DANIEL D. CRABTREE, District Judge.
This case originated from a substantial cattle transaction gone wrong. In simplest terms, plaintiff sold a million dollars' worth of cattle to an individual who didn't make good on his promise to pay. When plaintiff learned that the buyer's check wouldn't clear, it was too late to recover the cattle. So, plaintiff was out the cattle and didn't receive the payment it was promised. Sensing that it was unlikely to recover against the defaulting cattle buyer, plaintiff has sued two defendants. The first is Pinnacle Bank, the bank of the defaulting cattle buyer. The second defendant is Dinsdale Bros., Inc., the company who purchased the cattle from the individual who defaulted on his promise to pay plaintiff.
After spirited discovery and motion practice, all three parties moved for summary judgment. See Docs. 102, 104, & 110. In a Memorandum and Order entered late last year, the court decided all three motions. See Doc. 125 (entered December 21, 2018). The court denied plaintiff's summary judgment motion in its entirety. Defendant Pinnacle's motion met the same fate. The ultimate purchaser of the cattle—Dinsdale—fared slightly better. The court granted Dinsdale's summary judgment motion against plaintiff's claim for breach of contract, but denied the rest of the motion. Altogether, these rulings meant that plaintiff's claims for conversion, civil conspiracy, and unjust enrichment against both defendants would proceed to trial. Plaintiff's claim against Pinnacle for unjust enrichment also survived for trial.
Fourteen days after the summary judgment Order issued, Pinnacle Bank filed a Motion to Reconsider. See Doc. 127. This motion asked the court to reconsider its summary judgment ruling on the conversion claim against the bank. Plaintiff responded. See Doc. 131. Concluding that Pinnacle's reconsideration motion raised substantial legal questions, the court invited the parties to present oral argument. See Docs. 130 & 133. On February 1, 2019, counsel thoughtfully argued the difficult issues that inhere in the conversion claims. Pinnacle's arguments persuaded the court that it was a mistake to begin the trial with such substantial legal questions remaining unresolved. So, the court vacated the approaching trial date on its own motion. See Doc. 146.
While preparing for the February 1 oral argument on the reconsideration motion, the court encountered a statute that the summary judgment briefs hadn't discussed, at least not in any detail: Kan. Stat. Ann. § 84-4-303, part of the Uniform Commercial Code ("UCC"), as adopted in Kansas. To be fair, Pinnacle had cited UCC § 4-303 to support the proposition that a bank may "honor checks in any order." Doc. 105 at 19 n.1 (Pinnacle's brief supporting its summary judgment motion). And, plaintiff's Reply cited that portion of Pinnacle's motion and the UCC provision, arguing that Pinnacle had "concede[d] it could have honored the checks in any order." Doc. 121 at 27. But, that was the extent of the discussion. And neither party cited the Kansas version of the statute, any of the UCC Comments, or the Kansas Comments. And, most of all, Pinnacle never argued that UCC § 4-303 supplanted the Kansas conversion cases predating the statute's enactment in Kansas.
Three things about Kan. Stat. Ann. § 84-4-303 captured the court's attention.
First, this provision asserts that it governs a bank's "right or duty to pay an item or to charge its customer's account for the item" when presented to a bank for payment. Kan. Stat. Ann. § 84-4-303(a). These rights and duties are at the heart of plaintiff's conversion claim against Pinnacle.
Second, the UCC Comments for § 4-303 provide helpful commentary about this provision's role in the UCC's broader regulation of banks, checks, and other commercial paper. One part of this commentary states the obvious: A person who writes checks "should have funds available to meet all of them . . . ." Kan. Stat. Ann. § 84-4-303 UCC cmt. 7. The Comment continues with guidance that is directly pertinent to this dispute. The "drawer" of the check— here, Charles Leonard, the person who purchased the cattle from plaintiff but defaulted on his duty to pay for them—"has no basis for urging one [check] should be paid before another." Id. And, the Comment concludes with the most salient point of all: "[T]he holders [of checks] have no direct right against the payor bank in any event" unless that bank has "accepted, certified, or finally paid a particular item, or has become liable for it under Section 4-302." Id. In this case, plaintiff is the "holder" of the relevant check. Plaintiff held the check issued by the defaulting buyer, Mr. Leonard, on his checking account with Pinnacle—the "payor bank" referenced in the Comment.
Third, timing matters. Kansas adopted § 84-4-303 in 1991. This provision thus postdates almost all the case authorities that the parties had relied on in their summary judgment papers. The prior version of the statute—enacted in 1966—contains almost identical provisions and UCC Comments. But, differences in the Kansas Comments to the 1966 version of the statute and its 1991 counterparts provide insight about "the underlying policies and purposes" of § 84-4-303. Guar. State Bank & Tr. Co. v. Van Diest Supply Co., 55 P.3d 357, 362 (Kan. Ct. App. 2002). Specifically, the current Kansas Comment explains that when checks arrive on the same day and together, they direct payment exceeding the amount the customer has on deposit in his account, the bank may decide how to pay those checks without consulting the customer. See Kan. Stat. Ann. § 84-4-303 Kansas cmt. ("[T]he bank need not contact the customer to determine which check should be dishonored in order to mitigate the customer's loss. It may pay either and, if it so chooses, dishonor the other.").
