Hanover Ins. Co. v. Bank

• Decision Date: 05 May 2011
• Docket Number: Case No. 1:11cv11.
• Citation: 783 F.Supp.2d 809
• Court: U.S. District Court — Eastern District of Virginia
• Parties: HANOVER INSURANCE COMPANY, Plaintiff,v.M & T BANK, et al., Defendants.

783 F.Supp.2d 809

HANOVER INSURANCE COMPANY, Plaintiff,

v.M & T BANK, et al., Defendants.

Case No. 1:11cv11.

United States District Court, E.D. Virginia,Alexandria Division.

May 5, 2011.

Dawn Cheryl Stewart, Stewart & Henry PLLC, Fairfax, VA, for Plaintiff.Jeffrey Martin Schwaber, Timothy Brooks Hyland, Stein Sperling Bennett De Jong Driscoll & Greenfeig PC, Rockville, MD, for Defendants.

MEMORANDUM OPINION

T.S. ELLIS, III, District Judge.

At issue in this diversity action is whether plaintiff surety's breach of contract claim against defendant bank is barred by Va.Code § 8.4–406(f) because the surety failed to notify the bank of improper withdrawals from a guardianship account within one year. For the reasons that follow, a surety with limited signatory authority over a guardianship account is not a “customer” within the meaning of the Code, and hence the Code's statutory notice provision does not apply. Accordingly, the motion to dismiss must be denied.

I.¹

Plaintiff, Hanover Insurance Company (“Hanover”), is a New Hampshire corporation with its principal place of business in Massachusetts. Hanover is authorized and licensed to engage in the surety business in Virginia. Defendants, M & T Bank and M & T Bank Corporation (“M & T defendants”), are New York corporations with their principal place of business in Buffalo, New York. The M & T defendants are financial institutions doing business in Virginia as the successors in interest to Provident Bank.

This lawsuit arises out of the improper management of a guardianship account. Patricia Fallon and Lawrence Fabian were appointed by the Stafford County Circuit Court to serve as co-guardians for Fallon's grandson, K.F., on June 10, 2004. Over the course of the guardianship, Fallon received funds from the September 11 Victim's Compensation Fund (“VCF”) for the use and benefit of K.F. Pursuant to the Stafford County Circuit Court's June 10, 2004 Order, the co-guardians were permitted to use all funds received from the VCF for the benefit of K.F. as provided for in Va.Code § 31–8.

In conjunction with their appointment as co-guardians, Fallon and Fabian posted a bond in the amount of $696,000 issued by Hanover as surety. As a condition for issuing the bond, Hanover required the co-guardians to place all guardianship funds in an account with a financial institution that would execute a Joint Control Agreement. Hanover, Fallon, and M & T Bank (f/k/a Provident Bank) executed a Joint Control Agreement on June 8, 2004. In relevant part, the Joint Control Agreement provided that M & T Bank would not honor Fallon's withdrawal slips, receipts, or other orders in an amount exceeding $5,000 unless the item was countersigned by a representative of Hanover. The Joint Control Agreement identified Fabian as Hanover's authorized representative. Thus, in effect, the Joint Control Agreement prevented Fallon from withdrawing a sum of money exceeding $5,000 from the guardianship account at any time without obtaining Fabian's signature. Of course, nothing in the Joint Control Agreement prevented Fallon from making any number of withdrawals for less than $5,000 each without Fabian's signature.

On or about June 10, 2004, Fallon opened an account at M & T Bank in her own name and that of K.F. Hanover was not named on the account. Over the next few years, M & T Bank permitted Fallon, in breach of the Joint Control Agreement, to make at least ten withdrawals of $10,000 from the guardianship account without Fabian's signature. According to Hanover, the funds withdrawn from the guardianship account in contravention of the Joint Control Agreement were not used for K.F.'s benefit.

After the guardians repeatedly failed to submit proper accountings, the Stafford County Circuit Court removed Fallon and Fabian as guardians on August 3, 2009. At a hearing on November 2, 2009, the Stafford County Circuit Court concluded that the guardians misappropriated $240,468.87 in guardianship funds and ordered Hanover to reimburse the guardianship estate for $240,468.87. Hanover was also ordered to pay $10,172 and $2,500 to the Acting Commissioner of Accounts and a private accounting firm, respectively, for their work in auditing the guardianship estate's financial records. Hanover complied and then commenced this suit on January 6, 2011.

