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____________________________________________________________________________
IN THE COURT OF APPEALS FOR TENNESSEE
AT KNOXVILLE
____________________________________________________________________________
Docket No.
E2006-00212– COA-R3-CV
____________________________________________________________________________
MICHAEL A. S. GUTH,
Plaintiff-Appellant,
- versus -
SUNTRUST BANK,
Respondent-Appellee.
____________________________________________________________________________
REPLY BRIEF FOR PLAINTIFF-APPELLANT
____________________________________________________________________________
Dr. Michael A. S. Guth
Plaintiff pro se, BPR #019093
116 Oklahoma Ave.
Oak Ridge, TN 37830-8604
Phone: (865) 483-8309
e-mail: mike@michaelguth.com
Oral Argument Waived Feb. 5, 2007
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
ISSUES PRESENTED FOR REVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .v
ISSUES WITHDRAWN FROM APPELLANT BRIEF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
STATEMENT OF THE CASE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vi
STATEMENT OF THE FACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SUMMARY OF THE ARGUMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARGUMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
I. UNDER THE DOCTRINES OF RESPONDEAT SUPERIOR AND VICARIOUS LIABILITY, SUNTRUST BANK (THE EMPLOYER) IS LIABLE FOR THE PROMISES MADE BY ITS OWN BRANCH MANAGER AND TELLER (EMPLOYEES) ACTING WITHIN THE SCOPE OF THEIR EMPLOYMENT. . . . . . . 6
II. THE PARTIES FORMED AN AGREEMENT, AS EXPRESSLY PERMITTED UNDER TENN. CODE ANN. § 47-4-103(A), THAT EFFECTIVELY VARIED THE APPLICABILITY OF TENN. CODE ANN. § 47-4-201 TO THE MONEY ORDER TRANSACTION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
III. TENNESSEE LAW PROVIDES A REMEDY IN PROMISSORY ESTOPPEL AND PROMISSORY FRAUD WHERE A BANK BRANCH MANAGER AND BANK TELLER INDUCE A CUSTOMER TO TRANSACT BY PROMISING THE TRANSACTION WOULD NOT BE TIED TO HIS PERSONAL CHECKING ACCOUNT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
IV. SUNTRUST BANK BREACHED ITS STATUTORY DUTY OF GOOD FAITH IN CONTRACT PERFORMANCE, ITS DUTY OF ORDINARY CARE, AND USED COMMERCIALLY UNREASONABLE PRACTICES IN THIS MONEY ORDER CASHING TRANSACTION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
V. SUNTRUST BANK IS BARRED FROM ASSERTING A DEFENSE OF ILLEGALITY UNDER TENN. CODE ANN. § 47-3-305 BY ITS OWN CONDUCT, BY THE PLAINTIFF’S STATUS, AND BY OPERATION OF LAW.. . . . . . . . . . . . . . . . . . . . . 17
VI. FINAL COMMENTS IN REBUTTAL TO THE APPELLEE BRIEF.. . . . . . . . . . . . . . .20
CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ADDENDUM OF TENNESSEE STATUTES CITED IN BRIEF. . . . . . . . . . . . . . . . . . . . . . . . 26
TABLE OF AUTHORITIES
U. S. Supreme Court Cases
U. S. Courts of Appeals Cases
Tennessee Supreme Court Cases
Baird v. Fidelity-Phenix Fire Ins. Co., 178 Tenn. 653, 162 S.W.2d 384, 388 (Tenn. 1942)
Burge Ice Mach. Co. v. Strother, 197 Tenn. 391, 273 S.W.2d 479, 483 (Tenn. 1954)
Johnson v. LeBonheur Children's Med. Ctr., 74 S.W.3d 338 (Tenn. 2002)
McCall v. Wilder, 913 S.W.2d 150, 153 (Tenn. 1995)
McConnico v. Third National Bank in Nashville, 499 S.W.2d 874 (Tenn. 1973)
Miller v. Insurance Co. of North America, 211 Tenn. 620, 625, 366 S.W.2d 909, 911 (1963)
Staples v. CBL & Assocs., Inc., 15 S.W.3d 83, 89 (Tenn. 2000)
Turner v. Jordan, 957 S.W.2d 815, 818 (Tenn. 1997)
Vending Chattanooga, Inc. v. American Nat'l Bank & Trust Co., 730 S.W.2d 624, 626 (Tenn. 1987)
Yeiser v. Bank of Adamsville, 614 S.W.2d 338 (Tenn. 1981)
Tennessee Court of Appeals Cases
Allison v. Blount Nat'l Bank, 54 Tenn. App. 359, 390 S.W.2d 716, 719 (Tenn. Ct. App. 1965)
Amacher v. Brown-Forman Corp., 826 S.W.2d 480 (Tenn. Ct. App. 1991)
Brungard v. Caprice Records, 608 S.W.2d 585 (Tenn. Ct. App. 1995)
Covington v. Robinson, 723 S.W.2d 643, 645 (Tenn. App. 1986)
Edmond Bros. Supply Co. v. Boyle & Adams, 44 S.W.3d 530, 534-535 (Tenn. Ct. App. 2000)
Gitter v. Tennessee Farmers Mut. Ins. Co., 60 Tenn. App. 698, 450 S.W.2d 780, 784 (Tenn. App. 1969)
Intersparex Leddin KG v. Al-Haddad, 852 S.W.2d 245, 247 (Tenn. Ct. App. 1992)
Kelley v. Johnson, 796 S.W.2d 155, 157 (Tenn. Ct. App. 1990)
Mallicoat v. Volunteer Fin. & Loan Corp., 57 Tenn. App. 106, 415 S.W.2d 347, 350 (Tenn. Ct. App. 1966)
Marlowe v. First State Bank at Jacksboro, 371 S.W.2d 826 (Tenn. Ct. App. 1963)
R & J of Tenn., Inc. v. Blankenship-Melton Real Estate, Inc., 166 S.W.3d 195, 206 (Tenn. Ct. App. 2004)
Shahrdar v. Global Hous., Inc., 983 S.W.2d 230, 237 (Tenn.Ct.App.1998)
Shelby Mut. Ins. Co. v. Wilson, 53 Tenn. App. 428, 383 S.W.2d 791, 801 (Tenn. App. 1964)
Stacks v. Saunders, 812 S.W.2d 587, 592 (Tenn.Ct.App.1990)
Webb v. Board of Trustees of Webb School, 38 Tenn. App. 173, 271 S.W.2d 6, 19 (Tenn. App. 1954)
Cases from Other Jurisdictions
Kimberly A. Allen Trust v. FirstBank, N.A., 989 P.2d 203, 40 U.C.C. Rep. Serv. 2d 1048 (Colo. Ct. App. 1999)
Triffin v. Pomerantz Staffing Servs., L.L.C., 370 N.J. Super. 301, 309-310 (App. Div. 2004)
Triffin v. Travelers Express Company, Inc., 370 N.J. Super. 399, 405 (App. Div. 2004)
Tennessee Statutes and Rules
Tenn Code Ann. § 47-3-305
Tenn Code Ann. § 47-4-102(a)
Tenn Code Ann. § 47-4-103(a)
Tenn. Code Ann. § 47-3-401(1)
Tenn. Code Ann. § 47-9-627(b)
Tenn. Code Ann. § 47-1-203
Tenn. Code Ann. § 47-4-103
Tenn. Code Ann. § 47-4-201
ISSUES PRESENTED FOR REVIEW
I. Under the legal doctrines of vicarious liability and respondeat superior, is Suntrust Bank (the employer) liable for the promises made to the Plaintiff by its own branch manager and teller (employees) acting within the scope of their employment?
II. By agreeing to cash three money orders without payment being tied to the Plaintiff’s checking account, an agreement expressly authorized by Tenn. Code Ann. § 47-4-103(a), did the Plaintiff and the Defendant’s branch manager and teller effectively vary the applicability of Tenn. Code Ann. §§ 47-3-305, 47-4-201 to this transaction?
III. Does Tennessee law provide a remedy in promissory estoppel or promissory fraud where a bank customer relies on promises made by a bank branch manager and bank teller that his business transaction would not be tied to his personal checking account, without those promises no transaction would have occurred, and those promises were subsequently breached causing significant harm to the bank customer?
IV. Does a collections bank breach its contractual duty of good faith in performance of a contract, breach its duty of ordinary care, and violate commercially reasonable standards of conduct where (1) the collections bank ignores a clear warning printed on a money to hold the money order up to light and check for a Franklin watermark on the other side, and the bank ignores the warning, and cashes the counterfeit instrument without inspecting it, (2) the same bank has actual knowledge of counterfeit money order scams by virtue of the bank repeatedly offsetting funds from customer accounts at various branches in Tennessee, Georgia, Virginia, and North Carolina, but takes no action to prevent the same harm from recurring; (3) the bank is advised multiple times by federal law enforcement agencies about scams involving U.S. postal money orders and the bank implements no policies whatsoever to try to prevent the scams from occurring at its branches, (4) its tellers fail to hold money orders up to the light to check for an authenticating watermark, even though the custom of most, if not all, other banks in east Tennessee is for tellers to perform this quick and costless inspection, and (5) the bank fails to train its tellers or branch managers that all “collecting bank” activities entail the right to offset funds from a customer’s account?
