Integrated Resources Equity Corp. v. Founders Bank of Arizona

Decision Date17 January 1996
Docket NumberNo. 94-15383,94-15383
PartiesNOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel. INTEGRATED RESOURCES EQUITY CORPORATION, a Delaware corporation, Plaintiff-Appellant, v. FOUNDERS BANK OF ARIZONA, a state banking association, Defendant-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

Before: FLETCHER, POOLE, and O'SCANNLAIN, Circuit Judges.


Integrated Resources Equity Corporation ("IREC") appeals the district court's order granting Founder's motion for judgment on the pleadings in this diversity case. Relying on Berthot v. Security Pacific Bank of Arizona, 170 Ariz. 318, 823 P.2d 1326 (Ariz.App.1991), the court held that IREC's action necessarily alleged a claim for conversion and therefore could proceed only under A.R.S. Sec. 47-3419, rather than under a common law negligence theory. The court also concluded that Arizona courts would not apply the discovery rule to conversion claims under section 47-3419, and that IREC's claim was therefore time-barred. We have jurisdiction under 28 U.S.C. Sec. 1291, 1 and we reverse on both issues.


Judgment on the pleadings is appropriate only where the moving party clearly establishes on the face of the pleadings that no material issue of fact remains to be resolved and it is entitled to judgment as a matter of law. General Conference Corp. of Seventh-Day Adventists v. Seventh-Day Adventist Congregational Church, 887 F.2d 228, 230 (9th Cir.1989), cert. denied, 493 U.S. 1079 (1990); Fed.R.Civ.P. 12(c). All allegations of fact by the party opposing the motion are accepted as true and are construed in the light most favorable to that party. Id. We review the district court's rulings in light of these standards. 2


IREC first appeals the district court's ruling that its complaint may proceed only under section 47-3419, rather than under common law negligence. The court's conclusion was based on Berthot, in which the court held that "a common law negligence claim may not be brought when the cause of action falls under A.R.S. Sec. 47-3419." Berthot, 170 Ariz. at 319, 823 P.2d at 1327. Because the district court concluded that IREC's complaint necessarily alleged that Founders had accepted and paid checks with forged endorsements, the court held that the entire cause of action fell under section 47-3419.

We agree that Berthot prohibits a plaintiff from bringing a common law negligence action which seeks recovery for the types of conduct described in section 47-3419. However, we find nothing in Berthot which suggests that a plaintiff may not pursue both a section 47-3419 claim for conversion and also a common law negligence action for separate conduct not described in section 47-3419.

In Berthot, the plaintiff alleged that her father had cashed two checks at a bank branch office by forging her signature. She sued the bank for negligence, alleging that it "negligently and carelessly cashed the two checks ... based upon a forged endorsement...." Id. The bank moved to dismiss for failure to state a claim, arguing that section 47-3419 had displaced common law negligence causes of action "based on the same activity." Id., 170 Ariz. at 321, 823 P.2d at 1329. The court agreed and granted the bank's motion. In doing so, the court relied heavily on the reasoning in Equitable Life Assurance Society of the United States v. Okey, 812 F.2d 906 (4th Cir.1987), in which the Fourth Circuit held that South Carolina's version of U.C.C. Sec. 3-419 (a provision similar to A.R.S. Sec. 47-3419) had "effectively subsume[d] both conversion and negligence claims based on payment over a forged or unauthorized indorsement...." Id. at 908.

In light of Berthot and Okey, it is clear that to the extent that IREC seeks recovery "based on payment over a forged ... indorsement," it may proceed only under section 47-3419. However, we do not believe that the reasoning in either Berthot or Okey precludes IREC from proceeding both for conversion under section 47-3419 and for common law negligence for conduct not specified in that statute.

First, the holdings in both Berthot and Okey were quite limited. For example, Berthot held merely that section 47-3419 precluded "common law negligence claim[s] for conversion," Berthot, 170 Ariz. at 323, 823 P.2d at 1331 (emphasis added), while Okey merely held that section 3-419 precluded common law claims "based on payment over a forged or unauthorized indorsement." Okey, 812 F.2d at 908 (emphasis added). 3 Second, the conduct alleged in each case fell squarely and exclusively within the purview of U.C.C. Sec. 3-419; in neither opinion is there any indication that the complaint also alleged, as IREC has done here, conduct other than payment on forged instruments.

