Pero's Steak and Spaghetti House v. Lee

Decision Date24 October 2002
Citation90 S.W.3d 614
PartiesPERO'S STEAK AND SPAGHETTI HOUSE and Louis Inn, v. Elizabeth Jean Hinkle LEE and First American National Bank and First Tennessee Bank National Association.
CourtTennessee Supreme Court

Stephen G. Anderson, Knoxville, Tennessee, for defendant-appellee, First Tennessee Bank National Association.

OPINION

FRANK F. DROWOTA, III, C.J., delivered the opinion of the court, in which E. RILEY ANDERSON, ADOLPHO A. BIRCH, JR., JANICE M. HOLDER, and WILLIAM M. BARKER, JR., JJ, joined.

The issue in this appeal is whether the trial court and the Court of Appeals erred in refusing to apply the discovery rule to the three-year statute of limitations for conversion of negotiable instruments and in granting the defendant's motion for partial summary judgment as to checks allegedly converted more than three years before the plaintiffs filed suit on August 29 and 30, 1996. After fully and carefully considering the record and the relevant authorities, we conclude that the discovery rule does not apply to toll the statute of limitations when the claim alleged is conversion of a negotiable instrument. This conclusion applies both to the former statute of limitations, Tennessee Code Annotated section 28-3-105, and the current statute of limitations, Tennessee Code Annotated section 47-3-118(g). Therefore, in the absence of fraudulent concealment, a cause of action for conversion of a negotiable instrument accrues, and the statute of limitations begins to run, when the instrument is negotiated. With respect to the plaintiffs' claim that the defendant is guilty of fraudulent concealment, we are of the opinion that the record contains no genuine issue of material fact precluding summary judgment. Accordingly, the judgment of the Court of Appeals affirming the trial court's grant of partial summary judgment to the defendant is affirmed on the separate grounds stated herein.

Factual and Procedural Background

This appeal involves the alleged conversion of negotiable instruments. The plaintiffs, Pero's Steak and Spaghetti House ("Pero's") and Louis Inn are general partnership businesses in Knoxville. Brothers Arthur, Al, and Gus Peroulas were the partners who owned Pero's, and the Peroulas brothers, along with their brother-in-law, Menas Keramidas, were the partners who owned Louis Inn. These men immigrated to the United States in the 1950s, became citizens in 1956 and worked in all areas of the restaurant business, and in 1960, they purchased Louis Inn.

The partners hired Hinkle & Hinkle, a family accounting and bookkeeping firm, to perform all the general accounting, book-keeping, and tax preparation for Louis Inn and the later-acquired Pero's. Elmer Hinkle operated the family business with his wife, Anna, and eventually with his daughter, Elizabeth Hinkle Lee ("Lee"). Beginning at some point in 1985, after Elmer Hinkle died and his wife retired from the business, Lee handled all of the accounting, bookkeeping, and tax preparation work for Pero's and Louis Inn.

The plaintiffs allege that between 1988 and 1995, fifty-four checks written by Pero's and eighty-six checks written by Louis Inn were converted by Lee and the defendant, First Tennessee Bank National Association ("First Tennessee"). Pero's did not have an account at First Tennessee. The Pero's checks were drawn on First American Bank, where Pero's did its banking. Louis Inn had an account with First Tennessee, and the Louis Inn checks were drawn on this account. All 140 checks were payable to First Tennessee. All the checks were given to Lee by the partners of Pero's or Louis Inn, and she presented all of them to the First Tennessee branch office near the office of Hinkle & Hinkle. Of the 140 checks at issue, one Pero's check and thirty-seven Louis Inn checks were written within three years of August 29 & 30, 1996, the dates on which the complaints were filed.

The plaintiffs allege that all the checks were intended to be used to pay federal taxes. First Tennessee maintained a separate, segregated account to enable employers to pay federal taxes, which was called the Treasury, Tax and Liability Account ("Tax Account"). Employers, like Pero's and Louis Inn, would deposit funds into this account, and each branch office of First Tennessee would receive these deposits, set them aside until the end of the day, and then deposit the funds into the Tax Account. At the end of each day, First Tennessee transmitted all the monies in the Tax Account to the Internal Revenue Service ("IRS"), along with a tape identifying the portion to be credited to each listed employer tax identification number. According to the testimony of the partners, Pero's and Louis Inn adopted this method of paying taxes on Elmer Hinkle's suggestion that it was convenient and trustworthy. First Tennessee did not have a similar account and procedure available for paying state taxes.