V. Is Suntrust Bank barred from raising the defense of illegality under Tenn. Code Ann. § 47-3-305 by its own conduct, by the Plaintiff’s status, and by the operation of law?
ISSUES WITHDRAWN FROM THE APPELLANT BRIEF
1. Did the offsetting of funds from Plaintiff’s account violated the Final Payment Rule of the UCC?
2. Did Suntrust Bank violate the Tennessee Consumer Protection Act?
3. In terms of bank liability for accepting counterfeit money orders, does Tennessee law distinguish between a customer who presents money orders to be cashed and not linked to his checking account in any manner versus a customer who deposits the counterfeit money orders into his checking account?
STATEMENT OF THE CASE
The appellant hereby incorporates by reference the Statement of the Case contained in his Appellant’s Brief.
STATEMENT OF THE FACTS
Issue 1: Respondeat Superior
The branch manager and bank teller of a Suntrust Bank are employees of Suntrust Bank. The branch manager of the Oak Ridge Kroger store branch was either fired or left Suntrust Bank a few weeks after he was served with a summons and complaint in Plaintiff’s suit. Suntrust Bank teller Judith Solomon no longer works in the Oak Ridge Kroger store Suntrust branch.
Issue 3: Promissory Estoppel; Promissory Fraud
Plaintiff asked Defendant’s teller if he could cash three money orders without having them tied to his personal checking account. The Defendant’s employees (branch manager and teller) assured Plaintiff that he could. Defendant’s bank teller Judith Solomon turned around and asked her Branch Manager for the endorsement to prevent linking the postal money orders to Plaintiff’s checking account, and that Branch Manager told Solomon, who repeated to Plaintiff, that it should be “Not For Intended Use.” [Amd. Compl., R. 13; Memorandum, R. 48]. The money orders had no endorsements from Plaintiff prior to his entering into an agreement with the Suntrust employees. Plaintiff endorsed the money orders as he was instructed by the bank Branch Manager and Teller and was handed $3,000 in cash. Both the Suntrust Bank teller and the Branch Manager advised Plaintiff that the transaction would not be linked to his personal checking account. [Memorandum, R. 48, Amd. Compl., R. 13]
Issue 4: Breach of Contractual Duty of Good Faith
Paintiff observed that the teller did not hold the U.S. postal money orders up to the light to see if they contained a watermark. [Affidavit, R. 28]. The three postal money orders in dispute contained a written warning printed on the reverse side in all capital letters instructing a bank to hold the money orders up to the light and check for a Franklin watermark. Prior to the transaction at dispute in this case, the Defendant bank received two warnings or alerts about counterfeit postal money order scams. [Amd. Complaint, R. 11]. In March 2004, Defendant Suntrust Bank was one of hundreds of banks to whom “the Federal Deposit Insurance Corporation issued a special alert” about escalating problems with counterfeit postal money orders, according to an Internet web site maintained by the U.S. postal inspectors: http://www.usps.com/ postalinspectors/mofeature.htm. Suntrust Bank has repeatedly cashed or deposited counterfeit U.S. postal money orders for its customers and then used funds from customers’ accounts to offset its losses. [Appellant Brief, p.19; Motion to Compel, R. 37, Paragraph 14; Exh. 1, R. 44, Question 6, R. 46, Question 12, R. 6; Exhibit 1 to this Reply Brief].
Prior to the transaction in dispute, the Defendant had cashed counterfeit money orders for other Suntrust customers in Georgia, North Carolina, Tennessee, Alabama, and Virginia and subsequently charged back the funds advanced to the clients from their accounts.
Under the twin doctrines of respondeat superior and vicarious liability, Tennessee law recognizes that the employer (Defendant Suntrust) is liable for the promises made by its employees within the scope of their employment. Plaintiff relied heavily on promises by Suntrust’s employees that the cashing of his three money orders would not be linked to his personal checking account. These employees, the Suntrust branch manager and teller, had “apparent authority” to conduct business on behalf of Suntrust Bank. Accordingly, through the actions of its employees, the Defendant bank is liable for causes of action based on promissory estoppel and promissory fraud. The appellee brief completely igonored the promissory estoppel and promissory fraud claims in the appellant brief: the appellee brief offered no defense to these claims.
Contrary to appellee brief’s assertion that Tenn. Code Ann. § 47-4-201 gave Defendant a right to offset funds from Plaintiff’s account, the parties to this transaction were free to modify the debtor-creditor agreement between them under Tenn Code Ann. § 47-4-103(a), and that modified agreement affects Suntrust’s rights under any and all other provisions of Title 47, Chapter 4 of the Tenn. Code, including § 47-4-201. Unless the appellee agrees that Defendant’s employees formed an agreement with Plaintiff in which his money orders would be cashed without linking them to his checking account, then these parties have a genuine dispute over material issues and summary judgment was inappropriate at the trial court level.
Regardless of whether the parties modified their respective rights under § 47-4-103, the simple facts remain. Plaintiff told Defendant’s two employees, a teller and branch manager, exactly what he wanted to do. He wanted to cash money orders without having them tied to his personal checking account in any manner. The Defendant’s agents/employees were free to reject this offer to transact. However, Suntrust’s employees said there were happy to do the transaction as requested without linking to Plaintiff’s account, if he would endorse the money orders as they specified. In exchange for the promises of Defendant’s employees, Plaintiff agreed to endorse the money orders in the bizarre manner requested by the Suntrust Bank employees. Copies of the money orders, which are attached as exhibits to the Amended Complaint in the record, offer a glaring reminder of who and what induced Plaintiff to endorse them this strange way. If Plaintiff had agreed to let the money orders be linked to his personal account, he would have simply written “for deposit” – as he had previously done with checks.
The actual wording of the endorsement is immaterial to Plaintiff’s claims; instead, the endorsement manifests the crucial agreement concerning no linking to Plaintiff’s account. Without the promises from the Defendant’s employees, this transaction never would have occurred, and Plaintiff would have sustained no loss. Plaintiff would not have endorsed the money orders, and would have no liability on them. Plaintiff has repeatedly argued he is NOT an expert in this area of banking law and therefore as a member of the general public, Plaintiff had to rely on the bank employees’ promises that they were familiar with the money order cashing process, and this transaction would not be linked to his personal checking account.
Uttering false promises, fraudulent misrepresentations and the like are not authorized by Tenn. Code Ann. § 47-4-201 or any other provision of the Tenn. Code. Accordingly, Suntrust Bank has no statutory immunity from causes of action that arise from promises given by its employees to a customer. Defendant’s defense of illegality under Tenn. Code Ann. § 47-3-3-5 will also fail, because that defense is only available to a party that had no opportunity to learn of the counterfeit nature of the instrument being transacted. Suntrust Bank in this case chose to ignore the warnings printed on the money order to check for the authenticating watermark; in the process it violated every conceivable standard of commercial reasonableness and must bear the loss without recourse to the innocent Plaintiff. Furthermore, given a clash between the agreement formed under Tenn. Code Ann. § 47-4-103(a) and the defense in § 47-3-305, the Tenn. Code specifies that the agreement formed under § 47-4-103(a) trumps any conflicting provision of Chapter 3, including a defense raised under § 47-3-305.
Finally, as noted in Tenn. Code Ann. § 47-4-103(a), banks are obligated to exercise good faith in contract performance, and banks cannot enter into agreements that disclaim this duty of good faith. Even though Tennessee recognizes nothing more than a debtor-creditor relationship between banks and customers, banks nevertheless have a duty of ordinary care, and banks cannot operate in Tennessee with commercially unreasonable standards. Defendant has breached the duty of good faith, breached the duty of ordinary care, and violated commercial reasonableness standards where Suntrust Bank ignored a clear warning printed on a money order that the instrument will not be honored if it does not have a watermark on the other side, and where the money order gives information on how to verify it’s legitimacy, but Suntrust foolishly cashes the counterfeit instrument without heeding that warning, and Suntrust has actual knowledge of the counterfeit U.S. postal money order scams by virtue of offsetting funds from customer accounts with branches in Atlanta, Tennessee, North Carolina, and Virginia. The bank has arguably breached its duty of good faith and ordinary care by failing to use its actual knowledge of counterfeit money order fraud to prevent this same tort from injuring future customers. Expressed another way, it would be unreasonable for Plaintiff in the future to go to branches of Suntrust Bank and try to trick the Suntrust bank tellers into cashing dubious U.S. postal money orders. Having been burned by this experience, Plaintiff is expected to exercise ordinary care to prevent these circumstances from repeating. The same is true of Suntrust Bank.
I. UNDER THE DOCTRINES OF RESPONDEAT SUPERIOR AND VICARIOUS LIABILITY, SUNTRUST BANK (THE EMPLOYER) IS LIABLE FOR THE PROMISES MADE BY ITS OWN BRANCH MANAGER AND TELLER (EMPLOYEES) ACTING WITHIN THE SCOPE OF THEIR EMPLOYMENT
It is well established in Tennessee law that a principal (employer) is liable for the conduct and promises made by an agent (employee) acting within the scope of her employment. “When an agency relationship exists, the principal may be bound by the acts of the agent performed on the principal's behalf and within the actual or apparent scope of the agency. In Tennessee, the doctrine of respondeat superior permits the master/principal to be held liable for the negligent actions of his servant/agent. To hold the master/principal vicariously liable, it is enough that the servant or agent was acting in the business of his superior.” Johnson v. LeBonheur Children's Med. Ctr., 74 S.W.3d 338 (Tenn. 2002).
