Kuwait Airways Corp. v. American Sec. Bank, N.A.

• Decision Date: 01 December 1989
• Docket Number: Nos. 88-7039,88-7040,88-7056 and 89-7010,88-7055,s. 88-7039
• Citation: 890 F.2d 456
• Parties: , 10 UCC Rep.Serv.2d 21 KUWAIT AIRWAYS CORPORATION, Appellant, v. AMERICAN SECURITY BANK, N.A. and First American Bank, N.A., Appellees.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 456

890 F.2d 456

281 U.S.App.D.C. 339, 10 UCC Rep.Serv.2d 21

KUWAIT AIRWAYS CORPORATION, Appellant, v. AMERICAN SECURITY BANK, N.A. and First American Bank, N.A., Appellees.

Nos. 88-7039, 88-7040, 88-7055, 88-7056 and 89-7010.

United States Court of Appeals District of Columbia Circuit.

Argued Sept. 8, 1989.

Decided Dec. 1, 1989.

Order on Petition for Rehearing of No. 88-7039 Jan. 10, 1990.

Appeal from the United States District Court for the District of Columbia (Civil Action No. 86-2542).

Thomas J. Whalen, with whom Robert P. Silverberg and Robert W. Ludwig, Jr., Van Nuys, Cal., were on the brief, for appellant.

Dale A. Cooter and Joseph M. Cahill, with whom Nicholas H. Hantzes, Washington, D.C., was on the brief, for appellees.

Before MIKVA, EDWARDS and WILLIAMS, Circuit Judges.

Opinion for the Court filed by Circuit Judge HARRY T. EDWARDS.

HARRY T. EDWARDS, Circuit Judge:

This case involves a suit by Kuwait Airways Corporation ("Kuwait") against American Security Bank ("ASB"), the depositary bank, and First American Bank ("FAB"), the drawee bank. During the course of an extended jury trial, Kuwait sought to prove that the depositary bank converted funds and breached a contract by opening a corporate account upon the request of a Kuwait employee, Robert Sensi, without any documentation and by taking for deposit into this account checks amounting to approximately $2.5 million on missing or forged indorsements. Kuwait also sought to prove that the drawee bank converted approximately $2.5 million by processing and paying checks from ASB that had been deposited by Sensi without payee indorsements or some other form of authorized indorsement. The jury returned a verdict for Kuwait against ASB (the depositary bank) in the amount of $766,777.66; the jury rejected Kuwait's claim against FAB, thus returning a verdict of no damages against the drawee bank. The District Court then entered judgment in accordance with the jury's verdicts.

Kuwait now seeks reversal and remand of the District Court judgment. See Kuwait Airways Corp. v. American Sec. Bank, Civ. Action No. 86-2542, 1987 WL 33448 (D.D.C. Dec. 23, 1987), reprinted in Joint Appendix ("J.A.") 75. Kuwait asks this court to enter judgment in its favor against ASB in the amount of approximately $2.5 million for breach of contract and conversion of funds, and against FAB in the amount of approximately $2.5 million for conversion of funds for payment of checks on "unauthorized" indorsements. Kuwait further seeks an award of prejudgment interest from the date of conversion of each check by each bank. Finally, Kuwait requests remand for a new trial solely on the issue of punitive damages against American Security Bank. ¹ In advancing these claims, Kuwait asserts that the District Court erred in: (1) not holding ASB liable as a matter of law pursuant to D.C.Code Sec. 28:3-419 (1981) for the face amount of the checks converted; (2) not holding FAB absolutely liable for the face amount of the checks converted; (3) not awarding prejudgment interest pursuant to D.C.Code Sec. 15-108 or 15-109 (1981); and (4) dismissing Kuwait's claim for punitive damages against ASB.

American Security Bank, the defendant-appellee and cross-appellant, requests this court to vacate the jury verdict and enter judgment in its favor on the ground that Kuwait ratified the account opened by Sensi. Alternatively, ASB seeks a new trial on the grounds that: (1) the District Court failed to instruct the jury on the statute of limitations issue; (2) Kuwait's contract claim should not have been submitted to the jury; and (3) newly discovered evidence exonerates ASB from liability.

On the judgment against ASB, we conclude that, because the District Court should not have applied the "discovery rule" to this case, a significant portion of Kuwait's suit is barred by the statute of limitations. The jury returned a general verdict, so we cannot determine the portion of the award that relates to barred claims. Thus, we must reverse and remand for a new trial covering those periods not barred by the statute of limitations. We find no merit in any of the other claims advanced by ASB; and we find no merit in Kuwait's claims seeking a directed verdict or judgment notwithstanding the verdict against ASB. If on remand the District Court is again presented with the question of whether to award prejudgment interest, the matter should be determined pursuant to the standards enunciated in Duggan v. Keto, 554 A.2d 1126 (D.C.1989). On the judgment in favor of FAB, we find no error and affirm.

