Transcontinental Holding v. First Banks

• Decision Date: 01 September 2009
• Docket Number: No. ED 91469.,ED 91469.
• Parties: TRANSCONTINENTAL HOLDING LTD., f/k/a Transcontinental Indemnity, Ltd., Plaintiff/Appellant, v. FIRST BANKS, INC., Defendant/Respondent.
• Court: Missouri Court of Appeals

299 S.W.3d 629

TRANSCONTINENTAL HOLDING LTD., f/k/a Transcontinental Indemnity, Ltd., Plaintiff/Appellant, v. FIRST BANKS, INC., Defendant/Respondent.

No. ED 91469.

Missouri Court of Appeals, Eastern District, Division Two.

September 1, 2009.

Motion for Rehearing and/or Transfer to Supreme Court Denied October 21, 2009.

Application for Transfer Denied January 26, 2010.

David S. Corwin, St. Louis, MO, for appellant.

Michael W. Bartolacci, Matthew J. Landwehr, St. Charles, MO, for respondent.

LAWRENCE E. MOONEY, Judge.

Today we tell the tale, admittedly a long tale, of a bank ensnared in a dispute between two businessmen, Ron Scharf and Alexander Kogan. Scharf and Kogan, each operating through various business entities, engaged in a complex series of transactions. Over the course of these, Scharf loaned large sums of money to Kogan. In time, Scharf, who believed he was owed millions, learned that Kogan had money on deposit at First Bank. Scharf succeeded in having the bank transfer money from an account controlled by Kogan, to a new account, over which Scharf had sole control. From this new account, Scharf then persuaded the bank to issue a cashier's check payable to one of Scharf's companies. Scharf, however, was not honest with the bank. The bank, upon learning that Kogan disputed Scharf's authority to withdraw funds from the Kogan account, stopped payment on the cashier's check. The dispute between Scharf and Kogan is not ours to decide. Rather, today we decide only the dispute between Scharf and the bank. In so doing, we must determine a matter of first impression: whether, under Missouri's Revised Uniform Commercial Code, a bank may refuse payment and assert its own defenses against liability on its cashier's check. We answer that it may.

Factual and Procedural Background

This appeal concerns events occurring in May of 2006, when Ron Scharf entered First Bank and procured a cashier's check made payable to the appellant Transcontinental, and the bank then stopped payment on that check. In order to put these events in context, however, we must first travel back to early 2005, when Ron Scharf met Alexander Kogan and the two embarked on a business venture.

Ron Scharf owns and operates a number of businesses, collectively referred to as the "Scharf Affiliates."¹ In general, these businesses are either in manufacturing or insurance. Scharf's manufacturing businesses produce and sell many products, among which are large commercial heaters and air conditioners. Of the Scharf Affiliates in the insurance business, one is germane to this appeal: Transcontinental Holding, Ltd.,² the appellant in this case. Transcontinental is a paying agent; it acts as an escrow agent for its sister corporation, Transcontinental Insurance, a company that provides product-liability insurance policies for hard-to-insure businesses.

Ron Scharf met Alexander Kogan in early 2005. The two were introduced by Kogan's cousin, a Russian-immigrant engineer who worked for Scharf. Alexander Kogan, himself a Russian immigrant, was represented as having key connections in the Russian government, such that he had been able to broker the sale of some former Soviet Union debt. Kogan purportedly received a substantial commission for his efforts. He reportedly lost that money, however, and was experiencing financial difficulties at the time he was introduced to Scharf.

Kogan approached Scharf with a proposal to promote and sell air structures in Russia, using Kogan's relationships and contacts with members of the former Soviet Army. An air structure is a prefabricated, fabric building that relies on air, rather than columns, pillars, or posts, for support.³ Heaters and air-conditioners, such as those manufactured by Scharf's companies, circulate the air that holds up the structure. Kogan did not have sufficient financial resources for the endeavor, and approached Scharf about investing in one of his companies. Scharf ultimately agreed to provide financing. As a result, Ron Scharf and Alexander Kogan, both personally and through corporate entities, entered into a series of complex business agreements, evidenced by a number of documents executed between February 1st and August 1st, 2005. Scharf relied on these documents, and the purported powers set forth in those documents, when he procured the cashier's check at First Bank. We summarize these four general groups of agreements to set the stage for the critical events that later transpired at First Bank. As we shall see, although these agreements may demarcate the rights and liabilities of Scharf and Kogan, ultimately these agreements have little bearing on the rights and liabilities of the bank under the Uniform Commercial Code.