Altogether, these aspects of § 84-4-303 and its Comments persuade the court that the provision has significant consequences for the correct analysis of plaintiff's conversion claim against Pinnacle. The court thus ordered the parties to submit supplemental briefing about this statute, the UCC Comments, and the provision's consequences for the conversion claim. See Doc. 146.
The parties now have submitted their briefs—Docs. 147 & 154 (Pinnacle), 148 (Dinsdale), 149 & 155 (plaintiff)—and the court has considered them carefully. The court now is ready to decide Pinnacle's pending Motion to Reconsider (Doc. 127).
The court has decided to grant Pinnacle's motion because the court is convinced that it should have granted part of Pinnacle's Motion for Summary Judgment (Doc. 104). Specifically, this Order vacates the portion of Doc. 125 (Memorandum and Order dated December 21, 2018) denying Pinnacle's summary judgment motion against plaintiff's conversion claim. In place of that ruling, the court now grants Pinnacle's summary judgment motion (Doc. 104) against plaintiff's conversion claim against Pinnacle. In all other respects, the December 21, 2018, Memorandum and Order stands and remains the court's ruling on summary judgment.
The following pages explain why the court has reached this conclusion.
Pinnacle's motion for reconsideration doesn't challenge the statement of uncontroverted material facts identified in the summary judgment Order. See Doc. 125 at 2-16. The court thus bases its decision here on the same summary judgment facts it identified in that earlier Memorandum and Order. To simplify review of this Order, the court nonetheless recites those facts again, below.
The summary judgment facts were stipulated by the parties in the Pretrial Order (Doc. 101) or were uncontroverted for purposes of the parties' summary judgment motions. In the summary judgment Order, the court divided the following uncontroverted facts into three sections: (A) the parties involved in this case; (B) Mr. Leonard's relationship with Dinsdale; and (C) Mr. Leonard's relationship with Pinnacle. This Order uses the same convention.
Plaintiff's business involves selling livestock at auction in St. Marys, Kansas. Defendant Dinsdale's business involves feeding cattle. Dinsdale purchases cattle from sellers, including Charles D. Leonard d/b/a Leonard Cattle Company. Chris and John "Sid" Dinsdale, alongside other Dinsdale family members, own Dinsdale. Dinsdale purchases cattle from six or seven dealers, including Mr. Leonard, who are licensed under the Packers & Stockyards Act. And Dinsdale buys about 70,000 cattle per year.
Defendant Pinnacle Bank is a banking organization that is organized and operates under Nebraska law, but it conducts business at several locations in Kansas. Some members of the Dinsdale family own interests in both Dinsdale and Pinnacle.
Mr. Leonard operated as a cattle dealer from 1992 to 2015; his business involved buying and reselling cattle to cattle feeders. Mr. Leonard had a longstanding business relationship and friendship with the Dinsdale family. He also had been a long-time customer of Pinnacle.
Mr. Leonard made "dealer transactions" by purchasing cattle for his own account and reselling them to cattle feeders. These transactions include cattle purchased on commission. Mr. Leonard organized and paid for the trucking and insurance used to transport cattle he had purchased to his buyers. He used the same trucking dispatch service and insurance policy for each cattle transport. When Dinsdale purchased cattle from Mr. Leonard, Mr. Leonard had purchased the cattle from a sale barn, paid the sale barn for the cattle, and issued a separate invoice to Dinsdale. In earlier cattle sales, Dinsdale received good title to the cattle it purchased from Mr. Leonard.
On September 28, 2015, Dinsdale employee David Wahlert called Mr. Leonard, and the two spoke briefly over the phone. They discussed the cattle market, and Mr. Wahlert asked Mr. Leonard which sale he was attending the next day. Mr. Leonard replied that he planned to attend an auction in St. Marys, Kansas. The two did not discuss cattle prices. Mr. Wahlert told Mr. Leonard that Dinsdale was in the cattle market and agreed to talk to Mr. Leonard again the next day.
On September 29, 2015, Mr. Leonard called Mr. Wahlert before the auction, and the two talked again. Mr. Wahlert told Mr. Leonard that Dinsdale was interested in buying heifers under 800 pounds and steers under 900 pounds. The two did not discuss price or quantity during this call.
