Pavlovich v. National City Bank, No. 1:01 CV 1120.

• Decision Date: 30 September 2004
• Docket Number: No. 1:01 CV 1120.
• Citation: 342 F.Supp.2d 718
• Parties: Lauren M. PAVLOVICH, Plaintiff, v. NATIONAL CITY BANK, Defendant.
• Court: U.S. District Court — Northern District of Ohio

342 F.Supp.2d 718

Lauren M. PAVLOVICH, Plaintiff, v. NATIONAL CITY BANK, Defendant.

No. 1:01 CV 1120.

United States District Court, N.D. Ohio, Eastern Division.

September 30, 2004.

Derek Kaesgen, David J. Hessler, Peter A. Hessler, Angela M. Privitera, Wegman, Hessler & Vanderburg, Cleveland, OH, for Plaintiff.

James P. Burke, Geoffrey J. Ritts, John M. Newman, Jr., Jones Day, Michael M. Hughes, Frantz Ward, William D. Beyer, Wuliger, Fadel & Beyer, Richard L. Stoper, Rotatori Bender Gragel Stoper Alexander, Cleveland, OH, W. Joe Wilson, William S. Fish, Jr., Tyler Cooper & Alcorn, LLP, Hartford, CT, for Defendant.

ORDER

OLIVER, District Judge.

Lauren M. Pavlovich ("Plaintiff" or "Mrs. Pavlovich") instituted this action against National City Bank ("Defendant" or "NCB") on April 12, 2001, in the Cuyahoga County Court of Common Pleas. Defendant timely and properly removed the action to this court on May 8, 2001, based on federal question jurisdiction. Currently pending before the court are the parties' cross-motions for summary judgment. For the reasons set forth below, Defendant's Motion for Summary Judgment (ECF No. 66) is granted and Plaintiff's Motion for Partial Summary Judgment (ECF No. 70 (refiled as ECF No. 83)) is denied.

I. FACTS

On December 8, 1992, Mrs. Pavlovich, under the supervision of Thomas M. Durkin ("Mr.Durkin"), President of Cashel Management Company ("Cashel"), an investment advisor under the 1940 Investment Advisors Act, signed an Investment Management Contract ("Cashel Contract") with Cashel at its offices in Cleveland, Ohio. Pursuant to the Cashel Contract, Cashel was to "formulate a specific investment strategy" and then to implement that strategy by "effect[ing] purchase and/or sale transactions of securities as agent"; additionally, Cashel was to have "complete discretion with respect to the investments of [her] funds and the execution of purchase and/or sale orders through one or more broker-dealers and/or registered representatives as [Cashel] deems appropriate." (Pl.'s Reply Mem. in Supp. of Pl.'s Mot. for Partial Summ. J., Ex. 4.) Because the Cashel Contract provided that Cashel was not to have custody of the funds and/or securities, Mrs. Pavlovich simultaneously executed a Custody Agreement ("Custody Agreement") with NCB. This Custody Agreement provided: "The Custodian shall have no duty to and shall not review or make investment recommendations with respect to any property held hereunder." (Pl.'s Mot. for Partial Summ. J., Ex. 1 at ¶ 5.) It also provided that "[t]he Custodian shall not be liable for the depreciation in value of any property held hereunder due to its compliance with any written direction." (Id. at ¶ 11.) The duties of the Custodian were to be largely administrative:

The Custodian shall (a) follow for and collect all income and principal payments on the property; (b) perform the necessary clerical and bookkeeping services relative to the property; (c) advise [Mrs. Pavlovich] of all maturities, redemptions, exchanges, tenders, and shareholder rights and options; (d) send [Mrs. Pavlovich] a quarterly statement showing all receipts, disbursements, and other transactions and an annual priced inventory of the property; and (e) pay, deposit, or accumulate the net income and disburse the principal as [Mrs. Pavlovich] may direct in writing.

(Id. at ¶ 3.) Cashel was not a party to the Custody Agreement but acted as NCB's agent in obtaining Mrs. Pavlovich's execution thereof. Pursuant to the Custody Agreement, NCB was instructed that "The Custodian may safely rely and act upon any written direction delivered to it as provided herein, if purported to have been signed by me or by any one or more persons specifically authorized in writing by me and reasonably believed by the Custodian to be genuine." (Id. at ¶ 9.) Accordingly, Mrs. Pavlovich executed a letter ("Trading Letter") to Francis Dinda, an NCB Vice President and Trust Officer, instructing NCB that she was granting "sole trading authority" to Cashel.¹ (Pl.'s Mot. for Partial Summ. J., Ex. 2.)

