C-Wood Lumber Co. v. Wayne County Bank

• Decision Date: 24 January 2007
• Docket Number: No. M2005-00269-COA-R3-CV.,M2005-00269-COA-R3-CV.
• Citation: 233 S.W.3d 263
• Parties: C-WOOD LUMBER CO., INC. v. WAYNE COUNTY BANK.
• Court: Tennessee Court of Appeals

233 S.W.3d 263

C-WOOD LUMBER CO., INC. v. WAYNE COUNTY BANK.

No. M2005-00269-COA-R3-CV.

Court of Appeals of Tennessee, at Nashville.

February 22, 2006 Session.

January 24, 2007.

Permission to Appeal Denied by Supreme Court June 18, 2007.

T. Jake Wolaver, Columbia, Tennessee, for the appellant, C-Wood Lumber Co., Inc.

George G. Gray, Waynesboro, Tennessee; Ben Boston and Ryan P. Durham, Lawrenceburg, Tennessee; and C. Anthony Edwards, Columbia, Tennessee, for the appellee, Wayne County Bank.

OPINION

WILLIAM C. KOCH, JR., P.J., M.S., delivered the opinion of the court, in which WILLIAM B. CAIN and PATRICIA J. COTTRELL, JJ., joined.

This appeal involves a dispute between a lumber company and a bank in the aftermath of the company's discovery that its secretary/treasurer had embezzled approximately $500,000 by depositing checks payable to the company into her own and her children's personal accounts at the bank. The company filed a complaint in the Chancery Court for Wayne County seeking to recover the embezzled funds from the bank on the grounds of negligence and conversion. The bank responded that the company had executed a corporate resolution expressly authorizing the deposits. The trial court determined that the company's only viable claim was its negligence claim. Following a bench trial, the court entered a judgment for the bank after concluding that the company's negligence exceeded that of the bank. The company has appealed. We have determined that company's only viable claim against the bank is its conversion claim under the Uniform Commercial Code. We have also determined that while the trial court correctly dismissed the company's claims involving the deposits in the secretary/treasurer's personal accounts because the company had expressly authorized them, the court erred by dismissing the company's claims based on the deposits into the accounts of the secretary/treasurer's children between July 1, 1996 and September 11, 1996.

I.

C-Wood Lumber Company, Inc. (C-Wood) operates a sawmill and a kiln dry facility in Collinwood, Tennessee. The company was formed in 1983 by Danny and Brenda Sandusky and Pat Brewer. The Sanduskys later acquired Mr. Brewer's interest in the company and became equal owners of the corporation. Mr. Sandusky served as the corporation's president, and Ms. Sandusky served as the secretary/treasurer. Following the Sanduskys' divorce in 1988, Ms. Sandusky became the sole owner of the company and assumed the title of president. Ms. Sandusky remained sole shareholder throughout the events that led to this case.¹ Although the number of C-Wood employees fluctuated between twenty and thirty, the front office staff at all times relevant to this case consisted of Ms. Sandusky, Sue Lynville, and Diana McWilliams.

Ms. Sandusky treated C-Wood's corporate funds as her own and often instructed Ms. McWilliams to endorse and cash checks made payable to C-Wood and to give her the proceeds for her personal use. In addition to spending these funds on a mink coat and trips to Las Vegas and the Bahamas, Ms. Sandusky used the money while she was still married to take frequent trips to Nashville where she was carrying on a surreptitious extra-marital affair with one of C-Wood's accountants. Ms. McWilliams usually accompanied Ms. Sandusky to Nashville to lend an air of legitimacy to the trips.

Ms. Sandusky and Ms. McWilliams were close personal friends as well as business acquaintances. Ms. McWilliams had worked for C-Wood ever since it opened and had previously been employed by Ms. Sandusky's father. She had also been married to one of Ms. Sandusky's cousins for a time and, following her divorce, had dated one of Ms. Sandusky's other cousins. After the Sanduskys divorced, Ms. Sandusky named Ms. McWilliams secretary/treasurer of C-Wood.

On February 8, 1989, Ms. Sandusky and Ms. McWilliams executed a corporate resolution authorizing Ms. McWilliams to sign checks drawn on C-Wood's accounts at the Wayne County Bank.² Ten months later, on December 5, 1989, they executed a second corporate resolution substantially expanding Ms. McWilliams's authority. In addition to empowering Ms. McWilliams to sign corporate checks, the December 5, 1989 resolution authorized her "to endorse all notes, checks or drafts payable to the corporation and deposited to the credit of such account." This resolution also provided that The bank is hereby authorized to honor, receive, certify or pay all instruments signed in accordance with the foregoing resolution even though drawn or endorsed to the order of any officer signing the same, payable to cash or bearer or in payment of the individual obligation of such officer, or for deposit to his personal account and said bank shall not be required or be under any obligation to inquire as to the circumstances of the issuance or use of any instrument signed in accordance with the foregoing resolution or the application or disposition of such instrument or the proceeds thereof.

