Midwest Feeders, Inc. v. Bank of Franklin

• Citation: 886 F.3d 507
• Decision Date: 27 March 2018
• Docket Number: No. 17-60092,17-60092
• Parties: MIDWEST FEEDERS, INCORPORATED, Plaintiff–Appellant, v. The BANK OF FRANKLIN, Defendant–Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

886 F.3d 507

MIDWEST FEEDERS, INCORPORATED, Plaintiff–Appellant,

v.The BANK OF FRANKLIN, Defendant–Appellee.

No. 17-60092

United States Court of Appeals, Fifth Circuit.

Filed March 27, 2018

Scott C. Sandberg, John O'Brien, Esq., Spencer Fane, L.L.P., Suite 2000, 1700 Lincoln Street, Denver, CO 80203, James Franklin Noble, III, Esq., Noble & Noble, P.L.L.C., P.O. Box 3293, Ridgeland, MS 39158 for Plaintiff–Appellant.

Lawrence Matthew Quinlivan, Esq., Deutsch Kerrigan, L.L.P., Suite 1001, 2510 14th Street, 1 Hancock Plaza, Gulfport, MS 39501, Matthew Taylor Biggers, Judy Lynn Burnthorn, Esq., Deutsch Kerrigan, L.L.P., 755 Magazine Street, New Orleans, LA 70130, John Lewis Maxey, II, Esq., Kelly Hollingsworth Stringer, Esq., Steven Mark Wann, Maxey Wann, P.L.L.C., Suite 2100, 210 E. Capitol Street, Jackson, MS 39201-0000, Lane B. Reed, Mary Kathryn Williamson, McGehee, McGehee & Torrey, 26 1st Street, P.O. Box 188, Meadville, MS 39653 for Defendant–Appellee.

Before HIGGINBOTHAM, PRADO, and HIGGINSON, Circuit Judges.

EDWARD C. PRADO, Circuit Judge:

Plaintiff–Appellant Midwest Feeders, Inc. ("Midwest") alleges that Defendant–Appellee The Bank of Franklin ("BOF") is liable under Mississippi statutory and common law for its participation in a scheme involving fraudulent checks. Midwest alleges that BOF customer Robert Rawls, an individual with whom Midwest had a financing arrangement, orchestrated a "fictitious payee" scheme. Midwest sued BOF for its alleged participation and negligence regarding this scheme. The district court ruled against Midwest on all of its claims; the court dismissed two claims at the motion to dismiss stage and granted summary judgment with regard to the remaining claims. The court also denied as moot Midwest’s motion for discovery sanctions. Midwest appealed. We now AFFIRM.

I. BACKGROUND

A. Factual Background

Midwest is a Kansas-based cattle feedlot business that also "offers financing and credit to customers for procurement of livestock." BOF is a community bank in Mississippi.

1. The Midwest–Rawls Arrangement

Robert Rawls, individually and doing business as Robert Rawls Livestock and Rawls Trucking, LLC (collectively, "Rawls"), entered a contractual financing relationship with Midwest in 2006. Under the terms of the arrangement, Midwest "provided Rawls secured financing through access to Deposit Account No. **4167 at Alva State Bank & Trust of Alva, Oklahoma." Midwest funded the arrangement by depositing money into the Alva bank account. The arrangement obligated Rawls to use the deposited funds to purchase livestock; Midwest would possess a security interest in the livestock. To this end, Rawls received authorization to write checks drawn on the Alva account, which was labeled "Robert Rawls Livestock." When Rawls drew a check on the account, Midwest would deposit the corresponding amount to the account. After purchasing livestock, Rawls was responsible for reselling the livestock to livestock purchasers. Midwest required Rawls to "issue invoices to livestock purchasers and make arrangements for livestock purchasers to send their payments for the purchase price of the livestock to the Alva State Bank Account by delivery to a specified post office box in Alva, Oklahoma."

In other words, the parties established an arrangement where Rawls would purchase livestock, sell the cattle in inventory—thus creating an account receivable—and the proceeds would be paid directly to the Alva account. The proceeds—the deposits from the purchasers—would cover Rawls’s outstanding accounts receivable. For its part in funding the arrangement, Midwest received compensation through fees and interest on outstanding funds.

2. BOF’s Involvement

In 2008, BOF Executive Vice President Charles Magee solicited Rawls’s business.

The two had known each other for over thirty years. Despite the overture, Rawls declined.

In 2010, Rawls asked Magee whether BOF would refinance his Alva State Bank & Trust loans. After their initial phone call, the two met in person to discuss. The bank subsequently issued loans to Rawls in the fall of 2010. One loan involved a $750,000 line of credit, and the other was a $500,000 amortized loan. Both loans were secured by real property.

In September 2010, Rawls opened a checking account at BOF in the name of Robert Rawls Livestock. Upon opening his account, Rawls filled out a questionnaire describing the nature of his business. Rawls noted on the questionnaire that he did not accept third-party checks as payment for goods and services.