All employees of an employer are also agents of that employer. An agent is simply “one who undertakes to transact some business, or to manage some affair, for another, by the authority and on account of the latter, and to render an account of it." Miller v. Insurance Co. of North America, 211 Tenn. 620, 625, 366 S.W.2d 909, 911 (1963). The Suntrust branch manager and teller meet the definition of an agent authorized to cash negotiable instruments on behalf of the principal, Suntrust Bank. The appellee does not dispute that a Suntrust Bank branch manager and Suntrust Bank teller are employees of the Defendant bank. It is also undisputed that Plaintiff’s cause of action arose out conduct of the Suntrust branch manager and teller performing tasks within the scope of their employment.
“The doctrine of respondeat superior [holds] a principal may be liable solely for the tortious acts of his agent.” Johnson v. LeBonheur Children's Med. Ctr., 74 S.W.3d 338, 346 (Tenn. 2002). Any employee of any corporation or employer can be negligent or commit a tort. An employee can be negligent or commit a tort against a customer, even where Tennessee law defines the relationship of a bank and its customer as a debtor-creditor relationship.
We next turn to the issue of apparent authority to transact given to the Suntrust branch manager and teller.
Ostensible authority is such authority as a principal intentionally or by lack of ordinary care causes or allows a third person to believe the agent possesses. It is essential to ostensible authority that the principal hold the agent out to the public as possessing sufficient authority to embrace the particular act in question when the agent does not actually have such authority, or allows the agent to exercise such authority even though not actually granted, and the person dealing with the agent, acting in good faith, believed or had reason to believe the agent had the necessary authority. When an agent acts within the scope of his apparent or ostensible authority, the principal cannot prevail against a third party unless it shows that the third party knew or had reason to believe the agent did not have the claimed authority.
Intersparex Leddin KG v. Al-Haddad, 852 S.W.2d 245, 247 (Tenn. Ct. App. 1992); Edmond Bros. Supply Co. v. Boyle & Adams, 44 S.W.3d 530, 534-535 (Tenn. Ct. App. 2000). The Suntrust Oak Ridge Kroger branch manager and tellers had “apparent authority” or “ostensibly authority” to conduct banking transactions on behalf of Suntrust, because the bank held them out to the general public as having this authority, and they had previously exercised that authority with Plaintiff and hundreds of other Suntrust bank customers.
To summarize this section, a corporation can be held responsible for their employees; employees are the agents of the company for whom they work. A person who is authorized to act for another person or in place of another person is an agent of that person. For purposes of this case the term "agent" includes an employee. As employees, the Suntrust branch manager and teller received salaries from Defendant as payment for services rendered. The company that authorizes the agent to act is called a principal. For purposes of this case the term "principal" includes an employer, Suntrust Bank. Therefore, the principal and agent should be considered as one in assigning fault. If the Court of Appeals finds that the Suntrust branch manager and teller were at fault, then the preceding cases in this section state that Defendant Suntrust bank is also at fault.
II. THE PARTIES FORMED AN AGREEMENT, AS EXPRESSLY PERMITTED UNDER TENN. CODE ANN. § 47-4-103(A), THAT EFFECTIVELY VARIED THE APPLICABILITY OF TENN. CODE ANN. § 47-4-201 TO THE MONEY ORDER TRANSACTION.
Tenn. Code Ann. § 47-4-103(a) provides that the effect of the provisions of Title 47, Chapter 4, may be varied by agreement, subject to the constraint that the agreement does not disclaim a bank's responsibility for its own lack of good faith and is not manifestly unreasonable. Plaintiff has alleged facts in his Amended Complaint and other pleadings in the trial court indicating that (1) he requested the money orders in dispute be cashed without any link to his personal checking account, (2) the Defendant’s employees agreed to cash the money orders without any tie to Plaintiff’s checking account and requested that Plaintiff write a peculiar endorsement as per this agreement on each money order, (3) Plaintiff did as he was requested, a legal detriment he was not required to sustain, and (4) the Defendant’s employees cashed the money orders. [Amd. Compl., R. 13; Memorandum, R. 48].
Although a collecting bank enjoyed a statutory right to offset funds from Plaintiff’s personal checking account under Tenn. Code Ann. § 47-4-201, that right of offset was subject to and subordinate to any rights the parties agreed to at the time the transaction occurred. Indeed the wording of Tenn. Code Ann. § 47-4-103(a) explicitly states that the provisions of Title 47, Chapter 4, shall vary according to such agreements. It does not state the precise opposite, that any such agreements concerning the collecting bank must conform to the provisions of Title 47, Chap. 4. The official comments to Tenn Code Ann. § 47-4-103 indicate the Tennessee legislature did not want to tie the hands of the parties nor to enshrine in a statute the only possible terms related to cashing negotiable instruments. Instead, the legislature specifically intended to give the parties the widest possible latitude in conducting their banking affairs.
The Plaintiff’s request to cash the money order without any tie to his checking account was entirely reasonable. The funds belonged to a law client and should not be co-mingled with the Plaintiff’s personal funds. [Amd. Complaint, R. 12 - 13]. He also sought to remove his personal account from having any link with a purely business matter related to his law practice and to shift the risk of cashing onto the bank. [Amd. Complaint, R. 12 - 13]. The Defendant’s employees were reasonable to agree to these terms, because the employees stated that U.S. postal money orders, unlike checks, could not have stop payment orders issued on them and were backed by the full faith and credit of the U.S. government. [Affidavit, R. 28]. Plaintiff further stated to the Suntrust Bank teller, Judith Solomon, that the money orders were good as cash, she agreed, and said she would be happy to cash them. [Affidavit, R. 28]. The bank employees were happy, Plaintiff was happy, and the parties had reached a reasonable agreement in which the money orders would be cashed without linking them to Plaintiff’s account. Under Tenn. Code Ann. § 47-4-103(a), this agreement superseded and varied the provisions of Tenn. Code Ann. § 47-4-201, so that the bank no longer had an absolute right to offset its losses from Plaintiff’s personal checking account. (Contrary to the appellee brief at page 9 that Suntrust Bank “has a right of reimbursement that is superior to the right of the Appellant.” The appellee brief ignored Tenn. Code Ann. § 47-4-103(a).)
Offsetting losses from a customer account is authorized under Tenn. Code Ann. § 47-4-201. However, uttering false promises, fraudulent misrepresentations and the like are not authorized by Tenn. Code Ann. § 47-4-201 or any other provision of the Tenn. Code. Accordingly, Suntrust Bank has no statutory immunity from causes of action that arise from promises given by its employees to a customer. Furthermore, Tenn Code Ann. § 47-4-102(a) states that where a provision of Chapter 4 conflicts with a provision of Chapter 3, such as whether the agreement formed between Plaintiff and Defendant’s employees under § 47-4-103(a) trumps Suntrust’s illegality defense raised under Tenn Code Ann. § 47-3-305, Chapter 4 prevails. Furthermore, as shown in the last section of this brief, Defendant Suntrust is not qualified to raise the illegality defense, because its employees read and chose to ignore the warnings printed directly on the money orders in dispute that they were illegitimate without authenticating watermarks on their reverse sides.
III. TENNESSEE LAW PROVIDES A REMEDY IN PROMISSORY ESTOPPEL AND PROMISSORY FRAUD WHERE A BANK BRANCH MANAGER AND BANK TELLER INDUCE A CUSTOMER TO TRANSACT BY PROMISING THE TRANSACTION WOULD NOT BE TIED TO HIS PERSONAL CHECKING ACCOUNT.
Tenn. Code Ann. § 47-4-201 speaks to a bank’s authority to offset funds from a customer account for a provisional payment made on some negotiable instrument. That statute is silent as to causes of actions arising from promises made to bank customers that may contradict the statute. In fact, a previous provision of that chapter, § 47-4-103, expressly authorizes the parties to reach agreements that could vary or negate the other provisions under Chapter 4. The official comments to Tenn. Code Ann. § 47-4-103 indicate in light of the enormous number of items handled by banks, the state legislature wanted to permit parties within wide limits to vary the effect of provisions of the article by agreement, including, but not limited to, the right of offset contained in Tenn. Code Ann. § 47-4-201.
Those same official comments then go on to state “In the absence of a showing that the standards manifestly are unreasonable, the agreement controls. Owners of items and other interested parties are not affected by agreements under this subsection unless they are parties to the agreement or are bound by adoption, ratification, estoppel or the like.” (bold added). The legislature envisioned that bank employees would make promises to customers, and that their employers, the banks, would then be estopped from denying the actions governed by the promises of its employees. The parties to that agreement are clearly bound by it, and the branch manager and teller have apparent authority to bind the bank.
The appellee has not offered one single case, not one single argument, not one single shred of evidence in opposition to the promissory estoppel cause of action alleged in the Appellant’s brief. The U.C.C. recognizes that various legal principles - including estoppel - may be used to supplement its specific provisions. Amacher v. Brown-Forman Corp., 826 S.W.2d 480 (Tenn. Ct. App. 1991). We see that the official comments to Tenn. Code Ann. § 47-4-103 also acknowledged “estoppel” could modify the defense raised by the appellee.