That day, Mr. Leonard attended the auction at plaintiff's sale barn in St. Marys, and plaintiff sold Mr. Leonard some cattle. Mr. Leonard purchased some steers weighing more than 900 pounds, and plaintiff memorialized this purchase in a document called "Buyer Recap" and with invoices that identify "Leonard Cattle Co" as the buyer. Doc. 103-2. Neither plaintiff nor Mr. Leonard provided these invoices to Dinsdale. The Packers & Stockyards Act required Mr. Leonard and plaintiff, who both had licenses and bonds under that statute, to memorialize the sale accurately. Plaintiff did not know that Mr. Leonard had spoken with a Dinsdale representative before the sale on September 29. Plaintiff didn't know where Mr. Leonard planned to deliver the cattle until after the sale. And Mr. Leonard did not inform plaintiff in advance of the sale the weight or type of cattle he sought. After the sale, Mr. Leonard instructed plaintiff to send the cattle to D&D, a feedlot in Colorado. Plaintiff's owner, Dennis Rezac, testified that would have sold the cattle in question to Mr. Leonard notwithstanding Mr. Leonard's communication with a buyer before the auction "because he had been doing it over time." Doc. 103 at 11 (citing Rezac Dep. 134:13-135:3). Later in the day on September 29, 2015, Mr. Leonard and Mr. Wahlert spoke on the phone yet again; Mr. Wahlert confirmed that Dinsdale would purchase the cattle from Mr. Leonard.
The morning after the sale, Mr. Leonard's office wrote plaintiff a check for $980,361 from Mr. Leonard's account with Pinnacle for the cattle purchase. Mr. Leonard's office mailed this check to plaintiff. Dinsdale's name is not on the check, and Mr. Leonard never showed the check to Dinsdale. Mr. Leonard did not tell Dinsdale the amount he had paid plaintiff for the cattle, and Dinsdale did not receive an invoice or other documentation about this cattle purchase.
Mr. Leonard never received: (1) authority to write checks for Dinsdale or a Dinsdale "checkbook"; (2) signatory authority from Dinsdale; (3) vehicles from Dinsdale; (4) Dinsdale letterhead, logos, business cards, or apparel; (5) mileage or fuel reimbursements from Dinsdale; or (6) a 1099 or W-2 form from Dinsdale. Mr. Leonard maintained a separate business from Dinsdale, with his own books and records. Mr. Leonard's business with Dinsdale concluded when he sold cattle to Dinsdale. Mr. Leonard also paid federal income taxes on the September 29, 2015, cattle purchase; it was based on the difference between the price he paid plaintiff for the cattle and the price for which he sold the cattle to Dinsdale. He reported the gain from this transaction as "dealer markup" and not as agent's commission. The Packers & Stockyards Act also required Mr. Leonard to file annual reports with the Packers & Stockyards Administration that included transactions Mr. Leonard undertook as a dealer or agent. Plaintiff reported that Mr. Leonard undertook the September 29, 2015, transaction as a dealer, not a commissioned agent. And Mr. Leonard's 2015 report under the Packers & Stockyards Act listed all his purchases as "Livestock Dealer Purchases" and not as purchases "bought on commission for the account of others." Doc. 103 at 14-15 (quoting Doc. 103-7 at 2).
Mr. Leonard maintained a business checking account at Pinnacle for his cattle business, which was how Mr. Leonard made his living; the account was known as Account 161. Spencer Kimball was one of the people at Pinnacle who managed deposit accounts. Mr. Kimball also helped manage Pinnacle's loan relationship with customers such as Mr. Leonard.
Mr. Leonard and his wife maintained multiple accounts at Pinnacle, and Mr. Leonard took out loans from the bank. They were customers of Pinnacle before the fall of 2015. Mr. Leonard used Account 161, which Pinnacle administered in Gretna, Nebraska, to pay for cattle and other business expenses; he also used the account for personal uses. In 2014 and 2015, Mr. Leonard purchased cattle from 150 different sale barns and had 175 to 200 customers. He ran all his purchases and sales through Account 161. Mr. Leonard filed for bankruptcy in 2015 and is not a party in this case.
Generally, checks that Pinnacle customers write on their accounts are presented to Pinnacle as debits against those accounts. The Federal Reserve Bank or other clearing facilities typically present these checks for payment, usually in the evening. If an account lacks sufficient funds to cover the amount of a check or checks presented against the account, Pinnacle learns of this insufficiency the next morning. Pinnacle then decides whether it will honor the checks nonetheless. Specifically, Mr. Kimball was charged with making this decision by 10:00 a.m. the day after such checks were presented to Pinnacle. Pinnacle customers may deposit funds in several ways. These include cash deposits, wire transfers, or third-party checks. Mr. Leonard's deposits in September and October 2015 were primarily wire transfers or third-party checks. His online bank statements show credits and debits, and the last balance the statements show on a particular date reflects the balance at the end of the corresponding day. This balance includes all checks or other debits that had hit the account and all deposits made to the account, even if those deposits included uncleared checks.