Third, our conclusion that Berthot does not preclude a plaintiff from bringing both a conversion action and a common law negligence action based on other conduct is also supported by the manner in which Berthot distinguished First Georgia Bank v. Webster, 168 Ga.App. 307, 308 S.E.2d 579 (1983), a case in which the court found that Georgia's version of U.C.C. Sec. 3-419 does not preclude common law negligence actions. Berthot distinguished Webster by noting that in Webster, "the negligence alleged did not involve the bank's payment of a check with a forged endorsement. Instead, it was based on a representation made by a bank employee. Thus, the negligence alleged in Webster did not fit within the cause of action provided for in Sec. 3-419." Berthot, 170 Ariz. at 323, 823 P.2d at 1331. 4

Fourth and finally, we note that the Arizona Supreme Court has held that under Art. 18, Sec. 6 of Arizona's Constitution, 5 the right to bring a common law negligence action is a "fundamental" one which may not be abrogated. See Barrio v. San Manuel Div.Hosp. for Magma Copper Co., 143 Ariz. 101, 104, 692 P.2d 280, 283 (1984) (citing Kenyon v. Hammer, 142 Ariz. 69, 87-88, 688 P.2d 961, 979-80 (Ariz.1984) (Hays, J., concurring)). In light of this fact, we are particularly reluctant to affirm an order granting judgment on the pleadings which effectively precludes IREC from even introducing evidence in support of its negligence claim.

For these reasons, we conclude that Berthot does not preclude IREC from seeking recovery both under section 47-3419 and under a common law negligence theory for conduct not necessarily falling within the purview of that statute. We must therefore determine whether IREC's complaint necessarily alleges conduct falling exclusively within the purview of section 47-3419, or whether IREC's allegations also allege conduct which may not fall under that statute.

A.R.S. Sec. 47-3419 provided that:

A. An instrument is converted when:


3. It is paid on a forged indorsement.


C. Subject to the provisions of this title concerning restrictive indorsements a representative, including a depository or collecting bank, who has in good faith and in accordance with the reasonable commercial standards applicable to the business of such representative dealt with an instrument or its proceeds on behalf of one who was not the true owner is not liable in conversion or otherwise to the true owner beyond the amount of any proceeds remaining in his hands.

A.R.S. Sec. 47-3419 (repealed 1993) (emphasis added). 6

The district court held that "in order to have opened and maintained an account in IREC's name, Founders necessarily must have accepted instruments made payable to IREC. Dunlap's endorsement of those instruments was a forgery within the meaning of the former section 47-3419.... [Therefore, IREC's] claim clearly lies within the ambit of section 47-3419."

We agree with the district court that IREC's complaint almost certainly alleges conduct falling under the purview of section 47-3419. For example, the complaint alleges that Founders "breached its duty by ... allowing Dunlap to ... deposit checks therein and withdraw funds therefrom that were the property of IREC...." Complaint p 17. In light of Berthot, any such claim must necessarily be brought under section 47-3419.

However, IREC's complaint also seeks recovery for conduct which does not necessarily include payment on instruments with forged indorsements or "dealing with instruments or proceeds" on behalf of one not the true owner. For example, paragraph 11 of the complaint alleges that "Founders Bank allowed Dunlap to open the Account without verifying whether Dunlap was authorized to open the Account." Because IREC argues that it can prove that Dunlap opened the account with "an instrument validly payable to him or with a debit charge against another account he controlled," this allegation may not implicate section 47-3419. As such, IREC must be given the opportunity to introduce evidence on the issue, as well as on the other allegations in the complaint which do not necessarily implicate section 47-3419.

In sum, we conclude that IREC's complaint alleges conduct which does not necessarily fall within the purview of section 47-3419. If IREC can prove that Founders engaged in conduct which breached a duty at common law but that also was independent of conduct covered by section 47-3419, it may pursue recovery for that other conduct under any available theory, including common law negligence. Whether or not Founders engaged in such conduct is a material issue of fact which remains to be determined, and the district court therefore erred in granting judgment on the pleadings to Founders.


IREC also appeals the district court's conclusion that Arizona courts would not apply the discovery rule to toll the statute of limitations for claims sounding in conversion. 7 Because we conclude that the weight of authority suggests that Arizona courts would apply the...

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