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Midwest Feeders Inc. v. Bank of Franklin

United States District Court, S.D. Mississippi, Western Division

January 18, 2017




         This cause is before the Court on defendant Bank of Franklin's Motion for Summary Judgment (docket entry 321) and motions to exclude the opinions and testimony of Edward Cordes (docket entry 302), Cathy C. Glassman (docket entry 306), and John D. Barthel (docket entry 316). Having carefully considered the motions, responses, and applicable law, and being otherwise fully informed in the premises, the Court finds as follows:

         I. Facts and Procedural History

         This case arises from the Bank of Franklin's alleged involvement in a “fictitious payee” scheme orchestrated against Midwest Feeders, Inc. (“Midwest Feeders” or “Midwest”) by Robert Rawls, a Bank of Franklin customer. Midwest Feeders is a commercial cattle feedlot business based in Gray County, Kansas. Doc. 1, ¶ 1. The Bank of Franklin is a community bank with branches in Brookhaven and Meadville, Mississippi. Id.

         In an effort to expand its operations, Midwest Feeders entered the cattle “clearing” business in 2006. See Doc. 383-17. By entering into these arrangements with its customers, Midwest would provide financing and lines of credit to customers for the procurement of livestock. Id. In that same year, Midwest Feeders entered into a clearing agreement with Robert Rawls, who conducted business individually and through Robert Rawls Livestock and Rawls Trucking, LLC (collectively, “Rawls”). Id. at 13; Doc. 383-73. Midwest entered into this agreement after obtaining favorable recommendations about Rawls from other customers. Doc. 383-17, p. 30.

         Pursuant to the clearing arrangement between Rawls and Midwest Feeders, Midwest would deposit money into an account at Alva State Bank & Trust of Alva, Oklahoma (“Alva”) for Rawls to use for the purchase of livestock in exchange for a security interest in the livestock purchased. Id.; Doc. 1, ¶ 11. The agreement was structured so that Rawls could write a check drawn on the Alva account to purchase cattle, and the cattle would be put into inventory. The account was styled “Robert Rawls Livestock.” See Doc. 383-36; Doc. 383-70; Doc. 383-42. After a check on this account was issued, Midwest would fund the Alva account to cover the check drawn by Rawls. Doc. 383-17, p. 55. The cattle in inventory would then be sold, creating an account receivable, with proceeds from the cattle purchaser being paid directly to the Alva account. Id. The payment was to be made by purchasers via deposits to a post office lock box controlled by Alva. Id. Deposits from the purchaser would then be credited to Rawls' outstanding accounts receivable. Id. In exchange for its funding, Midwest received compensation through fees and interest on outstanding funds. Id.

         In 2010, Rawls became a customer of the Bank of Franklin, a banking relationship which consisted of two commercial loans and a checking account in the name of Robert Rawls Livestock. See Doc. 383-9; Doc 321-21; Doc. 383-32. Rawls came to the bank after Charles Magee, executive vice president and loan committee member, solicited his business. Doc. 383-9, p. 22. Magee and Rawls had known each other for 30 years, and the two socialized on occasion. See Id. Magee oversaw Rawls' accounts while he was a customer of the bank, processing his loans and approving wire transfers when necessary. See Doc. 383-9. On several occasions, Magee approved transfers from Rawls' checking account when the balance was in the negative. Id. According to Magee, if Rawls' line of credit was sufficient to cover the transaction or if Rawls indicated that he planned to deposit funds into his checking account, Magee would approve the wire. Id.

         At some point during Rawls' business dealings with Midwest Feeders, Rawls created fictitious cattle purchases and diverted money from the Alva account for his personal use. Doc. 1, ¶ 14. Rawls made out checks to fictitious payees drawn on the Alva account and endorsed them and stamped them as payable to his livestock company for deposit only. Rawls then deposited the checks into his checking account at Bank of Franklin, which turned them over to Alva for payment. See Doc. 383-77. In an effort to disguise these transactions as legitimate, Rawls also created fictitious invoices to accompany the checks. See Doc. 383-17, p. 215. In March of 2014, Rawls confessed his scheme to Midwest president, Jeff Sternberger, who then notified Charles Magee.[1] Id.

         In 2011, prior to Rawls' confession, executives at the Bank of Franklin made an inquiry concerning Rawls' account and deposit transactions, specifically his uncollected funds balance and the checks being deposited into his checking account. See Doc. 383-1; Doc. 383-2; Doc. 383-8. The type of checks deposited by Rawls were uncommon at the bank, [2] and Magee was instructed to speak with Rawls about the nature of these deposits. Doc. 383-3, p. 129; Doc. 383-9, p. 72. When asked about the checks, Rawls explained that these transactions were common practice in the cattle industry. Doc. 838-9, p. 73. Being satisfied with this explanation, the Bank conducted no further investigation into Rawls' account activity. See Doc. 838-9; Doc. 383-8.

         On September 5, 2014, Midwest Feeders filed suit against Bank of Franklin, alleging six claims against the bank in connection with Rawls' fraudulent scheme. The Court dismissed two claims at the motion to dismiss stage, and four claims remain pending: failure to exercise ordinary care under Mississippi Code Section 75-3-404(d), negligence, negligent hiring and supervision, and civil conspiracy. Bank of Franklin filed its Motion for Summary Judgment, along with motions to exclude the opinions and testimony of three expert witnesses designated by Midwest Feeders.

         II. Motion for Summary Judgment

         A. Standard of Review

         Summary judgment shall be granted “if the movant shows that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A “material fact” is one that might affect the outcome of the suit under the governing law. Spansel v. State Farm, 683 F.Supp.2d 444, 447 (S.D.Miss. 2010). A genuine dispute exists when the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Id. In determining whether there is a genuine dispute as to any material fact, the Court considers all of the evidence in the record but refrains from making credibility determinations or weighing the evidence. Flock v. Scripto-Tokai, 319 F.3d 231, 236 (5th Cir. 2003).

         A party moving for summary judgment “bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party makes such a demonstration, the burden shifts to the nonmovant to “go beyond the pleadings” and “designate specific facts showing that there is a genuine issue for trial.” Estate of Sanders v. U.S., 900 F.Supp.2d 730, 733 (S.D.Miss. 2012).

         The Court views the evidence and draws reasonable inferences in the light most favorable to the nonmovant. Maddox v. Townsend and Sons, Inc., 639 F.3d 214, 215 (5th Cir. 2011). But in the absence of any proof, the Court will not assume that the nonmoving party could or would prove the necessary facts. Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994).

         B. Discussion

         1. Failure to Exercise Ordinary Care

         Midwest Feeders brings its first claim against Bank of Franklin for failure to exercise ordinary care under the Uniform Commercial Code (“UCC”), as codified by Mississippi Code Annotated Section 75-3-404(d). The statute provides:

With respect to an instrument to which subsection (a) or (b) applies, if a person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from payment of the instrument, the person bearing loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.

Miss. Code Ann. § 75-3-404(d) (emphasis added). Bank of Franklin argues that Midwest lacks standing to recover under Section 75-3- 404 because Midwest was not a party to any of the checks deposited into Rawls' Bank of Franklin account. In response, Midwest maintains that Mississippi's fictitious payee statute provides a right of recovery for any person who suffers ...

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