Account 161 lacked sufficient funds to cover the presented checks several times in September and early October 2015. Mr. Kimball, once he was notified of the insufficiency in Account 161, contacted Mr. Leonard, let him know about the insufficiency, and asked how he intended to cover the checks presented. Mr. Leonard responded by describing deposits he intended to make that day to cover the amounts of the checks presented. If Mr. Kimball was satisfied with Mr. Leonard's anticipated deposits, he normally would decide to honor the presented checks. For most of September 2015, Mr. Leonard made deposits into Account 161 that exceeded the deficit created by the checks presented the day before. Pinnacle knew about Mr. Leonard's process of writing checks to purchase cattle before receiving deposits to cover these checks. Pinnacle also knew that Mr. Leonard's account was overdrawn in August 2015.
Pinnacle extended "provisional credit" to Mr. Leonard in Account 161 for checks third parties had deposited in this account. Provisional credit represents a credit for third-party checks that had not yet cleared the Federal Reserve (or other clearing agency). Mr. Leonard or his assistant deposited dozens of checks in Account 161, and one did not clear: a check for $221,818.39 that a third party—Feller Co.—had deposited. This check failed to clear because Feller Co. stopped payment on it. Also, when a Pinnacle customer writes checks on an account exceeding the amount of cleared funds in it, but the account also has uncollected deposited funds, Pinnacle refers to this situation as a "daylight overdraft" or an "intra-day overdraft." This kind of overdraft typically lasts for just one day, and later—usually the next day—the third-party checks clear and are deposited into the account. Notwithstanding the short duration of the overdraft, Pinnacle notifies customers who experience daylight or intra-day overdrafts.
Mr. Leonard attended plaintiff's livestock auction and purchased the cattle at issue in this case. Once Mr. Leonard received paperwork from plaintiff for these cattle, he reported this information to his assistant in Nebraska, Ms. Tammy Nichols. Ms. Nichols prepared and sent a check to plaintiff for the purchase amount: $980,361.45. For simplicity, this order refers to that check as "the Rezac check." Ms. Nichols mailed the Rezac check to plaintiff on September 30, 2015.
On the same day Mr. Leonard purchased the cattle from plaintiff—September 29, 2015— he sold the cattle to Dinsdale. Mr. Leonard prepared an invoice, which included the cost of the cattle, additional costs, and a mark-up, and he billed Dinsdale for the cattle.
On September 30, 2015, at 7:30 a.m., Mr. Leonard told Spencer Kimball that he was going to receive wired funds for the cattle purchase "from of all people Dinsdale Bros." Doc. 111-8 at 15. By 10:00 a.m. on September 30, 2015, Mr. Kimball had spoken with Roy Dinsdale, Chris Dinsdale, Steve Zey, and Marc Hock about Dinsdale's cattle purchase, Mr. Leonard's check to pay for these cattle, Mr. Leonard's account being $1,000,000 overdrawn, and Dinsdale's plan to send a $1,000,000 wire to pay for these cattle.
In late September 2015, Pinnacle officers learned of Account 161's activity, including knowledge that Dinsdale planned to pay for the cattle Mr. Leonard had purchased from plaintiff with wired funds. Pinnacle received these wired funds from Dinsdale and credited them to Mr. Leonard's Account 161 on October 1, 2015. At the end of the day on October 1, 2015, Mr. Leonard's account reflected a balance of $762,139.66. Mr. Leonard deposited about $590,000 the next day, October 2, 2015, but nearly $3 million in checks written by Mr. Leonard also were presented against the account on October 2. At the end of the day on October 2, 2015, Mr. Leonard's account reflected a negative balance of $1,755,365.80.
On October 5, 2015, Mr. Leonard provided Pinnacle with a list of outstanding checks he had written. They totaled about $5.8 million. Mr. Leonard did not have sufficient funds to cover his outstanding checks.
On October 6, 2015, the check Mr. Leonard had written to plaintiff was presented against Account 161. The first reported balance on October 6, 2015, in Account 161 was $1,598,433.80. That same day, Pinnacle returned the Rezac check for $980,361.45, reporting that the account held insufficient funds to cover it. Pinnacle also honored other, smaller checks presented against Account 161 that day, and determined payees and amount for each check. The honored checks totaled $1,344,253.51. By the time the check Mr. Leonard wrote to plaintiff was presented for payment on Account 161, Mr. Leonard already had consumed the funds deposited by Dinsdale's wire. Those funds were consumed by other checks presented on Account 161. Plaintiff never spoke with anyone from Pinnacle about the check Mr. Leonard had written to plaintiff. Mr. Leonard never directed anyone from Pinnacle to wire funds to plaintiff; and he did not attempt to get Pinnacle to issue a cashier's check or certified check to pay plaintiff.
