ann. Stat. § 456.310 (West 1992). The UFL relieves banks like
Mercantile from the common law duty of inquiring into the propriety of such
transactions conducted by fiduciaries. See Lauer, 98 F.3d at 383. To
establish a claim under the UFL, the Trustee must establish that Mansfield
was a fiduciary, that Mansfield breached his fiduciary duty, and that
Mercantile had either actual knowledge of the breach or sufficient facts
such that its conduct amounted to bad faith. See id. at 386.
Actual knowledge for purposes of the UFL requires a present awareness
that a fiduciary is breaching his duty for personal gain. See Trenton
Trust Co. v. Western Sur. Co., 599 S.W.2d 481, 491 (Mo. 1980) (en banc);
Southern Agency Co. v. Hampton Bank of St. Louis, 452
S.W.2d 100, 105 (Mo. 1970). “Bad faith” requires
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something more than mere negligence and can be found where the person
accepting a negotiable instrument disregards circumstances that are
suggestive of a breach and are sufficiently obvious such that it is in bad
faith to remain passive. See Trenton Trust Co., 599 S.W.2d at 492; General
Ins. Co. v. Commerce Bank of St. Charles, 505 S.W.2d 454, 458 (Mo. Ct. App.
1974) (“The facts and circumstances must be so cogent and obvious that to
remain passive would amount to a deliberate desire to evade knowledge
because of a belief or fear that inquiry would disclose a defect in the
transaction.”). Absent proof of these factors, the bank is allowed to
presume that the fiduciary is acting within his capacity as a fiduciary.
The bankruptcy court concluded, and we agree, that the Trustee failed
to establish that Mercantile acted with “actual knowledge” or in bad faith,
as no evidence was produced to establish the teller had any knowledge that
Mansfield was breaching his fiduciary duty. Compare Trenton Trust, 599
S.W.2d at 484-86 (guardian allowed to use insurance checks made payable to
her as guardian for her children to purchase certificates of deposit which
did not reflect fiduciary relationship; bank officer who allowed her to
cash checks was on first name basis with fiduciary, had been told about her
fiduciary status, and had supervised fiduciary’s endorsement of checks to
match payee, even looking specifically to see if the payee and endorsements
matched; bank was liable under UFL, as officer had actual knowledge of the
fiduciary’s breach), with Southern Agency, 452 S.W.2d at 102-04 (corporate
president deposited checks payable to corporation into account of different
corporation in which he was the principal shareholder; president then used
funds to purchase cashier’s checks; bank did not act with actual knowledge
or bad faith, as there was no evidence or testimony to show any
of bank’s employees actually knew president was breaching his fiduciary
obligations).6
6
While the Trustee points out that Mansfield did not have the authority to
endorse the check in his personal capacity, we note that “[i]t is not necessary, under
the Uniform Fiduciaries Act, that the fiduciary have express authority to indorse only
for a particular purpose. If he has the power to indorse for any purpose, and if the
limitations on that power have not been communicated to the indorsee bank, then actual
notice of misappropriation or conduct amounting to bad faith on the part of the bank
must be shown in order for the principal to recover.” See Southern Agency Co., 452
S.W.2d at 105.
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B. Holder in Due Course
Likewise, we conclude Mercantile took the check as a holder in due
course without knowledge of Mansfield’s fiduciary status and breach of
fiduciary duty. Under Missouri law in effect at the time of the
transaction--a
“purchaser [of a negotiable instrument] has
notice of a claim against the instrument when he has
knowledge that a fiduciary has negotiated the instrument
in payment of or as security for his own debt or in any
transaction for his own benefit or otherwise in breach of
duty,” Mo. Ann. Stat. § 400.3-304(2) (West 1965). A
purchaser who takes with such knowledge does not take as a holder in due
course. See Mo. Ann. Stat. § 400.3-302(1)(c) (West 1965). Section 400.3-
304(2) followed the policy of the Uniform Fiduciaries Act, and the UCC
Comment following § 400.3-304 makes it clear that:
mere notice of the existence of the fiduciary relation is not
enough in itself to prevent the holder from taking in due
course, and he is free to take the instrument on the assumption
that the fiduciary is acting properly. The purchaser may pay
cash into the hands of the fiduciary without notice of any
breach of the obligation.