Plaintiff alleges that through the fault of, and promises of no linking made by, the Suntrust branch manager and teller, he was induced to cash three money orders and subsequently sustained a loss of $3,019.50 in direct damages, and more than $2,000 in litigation costs. Unless Suntrust Bank is held bound to these promises of no linking to the Plaintiff’s personal checking account, it would operate as a virtual fraud upon him to allow Suntrust to offset funds from his personal account. Baird v. Fidelity-Phenix Fire Ins. Co., 178 Tenn. 653, 162 S.W.2d 384, 388 (Tenn. 1942) (quoting Shaw v. Spencer, 100 Mass. 382, 395 (1868)); accord Burge Ice Mach. Co. v. Strother, 197 Tenn. 391, 273 S.W.2d 479, 483 (Tenn. 1954); Gitter v. Tennessee Farmers Mut. Ins. Co., 60 Tenn. App. 698, 450 S.W.2d 780, 784 (Tenn. App. 1969); Shelby Mut. Ins. Co. v. Wilson, 53 Tenn. App. 428, 383 S.W.2d 791, 801 (Tenn. App. 1964); Webb v. Board of Trustees of Webb School, 38 Tenn. App. 173, 271 S.W.2d 6, 19 (Tenn. App. 1954). Plaintiff had no knowledge that Suntrust’s branch manager and teller lacked authority to bind the bank in a money order cashing transaction, the branch manager and teller represented that they would cash the three money orders without linking them to Plaintiff’s account, which misled Plaintiff and induced him to complete the transaction. Cf. Webb, 271 S.W.2d at 19 (quoting 56 Am. Jur. Waiver, at 104). Plaintiff prejudicially changed his position by affixing his signature to the money orders and by sending the full proceeds to his law client in London. Cf. Gitter, 450 S.W.2d at 785.
The appellee brief failed to dispute that both Suntrust Bank’s Branch Manager [Memorandum, R. 48] and teller [Amended Complaint, R. 12] represented to the Plaintiff that the cashing of the money orders would not be linked in any way to his checking account also maintained at Suntrust Bank. [Affidavit, R. 28, Amended Complaint, R. 12-13, Memorandum, R. 48]. The appellee brief also failed to dispute the fact that Defendant’s branch manager and teller instructed and misrepresented to Plaintiff that if he endorsed each money order as they requested, then the money orders would be cashed. [Amended Complaint, R. 13]
The Defendant bank cashes commercial paper all day long in normal business operations every day it is open for business. It was entirely reasonable for Dr. Guth to rely on a bank to know how to handle and cash commercial paper. It was also reasonable for him to rely on the bank personnel to read and know how to interpret the warnings printed on these U.S. postal money orders that they must have an authenticating watermark to be legitimate. The Defendant bank was free to impose restrictions on the cashing of the money orders, but it represented to Plaintiff through its employees that the money orders would be cashed without any link to Plaintiff’s account. Under these circumstances, the bank is estopped from refusing to honor the promises made by the Suntrust branch manager and Suntrust teller.
Finally, the doctrine of promissory fraud was adopted by this court in Brungard v. Caprice Records, 608 S.W.2d 585 (Tenn. Ct. App. 1995), and by implication by the Tennessee Supreme Court by denial of permission to appeal. Id. (Conner, J., concurring). Moreover, as Judge Conner noted, the parol evidence rule would bar admission of oral evidence on a contract claim, but would not be applicable to a claim sounding in tort. Thus on remand, Plaintiff is free to introduce oral evidence on his agreement with the Suntrust teller and branch manager.
The law on fraud is well established in Tennessee and, in order to state a claim for fraud, the following elements must be established: (1) an intentional misrepresentation with regard to a material fact; (2) knowledge of the representation's falsity - that the representation was made knowingly or without belief in its truth, or recklessly without regard to its truth or falsity; (3) that the plaintiff reasonably relied on the misrepresentation and suffered damage; and (4) if the claim is based on promissory fraud, then the misrepresentation must "embody a promise of future action without the present intention to carry out the promise." Shahrdar v. Global Hous., Inc., 983 S.W.2d 230, 237 (Tenn.Ct.App.1998) (quoting Stacks v. Saunders, 812 S.W.2d 587, 592 (Tenn.Ct.App.1990)).
Aside from promissory estoppel, the facts in this case would also enable Plaintiff-Appellant to recover under promissory fraud: (1) Suntrust branch manager and teller falsely promised that their cashing of Plaintiff’s money orders would be unlinked to Plaintiff’s personal checking account, (2) these employees showed reckless disregard for Suntrust’s statutory right of offset and intention to ignore the agreement, (3) Plaintiff relied on the promises and sent $3,000 to his law client in London [Statement of the Evidence Brief Section 6, paragraph 21; Amd. Compl. R. 15] and lost an additional $2,000 in litigation costs, and (4) Suntrust is now refusing to carry out the promise to hold Plaintiff’s checking account harmless and has reimbursed itself from these funds. Simply put, Plaintiff was fraudulently induced to endorse and cash the three U.S. postal money orders with Suntrust by its employees’ promises that the transaction would be unlinked to his personal checking account. Suntrust, aware of this promissory fraud, has now made these employees unavailable to Plaintiff: the branch manager was fired or quit shortly after Plaintiff filed his lawsuit, and the senior teller, Judith Solomon, a notary public, has mysteriously disappeared from the Oak Ridge branch.
In addition, Tenn. Code Ann. § 47-3-401(1), provides "No person is liable on an instrument unless his signature appears thereon." Vending Chattanooga, Inc. v. American Nat'l Bank & Trust Co., 730 S.W.2d 624, 626 (Tenn. 1987). Plaintiff was fraudulently induced to sign his name to these money orders by the Defendant’s agents in exchange for their promises. Prior to the transaction with Suntrust Bank, the money orders were blank on back, and Plaintiff had not signed them. He only signed his name to the (counterfeit) money orders in front of and at the insistence of the Suntrust Bank teller – an exchange of consideration to complete the parties’ agreement for the cashing transaction.
IV. SUNTRUST BANK BREACHED ITS STATUTORY DUTY OF GOOD FAITH IN CONTRACT PERFORMANCE, ITS DUTY OF ORDINARY CARE, AND USED COMMERCIALLY UNREASONABLE PRACTICES IN THIS MONEY ORDER CASHING TRANSACTION.
Under Tenn. Code Ann. § 47-1-203, Suntrust Bank was obligated to exercise good faith in contract performance with its customer, and, as noted in Tenn. Code Ann. § 47-4-103(a), banks cannot enter into agreements that disclaim this duty of good faith. Furthermore, a bank has a duty of ordinary care to its customer and must employ reasonable commercial standards of the banking industry. Vending Chattanooga, Inc. v. American Nat'l Bank & Trust Co., 730 S.W.2d 624, 628 (Tenn. 1987); Yeiser v. Bank of Adamsville, 614 S.W.2d 338 (Tenn. 1981) (Bank held liable for failing to exercise ordinary care in the handling the customer’s transaction.)
In the absence of precise Tennessee authority, Plaintiff would cite for your guidance two cases from another jurisdiction.
The party claiming to be a holder in due course was in the business of cashing checks. It is reasonable, in considering whether the instruments were received in good faith and whether the holder comported with reasonable commercial standards, that the holder be expected to fully examine the front and back of the instrument and, where the instrument purports to contain a method by which its authenticity may be tested, that the holder actually utilize that method. While this failure would likely preclude any holder of these instruments from claiming holder in due course status, it particularly precludes entities in the business of cashing checks. Accordingly, we reject plaintiff's contention that this information was irrelevant. Instead, we hold that it is commercially unreasonable for a check cashing entity to fail to utilize the heat sensitive test when so cautioned on the face of the check.
Triffin v. Pomerantz Staffing Servs., L.L.C., 370 N.J. Super. 301, 309-310 (App. Div. 2004).
In the second companion case, where a check cashing agency ignores clear warning on a money order that the instrument will not be honored if its signature is forged and where the money order gives information on how to verify it’s legitimacy, the check cashing agency that “blithely and blindly” cashes the money order bears any loss from it being counterfeit. Triffin v. Travelers Express Company, Inc., 370 N.J. Super. 399, 405 (App. Div. 2004). Under nearly identical circumstances in this case, Suntrust Bank, as a collecting bank, routinely cashes checks each and every day it is open for business (including Saturdays in Oak Ridge). Suntrust Bank ignored the clear warning printed directly on the U. S. postal money orders in dispute that to be legitimate they must contain a watermark visible upon holding them up to light, and instead Suntrust chose to “blithely and blindly” cash the money orders without inspecting them. By these actions, Suntrust Bank grossly violated commercial reasonableness standards, and Suntrust Bank cannot raise a claim against Plaintiff, because Suntrust induced Plaintiff to sign his name on the money orders with misrepresentations and false promises.