Soon after opening his account, Rawls’s account regularly had uncollected funds. Magee was responsible for overseeing Rawls’s bank accounts; he would also process his loans and approve wire transfers when necessary. On several occasions, Magee approved wire transfers of money from the account, even when the account had a six-figure negative balance. Magee believed that he had adequate business justification for approving these transfers: he would approve these transfers "if there was sufficient funds on the line of credit. If [he] didn’t think there were sufficient funds on the line of credit, [he] would call [Rawls’s] office" to inquire about any forthcoming deposits. Bank employees seeking to wire money from Rawls’s overdrawn account would only need Magee’s approval in order to wire funds.

Rawls became one of the top customers at BOF’s Brookhaven, Mississippi, branch in terms of the dollar amount of his deposits. Rawls also helped recruit several customers to BOF. Midwest alleges that Rawls received "favorable treatment" during his time as a customer. As an example, Midwest points to a December 2011 loan extension vote before the bank’s loan committee. BOF’s Vice Chairman Edmund Prestridge voted against extending Rawl’s loan because he worried about Rawls’s uncollected funds.¹ Nonetheless, the loan committee—including Magee—permitted the extension.

Rawls and Magee also carried on a social relationship during this period. Magee would occasionally visit Rawls’s livestock facility, drink beer with him, and watch football games with him. Magee also hunted on property owned by Rawls’s family. On several occasions, the two traveled together and attended the same social gatherings. They also exchanged dozens of text messages over the course of Rawls’s time as a BOF customer. The messages pertained to a variety of personal and professional matters.

3. Rawls’s Fraud

Midwest also alleges that during his time as a customer, Rawls began using his Alva account and BOF account to commit fraud. Midwest alleges that Rawls raised red flags for "check kiting."² Rawls regularly moved money between banks; he deposited into his BOF account checks drawn on his Alva Account. Midwest alleges that several BOF officers and executives were aware of this. Indeed, in October 2011, Magee became aware that "Robert Rawls was depositing certain checks payable to sellers into his checking account." Magee claims that Rawls, when confronted, explained that this was a "common practice" in the livestock industry. Magee accepted Rawls’s explanation that "depositing checks issued to sellers of cattle into his business checking account" had a legitimate business purpose.

While a BOF customer, Rawls also "created fictitious cattle purchases and diverted money from the Alva account for his personal use." He "made out checks to fictitious payees drawn on the Alva account and endorsed them and stamped them as payable to his livestock company for deposit only. Rawls then deposited the checks into his checking account at Bank of Franklin, which turned them over to Alva for payment." Rawls created corresponding fictitious livestock purchase invoices, as well. Midwest alleges that Rawls issued nearly 900 fraudulent checks between October 2013 and March 2014.

On March 17, 2014, Midwest’s President, Jeff Sternberger, spoke with Rawls over the phone. Rawls told Sternberger that he planned to shut down his business. The next day, Sternberger met Rawls at his livestock facility office. Rawls confessed to the scheme. Magee also showed up at Rawls’s facility on March 18. He did not see Rawls, who had just left for a medical appointment, but he saw Sternberger; Sternberger told Magee about the fraudulent checks and invoices.

B. Procedural Background

On September 5, 2014, Midwest filed suit against BOF. Midwest, demanding a jury trial, alleged six claims against BOF:

(1) Conversion of Instruments ( Miss. Code Ann. § 75-3-420 );

(2) Failure to Exercise Due Care ( Miss. Code Ann. § 75-3-404(d) );

(3) Common Law Conversion of Funds;

(4) Common Law Negligence;

(5) Common Law Negligent Hiring and Supervision; and

(6) Common Law Civil Conspiracy.

The district court dismissed the two conversion-based claims at the motion to dismiss stage. Subsequently, the court entered summary judgment against Midwest on all the remaining claims. On January 18, 2017, the district court entered final judgment, dismissing Midwest’s claims with prejudice. Two days later, the district court informed counsel via e-mail that Midwest’s pending motion for sanctions was moot. Midwest timely filed notice of appeal.

II. JURISDICTION

Midwest is a Kansas corporation, and BOF is a Mississippi corporation. Midwest alleges damages in excess of $30 million. Therefore, the district court properly exercised diversity jurisdiction under 28 U.S.C. § 1332. We have jurisdiction to review the district court’s final judgment under 28 U.S.C. § 1291.

III. STANDARD OF REVIEW

A. Substantive Law

Because we sit in diversity jurisdiction, we apply Mississippi’s substantive law. Krieser v. Hobbs , 166 F.3d 736, 739 (5th Cir. 1999) ; see also Erie R.R. Co. v. Tompkins , 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). And we review de novo the district court’s conclusions regarding Mississippi law. Krieser , 166 F.3d at 739.

B. Summary Judgment

We review summary judgment de novo. United States v. Lawrence , 276 F.3d 193, 195 (5th Cir. 2001) (citations omitted). "A summary judgment is only appropriate when,...