In a one-count complaint, Hanover claims that the M & T defendants breached the terms of the Joint Control Agreement by permitting Fallon to withdraw money from the guardianship account in excess of $5,000 without Fabian's signature. Hanover argues that the M & T defendants' breach of the Joint Control Agreement caused Hanover damages in the amount of the checks and withdrawals that were permitted in contravention of the Joint Control Agreement (approximately $100,000). Hanover further argues that the M & T defendants' failure to put Hanover on notice of Fallon's withdrawals in excess of $5,000 permitted Fallon to continue to misappropriate guardianship funds in small amounts, causing Hanover to sustain additional damages (approximately $140,000). Thus, Hanover argues that the M & T defendants are liable for the total amount that Hanover was required to pay to the guardianship estate, which equals $253,140.87.

II.

Dismissal pursuant to Rule 12(b)(6), Fed.R.Civ.P., is appropriate where the complaint does not “contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). It follows that to survive a Rule 12(b)(6) motion to dismiss, a complaint must contain “more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Id. Thus, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. Instead, the complaint must allege facts that, if true, plausibly satisfy each element of the claims for which relief is sought. Accordingly, a motion to dismiss must be granted if the complaint does not allege a sufficient factual basis to create a plausible inference that the plaintiff is entitled to relief.

III.

The M & T defendants have challenged whether there is subject matter jurisdiction over this case. As this is a diversity action, subject matter jurisdiction exists only if the parties are citizens of different states and the amount in controversy exceeds $75,000, exclusive of interest and costs. See 28 U.S.C. § 1332(a)(1). Here, there is no dispute that the parties are citizens of different states. The complaint alleges that Hanover is a New Hampshire corporation with its principal place of business in Massachusetts, and the M & T defendants are New York corporations with their principal place of business in New York. Instead, the parties dispute whether the amount in controversy exceeds $75,000.

In this regard, it is well-settled that “[i]f the plaintiff claims a sum sufficient to satisfy the statutory requirement, a federal court may dismiss only if ‘it is apparent to a legal certainty, that the plaintiff cannot recover the amount claimed.’ ” JTH Tax, Inc. v. Frashier, 624 F.3d 635, 638 (4th Cir.2010) (quoting St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 288, 58 S.Ct. 586, 82 L.Ed. 845 (1938)). Here, although Hanover has claimed damages totaling $253,140.87, which far exceeds the $75,000 minimum, the M & T defendants argue that it is legally certain that Hanover's damages are only $16,000. According to the M & T defendants, the Stafford County Circuit Court, which determined that Fallon misappropriated $240,468.87 in guardianship funds, arrived at this figure after the Acting Commissioner of Accounts reviewed the guardianship estate's financial records and compiled a list of every transaction involving guardianship funds. The Acting Commissioner of Accounts then went line-by-line through the list of transactions and, for each transaction determined whether the money was spent for a permitted or unpermitted purpose, approving the former and disapproving the latter. The total amount of the disapproved transactions was $240,648.87. Importantly, there was only one disapproved transaction for more than $5,000—a single check written for $16,000. Thus, the M & T defendants contend that although Hanover was required to reimburse the guardianship estate for a total of $240,684.87, only $16,000 of the total damages sought is attributable to a breach of the Joint Control Agreement because that is the amount of money that was misappropriated as a result of M & T Bank's failure to deny checks and withdrawal slips not bearing Fabian's signature.

Hanover responds by arguing that Fallon made ten withdrawals of at least $10,000 and these withdrawals were not used for the benefit of the child. Thus, Hanover contends that there is at least $100,000 in direct damages. Although the remainder of the $240,684.68 in damages resulted from withdrawals under $5,000 for which no second signature was required, Hanover argues that the M & T defendants are nonetheless liable for these damages as well. Specifically, Hanover argues that had M & T Bank notified Hanover that Fallon was attempting to withdraw sums in excess of $5,000 without a co-signature, Hanover would have investigated and stopped Fallon from misappropriating guardianship funds in smaller amounts. Thus, Hanover argues that the M & T defendants are liable for the total amount of funds that Hanover was ordered to pay to the guardianship estate, which equals $253,140.87.

After reviewing the evidence in the record, the M & T defendants' argument is ultimately unpersuasive. The record evidence ² shows that Fallon made ten withdrawals of at least $10,000 from one of the guardianship accounts, and the Acting Commissioner of Accounts submitted an affidavit stating that the $240,684.87 in disallowed expenses on the final...