This Court has twice previously defined the term "commercially reasonable" as follows: “The requirement that the property be disposed of in a "commercially reasonable" manner seems to us to signify that the disposition shall be made in keeping with prevailing trade practices among reputable and responsible business and commercial enterprises engaged in the same or a similar business. Mallicoat v. Volunteer Fin. & Loan Corp., 57 Tenn. App. 106, 415 S.W.2d 347, 350 (Tenn. Ct. App. 1966); see also Tenn. Code Ann. § 47-9-627(b) (2003).” R & J of Tenn., Inc. v. Blankenship-Melton Real Estate, Inc., 166 S.W.3d 195, 206 (Tenn. Ct. App. 2004). No reputable and responsible bank in the entire country would ignore the warnings printed directly on a negotiable instrument to verify its authenticity by the prescribed method: holding the money orders up to light to check for the authenticating watermark. As noted in pages 21 - 24 of the Appellant’s Brief, Suntrust Bank has been aiding and abetting counterfeit postal money order scammers by employing commercially unreasonable check cashing methods, accepting and cashing these counterfeit instruments willy-nilly, and then repeatedly charging back the accounts of its hapless customers.
Giving the complaint the liberal construction which, at this stage, the Court of Appeals is required to do, the court should discern a claim for a breach of the banks' contractual duty of good faith in their performance of the contracts. "Every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement." Covington v. Robinson, 723 S.W.2d 643, 645 (Tenn. App. 1986) (citing Restatement (Second) of Contracts § 205 and 17 Am.Jur.2d Contracts § 256). The court received guidance from Triffin v. Pomerantz Staffing Servs., L.L.C., 370 N.J. Super. 301, 309-310 (App. Div. 2004) and Triffin v. Travelers Express Company, Inc., 370 N.J. Super. 399, 405 (App. Div. 2004). In view of the clear duty of good faith and fair dealing in the performance of every contract which is a part of Tennessee jurisprudence, there is no reason that the trial court should have dismissed Plaintiff’s cause of action.
If liability is to be predicated on the defendant's constructive knowledge, the proof must show the dangerous or defective condition existed for such a period of time that the defendant knew or, in the exercise of ordinary care, should have known of the condition. See Allison v. Blount Nat'l Bank, 54 Tenn. App. 359, 390 S.W.2d 716, 719 (Tenn. Ct. App. 1965). In this case, Suntrust Bank had both actual knowledge and constructive knowledge of the widespread problem of counterfeit U. S. postal money orders, because it had been accepting and cashing these counterfeit instruments willy-nilly at branches in every state in which it operates, and then repeatedly charging back the accounts of its hapless customers.
The proof of Suntrust Bank’s bad faith is that even after the haranguing experience of this lawsuit, Suntrust bank continued to cash counter U.S. postal money orders under nearly identical circumstances as the present case as late as August 2006. On remand, Plaintiff will take the deposition of Suntrust Bank customer Deborah Rubbens, J.D., LLM, Alexandria, VA, to confirm the Defendant did not inspect the money orders she deposited or heed the warnings printed directly on the money orders by holding them up to light and checking for the watermark. Suntrust Bank told her the items had cleared and then a week later reneged on its promise and offset funds from her checking account.
In a negligence action, a plaintiff is required to prove five elements: (1) a duty of care owed by the defendant to the plaintiff; (2) conduct by the defendant falling below the applicable standard of care that amounts to the breach of that duty; (3) an injury or loss; (4) causation in fact; and (5) proximate causation. See Staples v. CBL & Assocs., Inc., 15 S.W.3d 83, 89 (Tenn. 2000); McCall v. Wilder, 913 S.W.2d 150, 153 (Tenn. 1995). The first element in a negligence claim, duty, is "the legal obligation owed by defendant to plaintiff to conform to a reasonable person standard of care for the protection against unreasonable risks of harm." McCall, 913 S.W.2d at 153. Courts must apply a balancing approach based upon principles of fairness to determine whether the risk to a plaintiff was unreasonable and gives rise to a duty to act with due care. See Staples, 15 S.W.3d at 89 (citing Turner v. Jordan, 957 S.W.2d 815, 818 (Tenn. 1997)). "A risk is unreasonable and gives rise to a duty to act with due care if the foreseeable probability and gravity of harm posed by defendant's conduct outweigh the burden upon defendant to engage in alternative conduct that would have prevented the harm." McCall, 913 S.W.2d at 153.
The court must consider several factors in determining whether the risk is unreasonable, including: the foreseeable probability of the harm or injury occurring; the possible magnitude of the potential harm or injury; the importance of social value of the activity engaged in by defendant; the usefulness of the conduct to defendant; the feasibility of alternative, safer conduct and the relative costs and burdens associated with that conduct; the relative usefulness of the safer conduct; and the relative safety of alternative conduct. Id.
A collecting bank, such as Defendant Suntrust, has a duty of good faith and ordinary care. Tenn. Code Ann. §§ 47-1-203; 47-4-103. Suntrust owed a duty of care to each of its customers where a national epidemic of scams involving U. S. Postal money orders created a foreseeable probability of harm. By holding a money order up the light, a costless procedure that would have taken less than two seconds for its tellers to perform, Suntrust Bank had an alternative course of conduct that could have spared countless customers the misery and harm from being victims of money order scams. Suntrust Bank had actual knowledge of the money order scams from four independent sources: (1) the FDIC warning, (2) the Knoxville postal inspectors warning delivered directly to the Knoxville Suntrust regional security officer, (3) repeated instances in which Suntrust found its customers’ money orders were counterfeit and then charged back losses to these customers in Georgia, Tennessee, Alabama, North Carolina, and Virginia, and (4) banking trade publications detailing stories about these scams.
Because a duty of ordinary care was owed to Dr. Guth, the trial court erred in granting the motion to dismiss. The pertinent questions now become whether Suntrust breached its duty, and if so, whether that breach caused Plaintiff injuries. Issues of breach and causation are generally questions decided by the trier of fact. See Kelley v. Johnson, 796 S.W.2d 155, 157 (Tenn. Ct. App. 1990). These questions become questions of law, however, when the facts and inferences drawn therefrom permit reasonable persons to reach only one conclusion. See id. If reasonable minds could differ, then the case should be remanded back to the trial court so that the Plaintiff may have the opportunity to present his evidence of Suntrust's negligence.
V. SUNTRUST BANK IS BARRED FROM ASSERTING A DEFENSE OF ILLEGALITY UNDER TENN. CODE ANN. § 47-3-305 BY ITS OWN CONDUCT, BY THE PLAINTIFF’S STATUS, AND BY OPERATION OF LAW.
“If a party's negligence substantially contributed to the unauthorized signature, that person is estopped from raising forgery as a defense against a holder in due course, and a person may ratify a signature made without authority.” 2-1B Negotiable Instruments Under the UCC § 1B.06; See also U.C.C. Rev. § 3-406(a); U.C.C. Rev. § 3-406(b). As previously argued, Suntrust, through its employees, caused Plaintiff to sign his name to these money orders. Suntrust’s employees bargained with Plaintiff to endorse the money orders in a special manner in exchange for the agreement to cash the money orders without linking them to his personal checking account.
In essence, any defense the Defendant might raise to this transaction is subject to Plaintiff’s separate defense that there would not have been any transaction “but for” the fraudulent misrepresentation of Defendant’s employees. Fraud in the inducement, which is broader, is defined as "fraud connected with [the] underlying transaction and not with the nature of the contract or document signed. Misrepresentation as to the terms, quality or other aspects of a contractual relation, venture or other transaction that leads a person to agree to enter into the transaction with a false impression or understanding of the risks, duties or obligations she has undertaken.
Ross v. Citifinancial, Inc., 344 F.3d 458, 465 (5th Cir. 2003) (quoting Black’s Law Dictionary 661, 6th Ed. 1990). Plaintiff was led to believe that through this agreement, the Defendant bank was assuming the risks of cashing the money orders, including but not limited to the risk of dishonor – which the parties discussed in detail prior to executing the transaction.
Like all U.S. postal money orders, the front sides of the three money orders in dispute in this case contained a warning typed in red ink in capital letters stating “SEE REVERSE WARNING.” Like all U.S. postal money orders, the back sides of the three money orders in dispute in the case contained a warning typed in all capital letters below the endorsement line stating “WARNING CASHIER, REQUIRE POSITIVE IDENTIFICATION, HOLD TO LIGHT AND CHECK FOR, FRANKLIN WATERMARK AND SECURITY THREAD.” As previously noted in the appellant brief and the Amended Complaint, neither the Suntrust teller nor the branch manager paid any attention to these warnings. Neither of them held the money orders up to the light to check for the authenticating Benjamin Franklin watermark in the white ovals on the front side. [Affidavit, R. 28; Amd. Complaint, R. 11].
Tennessee appellate jurisprudence has no case directly on point where a collecting bank so egregiously violated commercial reasonableness standards in its handling of a postal money order. The only relevant case maintained that where an agency involved in cashing checks ignores a clear warning on a money order that the instrument will not be honored if its authenticity is not verified and where the money order gives information on how to verify its legitimacy, the check cashing agency that “blithely and blindly” cashes the orders bears the loss from counterfeit money orders. Triffin v. Travelers Express Company, Inc., 370 N.J. Super. 399, 405 (App. Div. 2004). In this case, Suntrust Bank is free to go after the issuer of the money order that turned out to be counterfeit: his name and address are shown on the money orders, copies of which are in the Record as exhibits to the amended complaint.
