Rovell v. Am. Nat'l Bank

• Decision Date: 21 October 1999
• Docket Number: No. 98-3778,98-3778
• Parties: (7th Cir. 1999) IN RE: MICHAEL J. ROVELL, Debtor-Appellant, MICHAEL J. ROVELL, Plaintiff-Appellant, v. AMERICAN NATIONAL BANK, Defendant-Appellee
• Court: U.S. Court of Appeals — Seventh Circuit

Page 867

194 F.3d 867 (7th Cir. 1999)

IN RE: MICHAEL J. ROVELL, Debtor-Appellant,

MICHAEL J. ROVELL, Plaintiff-Appellant, v. AMERICAN NATIONAL BANK, Defendant-Appellee.

No. 98-3778

In the United States Court of Appeals For the Seventh Circuit

Argued April 6, 1999

Decided October 21, 1999

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 98 C 464--James B. Moran, Judge.

Before Kanne, Diane P. Wood, Evans, Circuit Judges.

Kanne, Circuit Judge.

When a law firm plagued by sloppy bookkeeping mistakenly writes a check that results in an overpayment to a private investigator who then decides to pocket the money, should the law firm's bank ultimately bear the loss? The appellant here, Michael J. Rovell, ("Rovell" or "Debtor"), thinks so. Given the facts of this case and the well established Illinois tort law of negligent misrepresentation, we believe the law does not compel such a result.

In the United States Bankruptcy Court for the Northern District of Illinois, the debtor sought a reduction in his debt based on alleged negligent misrepresentations by a bank-creditor, American National Bank ("ANB"). The bankruptcy court held that the bank could not be held liable for negligent misrepresentation as a matter of Illinois law because banks are not "suppliers of information." Rovell v. American Nat'l Bank, No. 95-B-21171 (Bankr. N.D. Ill. March 17, 1997). Furthermore, the court found Rovell had not reasonably relied on the bank's representations, an essential element of the tort. The district court partly reversed, finding that banks were in fact "suppliers of information" and could be held liable for negligent misrepresentation. Rovell v. American Nat'l Bank, 232 B.R. 381 (N.D. Ill. 1998). However, the district court, based on the bankruptcy court's findings of fact, agreed that Rovell's reliance on the alleged misrepresentation was unreasonable and therefore not compensable. Because we find that the bankruptcy court's determination of unreasonable reliance was not clearly erroneous, we will affirm.

I. History

Rovell practiced law in his own firm in Chicago, but his work took him on occasion to Arizona and California, where he engaged the services of an Arizona private investigator, Patricia O'Connor, and her firm, Pretty Eyes Detective Agency. On August 30, 1994, pursuant to a fee agreement between Rovell and O'Connor, Rovell's firm wrote a check to O'Connor for her services. The check in the amount of $38,250 was not immediately cashed. About three weeks later on September 19, Rovell discovered that the firm had overpaid O'Connor by more than $10,000. Wishing to correct the mistake, Rovell directed his associate, attorney Lisa I. Fair, to contact their banker, ANB in Chicago, and inquire whether the check had been cashed. Fair called the firm's account representative at ANB, Linda Williams, to request a stop-payment order. Fair had only incomplete records of the transaction with Pretty Eyes and was unable to provide Williams with a check number for the check to be canceled.

The conversation that took place between Fair and Williams represents the crucial exchange in the case. Only Fair and Williams can testify as to its content, and they disagree on key points. Fair asserted that she called Williams and asked if the check had been cashed. Because she did not know the check number, she could only supply the account number, check amount and payee. Fair added that it might be in the range of six checks beginning with number 1084 but that she could not be sure because no record had been kept of the check number. Fair said that Williams put her on hold and then returned to report that the check had not cleared. Fair testified that she then asked for a stop-payment order to be issued and contended that Williams never told her that the bank could not stop payment without a check number. Fair also denied that Williams advised her to wait before writing a replacement check. The correct number for the first check written to Pretty Eyes turned out to be 1105.

Williams recalled the conversation differently. She remembered Fair calling and not knowing the check number, but requesting a stop payment on checks numbered 1084 and 1086, neither of which had cleared the bank yet. Williams processed the stop-payment order on those two checks and said she cautioned Fair to wait a few days before writing the replacement. Williams, who had twenty-six years of banking experience, said she routinely cautioned customers not to write checks immediately after a stop-payment order had been issued but did not recall specifically telling Fair that a check number was necessary for a stop-payment order.

