PENALOSA CO-OP. EXCHANGE v. AS Polonyi Co.

• Citation: 745 F. Supp. 580
• Decision Date: 26 July 1990
• Docket Number: No. 88-0006-CV-W-9.,88-0006-CV-W-9.
• Parties: PENALOSA COOPERATIVE EXCHANGE, Plaintiff, v. A.S. POLONYI COMPANY, Defendant.
• Court: U.S. District Court — Western District of Missouri

745 F. Supp. 580

PENALOSA COOPERATIVE EXCHANGE, Plaintiff, v. A.S. POLONYI COMPANY, Defendant.

No. 88-0006-CV-W-9.

United States District Court, W.D. Missouri, W.D.

July 26, 1990.

COPYRIGHT MATERIAL OMITTED

Bruce B. Waugh, Gilliland & Hayes, P.A., Kansas City, Mo., Gerald L. Green, Gilliland, Hayes, Schmidt, Dillon & Green, P.A., Hutchinson, Kan., for plaintiff.

James F. Duncan, Brian D. Williams, Watson, Ess, Marshall & Enggas, Kansas City, Mo., Douglas C. McKenna, Watson, Ess, Marshall & Enggas, Olathe, Kan., for defendant.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS

BARTLETT, District Judge.

Defendant A.S. Polonyi Company moves to dismiss plaintiff's Complaint pursuant to Rule 12(b)(6), Federal Rules of Civil Procedure, for failure to state a claim upon which relief may be granted. In its Complaint, plaintiff Penalosa Cooperative Exchange asserts six claims for relief: negligence (Count I), conversion (Count II), conspiracy to commit conversion (Count III), violation of Missouri's codification of the Uniform Fiduciaries Act (Count IV), money had and received (Count V) and breach of duty to know customers (Count VI).

Plaintiff alleges that from September 1983, through December 1985, Wayne Winter, its general manager, embezzled funds from plaintiff and used the money to speculate in the commodities market for his own account. During that time, Winter employed defendant as his commodities broker. According to plaintiff, Winter's trades from 1983 through 1985 involved approximately $1,276,500 of plaintiff's money and ultimately resulted in losses to plaintiff of $810,500.

I. Standard for Dismissal for Failure to State a Claim Upon Which Relief Can Be Granted

"In passing on a motion to dismiss, a court is required to view the facts alleged in the complaint in the light most favorable to the plaintiff." Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). A complaint should not be dismissed unless it "appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Id., 355 U.S. at 45-46, 78 S.Ct. at 101-02.

II. Choice of Law

Neither party addressed the question of whether Missouri or Kansas law provides the basis for deciding whether plaintiff has stated claims for relief. Their failure to do so resulted in the citation of legal authority from multiple jurisdictions. For instance, in its Suggestions in Support of Motion to Dismiss and in its Reply, defendant relies on both Kansas and Missouri law without explaining why it chose to cite the law that it did. Defendant also relies on the decisions of federal and state courts with absolutely no connection to this controversy without stating that there is no controlling authority.

On the other hand, plaintiff addresses the choice of law problem as follows:

Throughout defendant's Motion to Dismiss reference is made to Chapter 84 of the Kansas Statutes Annotated. This case arises out of the embezzlement of funds in Kansas and the receipt of those funds by the defendant in Missouri. Conflict of law questions may exist in this case. For purposes of this brief, plaintiff does not admit that Kansas substantive law governs should a conflict between the laws of Kansas and Missouri arise. Therefore, since the UCC provisions at issue are identical in each state, plaintiff will make reference to the UCC statute rather than a particular state's codification of that law.

Plaintiff's opposition to defendant's Motion to Dismiss at p. 6, n. 1.

Although the Kansas and Missouri UCC statutes at issue in this case are identical, different interpretations are possible. Therefore, neither party can rely on something called "the UCC statute."

The parties have discussed choice of law issues in connection with defendant's Motion for Summary Judgment, particularly whether the Kansas or Missouri statute of limitations applies.¹ Based on the record presented in connection with the parties' Motions for Summary Judgment, I am able to resolve the choice of law issues necessary to decide defendant's Motion to Dismiss.

"A federal district court in Missouri "sitting in diversity must apply Missouri's conflict of law principles." Birdsell v. Holiday Inns, 852 F.2d 1078, 1079 (8th Cir. 1988) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941)). "Missouri has adopted the most significant contacts test as promulgated by Restatement (Second) of Conflict of Laws § 145 (1971)." See, e.g., Kennedy v. Dixon, 439 S.W.2d 173 (Mo. en banc 1969); Birdsell at 1079, n. 5.

