United States District Court, S.D. Mississippi, Western Division
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For Midwest Feeders, Inc., Plaintiff: John O'Brien - PHV, Scott C. Sandberg - PHV, Timothy G. O'Neill - PHV, LEAD ATTORNEYS, PRO HAC VICE, SNELL & WILMER, LLP - Denver, Denver, CO; Raymond Spencer Clift, III, LEAD ATTORNEY, BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, PC - Memphis, Memphis, TN.
For The Bank of Franklin, Defendant: Lawrence M. Quinlivan, LEAD ATTORNEY, DEUTSCH, KERRIGAN & STILES, LLP - Gulfport, Gulfport, MS; John L. Maxey, II, Kelly H. Stringer, Steven Mark Wann, MAXEY WANN, PLLC, Jackson, MS; Judy L. Burnthorn, DEUTSCH, KERRIGAN & STILES - New Orleans, New Orleans, LA; Lane B. Reed, Mary Kathryn Williamson, MCGEHEE, MCGEHEE & TORREY, Meadville, MS.
ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS
David Bramlette, UNITED STATES DISTRICT JUDGE.
This matter is before the Court on Defendant's, The Bank of Franklin, Motion to Dismiss [docket entry no. 11]. Having reviewed the motion and responses, applicable statutory and case law, and being otherwise fully informed in the premises, the Court finds as follows:
I. Factual And Procedural Background
In 2006, Robert Rawls entered into a financing contract with Plaintiff Midwest Feeders, Inc. (" Midwest Feeders" ). Rawls conducted business individually and through two corporate entities: Robert Rawls Livestock and Rawls Trucking, LLC. Midwest Feeders deposited money into an account at Alva State Bank & Trust of Alva, Oklahoma (" Alva" ). Rawls was to use the Alva account to purchase livestock, and in exchange Midwest Feeders was granted a security interest in the livestock. And as Midwest Feeders asserts in its complaint, " [a]t some point, Rawls decided to steal from Midwest [Feeders]." Compl. ¶ 14, ECF No. 1. Rawls made out checks to fictitious payees
from the Alva account and endorsed them and stamped them as payable to his livestock company for deposit only. Rawls then deposited the checks into an account at The Bank of Franklin (" Bank of Franklin" ), which turned them over to Alva for payment. Between October 2013 and March 2014, Rawls fraudulently endorsed and cashed 891 checks for over $85 million through a " fictitious payee" scheme. In litigation in the District Court of Finney County, Kansas, Rawls confessed to the fraudulent activity, but invoked his Fifth Amendment rights against self-incrimination in response to certain deposition questions.
Midwest Feeders sued Bank of Franklin on September 5, 2014, alleging its involvement in Rawls's scheme. In its complaint, Midwest Feeders lists six claims for relief: (1) conversion of instruments under Mississippi Code Annotated (" MCA" ) Section 75-3-420, (2) failure to exercise ordinary care under MCA 75-3-404(d), (3) common law conversion of funds, (4) negligence, (5) negligent hiring and supervision, and (6) civil conspiracy. Compl. 12-20. On October 9, 2014, Bank of Franklin moved to dismiss all of these claims for failure to state a claim. The Court having ruled on two intervening motions, see Order, ECF No. 26, the Motion to Dismiss is now ripe.
Bank of Franklin has moved to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). " To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (internal quotation omitted). The plaintiff must plead sufficient facts so that the court may reasonably infer the defendant's liability for the alleged misconduct. Id. " [A] plaintiff armed with nothing more than conclusions cannot unlock the doors of discovery." Doe v. Robertson, 751 F.3d 383, 393 (5th Cir. 2014) (internal quotations omitted). Because this Court sits in diversity in this case, it must apply the substantive law of Mississippi.
See Krieser v. Hobbs, 166 F.3d 736, 739 (5th Cir. 1999).
A. Conversion Claims
1. Under the UCC
In Midwest Feeders' first claim, it alleges conversion under the Uniform Commercial Code (" UCC" ) as codified in Mississippi. Section 75-3-420 provides that an instrument can be
converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment. An action for conversion of an instrument may not be brought by (I) the issuer or acceptor of the instrument or (ii) a payee or indorsee
who did not receive delivery of the instrument either directly or through delivery to an agent or a co-payee.
Miss. Code Ann. § 75-3-420 (1993). Bank of Franklin argues that Midwest Feeders has failed to properly plead this claim because " the instrument was properly negotiated and payable to Rawls." Mem. Supp. 9, ECF No. 12. Midwest Feeders argues this is not true because " the payee did not exist to provide any valid endorsement to Rawls." Mem. Opp. 13, ECF No. 14. Section 75-3-110 provides that " [t]he person to whom an instrument is initially payable is determined by the intent of the person . . . signing as . . . the issuer of the instrument." Miss. Code Ann. § 75-3-110(a) (1993). Bank of Franklin argues that because Rawls always intended to be the payee, the instrument was properly negotiated. But the comments to Section 75-3-110 make clear that in " fictitious payee" situations, courts apply the rules laid out in Section 75-3-404(b). Section 75-3-404(b) provides that " [a]n indorsement by any person in the name of the payee stated in the instrument is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for 4 collection." Miss. Code Ann. § 75-3-404(b)(2) (1993). Midwest Feeders argues that it has pled that Rawls did not indorse the checks in good faith, rendering the negotiation of the instrument in his favor improper.
Bank of Franklin next argues that the claim fails because Midwest Feeders " is not the proper party to assert a claim for conversion." Reply 18, ECF No. 20. Bank of Franklin cites to a case from the Seventh Circuit holding that a party with only an equitable interest in a check could not assert a claim for conversion under the UCC in Illinois. See Am. Nat'l Ins. Co. v. Citibank, N.A.,543 F.3d 907, 909-10 (7th Cir. 2008). The Seventh Circuit held that " an interest in the funds backing the checks" was not the same as " an interest in the checks themselves."