Williams processed the stop-payment order that day for checks 1084 and 1086, and the order took effect at the start of business the next day. Between the time Williams ended her conversation with Fair and the close of business that day, the check for $38,250 was presented for payment and cashed. Two days later, without waiting for the stop-payment confirmation order to arrive and without calling back to check on the status of the account, Fair wrote a replacement check for $27,284.50 and mailed it by overnight express mail to Arizona. That check also was cashed, causing Rovell to overdraw his account the following December. Despite the uncertainty surrounding the stop-payment order, Rovell never read or responded to the stop-payment confirmation orders and failed to open his monthly account statements for many weeks. Only when he realized that he had overdrawn his account and incurred penalties did Rovell become a dutiful and prolific correspondent with the bank.

In October 1995, Rovell initiated a voluntary bankruptcy under Chapter 11 of the Bankruptcy Code. ANB presented a claim on a secured line of credit for $50,081.25, the validity of which is undisputed. Rovell, however, filed an objection seeking to reduce the claim by the amount he lost due to the overpayment to Pretty Eyes. He asserted claims under Illinois law for breach of contract on the ground that ANB had promised to stop payment on the first check and negligent misrepresentation based on the bank's alleged "assurance that the check had not cleared and could be stopped."

The bankruptcy court denied both claims, ruling that the bank could not be held liable on the tort claim as a matter of Illinois law under Moorman Manufacturing Co. v. National Tank Co., 91 Ill.2d 69, 88-89 (1982), because it was not a "supplier of information." The district court reversed that holding, but because we do not need to reach that issue, we will leave the interpretation of state law for Illinois courts to resolve. The bankruptcy and district courts agreed, however, that Rovell's reliance on the bank's statements regarding stopping payment of checks was unreasonable and therefore denied the claim for setoff under the tort theory.

II. Analysis

On appeal, Rovell raises two issues. First, he argues that the district court should have reviewed the bankruptcy court's finding of unreasonable reliance de novo, rather than for clear error. Second, Rovell argues that the evidence, including the conflicting testimony of the two primary witnesses, was insufficient to support the bankruptcy court's finding that the bank had not negligently misrepresented the procedure for stopping payment.

A. Standard of Review

Illinois law requires that the plaintiff show reasonable reliance on the defendant's misrepresented facts to prevail on a claim of negligent misrepresentation. See Board of Education of Chicago v. AC&S, Inc., 546 N.E.2d 580, 591 (Ill. 1989); see also Quinn v. McGraw- Hill Cos., 168 F.3d 331, 335 (7th Cir. 1999). The bankruptcy court found that Rovell did not act out of reasonable reliance on the statements made by Williams when Rovell wrote a replacement check without waiting for the stop-payment order to take effect or for the first check to be canceled. The district court agreed with the bankruptcy court, but Rovell now argues that the district court should have engaged in a more rigorous review of the bankruptcy judge's finding.

An appellate court will overturn a lower court's findings of fact only where clearly erroneous, and conversely, it will apply less deferential de novo review to questions of law. In re Bonnett, 895 F.2d 1155, 1157 (7th Cir. 1989). Rovell argues that "reasonable reliance" is a mixed question of law and fact and must be reviewed de novo. The cases of this and other circuits show him to be half right.

Reasonable reliance, as Rovell contends, involves the application of a legal principle to a set of facts, also known as a mixed question of law and fact as discussed in Ornelas v. United States, 517 U.S. 690, 696-97 (1996), and United States v. D.F., 115 F.3d 413, 415 (7th Cir. 1997). When the facts are established and the relevant standard is undisputed, the only remaining question can be "whether those facts satisfy the relevant standard." Id. In Ornelas, the district court was called upon to decide whether a particular set of facts gave rise to a "reasonable suspicion" or "probable cause" sufficient to support an investigatory stop and warrantless search. Ornelas, 517 U.S. at 695, 116 S.Ct. 1657. The Court held that a mixed question of law and fact was presented by the "decision whether these historical facts, viewed from the standpoint of an objectively reasonable police officer, amount to reasonable suspicion or to probable cause." Id. at 696, 116 S.Ct. 1657.

We agree that reasonable reliance in the context of a negligent misrepresentation action likewise constitutes a mixed question of law and fact when the fact finder--here the bankruptcy court--is called upon to apply a legal rule to the particular facts of a case. However, Rovell's characterization of the question does not automatically afford the bankruptcy judge's determination a less deferential review. The case law firmly establishes the...