I. BACKGROUND

The material facts of this case are undisputed. In 1976, Kuwait opened a corporate account with ASB in the District of Columbia, for which the bank required documentation from the Board of Directors of Kuwait authorizing the establishment of the account and designating persons authorized to withdraw funds from the account. ASB established the corporate account, herein referred to as the "826 Account," in Kuwait's name upon receipt of the documentation.

Kuwait's Chairman, members of the Board and certain key members of management in the home country were the only persons authorized to withdraw funds from the 826 Account. It is uncontested that this account was a "depositary account" into which funds were to be deposited locally; it was not a checking account upon which funds could be drawn by any Kuwait employee in Washington or New York.

In 1977, Kuwait hired Robert Sensi as area sales manager for the District of Columbia. Sensi had a broad range of authority in managing the sales office including regular contact with ASB regarding the Kuwait 826 Account. On November 25, 1980, at Sensi's request and on the basis of Sensi's signature alone, ASB opened a corporate checking account (the "640 Account") in the name of Kuwait, and issued checks permitting withdrawal of funds on Sensi's signature alone. In disregard of the bank's own procedures, ASB opened the account without any documentation from Kuwait that the airline authorized the opening of the account or the withdrawal of funds from the account.

During the period from the opening of the 640 Account in November of 1980 through August of 1986, Sensi and his subordinates made deposits of checks payable to Kuwait into both the 826 Account and the 640 Account. Deposits into the 640 Account amounted to a total of $2,654,232.64. Out of the 523 checks deposited in the 640 Account, all but five were drawn by the Embassy of Kuwait in Washington, D.C. The Embassy checks deposited into the 640 Account represented approximately ten percent of Kuwait's total sales to the Embassy for the period. Accordingly, Kuwait records showed that the Embassy of Kuwait carried a substantial and long past due outstanding balance to the airline. The New York Kuwait office, which was responsible for the accounting functions of the region, relied upon the Washington office to collect the outstanding balances from the Embassy. Representatives of the New York office visited with Embassy officials regarding the substantial outstanding balance on only two or three occasions over the six-year period. The deposits into the 640 Account stopped in August of 1986 when the Embassy produced cancelled checks as proof to Kuwait of payment of old airline invoices.

ASB accepted over ninety percent of the checks deposited into the 640 Account on missing payee indorsements. FAB, the Embassy of Kuwait's bank (the "drawee bank" in the instant case), processed these checks for collection and payment on ASB's line indorsement only. ² The remaining ten percent of the checks contained some form of incomplete or unauthorized indorsement, such as: "for deposit only" (with or without the account number); or a bank-supplied payee indorsement "For deposit only to within named payee"; or "Deposit to the Credit of the Within Named Payee Absence of Endorsement Guaranteed American Security Bank, N.A. Washington, D.C."; or with the payee stamp indorsement "For Deposit Only, Kuwait Airways Account 21-862-93-826," the number of the 826 Account.

Sensi wrote numerous checks from the 640 Account payable to family members, friends, business associates, business ventures, investments and political organizations. He also wrote checks from the 640 Account to "cash" in amounts ranging from $5,000 to $25,000 and deposited these checks into his personal account. When Kuwait pressured Sensi to collect the outstanding amounts from the Kuwait Embassy, he transferred funds from the 640 Account to the 826 Account to cover the oldest outstanding invoices, in an amount totaling $141,060.56.

Kuwait inquired about their account balances around the world every year for audit purposes. In 1983, ASB responded to the audit inquiry stating that it could find no account of Kuwait Airways Corporation. When the Kuwait Chairman referred ASB to the 826 Account, ASB confirmed the account by telex and a letter which referred to the balance of the 826 Account, but did not mention the 640 Account. In 1984, ASB sent to Kuwait's outside auditors in the home country a form listing account numbers and balances for both accounts. The auditors apparently deemed the information pertaining to the accounts immaterial to their audit, but they passed along the information to Kuwait. Upon receiving this information, Kuwait's head office sent a telex to the New York office on October 31, 1984, requesting that they investigate the 640 Account. Several months later, when Kuwait's New York office failed to respond, the Kuwait home office sent a follow-up telex. There is no evidence of any further follow-up on the telexes.

In 1985, ASB ignored Kuwait's instruction to mail audit information directly to Kuwait's auditors. Instead, ASB gave the requested information to Sensi, who then altered the response (which had identified both accounts) to list only the 826 Account. Sensi sent this altered document on to Kuwait's home office. In 1986, Kuwait's...