On September 21, 1995, Cashel began investing Mrs. Pavlovich's money in Rx Remedy, a privately-held start-up company headquartered in Westport, Connecticut. The company was a healthcare information service and owned a large database of health care information. It published a magazine and sold information from its database to various parties in the medical field. Cashel directed NCB to disburse $250,000 from Mrs. Pavlovich's account (the "Account") and wire transfer that money to Rx Remedy's operating account at Chase Manhattan Bank in Westport, Connecticut. This money was for a stock investment in Rx Remedy; John Pavlovich ("Mr.Pavlovich") stated at deposition that he informed Mr. Durkin that Mrs. Pavlovich only wished to invest $100,000 in Rx Remedy stock and that she did not wish to invest any more funds in Rx Remedy. At the end of October 1995, Cashel deposited into the Account a refund check in the amount of $143,420; additionally, Mrs. Pavlovich received an Rx Remedy stock certificate in the mail which represented her $100,000 stock investment.

After two years of no transactions with Rx Remedy, Cashel again started investing Mrs. Pavlovich's money in Rx Remedy debt instruments and warrants. Typically, at the beginning of each month, Cashel requested money to be wired from the Account to Rx Remedy's account; then on the last day of the month, a Cashel representative would hand deliver to NCB a check in the amount of the earlier wire transfer plus "interest" for deposit into the Account. This pattern of transactions would begin again on the first day of the next month. The net effect of these repeated transactions was that even before the funds represented by the checks had been deposited into the Account, those same funds had already been wired back to Rx Remedy. Mr. Durkin named this pattern of transactions, "rollover transactions." Mrs. Pavlovich received at least 21 monthly statements from NCB; she never took any actions to indicate to NCB that she thought there was any problem. Mrs. Pavlovich also received statements from Cashel reflecting her investment in Rx Remedy notes and warrants as well as the interest that Rx Remedy was paying her. Finally, Mrs. Pavlovich received reports from Rx Remedy showing that it was losing money and that it depended on capital injections to sustain operations. It appears that Mrs. Pavlovich refused to fire Cashel or otherwise alter this series of investments, despite the increasingly apparent risks of not doing so, because she was convinced that Rx Remedy was going to be a "home run."

On February 20, 1999, the Tax Department of the Ohio Secretary of State's Office revoked Cashel's corporate charter with notice to Cashel; Cashel's charter was never reinstated.²

According to Mr. Pavlovich, during the summer of 1999 he confronted Mr. Durkin after he noticed that his wife's total account balance had dropped by approximately $200,000. Mr. Durkin explained that he had loaned the funds to Rx Remedy because that was the only way he could generate enough income on a monthly basis to meet the Pavlovichs' investment objectives without compromising their investment principal. Upon hearing this explanation, Mr. Pavlovich authorized Mr. Durkin to loan Rx Remedy a maximum of $300,000 in additional funds. Mrs. Pavlovich has presented no evidence that NCB was aware of this conversation which Mr. Pavlovich maintains he had with Mr. Durkin in that regard.

In December 1999, however, $505,000 was transferred from the Account to Rx Remedy and at the end of the month, $505,498 was deposited back into the Account. Mr. Pavlovich has testified that he received the December statement and called NCB in January to complain. NCB denies that this call ever took place. Mr. Pavlovich states that during this conversation he learned of similar transactions that took place in January 2000 and that he demanded that the money be returned to his wife's Account. He further states that he told someone at NCB that "these transfers are not supposed to happen." (J. Pavlovich Dep. at 114.) A few days later, the money that was transferred out of the Account on January 3, 2000, was returned. Also in January 2000, according to Mr. Durkin, an employee at NCB informed him that NCB would be implementing a "five day rule" from that point forward. Under the five day rule, NCB would not approve any wire transfers from Cashel which were dependent on funds that had been deposited by check less than five days earlier. There is no evidence that NCB ever breached this five-day rule or that the rule was to be interpreted to prevent NCB from ever making transfers of money to Rx Remedy. In October 2000, Cashel again requested big wire transfers from the Account to Rx Remedy, two of which exceeded the available cash balance in the Account. At the end of the month, Rx Remedy made a deposit back into the Account, slightly exceeding the total amount transferred out of the Account.

In October 2000, Cashel again ordered money transfers out of the Account back to Rx Remedy. When Mr. Pavlovich received his wife's October 2000 statement in November, he noticed the big transfers of money. On November 16, 2000, Rx Remedy sent a check for deposit into the Account in the amount of $2,090,000; on the same day, however, Rx Remedy ordered its bank to "Stop Payment" on the check. Days later, NCB informed the Pavlovichs that the check was not honored. On or about November 16, 2000, Mrs. Pavlovich sent a letter to NCB withdrawing Cashel's authority over the custody account. On November 20 and 21, 2000, Rx Remedy wired a total of $650,000 to the Account. However, Rx Remedy filed for bankruptcy on December 20, 2000, and this transfer was claimed by the trustee to be a preference; eventually, Mrs. Pavlovich had to return $176,962.02 of the $650,000 to the trustee.

II. SUMMARY JUDGMENT STANDARD

Federal Rule of Civil Procedure 56(c) governs summary...