Emails from Pinnacle that include Chris Dinsdale show it knew that: (1) the Dinsdale wire was related to Mr. Leonard's purchase of cattle from plaintiff; (2) Pinnacle was expecting the check Mr. Leonard wrote to plaintiff to be presented against Account 161 soon; and (3) Mr. Leonard was having difficulty maintaining a positive balance in his account.
Because Mr. Leonard could not maintain sufficient funds to cover checks he had written, and because of the volume of checks Pinnacle returned for insufficient funds, Pinnacle decided to close Account 161. But Pinnacle did not close Mr. Leonard's account until October 15 because checks were presented against it and Mr. Leonard continued to deposit funds, though these funds were insufficient to cover all his debits. When Pinnacle closed Account 161, it had a negative balance of $159,484.39 because Feller Co. had stopped payment on a check deposited in Account 161. To close that account, Pinnacle wrote off this negative balance to close Account 161; this write-off appears as a credit made to the account on October 13, 2015. Mr. Leonard's lack of funds, and not the account's closing, kept him from paying his creditors. Pinnacle also assessed fees on incoming wire deposits as well as overdraft fees that totaled about $230. Pinnacle charged overdraft interest of $30,525.30 on September 30, 2015, but most of that interest charge was refunded later.
On October 12, 2015, plaintiff demanded possession of the cattle from D&D Feedlot West.
Pinnacle brings its reconsideration motion under D. Kan. Rule 7.3(a), asserting that the court should reconsider its December 21 Memorandum and Order "to correct error regarding the application of Scoby v. Bird City State Bank and Torkelson v. Bank of Horton[.]" Doc. 127 at 2 (citations omitted). Rule 7.3(a) provides that "[p]arties seeking reconsideration of dispositive orders or judgments must file a motion pursuant to" Federal Rules of Civil Procedure 59(e) or 60. Rules 59(e) and 60 apply only after a court enters judgment, but not all dispositive orders require the court to enter judgment. So, "[n]either the Federal Rules of Civil Procedure nor this court's local rules recognize a motion for reconsideration,"—such as Pinnacle's Motion to Reconsider here—"when it contemplates a dispositive order" that precedes entry of the judgment. Ferluga v. Eickhoff, 236 F.R.D. 546, 548-49 (D. Kan. 2006) (citing Nyhard v. U.A.W. Int'l, 174 F.Supp.2d 1214, 1216 (D. Kan. 2001)). In this situation—one that has arisen in this case before (see Doc. 44)—the court has exercised its "discretion to revise an interlocutory order at any time prior to the entry of final judgment" and treated the motion as one for reconsideration. Id. at 549 (citations omitted). The court thus applies "the legal standards applicable to a Rule 59(e) motion to alter or amend and/or a motion to reconsider a non-dispositive order under D. Kan. Rule 7.3, which are essentially identical." Id.
D. Kan. Rule 7.3(b) requires a movant to base its motion for reconsideration on: "(1) an intervening change in controlling law; (2) the availability of new evidence; or (3) the need to correct clear error or prevent manifest injustice." A motion to reconsider "is not appropriate to revisit issues already addressed or advance arguments that could have been raised in prior briefing." Ferluga, 236 F.R.D. at 549 (citing Servants of Paraclete v. Does, 204 F.3d 1005, 1012 (10th Cir. 2000)). So, "a motion for reconsideration is appropriate [only] where the court has misapprehended the facts, a party's position, or the controlling law." Id. (citing Servants of Paraclete, 204 F.3d at 1012). "The decision whether to grant a motion to reconsider is committed to the district court's discretion." Coffeyville Res. Ref. & Mktg., LLC v. Liberty Surplus Ins. Corp., 748 F.Supp.2d 1261, 1264 (D. Kan. 2010) (citing In re Motor Fuel Temperature Sales Practices Litig., 707 F.Supp.2d 1145, 1166 (D. Kan. 2010)); Brumark Corp. v. Samson Res. Corp., 57 F.3d 941, 944 (10th Cir. 1995).
Here, Pinnacle contends that one part of Rule 7.3(b) requires the court to reconsider its December 21 Order: the need to correct a clear error. The court evaluates Pinnacle's arguments to that effect, and plaintiff's arguments as well, below.
The parties' briefs responding to the court's February 7, 2019, Order argue some of the same points the parties raised in their summary judgment papers. But, they also address the issues emanating from Kan. Stat. Ann. § 84-4-303. The court focuses on these arguments, and not the ground the parties have covered before.
Section 4-303 of the Kansas Uniform Commercial Code provides the following:
Kan. Stat. Ann. § 84-4-303 (emphasis added).
The UCC Comments for this provision explain several circumstances when knowledge about an "item presented for payment," id. at UCC cmt. 1, among other events, can affect "the bank's right or duty to pay [that] item." Id. at § 84-4-303(a). "[I]f any one of several things has been done to the item or if it has reached any one of several stages in its processing at the time the knowledge . . . is received . . . and a reasonable time for the bank to act thereon expires[,] . . . the knowledge . . . comes too late, the item has priority and a charge to the customer's account may be made and is effective." Id. at UCC cmt. 2. But, as UCC Comment 7 explains, "[a]s between one item and another[,] no priority rule is stated." Id. at UCC cmt. 7. The UCC Comment then continues:
Id. (emphasis added).
