Bank of America, N.A. v. Prestige Imports

• Decision Date: 19 November 2009
• Docket Number: No. 07-P-890.,07-P-890.
• Citation: 75 Mass. App. Ct. 741,917 N.E.2d 207
• Court: Appeals Court of Massachusetts
• Parties: BANK OF AMERICA, N.A.<SMALL><SUP>1</SUP></SMALL> v. PRESTIGE IMPORTS, INC., & others.<SMALL><SUP>2</SUP></SMALL>

917 N.E.2d 207

75 Mass. App. Ct. 741

BANK OF AMERICA, N.A.¹ v. PRESTIGE IMPORTS, INC., & others.²

No. 07-P-890.

Appeals Court of Massachusetts, Norfolk.

Argued April 16, 2008.

Decided November 19, 2009.

Gary R. Greenberg, Boston (Louis J. Scerra, Jr., & Peter Alley with him) for the plaintiff.

George C. Deptula, Boston, for the defendants.

Present: McHUGH, KATZMANN, & GRAINGER, JJ.

McHUGH, J.

Using a sophisticated and complex scheme, a thief named Wajahat Malick stole hundreds of thousands of dollars from his employer, Prestige Imports, Inc. (Prestige), a Weymouth automobile dealership. Essentially, the scheme involved Malick's manipulation of deposits Prestige intended to make to its accounts at South Shore Bank (SSB or the Bank). Discovery of the fraud produced a lengthy prison sentence for Malick and energized litigation between SSB, Prestige, Helmut Schmidt (Helmut), who owned Prestige, and his wife Renate Schmidt (Renate), both of whom had guaranteed SSB loans to Prestige.

The litigation stretched over twelve years, involved two jury trials, and is documented in numerous judicial orders, thousands of documents, and thousands of pages of trial transcript. Ultimately, three judgments entered. The first awarded SSB $1,049,000 on its claims against Prestige and the Schmidts. The second awarded $2,890,430 to Prestige on its counterclaims against SSB, and $1,049,000 to the Schmidts on their counterclaims, an amount which was designed to offset SSB's judgment against them. The third ruled against Prestige and the Schmidts on their G.L. c. 93A claim against SSB. All parties have appealed, citing numerous alleged errors. We affirm in part and reverse in part.³

I. BACKGROUND

1. The SSB-Prestige security agreement. The relationship between Prestige and SSB began in February, 1977, when Prestige signed a loan and security agreement with the Bank, which Helmut and Renate guaranteed.⁴ The agreement included a "floor-plan loan" through which the Bank loaned Prestige money to purchase automobiles for resale. Under the agreement, the Bank took a security interest in each vehicle, and Prestige repaid the loan on each vehicle as it sold. Under the terms of the agreement, failure to pay the loan immediately following a sale would put Prestige "out of trust" and in default, at which time all obligations to the Bank would become due. SSB conducted monthly inventories of Prestige vehicles to confirm that its collateral was there.

2. The embezzlement. In April, 1987, Prestige hired Malick to be its comptroller. Malick's responsibilities included safeguarding the dealership's assets and overseeing its financial affairs. A document entitled "Corporate Deposit and Borrowing Resolutions," which Prestige delivered to SSB, gave Malick broad authority to sign checks and to engage in other financial transactions with SSB if his signature was accompanied by Helmut's or that of another designated Prestige employee. Soon after commencing his employment, Malick began to go to an SSB office on a daily basis to make deposits and conduct other Prestige business. As a result, SSB tellers and other employees got to know him well.

Almost immediately, Malick began to engage in two schemes that lie at the heart of this litigation.⁵ The first was what the parties and the trial judge refer to as the "redeposit" scheme. We shall refer to it by the same name, although calling it the "nullity check" scheme would be equally descriptive. The scheme, which was designed to conceal Malick's theft of cash and third-party checks payable to Prestige, capitalized on the oral payoff system Prestige had used to pay down its floor-plan loan from the very beginning of the banking relationship with SSB.

Under the oral payoff system, Prestige's office manager would determine from time to time the identity of the vehicles Prestige had sold and the resulting amount due to SSB. She would then telephone an SSB employee with instructions to debit Prestige's checking account in the amount due. The SSB employee would make the debit, credit the amount debited to Prestige's loan account, and then confirm the transaction by sending Prestige a debit memo.

In 1989, Prestige began using a computer system to print a loan payoff check each time it sold a vehicle. Each check was payable to SSB and contained the vehicle's identification number plus various Prestige accounting numbers. Helmut signed all of the checks. Prestige received the cancelled payoff checks with its monthly bank statement and confirmed the payment on its books.