In Hicks v. Graves Truck Lines, Inc., 707 S.W.2d 439, 442 (Mo.App.1986), the court described the most significant contacts test:

Under the most significant contacts test, a choice of law is made based on the predominance of contacts with the state whose law is to prevail. The contacts to be taken into account are:

`(a) the place where the injury occurred,

(b) the place where the conduct causing the injury occurred,

(c) the domicile, residence, nationality, place of business of the parties, and

(d) the place where the relationship, if any, between the parties is centered.

The contacts are to be evaluated according to their relative importance with respect to the particular issue.'

Neither party analyzes Restatement (Second) of Conflict of Laws § 145 in light of the facts of this case.

A. Place Where Injury Occurred

Plaintiff alleges that the losses it suffered were caused when Polonyi negligently accepted checks written by Winter and received wire transfers authorized by Winter and converted those checks and wire transfers.

Polonyi's offices are located in Kansas City, Missouri. Exhibit C, Plaintiff's Motion for Partial Summary Judgment. The Polonyi bank account into which Winter wired money and the bank account into which Winter's checks were deposited was located in Kansas City, Missouri. Exhibit I, Plaintiff's Motion for Partial Summary Judgment. Therefore, when Polonyi used the money on deposit in that account to pay for trades allegedly not authorized by plaintiff, the money was taken from the Missouri account. Accordingly, any injury or loss sustained by plaintiff occurred in Missouri.

B. Place Where Conduct Causing Injury Occurred

Any allegedly wrongful conduct on the part of Polonyi that caused plaintiff's losses occurred in Missouri when the plaintiff's funds allegedly were used improperly.

C. Domicile, Residence, Nationality, Place of Business of the Parties

The plaintiff's business is located in Kansas. The defendant's business is located in Missouri.

D. Place Where Relationship, If Any, Between the Parties is Centered

The parties had no relationship between themselves. Therefore, there was no place where the relationship was centered.

Because the injury to plaintiff occurred in Missouri and because defendant's allegedly wrongful conduct occurred in Missouri, and because the other factors favor neither Missouri nor Kansas, Missouri has the most significant contacts with respect to the issues in this case. Accordingly, Missouri substantive law governs in this case.

III. Defendant Has Failed to Establish That Plaintiff's Common Law Claims Are Displaced by §§ 3-419, 3-305 and 3-418 of the UCC

Defendant contends that because the essence of plaintiff's claim is "conversion of negotiable instruments, all its common law claims are displaced by § 3-419 of the UCC." Defendant argues that "plaintiff's real complaint is that its general manager was unauthorized to sign its checks or make wire transfers for his personal trading...." According to defendant, the allocation of loss from unauthorized signatures "is precisely the kind of dispute which Article 3 of the UCC was carefully designed and drafted to resolve."

In making this argument, defendant relies primarily on the Kansas version of §§ 3-419(1)(b), 3-305 and 3-418 of the UCC. For reasons previously discussed, Missouri substantive law governs this case.

V.A.M.S. 400.1-103 provides in part: "Unless displaced by the particular provisions of this Act, the principles of law and equity ... shall supplement its provisions. `Nothing short of an express code provision limiting plaintiff's remedy' demonstrates displacement." Morgan Guar. Trust Co. v. American Sav. and Loan, 804 F.2d 1487, 1495 (9th Cir.1986) (quoting Hechter v. New York Life Ins. Co., 46 N.Y.2d 34, 39, 385 N.E.2d 551, 554, 412 N.Y.S.2d 812, 815 (1978)).

V.A.M.S. § 400.3-419(1)(b) is entitled "Conversion of Instrument — Innocent Representative" and provides in pertinent part: "An instrument is converted when ... (b) any person to whom it is delivered for payment refuses on demand either to pay or to return it...."

V.A.M.S. 400.3-419(1)(b) does not displace plaintiff's common law theories of recovery. V.A.M.S. 400.3-419(1)(b) pertains only to the conversion of negotiable instruments and "adopts the generally recognized rule that a refusal to return it a negotiable instrument on demand is a conversion." Comment 2 to § 400.3-419. Plaintiff does not allege that negotiable instruments were delivered to defendant for payment and that defendant refused to pay or return the instruments. Defendant was the payee of the checks and wire transfers not the "person" to whom the instruments were delivered for payment as those words are used in § 400.3-419(1)(b). Other Code sections relied on by defendant, e.g., V.A.M.S. 400.3-305 (holder in due course) and 400.3-418 (final payment) may be available as defenses to plaintiff's claims but these provisions do not preclude plaintiff from asserting claims.

"Although it may be unusual to uphold an affirmative defense at the pleading stage, when the defense is established on the face of the complaint, dismissal is appropriate." Burlison v. United States, 627 F.2d 119, 122 (8th Cir.1980). The allegations in plaintiff's Complaint do not establish that defendant was a holder in due course or that the final payment provision...