John Hancock Financial Servs. v. Old Kent Bank

• Decision Date: 10 October 2003
• Docket Number: No. 02-1288.,No. 02-1307.,02-1288.,02-1307.
• Parties: JOHN HANCOCK FINANCIAL SERVICES, INC., Plaintiff-Appellee/Cross-Appellant, v. OLD KENT BANK, Defendant-Appellant/Cross-Appellee, Michigan National Bank; Patrick W. Sherman; Standard Federal Bank, successor by merger to Michigan National Bank, Defendants.
• Court: U.S. Court of Appeals — Sixth Circuit

346 F.3d 727

JOHN HANCOCK FINANCIAL SERVICES, INC., Plaintiff-Appellee/Cross-Appellant, v. OLD KENT BANK, Defendant-Appellant/Cross-Appellee, Michigan National Bank; Patrick W. Sherman; Standard Federal Bank, successor by merger to Michigan National Bank, Defendants.

No. 02-1288.

No. 02-1307.

United States Court of Appeals, Sixth Circuit.

Argued: September 12, 2003.

Decided and Filed: October 10, 2003. Pursuant to Sixth Circuit Rule 206

ARGUED: Molly E. McManus, WARNER, NORCROSS & JUDD, Grand Rapids, Michigan, for Appellant.

Francis R. Ortiz (argued and briefed), Dickinson, Wright, PLLC, Detroit, Michigan, for Plaintiff-Appellee Cross-Appellant.

ON BRIEF: Molly E. McManus (argued and briefed), Nathaniel R. Wolf (briefed), Warner, Norcross & Judd, Grand Rapids, Michigan, for Defendant-Appellant Cross-Appellee.

Francis R. Ortiz, DICKINSON WRIGHT, PLLC, Detroit, Michigan, for Appellee.

Gary J. Galopin, Standard Federal Bank, Legal Department, Troy, MI, Charles E. Chamberlain, Jr., Willey & Chamberlain, Grand Rapids, MI, for Defendants.

Before: MERRITT, MOORE, and GILMAN, Circuit Judges.

OPINION

RONALD LEE GILMAN, Circuit Judge.

John Hancock Financial Services, Inc., a Delaware corporation, sued Old Kent Bank, a Michigan corporation, to recover check proceeds converted by Old Kent and paid to one of John Hancock's agents, Patrick Sherman. The checks were drawn on the accounts of several clients of John Hancock, were made payable to John Hancock, and were entrusted to Sherman to invest. Sherman instead indorsed the checks with his own stamp and deposited them into his personal business account with Old Kent. Over the course of seven years, Sherman used this scheme to embezzle nearly $800,000 from John Hancock and its clients.

The claims against Old Kent were based on common law conversion, statutory conversion under the Uniform Commercial Code (UCC), and negligence. John Hancock filed a motion for summary judgment. Old Kent both responded to John Hancock's motion and filed its own motion for partial summary judgment, arguing that the three-year statute of limitations had run on all checks deposited prior to June 2, 1997.

The district court ruled in favor of John Hancock on the basis of its UCC conversion claim, but also granted Old Kent's motion for partial summary judgment. On appeal, Old Kent argues that the district court erroneously decided that the bank's forgery defense was without merit and that the district court failed to address the bank's contention that the Michigan Tort Reform Act's comparative-fault scheme applied to UCC conversion claims. John Hancock disagrees, and also argues that the discovery rule should be applied so that it can recover on all checks unlawfully converted by Old Kent, some dating back to 1993. For the reasons set forth below, we AFFIRM the judgment of the district court.

I. BACKGROUND

A. Factual background

Sherman was a representative of John Hancock in Michigan, where he sold insurance and investment products. Beginning in 1993, he concocted a scheme to embezzle from three of his John Hancock clients. The clients would write checks payable to John Hancock for investment products or insurance premiums. Sherman was authorized to accept these checks on behalf of John Hancock. He would then indorse the checks with a stamp that read: "Sherman and Associates Financial Services." Sherman maintained a checking account at an Owosso, Michigan branch of Old Kent under the same name as that on his indorsement stamp. Old Kent deposited these checks into Sherman's account, never questioning his authority to deal in this manner with checks clearly made payable to John Hancock. Approximately 71 checks were so indorsed and deposited over a period of seven years. Sherman was able to cover up his embezzlements by generating false accounting statements for his defrauded clients.

The scheme was finally uncovered in March of 2000, by which time Sherman had embezzled nearly $800,000. John Hancock repaid the defrauded clients the money that they had lost plus interest. It then demanded reimbursement from Old Kent.