Finally, the 1996 Kansas Comment for § 84-4-303 explains that if a bank receives knowledge, among other types of notice, "within a reasonable time before the bank has made any final decision regarding [an] account, the [knowledge] has priority and wins." Kan. Stat. Ann. § 84-4-303 Kansas cmt. But, this Kansas Comment reinforces a point made by the UCC Comment emphasizing that § 84-4-303(b) "allows the drawee bank to pay incoming items in any order." Id. Then, the Kansas Comment offers the following example:
Id. Also, the Kansas Comment notes that "[p]re-UCC Kansas decisional law was in accord with the basic policy of . . . subsection [(a)]" of § 84-4-303.
Kansas courts rely on comments such as UCC Comment 7 and the Kansas Comment to § 84-4-303 to articulate "the underlying policies and purposes" of the provision. Guar. State Bank & Tr. Co., 55 P.3d at 362. Kansas courts have utilized comments to help: (1) understand the circumstances where a particular statutory provision applies; and (2) align interpretation of certain statutes with the drafters' intent or existing common law, or to fill a gap in common law. See, e.g., Hurst Enters., LLC v. Crawford, 197 P.3d 882, 884-85 (Kan. 2008) (using a UCC comment to highlight "an illustration as to the type of situation to which [a statutory provision] applies"); Guar. State Bank & Tr. Co., 55 P.3d at 362-63 (finding no Kansas cases on point, Kansas Court of Appeals turned to Kansas comment adopted after state had enacted a UCC provision).
Pinnacle asserts that the first part of § 84-4-303—subsection (a)—doesn't apply to the summary judgment facts here because none of the "four legals"—i.e., the four events listed in § 84-4-303(a)—occurred when plaintiff presented the check that the cattle's buyer, Mr. Leonard, wrote on his Pinnacle account. Kan. Stat. Ann. § 84-4-303 UCC cmt. 3. Specifically, Pinnacle explains, "`[k]nowledge' is not just any knowledge—it is knowledge affecting the item, such as knowledge that the drawer has filed [for] bankruptcy or made an assignment for the benefit of creditors." Doc. 147 at 2. And, Pinnacle argues, nothing in the summary judgment record suggests that Pinnacle accepted or certified the check; paid the check; settled the check; or waited to act on the check until after the deadlines established in §§ 84-4-302 and 84-4-303. Instead, Pinnacle contends, § 84-4-303(b) underscores the rule that a bank can pay checks drawn on its customers' accounts in any order it chooses. Finally, Pinnacle argues, Comment 7 serves to "insulate . . . [Pinnacle] from claims made by [plaintiff[ that it should have paid [plaintiff's] check on the day it was presented, instead of paying all the other checks that were presented that day." Id. at 3.
Plaintiff responds, arguing that § 84-4-303 imposes liability on Pinnacle because "Pinnacle knowingly paid out [plaintiff's] sale proceeds on October 1-2, 2015, to Leonard's other payees in furtherance" of Pinnacle's continuing "float" of Mr. Leonard's account. Doc. 155 at 2. Plaintiff contends that Pinnacle's knowledge about the relationship between the funds that Dinsdale wired to Pinnacle for deposit in Mr. Leonard's account to pay his check to plaintiff "imposed a legal obligation of good faith and fair dealing upon Pinnacle to act with honesty of . . . known facts." Id. Plaintiff's argument continues, asserting that Pinnacle—when it used Dinsdale's wired funds to pay other checks written by Mr. Leonard—rendered itself liable to plaintiff for the amount of the check Mr. Leonard had written to plaintiff. And, according to plaintiff, "[t]he holder of a rejected item clearly has a right of action against the bank if the bank wrongfully refuses its check." Id. at 3.
Plaintiff also directs the court to other UCC provisions adopted in Kansas. Id. (first citing Kan. Stat. Ann. § 84-3-408; then citing Kan. Stat. Ann. § 84-1-103). Section 84-3-408 provides that a drawee bank "is not liable on [an] instrument until the drawee accepts it." But, this provision also explains that "a bank that has not certified a check may engage in other conduct that might make it liable to a holder . . . . Section 1-103 is adequate to cover those cases." Kan. Stat. Ann. § 84-3-408 UCC cmt. 1. Section 1-103 provides, in turn, that the UCC's purpose is "[t]o simplify, clarify, and modernize the law governing commercial transactions." Kan. Stat. Ann. § 84-1-103(a)(1). And so, "[u]nless displaced by the particular provisions of the uniform commercial code, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other validating or invalidating cause supplement its provisions." Id. at § 84-1-103(b). Finally, plaintiff notes, Kansas law has adopted the UCC's definitions of "good faith," see Kan. Stat. Ann. § 84-1-201(b)(2); "ordinary care," id., § 84-3-103 UCC cmt. 4; and "knowledge," id., § 84-1-202.