Again, Suntrust Bank “was in the business of cashing checks. It is reasonable, in considering whether the instruments were received in good faith and whether the holder comported with reasonable commercial standards, that the holder be expected to fully examine the front and back of the instrument and, where the instrument purports to contain a method by which its authenticity may be tested, that the holder actually utilize that method. We hold that it is commercially unreasonable for a check cashing entity to fail to utilize the . . . test when so cautioned on the face of the check.” Triffin v. Pomerantz Staffing Servs., L.L.C., 370 N.J. Super. 301, 309-310 (App. Div. 2004).
Suntrust bank had reasonable opportunity to inspect the money orders and learn the true character of the instruments. The Defendant’s employees were experts on check and money order cashing, and they did this function all day long as part of their normal business operations. Plaintiff was not an expert on banking transactions or methods of detecting authentic and counterfeit notes. He had to rely on the Defendant’s agents’ superior knowledge, and thus he sought and obtained a release from liability as part of this money order cashing transaction.
According to the Official Comment to U.C.C. Section 3-305: "The test of the defense here is that of excusable ignorance. . . . In determining what is a reasonable opportunity all relevant factors are to be taken into account, including the age and sex of the party, his intelligence, education, and business experience; . . . the representations made to him and his reason to rely on them or to have confidence in the person making them; the presence or absence of any third person who might read or explain the instrument to him . . .; and the apparent necessity, or lack of it, for acting without delay." There was no urgency in this transaction. Suntrust Bank had all the time in the world to inspect the money orders but “blithely and blindly” chose to ignore the warnings. Surely in this day and age when counterfeiting poses a threat to both banks and sovereign governments, so that checks and money orders and currency must be redesigned with authenticating security features to prevent counterfeiting, the Tennessee Court of Appeals is not going to endorse and sanction Suntrust Bank’s lazy failure to heed the warnings for authentication printed on these money orders and simply ignore the security measures followed by the rest of the banking community.
Plaintiff had no knowledge of the counterfeit nature of the money orders and was an innocent victim who received no pecuniary reward from the provisional credit given to him by Defendant. Presenting a U.S. postal money order for cashing at a bank provides no basis for an
“illegality of the transaction” as that term is defined under Tenn. Code Ann. § 47-3-305(a)(ii). Across the American state and federal jurisprudence, the U.C.C. cases that fall under that illegality defense relate to negotiable instruments used in illegal gaming activities, transactions involving an unlicensed person in a professional activity requiring a license, usury, or other situations where the parties knew the underlying transaction was illegal, e.g., the purchase of illegal drugs. Neither Plaintiff nor Defendant suspected the instruments in dispute were counterfeit. Furthermore, Tenn. Code Ann. § 47-3-305(a)(ii) requires “illegality of the transaction which, under other law, nullifies the obligation of the obligor.” This phrase has been interpreted to mean a person asserting the defense must point to a separate statute that nullifies the obligation. Plaintiff is not aware of any such statute, and Defendant has failed to point to any such statute in its skimpy Appellee Brief. Arguably, a purported U.S. postal money order is valid consideration, but like any negotiable instrument, bears some risk of dishonor. There is nothing illegal about asking a bank to assume responsibility for the risk of dishonor – for whatever reason an item might be dishonored.
As a matter of operation of law, Tenn. Code Ann. § 47-4-102(a) states that agreements between the parties formed under Chapter 4 govern and trump any conflicting provisions of Chapter 3, which is where the “illegality of the transaction” defense is found. Accordingly, the risk transfer agreement between Plaintiff and Defendant’s agents, whereby the three money orders would be cashed without any link or claim against Plaintiff’s personal funds must be upheld against any defense Suntrust Bank raised under Tenn. Code Ann. § 47-3-305.
VI. FINAL COMMENTS IN REBUTTAL TO THE APPELLEE BRIEF.
On page 6 of the Appellee brief, defense counsel claims the date of the transaction and the date of the discovery and the date of the offset are not stated in the Amended Complaint. These dates are known to the defense counsel, and two of the dates are mentioned in various pleadings contained in the record. The precise date of discovery of the counterfeit nature is unknown to Plaintiff, but the date of the transaction was Plaintiff’s birthday, Aug. 1, 2005. The copies of the money orders, attached as exhibits to the Amended Complaint and therefore a part of the Amended Complaint – contrary to Mr. Powell’s assertion – are clearly stamped on back with a transaction date of Aug. 1, 2005. There is a second stamp on Aug. 2, 2005, that indicates “Not on US Withdrawal.” Suntrust Bank chose not to inform Plaintiff about the counterfeit nature of the instruments until approximately Aug. 26, 2005, which is an unreasonably long time (25 days) to delay advising a customer. As such, Suntrust probably violated the “midnight deadline” rule for bank notification of dishonor and thereby forfeited its charge back rights. See Kimberly A. Allen Trust v. FirstBank, N.A., 989 P.2d 203, 40 U.C.C. Rep. Serv. 2d 1048 (Colo. Ct. App. 1999)
On page 7, Powell states “A careful reading of the Plaintiff’s amended complaint and the Plaintiff’s brief . . . fails to identify any legal authority . . . that Suntrust Bank owed him a duty.” Apparently, Mr. Powell cannot read. Plaintiff’s brief cited Tenn. Code Ann. § 47-1-203 concerning the duty of good faith in contract performance and even attached the verbatim statute in the appendix. Furthermore, Plaintiff cited numerous “legal authority” in cases that showed the bank owed him a duty of ordinary care and commercially reasonable conduct.
On page 8, counsel argues that the Marlowe v. First State Bank at Jacksboro, 371 S.W.2d 826 (Tenn. Ct. App. 1963) is “very similar to the one at bar.” In fact, Marlowe has practically no relevance to the case sub judice because in Marlowe: (1) the bank’s agents did not enter into an agreement with the Plaintiff that would have the effect of superseding the provisions of the U.C.C. adopted in Tennessee; (2) the banks agents’ did not fraudulently induce the Plaintiff to sign the instruments by promising her that the transaction would not be tied to her own personal funds in her account; (3) the bank’s employees did not fail to inspect the instruments and heed any warning for authentication printed on them; and (4) the bank did not have a repeated history, and therefore direct knowledge, of accepting and cashing the instruments willy-nilly only to charge back payments to customers accounts upon learning over and over again, for the “umpteenth” time, the bank had recklessly participated in a counterfeit U. S. postal money order scam.
On page 9, the appellee brief ridicules the fact that Plaintiff cited case law applicable to a payor bank and a drawer bank. The instruments in dispute are complicated, because they were not issued by a drawer bank. They were issued ostensibly by the U.S. government. During oral arguments at the trial court level, Plaintiff referred to himself as the payee and to Suntrust as the “payor bank.” Defense counsel offered no objection to this terminology and arguably waived his right to protest this same terminology on appeal. It appears that Suntrust Bank was simultaneously a collecting bank and a payor bank in this transaction. The money orders were issued by the U.S. government, so this transaction does not have a drawer bank. Case law citations in the appellant’s brief to a drawer bank were intended to illustrate general principles of law that arguably should be applied to all banks: duty of ordinary care, duty to use commercial reasonableness, etc.
Plaintiff has repeatedly argued he is NOT an expert in this area of banking law and therefore as a member of the general public, Plaintiff had to rely on the bank employees’ promises that they were familiar with the money order cashing process, and this transaction would not be linked to his personal checking account. He is a risk management specialist, and that is why he undertook to form an agreement with Suntrust Bank in which the risks of acceptance and cashing the money orders (including possible dishonor) would be borne by the bank – after proper inspection of his instruments – and leave Plaintiff’s personal funds harmless.
Plaintiff is justifiably indignant and outraged that Mr. Powell has intentionally prolonged and exacerbated this litigation by waiting until the 11th hour to disclose his contention that Suntrust Bank was a “collecting bank” and that it had authority to offset under Tenn. Code Ann. § 47-4-201. Plaintiff repeatedly asked Mr. Powell why he contended Suntrust Bank was not at fault. In interrogatory answers, he never disclosed either of these defense claims. In more than a dozen exchange of email messages, including two offers of compromise from the Plaintiff, Mr. Powell never once disclosed either “collections bank” or Tenn. Code Ann. § 47-4-201. At the general sessions court level, he won his case by arguing Suntrust Bank had not done anything wrong. At the Circuit Court hearing, he prevailed by arguing that there was no fiduciary duty owed by a bank to its customer.
Thereafter in the Appellant’s brief, Plaintiff no longer argued there was any type of fiduciary relationship between the bank and its customer. On page 21 of the Appellant brief, he specifically said there is no fiduciary relationship between a bank and its customer: “Tennessee does not impose a fiduciary duty between the bank and its customers.” Again on page 24 of the Appellant brief, Plaintiff noted “it had no fiduciary duty and therefore it could not be held liable for inaction.” Aside from the two quotations above, the word “fiduciary” does not appear anywhere else in the Appellant’s brief! Thus when Mr. Powell claims on page 10 of the Appellee Brief that Plaintiff “asserts that there is a fiduciary relationship between himself and SunTrust,” one has to wonder, can Mr. Powell read?