Although Helmut intended the check system as a replacement for the oral payoff system, Malick kept the oral system in place. However, in order to avoid two payoffs for each vehicle, Malick instructed a Prestige employee to place an indorsement reading "for deposit only—Prestige Imports, Inc." on the reverse of each check, thus indicating that the payoff check should be deposited into Prestige's checking account, not debited to the checking account and credited to the loan account. Malick then delivered the checks to SSB with an itemized deposit slip marked "payoff" that the Prestige office manager had prepared.

Although SSB was the payee of the payoff checks and played no role in creating the indorsement, it routinely followed the indorsement's direction and credited the amount of each payoff check to Prestige's checking account, not to its loan account, which had already been credited pursuant to the office manager's oral instructions. Crediting, or "redepositing," the payoff check to Prestige's checking account meant that the transaction was a nullity, for SSB was simultaneously crediting and debiting in the same amount the account on which the check had been drawn.

By themselves, the redeposit transactions caused Prestige no harm. Because they were nullities, the transactions had no impact on Prestige's profits, losses, or cash flow, save perhaps for the cost of added time it may have taken to reconcile the monthly bank statements on which the transactions were reflected. Instead, the harm to Prestige flowed from the way the transactions facilitated and camouflaged Malick's theft of cash and checks Prestige received from third parties.

Malick's camouflaged thefts occurred in the following fashion. In addition to itemized "payoff" deposit slips covering the redeposit checks just described, Prestige routinely deposited to the same checking account cash and checks from third parties. The cash and third-party checks were covered by a separate deposit slip prepared by the office manager, which also specified each item in the deposit. These deposits were not nullities and were designed to increase Prestige's account balance by the deposit amount. On twenty-three occasions between November, 1989, and November, 1990, however, Malick took cash and checks from these deposits, replaced the cash and checks with redeposit checks of the type just described, and also replaced the itemized deposit slip with an unitemized slip simply stating the total deposit amount. The total amount shown on the unitemized deposit slip, therefore, corresponded with the total amount stated on the office manager's deposit slip, although the net deposit was lower by the amount of cash or checks Malick pocketed and replaced with redeposit checks. The face amount of the redeposit checks Malick used in that scheme totaled $354,086.⁶

The scheme likely succeeded for as long as it did because it was difficult to detect solely on the basis of the monthly bank statements and because of the volume of checks involved. Between April and November, 1989, when Malick started using the scheme to steal, Prestige deposited approximately 300 of the redeposit checks to its account. When Malick saw that no eyebrows were raised despite the nonconforming indorsements on the checks, he began his theft. During the one-year period when the scheme was in effect, Malick deposited approximately 1,300 of the redeposit checks, the face amount of which was approximately $32 million.

The second scheme involved treasurer's checks and was more straightforward. On nine occasions between February and October, 1990, Malick presented SSB with Prestige "payoff" checks signed by Helmut ranging in amount from $24,377 to $59,980. In each instance, Malick asked for and received an SSB treasurer's check in the same amount payable to South Weymouth Savings Bank (South Weymouth), where he had a checking account and had obtained personal loans. Malick then deposited the SSB treasurer's checks in his South Weymouth account and either pocketed the proceeds or used them to pay down his personal loans. In all, this scheme netted Malick $432,895.

3. The unraveling. Prestige's financial statements showed a $632,000 loss for the year ending July 31, 1990. In addition, in early November, 1990, South Weymouth called Helmut to express concern about a $90,000 Prestige check made payable to Malick. Suspicions aroused, Helmut asked his accounting firm for advice. An accountant investigated the matter and told Helmut that someone had made unusual adjustments to Prestige's records. He also advised Helmut not to allow Malick to continue his daily banking transactions and suggested that Malick might be stealing money. Despite this advice, Helmut did not fire Malick, change his duties, or remove him as signatory on an account Prestige had opened at another bank that November and utilized for used car transactions.⁷

Malick left Prestige in mid-December. On January 2, 1991, SSB conducted one of its periodic "floor plan audits" or inventories of Prestige vehicles and concluded that Prestige had sold sixty-seven vehicles, worth approximately $1.6 million, "out of trust," that is, without repayment to SSB of the loans Prestige had used to purchase the vehicles. SSB immediately defaulted Prestige on the security agreement and called the loan, the balance of which then approximated $7 million. SSB seized the money in Prestige's...