The checks at issue in this appeal were not processed in strict accordance with the Tax Account procedure. First Tennessee occasionally allowed Lee to cash the checks without endorsement and use some or all of the proceeds to purchase cashier's checks payable to the State of Tennessee or to the IRS. At other times First Tennessee allowed Lee, again without endorsement, to deposit some or all of the funds from the checks into the "Hinkle & Hinkle Tax Account." Lee often would then write checks on this account to pay taxes owed by Pero's and Louis Inn. Lee also wrote checks on this account for her personal needs.

In 1991, Pero's was audited by the IRS. As a result of that audit, Pero's was required to pay approximately $39,000 in back taxes, interest, and penalties. On or about February 3, 1992, Pero's received another notice from the IRS. This notice was sent to the restaurant located at 4931 Kingston Pike, and it stated that the IRS had not received any tax deposits during the fourth quarter of 1990. The partners of Pero's had written and delivered to Lee during that quarter four checks, each in the amount of $9,500, for a total of $38,000. Before and after 1991, the plaintiffs had received numerous notices from the IRS, some indicating underpayment of payroll taxes, others indicating overpayment, and some indicating a refund due. The plaintiffs turned these notices over to Lee and relied upon her to handle them. Lee assured the plaintiffs that the notices were an IRS mistake and that she would take care of them. On occasion, Lee used funds from the Hinkle & Hinkle Account to pay the outstanding tax deficiencies.

In July of 1995, the plaintiffs received an IRS levy and approximately fifteen notices alleging a tax deficiency. The partners investigated by personally contacting the IRS. In a March 14, 1996 letter, the IRS advised the partners to contact their bank. Upon further investigation, the partners learned that 140 checks payable to First Tennessee had not been applied to the Tax Account.

As a result of this investigation, on August 29, 1996, Pero's filed a complaint against Lee, First Tennessee, and First American National Bank.1 The complaint alleged that First Tennessee had engaged in joint conversion with Lee by improperly allowing her to cash or deposit fifty-four Pero's checks that were payable to First Tennessee and intended for deposit in the Tax Account. On August 30, 1996, Louis Inn filed a complaint that was essentially the same, alleging that First Tennessee had engaged in joint conversion with Lee by improperly allowing her to cash or deposit eighty-six Louis Inn checks that were payable to First Tennessee and intended for deposit in the Tax Account.

The cases were consolidated and eventually tried by a jury. Although the proof showed that First Tennessee had allowed Lee to cash and/or deposit 140 Pero's and Louis Inn checks, First Tennessee records revealed that a substantial portion of the proceeds of the more recent checks had been used to pay taxes owed by Pero's and Louis Inn. First Tennessee also argued that it was not guilty of conversion because Lee had been an agent of the plaintiffs, who was authorized to direct the tellers to cash and/or deposit the disputed checks. The plaintiffs responded that Lee only had authority to deliver the checks to First Tennessee for deposit The issue of agency was submitted to the jury. Also submitted to the jury was the question of whether the claims were barred by a three-year statute of limitations. First Tennessee argued that claims relating to checks allegedly converted more than three years before the complaint was filed were barred by the statute of limitations. The plaintiffs responded that the claims were timely filed because the statute of limitations had been tolled by the discovery rule, or in the alternative, by fraudulent concealment. The jury returned verdicts for the plaintiffs; however, the plaintiffs filed a motion for a new trial which the trial court granted on the basis that the verdicts as to damages were inadequate and not consistent with the weight of the evidence at trial. The trial court also granted the defendant's motion to transfer the consolidated cases to another judge for the second trial.

After the transfer, First Tennessee moved for partial summary judgment, again relying upon the three-year statute of limitations. The plaintiffs opposed the motion, again arguing both that the discovery rule applied to toll the running of the statute of limitations, and in the alternative, that the statute of limitations was tolled by First Tennessee's fraudulent concealment. According to the plaintiffs, because the checks payable to First Tennessee constituted "special deposits," First Tennessee had a fiduciary duty which imposed upon First Tennessee both the duty to inquire of the makers, Pero's and Louis Inn, as to how the checks were to...

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