No where in the entire record of the case, not in any pleading filed at the trial court level nor any piece of correspondence nor any piece of evidence, did the appellee refer to itself as a “collecting bank” or mention its statutory defenses. Thus, relying on the “payor bank” terminology used at the trial court level, it is not surprising that Plaintiff cited and created a section of the Appellant’s brief related to Tenn. Code Ann. § 47-4-215 and the Final Payment Rule of the U.C.C. This does not represent a frivolous filing, as Mr. Powell suggests on page 10 of the Appellee Brief, but rather a reasonable response to oral arguments at the trial court stage.
When he was asked point blank by the Plaintiff what defense he alleged in response to Plaintiff’s “holder in due course” status, Mr. Powell refused to answer. When the Plaintiff then threatened to contact the Board of Professional Responsibility immediately and report Powell for violating the disciplinary rules requiring cooperation and communication between opposing counsel during all stages of litigation, Powell then offered the cryptic response that Plaintiff “had a problem with value – taking for value.” Powell claims on page 10 of the Appellee Brief that it was frivolous for the Appellant not to address the illegality issue of Tenn. Code Ann. § 47-3-305. But the first time Plaintiff ever heard the Defendant utter this defense was in the Appellee Brief. He has tackled the illegality defense issue squarely and forcefully in this Reply Brief, which was his first opportunity to respond. Certainly, no Appellant should be expected to address every point or defense raised in an appellee brief prior to even reading it.
McConnico v. Third National Bank in Nashville, 499 S.W.2d 874 (Tenn. 1973) cited on page 10 of the Appellee Brief is not directly relevant to the case sub judice. McConnico involved an appellant bank that was a holder in due course of the checks, which had been properly endorsed by debtor, and was not subject to claims or defenses of those with whom the appellant bank had not dealt. In this case, Suntrust Bank was not a holder in due course, because it failed to heed the authentication warnings printed directly on the instruments it cashed, and it fraudulently created the transaction by promising Plaintiff that the payment to him would not be linked to his personal checking account. There would never have been any endorsement of the money orders and no transaction without the promises relied on by Plaintiff from Suntrust’s employees.
WHEREFORE, the appellant prays for relief as follows:
1. That the judgment of the trial court be reversed and this case remanded with instructions that the trial court is to proceed with discovery and schedule this case for jury trial.
2. That the appellee be required to reimburse Plaintiff immediately the $2,000 he has paid for this appeal alone, and the appellee pay the Clerk of the Court of Appeals any remaining costs.
3. That the Court of Appeals instruct the trial court on remand to permit Plaintiff to amend his ad damnum to include punitive damages.
4. That the Court of Appeals send specific instructions to the trial court that under Tennessee law, (i) Suntrust Bank behaved in a commercially unreasonable manner; (ii) the Defendant is estopped from claiming the money order transaction was tied to Plaintiff’s personal checking account, from which funds could be offset against the Defendant’s losses; (iii) that the Defendant is barred from asserting a defense to this action under Tenn. Code Ann. § 47-3-305 or § 47-4-201; (iv) the trial court is to grant Plaintiff’s Motion to Compel Discovery, which is well taken.
5. For such other, further, and general relief as to which the Plaintiff may be entitled.
Respectfully submitted February 5, 2007.
___________________________________
Michael A. S. Guth, Ph.D., J.D.
Plaintiff-Appellant, BPR # 019093
116 Oklahoma Ave.
Oak Ridge, TN
37830-8604
Phone: (865) 483-8309
e-mail: mike@michaelguth.com
Certificate of Service
I, Michael A. S. Guth, attorney at law, certify that a copy of the appellant's brief with addendum was mailed to Michael Powell, Attorney for Suntrust Bank, P.O. Box 948, Knoxville, TN, 37901 on Feb. 5, 2007.
_________________________________
Michael A. S. Guth
ADDENDUM OF TENNESSEE STATUTES CITED IN BRIEF
Tenn. Code Ann. § 47-1-203 Obligation of Good Faith
Every contract or duty within chapters 1-9 of this title imposes an obligation of good faith in its performance or enforcement.
Tenn. Code Ann. § 47-3-305. Defenses and claims in recoupment.
(a) Except as stated in subsection (b), the right to enforce the obligation of a party to pay an instrument is subject to the following:
(1) a defense of the obligor based on (i) infancy of the obligor to the extent it is a defense to a simple contract, (ii) duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor, (iii) fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms, or (iv) discharge of the obligor in insolvency proceedings;
(2) a defense of the obligor stated in another section of this chapter or a defense of the obligor that would be available if the person entitled to enforce the instrument were enforcing a right to payment under a simple contract; and
(3) a claim in recoupment of the obligor against the original payee of the instrument if the claim arose from the transaction that gave rise to the instrument; but the claim of the obligor may be asserted against a transferee of the instrument only to reduce the amount owing on the instrument at the time the action is brought.
(b) The right of a holder in due course to enforce the obligation of a party to pay the instrument is subject to defenses of the obligor stated in subsection (a)(1), but is not subject to defenses of the obligor stated in subsection (a)(2) or claims in recoupment stated in subsection (a)(3) against a person other than the holder.
(c) Except as stated in subsection (d), in an action to enforce the obligation of a party to pay the instrument, the obligor may not assert against the person entitled to enforce the instrument a defense, claim in recoupment, or claim to the instrument ( § 47-3-306) of another person, but the other person's claim to the instrument may be asserted by the obligor if the other person is joined in the action and personally asserts the claim against the person entitled to enforce the instrument. An obligor is not obliged to pay the instrument if the person seeking enforcement of the instrument does not have rights of a holder in due course and the obligor proves that the instrument is a lost or stolen instrument.
(d) In an action to enforce the obligation of an accommodation party to pay an instrument, the accommodation party may assert against the person entitled to enforce the instrument any defense or claim in recoupment under subsection (a) that the accommodated party could assert against the person entitled to enforce the instrument, except the defenses of discharge in insolvency proceedings, infancy, and lack of legal capacity.
Tenn. Code Ann. § 47-4-102. Applicability.
(a) To the extent that items within this chapter are also within chapters 3 and 8, they are subject to those chapters. If there is conflict, this chapter governs chapter 3, but chapter 8 governs this chapter.
(b) The liability of a bank for action or non-action with respect to an item handled by it for purposes of presentment, payment, or collection is governed by the law of the place where the bank is located. In the case of action or non-action by or at a branch or separate office of a bank, its liability is governed by the law of the place where the branch or separate office is located.
Tenn. Code Ann. § 47-4-103. Variation by agreement; measure of damages; action constituting ordinary care.
(a) The effect of the provisions of this chapter may be varied by agreement, to the extent the agreement does not disclaim a bank's responsibility for its own lack of good faith and is not manifestly unreasonable.
(b) Federal Reserve regulations and operating circulars, clearing-house rules, and the like have the effect of agreements under subsection (a), whether or not specifically assented to by all parties interested in items handled.
(c) Action or non-action approved by this chapter or pursuant to Federal Reserve regulations or operating circular is the exercise of ordinary care and, in the absence of special instructions, action or non-action consistent with clearing-house rules and the like or with a general banking usage not disapproved by this chapter, is prima facie the exercise of ordinary care.
(d) The specification or approval of certain procedures by this chapter is not disapproval of other procedures that may be reasonable under the circumstances.
(e) The measure of damages for failure to exercise ordinary care in handling an item is the amount of the item reduced by an amount that could not have been realized by the exercise of ordinary care. If there is also bad faith it includes any other damages the party suffered as a proximate consequence.
HISTORY: [Acts 1963, ch. 81, § 1 (4-103); 1995, ch. 397, § 3.]
COMMENTS TO OFFICIAL TEXT
1. Section 1-102 states the general principles and rules for variation of the effect of this Act by agreement and the limitations to this power. Section 4-103 states the specific rules for variation of chapter 4 by agreement and also certain standards of ordinary care. In view of the technical complexity of the field of bank collections, the enormous number of items handled by banks, the certainty that there will be variations from the normal in each day's work in each bank, the certainty of changing conditions and the possibility of developing improved methods of collection to speed the process, it would be unwise to freeze present methods of operation by mandatory statutory rules. This section, therefore, permits within wide limits variation of the effect of provisions of the article by agreement.
2. Subsection (a) confers blanket power to vary all provisions of the Article by agreements of the ordinary kind. The agreements may not disclaim a bank's responsibility for its own lack of good faith or failure to exercise ordinary care and may not limit the measure of damages for the lack or failure, but this subsection like Section 1-102(3) approves the practice of parties determining by agreement the standards by which the responsibility is to be measured. In the absence of a showing that the standards manifestly are unreasonable, the agreement controls. Owners of items and other interested parties are not affected by agreements under this subsection unless they are parties to the agreement or are bound by adoption, ratification, estoppel or the like.
