Buffets, Inc. v. Leischow

• Decision Date: 21 October 2013
• Docket Number: No. 12–2804.,12–2804.
• Court: U.S. Court of Appeals — Eighth Circuit
• Parties: BUFFETS, INC., a Minnesota corporation; OCB Restaurant Company, LLC, a Minnesota limited liability company; Ryan's Restaurant Group, Inc., a South Carolina corporation; Home Town Buffet, Inc., a Minnesota corporation; Tahoe Joe's, Inc., a Minnesota corporation; Fire Mountain Restaurants, LLC, a Delaware limited liability company, Plaintiffs–Appellants v. Dean LEISCHOW, Defendant BMO Harris Bank, formerly known as M & I Marshall & Isley Bank; U.S. Bank, N.A., Defendants–Appellees.

732 F.3d 889

BUFFETS, INC., a Minnesota corporation; OCB Restaurant Company, LLC, a Minnesota limited liability company; Ryan's Restaurant Group, Inc., a South Carolina corporation; Home Town Buffet, Inc., a Minnesota corporation; Tahoe Joe's, Inc., a Minnesota corporation; Fire Mountain Restaurants, LLC, a Delaware limited liability company, Plaintiffs–Appellants

v.Dean LEISCHOW, Defendant

BMO Harris Bank, formerly known as M & I Marshall & Isley Bank; U.S. Bank, N.A., Defendants–Appellees.

No. 12–2804.

United States Court of Appeals,

Eighth Circuit.

Submitted: March 14, 2013.

Filed: Oct. 21, 2013.

Counsel who presented argument on behalf of the appellant was William F. Mohrman, of Minneapolis, MN. The following attorney(s) appeared on the appellant brief; James Roger Magnuson, of Minneapolis, MN.

Counsel who presented argument on behalf of the appellee U.S. Bank was Peter William Carter, of Minneapolis, MN. The following attorney(s) appeared on the appellee brief of U.S. Bank; Eric R. Sherman, of Minneapolis, MN. Kristin Kate Zinsmaster, of Minneapolis, MN.

Counsel who presented argument on behalf of the appellee BMO Harris Bank was Keith Solomon Moheban, I, Allen I. Saeks and Elizabeth A. Larsen, of Minneapolis, MN.

Before WOLLMAN and COLLOTON, Circuit Judges, and HOLMES,¹ District Judge.

COLLOTON, Circuit Judge.

Buffets, Inc. brought this action against U.S. Bank and BMO Harris Bank (“BMO”), alleging among other things violations of the Uniform Fiduciaries Act (“UFA”). The district court ² granted the banks' motions for summary judgment, and we affirm.

I.

Buffets, Inc. owned and operated approximately 546 restaurants in 39 States across the country. On January 7, 2007, Buffets hired LGI Energy Solutions, Inc. to manage its utility costs. The companies entered into a contract stating that LGI would provide customized reports describing and analyzing Buffets' utility bills, as well as analysis of Buffets' “existing rate structures to determine if a more cost effective rate is available.”

The contract established a procedure by which LGI would pay utility bills on behalf of Buffets. After receiving a bill for one of Buffets' restaurants from the utility provider, LGI would send Buffets an “accounts payable report [ ]”; on the following day, Buffets would remit to a bank account held by LGI sufficient funds to cover the portion of the report Buffets approved, and LGI would then use those funds to pay Buffets' bill. The contract also set forth LGI's fees for managing Buffets' bills and for reducing Buffets' utility costs. Buffets paid these fees and remitted funds for bill payment into the same LGI bank accounts.

During its negotiations with LGI, Buffets sought to require LGI to set up a designated “fiduciary” account into which Buffets would deposit funds for bill payment, but LGI refused. Instead, Buffets agreed to a provision stating that “[a]t no time shall LGI have a legal or equitable interest in [Buffets'] funds and [Buffets] grants no security interest to LGI.” LGI previously had opened “demand deposit accounts” in its name with U.S. Bank, and LGI used those accounts in managing Buffets' bills (and the bills of at least eight other clients) until fall of 2008. According to the contract between LGI and U.S. Bank, the bank presumed that the holder of an “[i]ndividual [a]ccount,” such as LGI's account, owned the funds in that account. Under a separate treasury management services agreement, LGI represented to U.S. Bank that “any and all transfers and commingling of funds ... requested by [LGI] ... have been duly authorized by all necessary parties.”

The U.S. Bank employees who managed LGI's accounts testified that LGI sometimes would pay a client's bill before receiving funds from that client, in which case the client would then reimburse LGI. LGI thus needed access to sufficient resources to pay its clients' considerable utility bills up front. To this end, U.S. Bank extended a $1 million line of credit to LGI in October 2007.