Scharf — Kogan Agreement, February 1, 2005; Promissory Note; Security Agreement

The first in the series of Scharf-Kogan agreements came on February 1, 2005, when the Kogan Affiliates⁴ entered into an agreement with one of the Scharf Affiliates. By its terms, the Kogan Affiliates appointed a Scharf Affiliate company as the Kogans' sole and exclusive manufacturer and supplier of heating, ventilating, and air-conditioning equipment for use with all air-supported structures sold by the Kogan Affiliates. Scharf and Kogan also established a lender-borrower relationship; specifically, the Scharf Affiliate agreed to extend $500,000 in working capital to the Kogan Affiliates, as a line of credit for the purchase of air-handling equipment from the Scharf Affiliates.

In conjunction with this February 1st agreement, the Kogan Affiliates executed a Promissory Note and Line of Credit, by which the Kogan Affiliates promised to pay the Scharf Affiliate the extended loan amount of $500,000, plus interest, no later than July 1, 2005. To secure the payment and performance of the obligations incurred by the Kogan Affiliates under the note, the Kogan Affiliates also executed a Security Agreement, by which the Kogans purportedly granted the Scharf Affiliate a security interest in a broad range of collateral set forth and detailed in the Note and contemporaneously-executed Security Agreement.

Resolution, February 21, 2005

Just over two weeks later, on February 21, 2005, Alexander Kogan executed a document entitled "Resolution of the Members of IPD Sales & Marketing, LLC." In part, this resolution, approved and adopted by Kogan as sole member of the company, stated that Ron Scharf was authorized to open a bank account in the name of the limited liability company and to be sole signatory thereon for all purposes.

Scharf — Kogan Agreement, May 3, 2005

The Scharf Affiliates and Kogan Affiliates entered into an additional agreement on May 3, 2005. This agreement notes that Scharf is forming and capitalizing two corporations to sell and manufacture air-supported structures. The agreement further notes that the Kogan Affiliates would exclusively market air-supported structures in the "Eastern Bloc" territory, which included Poland, the Czech Republic, and the countries of the former U.S.S.R.; Scharf's newly-formed corporations would manufacture and market air-supported structures in the rest of the world. The agreement also includes what is best described as exclusive-purchase provisions. The parties agreed to exclusively purchase any and all air-supported structures they sold, as well as the heating, ventilating, and air-conditioning equipment to be used with those structures, from Scharf's newly-formed corporation and the Scharf Affiliates.

Foreclosure; Redemption Bond; Escrow Agreement with Power of Attorney; Sinking Fund Agreement, July 2005

Kogan approached Scharf during the summer of 2005 for additional financial assistance. The Kogan Affiliates' office building, located at # 1 The Pines Court in St. Louis County, Missouri, had been the subject of foreclosure proceedings. This property was owned by IPD Properties, LLC, a limited liability company formed by Kogan, and was subject to a mortgage deed of trust in favor of Truman Bank. The bank foreclosed and the property was sold at a foreclosure sale on July 5, 2005. At Kogan's request, Scharf agreed to post a redemption bond for Kogan. Scharf testified that he agreed to provide the bond only if Kogan would turn over complete control of the property to him and allow him to control the sale of that property. He also insisted that Kogan set up a fund, to be controlled by Scharf, into which Kogan would deposit funds for the payment of Kogan's mounting bills and obligations.

As a result of the parties' discussions, the Kogan Affiliates and the Scharf Affiliates executed an Escrow Agreement (with Power of Attorney). Scharf's company, Transcontinental, is designated as escrow agent under this agreement. The parties agreed that the purpose of the Escrow Agreement was for Scharf and Transcontinental to supervise the sale of the Pines Court property, applying the proceeds to the various obligations of the Kogan Affiliates. Accordingly, the Kogan Affiliates agreed to convey their interest in the property to Scharf by quitclaim deeds that were to be held in escrow by Transcontinental.

The Escrow Agreement incorporated a Sinking Fund Agreement, entered into by the Kogan Affiliates and Scharf Affiliates, and contemporaneously executed on July 25, 2005. By this agreement, the Kogan Affiliates agreed to establish a sinking fund, and to continue to fund that account on a monthly basis until it contained sufficient funds to pay certain enumerated obligations.⁵ The sinking-fund account was to be managed by Transcontinental. According to Scharf's trial testimony, Kogan never provided the initial funds required to open the account, and no account in the name of the sinking fund was ever created as contemplated by the Sinking Fund Agreement and the Escrow Agreement.

The Escrow Agreement contained a power-of-attorney provision.⁶ The agreement also referenced an attached document, entitled "Powers of the Attorney-in-fact," which further lists...