Plaintiff correctly argues that a payor bank—the role Pinnacle occupies here—can acquire knowledge that affects its right and duty to pay an item drawn on its customer's account. Plaintiff's problem here, however, is two-fold. First, § 84-4-303(a) identifies specific events that displace a payor bank's right or duty to pay an item. And second, none of the summary judgment facts suggest that any of the events specified in § 84-4-303(a) ever materialized. To be sure, the summary judgment facts establish that Pinnacle acquired some knowledge that Dinsdale had purchased the cattle plaintiff sold to Mr. Leonard—Pinnacle's account holder and drawer of the check at issue here. Also, the summary judgment facts demonstrate that Pinnacle had some knowledge that there was a connection between the funds wired to Pinnacle for deposit into Mr. Leonard's account and the check Mr. Leonard had written to plaintiff. Pinnacle knew this background information before the wired funds arrived in Mr. Leonard's account and several days before plaintiff presented the check Mr. Leonard issued to plaintiff on his Pinnacle account. See Doc. 125 at 12-15. And, a factual dispute exists whether Mr. Leonard ever instructed Pinnacle how to pay the many outstanding checks issued on his account at Pinnacle as of September 30, 2015. Id. at 27-29. But, as a matter of law, none of these facts creates a genuine issue of material fact requiring a trial. Three related conclusions produce this holding.
First, the court predicts
Second, the court predicts that the Kansas Supreme Court would hold that Kansas law precludes plaintiff—the holder of the dishonored check—from suing the bank on which the check was drawn. Section 84-4-303(b) says exactly that, and UCC Comment 7 to this provision drives home the point. Mr. Leonard, as "the drawer [of the check given to plaintiff as payment] has drawn all the checks, . . . [and he] should have funds available to meet all of them . . . ." Kan. Stat. Ann. § 84-4-303 UCC cmt. 7. But, where the drawer failed this responsibility—as Mr. Leonard did—"the holders [of the insufficiently funded checks] have no direct right against the payor bank in any event . . . ." Id.
Third, no evidence suggests that circumstances here could qualify for any one of the exceptions to these general rules. As outlined in detail earlier, the Kansas version of the UCC recognizes several exceptions to these rules. That is the import of the introductory language in § 84-4-303(b), i.e., "subject to subsection (a) . . . ." Id. But, here, as a matter of law, plaintiff can't qualify for any of the exceptions recognized in subsection (a) of that provision.
The kinds of knowledge that can modify a bank's "right or duty to pay an item or to charge its customer's account," the UCC Comments explain, include "knowledge or notice that the drawer has filed a petition in bankruptcy or made an assignment for the benefit of creditors." Kan Stat. Ann. § 84-4-303(a), UCC cmt. 2. Here, the summary judgment facts show that Pinnacle knew the wired funds from Dinsdale corresponded with the check Mr. Leonard had written to plaintiff. But, UCC Comment 7 addresses the effect this type of knowledge has on a bank's rights and duties. Comment 7 explains that "no priority rule" exists "between one item and another." Kan. Stat. Ann. § 84-4-303 UCC cmt. 7. Put more succinctly, a bank's knowledge that a check—like the one Mr. Leonard wrote—corresponds with a deposit—such as Dinsdale's wired funds—doesn't qualify as knowledge affecting the bank's rights or duties recognized in § 84-4-303(a) and UCC Comment 1.
Finally, the Kansas statutes that plaintiff cites—ones defining "good faith," "ordinary care," and "knowledge"—do not override § 84-4-303 or its Comments. The Comments to § 84-4-303 reflect that this provision explicitly bars account holders from dictating the order in which a bank must honor checks. The Comments also recognize that § 84-4-303 bars check holders from asserting causes of action against a payor bank. Though Comments to other Kansas statutes recognize that "a bank that has not certified a check may engage in other conduct that might make it liable to a holder," see Kan. Stat. Ann. § 84-3-408 UCC cmt. 1, the Comments to § 84-4-303 preclude Pinnacle's liability under the summary judgment facts.
In its Order on the parties' summary judgment motions, the court declined to grant summary judgment because "Pinnacle is liable to plaintiff for conversion if the factfinder determines that the bank knew the purpose of the funds transferred by Dinsdale." Doc. 125 at 29. Concluding that a reasonable jury could find that Pinnacle knew the reason the Dinsdale funds were transferred into Mr. Leonard's account at Pinnacle, the court denied summary judgment because of this factual dispute. Id. But, after hearing the parties' oral arguments and reviewing their supplemental briefing, the court concludes that this factual dispute is not a material one.