Mo. Ann. Stat. § 400.3-304, UCC comment 5 (West 1965); McKee Constr. Co.
v. Stanley Plumbing & Heating Co., 828 S.W.2d 700, 703 (Mo. Ct. App. 1992)
(where code is adopted by state, accompanying comments “are given great
weight”); Boatmen’s Nat’l Bank of Carthage v. Eidson, 796 S.W.2d 920, 923
(Mo. Ct. App. 1990) (official UCC comments, while not having the force of
statutory language, are nonetheless permissible and persuasive in
determining legislative intent).
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Testimony before the bankruptcy court reflects that while the
Mansfields’ loan officer at Mercantile knew of Mansfield’s status as
officer of Broadview and Broadview’s impending bankruptcy, the teller who
conducted the transaction was unaware of both these facts. The teller
testified that she did not know Mansfield, and she was unable to identify
him in the courtroom; she further testified that there was no way to tell
whether the check was payable to a corporation, and that she assumed the
check may have been payable to a “d/b/a type of account.” These facts are
insufficient to demonstrate actual knowledge that Mansfield was depositing
corporate funds for his personal benefit and are thus insufficient to put
Mercantile on notice of the Trustee’s claim to the funds.
To the extent the Trustee relies on what he believes to be the
current UCC provision, such reliance is misplaced. The Trustee sets forth
in his brief the UCC provision enacted in Missouri in 1992--after the
that a taker has notice
transaction at issue here7--which stated
of a breach of fiduciary duty where an instrument payable
to a represented person (which includes a corporation) is
“deposited to an account other than an account of the
fiduciary, as such, or an account of the represented
person.” See Mo. Ann. Stat. § 400.3-307(a) & (b)(2) (iii) (West
1994). The Missouri Legislature amended that provision in 1994, however,
to delete the language on which the Trustee relies. See Mo. Ann. Stat. §
400.3-307(b)(2) (West 1994 & Supp. 1997).8 We also
7
The transaction in this case occurred in January 1992, and the new UCC
provision was not approved until July 8, 1992.
8
Section 400.3-307(b)(2) (West 1994 & Supp. 1997) states:
In the case of an instrument payable to the represented person or the
fiduciary as such, the taker has notice of the breach of fiduciary duty if the
instrument is (i) taken in payment of or as security for a debt known by
the taker to be the personal debt of the fiduciary, or (ii) taken in a
transaction known by the taker to be for the personal benefit of the
fiduciary.
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note that both the current and superseded versions of section 400.3-307
apply only when the bank has “knowledge” of the presenter’s fiduciary
status; “knowledge of the [bank] is determined by the knowledge of the
‘individual conducting that transaction,’ i.e., the clerk who receives and
processes the instrument.” Mo. Ann. Stat. § 400.3-307, UCC comment 2 (West
1994). “Notice which does not amount to knowledge is not enough to cause
section 3-307 to apply.” Id. The bank clerk’s mere notice of
Mansfield’s status as a corporate officer does not amount to “knowledge”
that Mansfield owed “a fiduciary duty with respect to [the] instrument,”
Mo. Ann. Stat. § 400.3-307, within the meaning of Missouri’s Uniform
Commercial Code.
C. Constructive Trust or Equitable Lien
“A constructive trust is a method by which a court exercises its
equitable powers to remedy a situation where a party has been wrongfully
deprived of some right, title, benefit or interest in property as a result
of fraud or in violation of confidence or faith reposed in another.” Fix
v. Fix, 847 S.W.2d 762, 765 (Mo. 1993) (en banc) (internal quotations
omitted). The purpose of a “constructive trust is to restore to the
rightful owner the property wrongfully withheld by the defendant.” Id.
Under Missouri law, an equitable lien is applicable only where there is an
inadequate remedy at law and “justice would suffer without the equitable
remedy.” Jorritsma v. Tymac Controls Corp., 864 F.2d 597, 599 (8th Cir.
1988). “Generally, equity will not intercede if there is an adequate
remedy at law.” Hammons v. Ehney, 924 S.W.2d 843, 847 (Mo. 1996) (en
banc). See Newmark v. Vogelgesang, 915 S.W.2d 337, 339 (Mo. Ct. App. 1996)
(“Equitable relief is discretionary, extraordinary, and should not be
applied when an adequate legal remedy exists.” (internal quotations
omitted)).
As the Trustee was awarded a money judgment against the Mansfields,
and there is no evidence that the Mansfields are insolvent, we conclude
that the bankruptcy court correctly declined to impose a constructive trust
or an equitable lien.
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IV.
Accordingly, we affirm the judgment of the district court.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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