Ms. McWilliams began embezzling from C-Wood not long after becoming secretary/ treasurer. The company's lack of any internal controls made it relatively easy for Ms. McWilliams to carry out her scheme. She was generally the only employee who opened the mail, kept the books, and made the deposits. No one supervised her or checked her work. Accordingly, Ms. McWilliams simply endorsed checks received by C-Wood with "C-Wood Lumber Co., Inc. by Diana McWilliams, Sec. & Treas." and then deposited these checks either into her personal account or into her children's accounts at the Wayne County Bank. Between January 1989 and September 1996, Ms. McWilliams used the scheme to embezzle between $445,672.99 and $512,653.89 from C-Wood.

C-Wood had a long-standing banking relationship with Wayne County Bank. It maintained a number of accounts there, and Wayne County Bank provided factoring and other corporate loans to C-Wood. The tellers at Wayne County Bank were aware that Ms. McWilliams was endorsing checks payable to C-Wood and then either cashing these checks or depositing them into her personal accounts or into her children's accounts. However, they never questioned Ms. McWilliams directly about this practice. When the tellers called Ms. McWilliams's activities to the attention of bank officers, they were informed that Ms. McWilliams's actions were authorized by a C-Wood corporate resolution and that Larry Haggard, the bank's president, was aware of the practice.

Not surprisingly, C-Wood experienced serious cash flow problems during the years that Ms. McWilliams was embezzling company funds, even though the company's annual gross income averaged over $3,000,000. Ms. Sandusky stopped cashing her payroll checks and used her personal assets for corporate purposes. She spoke to other industry executives about cash flow, called in a software consultant to address the discrepancies between the accounting software and the company's bank statements, and performed feasibility studies to determine whether the company was operating as efficiently as possible. When one of the company's accountants suggested that someone might be stealing lumber, Ms. Sandusky hired a night watchman to guard the premises. Ms. Sandusky also reviewed the company's check ledger to determine whether an employee might be writing unauthorized corporate checks.

Despite Ms. Sandusky's efforts, C-Wood's financial woes continued. Sometime in 1993, the company filed for bankruptcy protection under Chapter 11. The company reorganized its operations and limited its activities to custom wood drying. Robert Farris took over as C-Wood's chief operating officer in 1995, but he too failed to discover what Ms. McWilliams was doing until 1996 when he was negotiating a loan with Wayne County Bank that would enable C-Wood to emerge from bankruptcy. In September 1996, a vice president of Wayne County Bank, Martin Haggard Jr.,³ told Mr. Farris that one of the conditions of the loan would be that all checks payable to C-Wood must be deposited in corporate rather than in personal accounts.

Mr. Farris was surprised to learn that Ms. McWilliams was depositing checks payable to C-Wood into her personal account and into her children's accounts. He shared his conversation with Mr. Haggard with Ms. Sandusky, and they jointly decided to request the company's accountants to review the books. Ms. McWilliams's embezzlement was quickly discovered, and she was fired. Ms. McWilliams eventually pled guilty to charges stemming from her embezzlement, paid approximately $60,000 in restitution, and began serving her sentence on weekends.

C-Wood then turned to Wayne County Bank and demanded that it replace the funds that Ms. McWilliams had embezzled. The bank declined based on the corporate resolution executed on December 5, 1989 that specifically authorized the bank to accept checks payable to C-Wood for deposit into Ms. McWilliams's personal accounts.

On June 20, 1997, C-Wood filed suit in the Chancery Court for Wayne County seeking a declaratory judgment that the December 5, 1989 corporate resolution did not authorize Ms. McWilliams's actions and recovery of the funds that Ms. McWilliams had embezzled. C-Wood alleged that the bank knew that Ms. McWilliams's actions were in violation of her fiduciary duties as an officer of C-Wood and, therefore, that the bank took the checks subject to C-Wood's claims. C-Wood further alleged that the December 5, 1989 corporate resolution was insufficient to relieve the bank of its duties to C-Wood under Tenn. Code Ann. § 47-4-103(a).⁴

On November 17, 1997, C-Wood filed a motion for summary judgment regarding its claim that Tenn.Code Ann. § 47-4-103(a) undermined the validity of the December 5, 1989 corporate resolution. It did not file its required statement of undisputed facts until April 13, 1998. Five years later, on June 9, 2003, Wayne County Bank filed its own motion for summary judgment and statement of undisputed facts.

At this stage...