B. Procedural background

John Hancock sued Old Kent in August of 2000, claiming common law conversion, statutory conversion under the UCC, and negligence. The parties had earlier agreed to toll the applicable three-year statute of limitations as of June 2, 2000. Old Kent did not dispute John Hancock's factual allegations or that the bank was partially at fault, but argued that John Hancock should bear a portion of the loss. John Hancock filed a motion for summary judgment in the fall of 2001. At the same time, Old Kent filed a motion for partial summary judgment based upon the theory that the statute of limitations barred recovery on all checks deposited more than three years prior to the June 2, 2000 tolling agreement.

The district court granted John Hancock's motion for summary judgment on the UCC conversion claims, declining to reach the claims of common law conversion or negligence. It also granted Old Kent's motion, thus limiting John Hancock's award to checks accepted for deposit by the bank after June 2, 1997, plus prejudgment interest. This timely appeal followed.

II. ANALYSIS

A. John Hancock's conversion claim

On appeal, Old Kent argues that the district court erred in granting summary judgment to John Hancock because comparative-fault principles allegedly apply to John Hancock's UCC conversion claim. We review the district court's grant of summary judgment de novo. Sperle v. Mich. Dep't of Corr., 297 F.3d 483, 490 (6th Cir.2002). Summary judgment is proper where no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). In considering a motion for summary judgment, the district court must construe all reasonable inferences in favor of the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The central issue is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

Old Kent contends that the district court erred in not applying Mich. Comp. Laws § 440.3406 (hereafter referred to as UCC § 3-406) to John Hancock's claims. UCC § 3-406 provides in pertinent part that a party whose negligence "substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection." UCC § 3-406(1). As noted above, Sherman indorsed the checks with a stamp that read "Sherman and Associates Financial Services." The district court held that the UCC's preclusion defense did not apply to John Hancock's conversion claim, reasoning that Sherman's indorsement was not a forgery because it "did not appear to be the genuine signature of the payee, John Hancock." Old Kent argues that the district court's definition of "forged signature" is too restrictive.

Because the UCC does not define the term "forged signature," Old Kent looked to Michigan law and the comments to UCC § 3-406 for the meaning of the term. Old Kent cites Pamar Enterprises, Inc. v. Huntington Banks of Michigan, 228 Mich. App. 727, 580 N.W.2d 11, 15 (1998), for the proposition that "[p]ayment of a check with a missing endorsement is the legal equivalent of payment over a forged endorsement." Pamar, however, gives no persuasive reason for this result, and the Michigan Supreme Court has not opined on the issue. Given the lack of a reasoned basis for treating a missing indorsement as the legal equivalent of a forged indorsement, we see no justification to extend Pamar to a case like the present where there is in fact an indorsement quite distinct from the named payee.

In advocating for a broad definition of the term "forged signature," Old Kent also relies on the following official comment to UCC § 3-406:

An insurance company draws a check to the order of Sarah Smith in payment of a claim for a policy holder, Sarah Smith, who lives in Alabama. The insurance company also has a policyholder with the same name who lives in Illinois. By mistake, the insurance company mails the check to the Illinois Sarah Smith who indorses the check and obtains payment. Because the payee of the check is the Alabama Sarah Smith, the indorsement by the Illinois Sarah Smith is a forged indorsement.

UCC § 3-406 cmt. 3. Old Kent argues that Sherman's indorsements are analogous to those of Illinois Sarah Smith's because they are both indorsements "by someone other than the intended payee." In rejecting this argument, the district court noted that, unlike the hypothetical in Comment 3, Sherman's indorsement was completely different from the payee's. The district court reasoned that the use of a common name in Comment 3 "supports the argument that a forged signature must appear to be the genuine signature of the intended payee." This analysis is consistent with Comment 2 to UCC § 3-406, which suggests that the drafters intended the term "forged signature" to be construed narrowly. Comment 2 provides:

Section 3-406 refers to "forged signature" rather than "unauthorized signature" that appeared in the former Section 3-406 because it more accurately describes the scope of the provision. Unauthorized signature is a broader concept that includes not only forgery but also the signature of an agent which does not bind the principal under the law of agency. The agency cases are resolved independently under agency law. Section 3-406 is not necessary in those cases.

UCC § 3-406 cmt. 2.

The district court defined the term "forged signature" within the context of UCC § 3-406 as a signature "substantially similar to the name of...