Lund's Inc. v. Chemical Bank
| Decision Date | 16 March 1989 |
| Docket Number | D,1109,Nos. 976,1111,s. 976 |
| Citation | 870 F.2d 840 |
| Parties | 8 UCC Rep.Serv.2d 731 LUND'S, INC. and Wardwell M. Montgomery, Plaintiffs-Cross-Appellees, Russell T. Lund, Jr., Plaintiff-Appellant, v. CHEMICAL BANK, Defendant-Cross-Appellant-Appellee. CHEMICAL BANK, Defendant and Third-Party Plaintiff, v. LAIDLAW ADAMS & PECK INC., Third-Party Defendant-Appellant. ockets 87-7605, 87-7607, 87-7625. |
| Court | U.S. Court of Appeals — Second Circuit |
Jonathan C. Thau, New York City (Maura E. Mahon, Wilson, Elser, Moskowitz, Edelman & Dicker, New York City, of counsel), for third-party defendant-appellant Laidlaw Adams & Peck Inc.
Eileen Berkman, New York City (Barbara E. Daniele, New York City, of counsel), for defendant-cross-appellant-appellee and third-party plaintiff Chemical Bank.
Jerome B. Pederson, Minneapolis, Minn. (Ted. S. Meikle, Fredrikson & Byron, Minneapolis, Minnesota, Richard L. Bond, James R. Kahn, Dorsey & Whitney, New York City, of counsel), for plaintiff-cross-appellee Lund's, Inc. and plaintiff-appellant Russell T. Lund, Jr.
Stephen G. Rinehart, New York City (Parker Chapin Flattau & Klimpl, New York, New York, of counsel), for plaintiff-cross-appellee Wardwell M. Montgomery.
Before CARDAMONE, PRATT and MAHONEY, Circuit Judges.
We consider here appeals and a cross-appeal from summary judgments entered in the United States District Court for the Southern District of New York, Robert W. Sweet, Judge, for plaintiffs-cross-appellees Lund's, Inc. and Wardwell M. Montgomery ("Montgomery") against defendant-cross-appellant-appellee and third-party plaintiff Chemical Bank ("Chemical"), and for Chemical against plaintiff-appellant Russell T. Lund, Jr. ("Lund"). 1 Judgment was also entered for Chemical for indemnification against third-party defendant-appellant Laidlaw Adams & Peck Inc. ("Laidlaw") (1) in the amount of the judgments entered for Lund's, Inc. and Montgomery against Chemical, and (2) for Chemical's costs and attorney's fees in defending against the claims which resulted in those judgments. Laidlaw does not appeal from that judgment, but rather appeals as the real party in interest contesting the summary judgments for Lund's, Inc. and Montgomery against Chemical, and defending the summary judgment for Chemical against Lund.
This diversity action was brought pursuant to N.Y.U.C.C. Sec. 3-419(1)(c) (McKinney 1964) 2 to recover the face amounts of three checks which Lund, Montgomery and Lund's, Inc. claim were converted because they were paid by Chemical on forged endorsements. On appeal, Laidlaw contends that the district court erred in ruling that N.Y.U.C.C. Sec. 3-406 (McKinney 1964) is not available as a defense to plaintiffs' claims. Lund appeals from the grant of summary judgment against him in favor of Chemical, contesting the district court's finding that Lund's business partner was authorized to endorse the check Lund alleges to have been converted.
For the reasons stated below, we reverse all of the summary judgments and remand.
This action arises out of a fraud committed on or around March 9, 1981 by William Rubin ("Rubin") and Janet Karki ("Karki"), who were officers and directors of Flight Transportation Corporation ("FTC"), a Minnesota corporation engaged in the business of providing aircraft charter and general aviation services. At all pertinent times, Rubin was the chairman and president of FTC, in charge of its day-to-day operations and coordinating its periodic offerings of stock to the public. Lund and Montgomery were directors and shareholders, and Lund a vice president, of FTC. Lund's, Inc. was a privately held Minnesota corporation engaged in a retail food business. Lund was a vice president of Lund's, Inc. and owned approximately thirty percent of its stock.
Lund and Rubin purchased and leased various aircraft together. To facilitate these activities, Lund and Rubin opened joint banking accounts through which each possessed the independent right to write checks. Lund contributed substantial funds toward the purchase of the aircraft, and cosigned loan agreements with Rubin to finance the purchases. Rubin, however, selected the aircraft for purchase, negotiated the related leases, received the lease payments, and made loan and maintenance payments. These activities provided investment tax credits and deductions to Rubin and Lund in connection with their personal income taxes.
Karki was, at all relevant times, FTC's executive vice president and secretary. In addition, she co-owned a Cessna P210 aircraft with Montgomery.
