Broadview Lumber Co., Inc., In re

• Decision Date: 08 July 1997
• Docket Number: No. 96-2357,96-2357
• Citation: 118 F.3d 1246
• Parties: , 33 UCC Rep.Serv.2d 1 In re: BROADVIEW LUMBER CO., INC., Debtor, Thomas J. O'NEAL, Trustee, Plaintiff-Appellant, v. SOUTHWEST MISSOURI BANK OF CARTHAGE; Mercantile Bank of Joplin; Richard Mansfield; Jenny Mansfield, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1246

118 F.3d 1246

31 Bankr.Ct.Dec. 257, 33 UCC Rep.Serv.2d 1

In re: BROADVIEW LUMBER CO., INC., Debtor Thomas J. O'NEAL, Trustee, Plaintiff-Appellant, v. SOUTHWEST MISSOURI BANK OF CARTHAGE; Mercantile Bank of Joplin; Richard Mansfield; Jenny Mansfield Defendants-Appellees.

No. 96-2357.

United States Court of Appeals Eighth Circuit.

Submitted March 10, 1997.

Decided July 8, 1997.

Richard J. Rollings, Jr., argued, Springfield, MO, (Thomas J. O'Neal, on the brief), for appellant.

John S. Dolence, argued, Joplin, MO, for appellee.

Before McMILLIAN and HANSEN, Circuit Judges, and MAGNUSON, ¹ District Judge.

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's ² decision affirming certain rulings of the bankruptcy court ³ 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 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 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 $19,303.37 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 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, 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 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 Cir.1996) (citing Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 1221, 113 L.Ed.2d 190 (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 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...