The court's earlier Order held this dispute was material based on the Kansas Supreme Court's holding in Scoby v. Bird City State Bank, 211 P. 110 (Kan. 1922), and Torkelson v. Bank of Horton, 491 P.2d 954 (Kan. 1971). Both cases recognized that a drawee bank could be liable to a check's holder, i.e., the payee, where "the defendant bank was . . . informed" about the purpose of a deposit into the account "before [the bank] devoted that money to the payment of [the drawer's] overdrafts or otherwise disposed of it." Scoby, 211 P. at 113; see also Torkelson, 491 P.2d at 957-58 ("[I]f, by virtue of special circumstances in addition to the mere issuance of the check, the check is deemed to be an assignment pro tanto of the funds called for, the holder may sue the drawee bank for its payment if there are sufficient funds to meet the check, even though it was not accepted or certified.").
But, the most important feature of these two cases is the year when the Kansas Supreme Court decided them: in 1922 (Scoby) and 1971 (Torkelson). Both cases predated 1991, when the Kansas legislature adopted the current version of Kan. Stat. Ann. § 84-4-303. And, one of the cases predated 1966, when the Kansas legislature first adopted the UCC and the original version of § 84-4-303. That provision hasn't changed materially since 1966, but some of the interpretive Comments have changed. In 1966, UCC Comment 6 to § 84-4-303 explained that "the drawer [of a check] has drawn all the checks, [and he] should have funds available to meet all of them. . . ." Kan. Stat. Ann. § 84-4-303 UCC cmt. 6 (1966). This Comment continued, explaining that "the holders [of the insufficiently funded checks] have no direct right against the payor bank in any event . . . ." Id. But, the Kansas Comment to § 84-4-303 expanded between 1966 and 1991. The 1966 version didn't contain an illustration explaining that a bank had the right to pay checks arriving on the same day in any order it chooses. Indeed, the 1966 Kansas Comment provided little guidance. It advised merely that § 84-4-303(b)—the subsection allowing banks to pay checks in any order—was "[n]ew" with "[n]o Kansas authority directly in point." Id. at Kansas cmt. 2.
The example provided in the current Kansas Comment mirrors the facts here—i.e., Mr. Leonard had written multiple checks that arrived on the same day as the check he had written to plaintiff, and his account at Pinnacle contained insufficient funds to pay them all. The current Kansas Comment recognizes that Pinnacle had the right to pay the checks in any order it chose and dishonor checks for which insufficient funds remained in Mr. Leonard's account.
In this diversity case, "the federal court's task is not to reach its own judgment regarding the substance of the common law, but simply to `ascertain and apply the state law.'" Wankier v. Crown Equip. Corp., 353 F.3d 862, 866 (10th Cir. 2003) (quoting Huddleston v. Dwyer, 322 U.S. 232, 236 (1944)). But, "[w]here no controlling state decision exists, the federal court must attempt to predict what the state's highest court would do," id., if presented with the question today.
The court concludes that the gravamen of § 84-4-303—and particularly the Kansas Comment updated since 1991—precludes Scoby, Torkelson, and like-minded cases from serving as "controlling" state decisions. The court predicts that the Kansas Supreme Court would hold, instead, that Kansas law does not permit plaintiff to prevail on a claim for conversion under the circumstances presented by these summary judgment facts. The court predicts the Kansas court would hold that § 84-4-303 establishes the general rule of law governing plaintiff's claim, and this rule precludes plaintiff from prevailing on a conversion claim against Pinnacle. The court likewise predicts the Kansas Supreme Court would hold that plaintiff's claim does not qualify for any of the exceptions to this general rule in § 84-4-303(a). The court thus vacates its earlier ruling and holds, instead, that Pinnacle is entitled to summary judgment as a matter of law against plaintiff's claim for conversion.
For reasons explained above, the court grants Pinnacle's Motion to Reconsider (Doc. 127). The court vacates the portion of Doc. 125 (Memorandum and Order dated December 21, 2018) denying Pinnacle's Motion for Summary Judgment against plaintiff's conversion claim. In its place, the court now grants that portion of Pinnacle's summary judgment motion and enters summary judgment against plaintiff's conversion claim against Pinnacle. In all other respects, the December 21, 2018, Memorandum and Order stands and remains in effect.
Plaintiff's Memorandum in Support of Plaintiff's Motion for Summary Judgment (Doc. 111) asserts that the September 30, 2015, email anticipating the presentment of Mr. Leonard's check to plaintiff and Dinsdale's wired funds "shows that [Pinnacle representatives] were told that the Dinsdale Bros. wire was to pay the check Mr. Leonard had written for the purchase" of cattle from plaintiff. Doc. 111 at 7. But defendant Dinsdale properly has controverted this fact, and the court addresses this dispute in the portion of this order that discusses the parties' summary judgment arguments, infra.