FTC hired Laidlaw in 1980 to comanage a public offering of FTC securities. Prior to this offering, Lund, Montgomery and Rubin proposed various transactions by which FTC was to purchase aircraft owned by Rubin and Lund, Lund's, Inc., and Montgomery and Karki. The public offering and the aircraft sales were to close simultaneously, and details of the proposed aircraft sales were disclosed in the prospectus for the public offering.
The public offering closed in Manhattan on March 9, 1981. Rubin and Karki were present at the closing, but neither Lund, Montgomery nor a representative of Lund's, Inc. attended. At the closing, Laidlaw presented the three checks at issue here, which represented part of the proceeds of the public offering, to FTC. Laidlaw drew the three checks on a Laidlaw account at Chemical, payable to the order of FTC. The check numbers and face amounts were as follows:
Check Amount
56863 $716,946.00
56853 $400,000.00
56854 $ 46,056.00
The checks were properly endorsed by Karki, as secretary of FTC, to the following endorsees: check no. 56863 ($716,946) to the order of "William Rubin and Russell T. Lund, Jr.," check no. 56853 ($400,000) to the order of "Lund's, Inc.," and check no. 56854 ($46,056) to the order of "Wardwell Mongtomery and Janet Karki." The checks were endorsed to these entities pursuant to the aircraft transactions discussed above, and represented partial payment 3 by FTC for the purchase of four aircraft from the endorsees. Specifically, check no 56863 represented payment for two aircraft jointly owned by Lund and Rubin, a Learjet 25D and a Learjet 28. Check no. 56853 represented payment for a Mitsubishi MU-2J aircraft owned by Lund's, Inc. Check no. 56854 represented payment for the Cessna P210 aircraft owned by Montgomery and Karki.
The fraud occurred when Rubin endorsed the three checks to the order of Laidlaw as "attorney in fact" for Lund, Montgomery and Lund's, Inc. Rubin presented purported powers of attorney from each of these three endorsees, specifically authorizing the endorsements, to Laidlaw. 4 Karki also endorsed check no. 56854 in her own behalf. The checks, now endorsed to Laidlaw, were used for Rubin's private purchase of FTC securities from Laidlaw. Laidlaw then deposited the checks in its account at Chemical. It is the crediting of these checks to Laidlaw's account by Chemical which plaintiffs allege to constitute payments on forged endorsements by Chemical in violation of N.Y.U.C.C. Sec. 3-419(1)(c) (McKinney 1964). Lund, Lund's, Inc. and Montgomery never received the cash proceeds from FTC's purchase of their aircraft represented by these checks, and have lost their ownership interests in the aircraft.
Rubin and Karki never advised Lund, Montgomery or Lund's, Inc. that the aircraft purchases would occur in Manhattan simultaneously with the public offering of FTC's securities, or concerning the disposition of the cash proceeds of the aircraft sales.
In June, 1982, the Securities and Exchange Commission commenced an action against FTC, asserting that FTC and certain of its officers and directors, including Rubin, had engaged in a massive fraud upon the investing public. Thereafter, FTC was declared bankrupt and placed into receivership. Rubin and Karki were imprisoned for their part in the fraud.
After FTC filed for bankruptcy, investors and creditors of FTC commenced a number of lawsuits against FTC, its officers and directors, auditors, attorneys and underwriters. Pursuant to 28 U.S.C. Sec. 1407 (1982), these actions were accorded multidistrict treatment before Judge Charles Weiner in the United States District Court for the District of Minnesota. Significantly, in one of these cases, Lund v. Flight Transp. Co. (In re Flight Trans. Corp. Sec. Litig.), 669 F.Supp. 284 (D.Minn.1985), aff'd sub nom. Lund v. Norwest Bank (In re Flight Transp. Corp. Sec. Litig.), 825 F.2d 1249 (8th Cir.1987), cert. denied, --- U.S. ----, 108 S.Ct. 1113, 99 L.Ed.2d 273 (1988) ("Lund I "), Lund brought a conversion claim against a Minnesota bank to recover on a check other than those at issue here, payable to Rubin and Lund as insurance proceeds on a jointly owned aircraft destroyed in a crash. Rubin signed Lund's name as endorser on the check, as well as his own name, and deposited the check in a joint banking account that Rubin and Lund maintained in connection with their joint aircraft business activities.
After a bench trial, the district court ruled that Rubin and Lund were partners with respect to the ownership of six aircraft, including those at issue here. Lund I, 669 F.Supp. at 288. The court accordingly held that under Minnesota law, Rubin, who concededly had signed his own name to the check, "had the authority to endorse the check on behalf of the partnership," with the result that "the identity of the party who signed Lund's name to the check is of no consequence." Id. The Eighth Circuit affirmed on the basis that "Rubin's status as a partner in the aircraft leasing business made him Lund's agent ... for the purpose of carrying on the usual business of the partnership and thus provided him with the implied authority, as a partner, to endorse Lund's name on the check and to deposit the check in [a partnership] account." Lund I, 825 F.2d at 1253.
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