LGI's practice of paying its clients' utility bills before receiving payment from those clients also led to consistent “overdrafts”—that is, LGI would write checks for amounts in excess of the funds in its account. Because permitting a banking customer to overdraft its account increases a bank's exposure to risk, U.S. Bank began to monitor LGI's overdrafts on a daily basis in November 2007. U.S. Bank's records indicate, and one of its employees testified, that when LGI overdrafted its accounts, LGI's president, Dean Leischow, consistently represented to the bank that one of LGI's clients would send a wire transfer to cover the overdraft. U.S. Bank always received a transfer sufficient to cover the overdrawn account.

In April 2008, Leischow sought to increase LGI's line of credit with U.S. Bank, and U.S. Bank declined. On April 9, BMO Harris Bank (“BMO”) extended LGI a $3 million line of credit (later increased to $3.5 million), secured by a priority lien on LGI's assets, and personally guaranteed by Leischow. The contract included a condition requiring LGI to maintain its “primary depository accounts” at BMO. LGI opened four accounts at BMO: an “operating account” for LGI; a “customer payable funding account,” into which LGI's clients would deposit funds; and two accounts from which LGI would pay its clients' bills.

LGI continued using its accounts at U.S. Bank and did not begin receiving deposits from clients to its accounts at BMO until September 2008. In that same month, LGI changed the title holder of its BMO customer bill payment accounts—but not its operating account—to Data Solutions, LLC, a new entity LGI formed to segregate its utility bill payment business from its other businesses. Buffets first transferred funds to an LGI account at BMO on November 5, 2008.

LGI moved funds among its accounts at U.S. Bank and BMO; this practice raised concerns at both banks. At some point between August and October 2008, U.S. Bank's loss-prevention unit detected a pattern of suspicious activity and conveyed information to employees who managed the bank's relationship with LGI about “check kiting”—a method by which a banking customer can obtain the equivalent of an interest-free loan by capitalizing on the lag time between a bank's crediting a customer's check and presenting that check for collection, see Williams v. United States, 458 U.S. 279, 281 n. 1, 102 S.Ct. 3088, 73 L.Ed.2d 767 (1982)—or other fraudulent behavior. Those employees decided not to take action beyond continuing to monitor LGI's accounts, because they considered Leischow “credible” based on past experience, and they “did not suspect that there was anything out of the ordinary in this situation other than his business was not structured financially well.” Leischow helped allay U.S. Bank's skepticism of LGI's business model on October 28, 2008, when he informed U.S. Bank that “[b]eginning this week [LGI] will no longer send checks [to utility providers] prior to having the funds from our clients. It is no longer worth the risk or hassle to us.”

On November 5, 2008, BMO's fraud department detected activity suggesting check kiting and communicated that information to Todd Senger, who managed BMO's relationship with LGI. After confirming a kite, BMO's practice was to apply a “post no debits” status, which prevents the account holder from making withdrawals without sufficient supporting funds in the account. Unless the account manager filed a “kiting appeal letter,” BMO would eventually shut down the account in question.

Senger contacted Leischow, who explained that the suspicious activity was attributable to “transition issues surrounding changing banks.” Because LGI's clients continued to remit funds to LGI's account at U.S. Bank while LGI paid its clients' utility providers out of its accounts at BMO, LGI needed to move funds from bank to bank accordingly. Senger stated in an internal memorandum that he was “hard pressed to believe that this is true,” and BMO documented a “confirmed kite.” Senger applied a “post no debits” status to LGI's “customer payable funding account,” and he never filed a kiting appeal letter to avoid shutting down the account, but the account was not closed immediately. In early November, when LGI had drawn on its entire $3.5 million line of credit with BMO, Leischow sought additional funding to weather “cash flow issues.” BMO declined to extend additional credit to LGI, because it thought LGI “needs to start managing its accounts receivables better.”

In a letter dated December 10, 2008, Leischow informed LGI's clients that LGI had “ceased operations.” The letter also said that BMO had a priority lien on LGI's assets, and that because LGI's assets “will leave a significant deficiency claim owed to the bank ... there will be no assets available for distribution to unsecured creditors.” Buffets then sought documentation from LGI to determine which, if any, of its utility bills had not been paid despite Buffets' having transferred funds to LGI's “customer payable funding account.” LGI declined to provide any documentation. Over the ensuing weeks, Buffets claims that it paid approximately $3,471,238.54 toward utility bills for which it previously had remitted funds to LGI's account at BMO.

Buffets brought an action in state court, making an array of state-law claims against Leischow, LGI Energy Solutions, Data Solutions, and BMO on January 2, 2009. On February 6, 2009, other LGI creditors filed an involuntary bankruptcy petition under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Minnesota. After the bankruptcy court issued orders for relief in those proceedings, BMO removed the state court action to federal district court, asserting that the federal court had jurisdiction over the action because it was “related to” the bankruptcy case. See28 U.S.C. § 1334(b). The district court ³ denied Buffets' motion to remand its claims against BMO and...