As here used "agreement" has the meaning given to it by Section 1-201(3). The agreement may be direct, as between the owner and the depositary bank; or indirect, as in the case in which the owner authorizes a particular type of procedure and any bank in the collection chain acts pursuant to such authorization. It may be with respect to a single item; or to all items handled for a particular customer, e.g., a general agreement between the depositary bank and the customer at the time a deposit account is opened. Legends on deposit tickets, collection letters and acknowledgments of items, coupled with action by the affected party constituting acceptance, adoption, ratification, estoppel or the like, are agreements if they meet the tests of the definition of "agreement." See Section 1-201(3). First Nat. Bank of Denver v. Federal Reserve Bank, 6 F.2d 339 (8th Cir. 1925) (deposit slip); Jefferson County Bldg. Ass'n v. Southern Bank & Trust Co., 225 Ala. 25, 142 So. 66 (1932) (signature card and deposit slip); Semingson v. Stock Yards Nat. Bank, 162 Minn. 424, 203 N.W. 412 (1925) (passbook); Farmers State Bank v. Union Nat. Bank, 42 N.D. 449, 454, 173 N.W. 789, 790 (1919) (acknowledgment of receipt of item).
3. Subsection (a) (subject to its limitations with respect to good faith and ordinary care) goes far to meet the requirements of flexibility. However, it does not by itself confer fully effective flexibility. Since it is recognized that banks handle a great number of items every business day and that the parties interested in each item include the owner of the item, the drawer (if it is a check), all nonbank endorsers, the payor bank and from one to five or more collecting banks, it is obvious that it is impossible, practically, to obtain direct agreements from all of these parties on all items. In total, the interested parties constitute virtually every adult person and business organization in the United States. On the other hand they may become bound to agreements on the principle that collecting banks acting as agents have authority to make binding agreements with respect to items being handled. This conclusion was assumed but was not flatly decided in Federal Reserve Bank of Richmond v. Malloy, 264 U.S. 160, at 167, 44 S.Ct. 296, at 298, 68 L.Ed. 617, 31 A.L.R. 1261 (1924).
To meet this problem subsection (b) provides that official or quasi-official rules of collection, that is Federal Reserve regulations and operating circulars, clearing-house rules, and the like, have the effect of agreements under subsection (a), whether or not specifically assented to by all parties interested in items handled. Consequently, such official or quasi-official rules may, standing by themselves but subject to the good faith and ordinary care limitations, vary the effect of the provisions of Article 4.
Federal Reserve regulations. Various sections of the Federal Reserve Act ( 12 U.S.C. § 221 et seq.) authorize the Board of Governors of the Federal Reserve System to direct the Federal Reserve banks to exercise bank collection functions. For example, Section 16 ( 12 U.S.C. § 248(o)) authorizes the Board to require each Federal Reserve bank to exercise the functions of a clearing house for its members and Section 13 ( 12 U.S.C. § 342) authorizes each Federal Reserve bank to receive deposits from nonmember banks solely for the purposes of exchange or of collection. Under this statutory authorization the Board has issued Regulation J (Subpart A - Collection of Checks and Other Items). Under the supremacy clause of the Constitution, federal regulations prevail over state statutes. Moreover, the Expedited Funds Availability Act, 12 U.S.C. Section 4007(b) provides that the Act and Regulation CC, 12 CFR 229, supersede "any provision of the law of any State, including the Uniform Commercial Code as in effect in such State, which is inconsistent with this chapter or such regulations." See Comment 1 to Section 4-102.
Federal Reserve operating circulars. The regulations of the Federal Reserve Board authorize the Federal Reserve banks to promulgate operating circulars covering operating details. Regulation J, for example, provides that "Each Reserve Bank shall receive and handle items in accordance with this subpart, and shall issue operating circulars governing the details of its handling of items and other matters deemed appropriate by the Reserve Bank." This Article recognizes that "operating circulars" issued pursuant to the regulations and concerned with operating details as appropriate may, within their proper sphere, vary the effect of the Article.
Clearing-House Rules. Local clearing houses have long issued rules governing the details of clearing; hours of clearing, media of remittance, time for return of mis-sent items and the like. The case law has recognized these rules, within their proper sphere, as binding on affected parties and as appropriate sources for the courts to look to in filling out details of bank collection law. Subsection (b) in recognizing clearing-house rules as a means of preserving flexibility continues the sensible approach indicated in the cases. Included in the term "clearing houses" are county and regional clearing houses as well as those within a single city or town. There is, of course, no intention of authorizing a local clearing house or a group of clearing houses to rewrite the basic law generally. The term "clearing-house rules" should be understood in the light of functions the clearing houses have exercised in the past.
And the like. This phrase is to be construed in the light of the foregoing. "Federal Reserve regulations and operating circulars" cover rules and regulations issued by public or quasi-public agencies under statutory authority. "Clearing-house rules" cover rules issued by a group of banks which have associated themselves to perform through a clearing house some of their collection, payment and clearing functions. Other agencies or associations of this kind may be established in the future whose rules and regulations could be appropriately looked on as constituting means of avoiding absolute statutory rigidity. The phrase "and the like" leaves open possibilities for future development. An agreement between a number of banks or even all the banks in an area simply because they are banks, would not of itself, by virtue of the phrase "and the like," meet the purposes and objectives of subsection (b).
4. Under this Article banks come under the general obligations of the use of good faith and the exercise of ordinary care. "Good faith" is defined in Section 3-103(a)(4). The term "ordinary care" is defined in Section 3-103(a)(7). These definitions are made to apply to Article 4 by Section 4-104(c). Section 4-202 states respects in which collecting banks must use ordinary care. Subsection (c) of Section 4-103 provides that action or non-action approved by the Article or pursuant to Federal Reserve regulations or operating circulars constitutes the exercise of ordinary care. Federal Reserve regulations and operating circulars constitute an affirmative standard of ordinary care equally with the provisions of Article 4 itself.
Subsection (c) further provides that, absent special instructions, action or non-action consistent with clearing-house rules and the like or with a general banking usage not disapproved by the Article, prima facie constitutes the exercise of ordinary care. Clearing-house rules and the phrase "and the like" have the significance set forth above in these Comments. The term "general banking usage" is not defined but should be taken to mean a general usage common to banks in the area concerned. See Section 1-205(2). In a case in which the adjective "general" is used, the intention is to require a usage broader than a mere practice between two or three banks but it is not intended to require anything as broad as a country-wide usage. A usage followed generally throughout a state, a substantial portion of a state, a metropolitan area or the like would certainly be sufficient. Consistently with the principle of Section 1-205(3), action or non-action consistent with clearing-house rules or the like or with banking usages prima facie constitutes the exercise of ordinary care. However, the phrase "in the absence of special instructions" affords owners of items an opportunity to prescribe other standards and although there may be no direct supervision or control of clearing houses or banking usages by official supervisory authorities, the confirmation of ordinary care by compliance with these standards is prima facie only, thus conferring on the courts the ultimate power to determine ordinary care in any case in which it should appear desirable to do so. The prima facie rule does, however, impose on the party contesting the standards to establish that they are unreasonable, arbitrary or unfair as used by the particular bank.
5. Subsection (d), in line with the flexible approach required for the bank collection process is designed to make clear that a novel procedure adopted by a bank is not to be considered unreasonable merely because that procedure is not specifically contemplated by this Article or by agreement, or because it has not yet been generally accepted as a bank usage. Changing conditions constantly call for new procedures and someone has to use the new procedure first. If this procedure is found to be reasonable under the circumstances, provided, of course, that it is not inconsistent with any provision of the Article or other law or agreement, the bank which has followed the new procedure should not be found to have failed in the exercise of ordinary care.
6. Subsection (e) sets forth a rule for determining the measure of damages for failure to exercise ordinary care which, under subsection (a), cannot be limited by agreement. In the absence of bad faith the maximum recovery is the amount of the item concerned. The term "bad faith" is not defined; the connotation is the absence of good faith (Section 3-103). When it is established that some part or all of the item could not have been collected even by the use of ordinary care the recovery is reduced by the amount that would have been in any event uncollectible. This limitation on recovery follows the case law. Finally, if bad faith is established the rule opens to allow the recovery of other damages, whose "proximateness" is to be tested by the ordinary rules applied in comparable cases. Of course, it continues to be as necessary under subsection (e) as it has been under ordinary common law principles that, before the damage rule of the subsection becomes operative, liability of the bank and some loss to the customer or owner must be established.
Tenn. Code Ann. § 47-9-627. Determination of whether conduct was commercially reasonable.
(a) Greater amount obtainable under other circumstances; no preclusion of commercial reasonableness. The fact that a greater amount could have been obtained by a collection, enforcement, disposition, or acceptance at a different time or in a different method from that selected by the secured party is not of itself sufficient to preclude the secured party from establishing that the collection, enforcement, disposition, or acceptance was made in a commercially reasonable manner.
(b) Dispositions that are commercially reasonable. A disposition of collateral is made in a commercially reasonable manner if the disposition is made:
(1) in the usual manner on any recognized market;
(2) at the price current in any recognized market at the time of the disposition; or
(3) otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.
(c) Approval by court or on behalf of creditors. A collection, enforcement, disposition, or acceptance is commercially reasonable if it has been approved:
(1) in a judicial proceeding;
(2) by a bona fide creditors' committee;
(3) by a representative of creditors; or
(4) by an assignee for the benefit of creditors.
(d) Approval under subsection (c) not necessary; absence of approval has no effect. Approval under subsection (c) need not be obtained, and lack of approval does not mean that the collection, enforcement, disposition, or acceptance is not commercially reasonable.
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