Approved Mortg. Corp. v. Truist Bank

106 F.4th 582

APPROVED MORTGAGE CORPORATION, Plaintiff-Appellant, v. TRUIST BANK, formerly known as SunTrust Bank, Defendant-Appellee.

No. 22-3163

United States Court of Appeals, Seventh Circuit

Argued September 20, 2023

Decided June 28, 2024

Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 1:22-cv-00633 — Jane Magnus-Stinson, Judge.

Paul Delmar Vink, Seema Shah, Attorneys, Bose McKinney & Evans, LLP, Indianapolis, IN, for Plaintiff-Appellant.

Darren A. Craig, Cameron Trachtman, Attorneys, Frost Brown Todd LLP, Indianapolis, IN, for Defendant-Appellee.

Before Ripple, Jackson-Akiwumi, and Lee, Circuit Judges.

Ripple, Circuit Judge.

Before Approved Mortgage Corporation ("Approved Mortgage") could initiate two wire transfers, the instructions for the transactions were altered surreptitiously by a third party. Truist Bank ("Truist"), formerly known as SunTrust Bank, ultimately received the transfers, deposited the funds into an account it previously had flagged as suspicious, and then allowed the withdrawal of a half-million dollars in cashier's checks from that account.

With the funds unrecoverable, Approved Mortgage brought this action against Truist, seeking damages in the amount of the transfers. Approved Mortgage asserted two claims under Section 207 of Article 4.1 of the Indiana Uniform Commercial Code ("UCC"), which governs the rights, duties, and liabilities of banks and their customers with respect to electronic funds transfers. It also asserted a common law negligence claim. The district court dismissed the Section 207 claims for lack of privity between Approved Mortgage and Truist. The court dismissed the negligence claim as preempted by Article 4.1.¹

Approved Mortgage's Section 207 claims were properly dismissed. Section 207 does not establish an independent remedy. It must be read with Section 402 and, under Section 402, a sender is entitled to a refund only from the bank which received its payment. The district court erred, however, in its dismissal of Approved Mortgage's negligence claim. To the extent that the negligence claim arises from Truist's issuance of the cashier's checks after Truist credited the funds to the suspicious account, the claim is not preempted by Article 4.1.

We therefore affirm in part and reverse in part the judgment of the district court. The case is remanded to the district court for further proceedings consistent with this opinion.

IBACKGROUND

A.

Because this case comes to us from the district court's grant of a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, we present the facts as alleged in Approved Mortgage's amended complaint.

Approved Mortgage is a mortgage originator that provides loans to residential and commercial customers. In the summer of 2021, Approved Mortgage received payoff requests from two of its customers. These customers directed, in both situations, that the payments be made to Huntington Mortgage Company ("Huntington"). Before Approved Mortgage acted on these requests, however, the instructions for both payoffs were altered by unknown perpetrators who had accessed illegally Approved Mortgage's system. These hackers had modified the wire instructions to substitute SunTrust Bank, Truist's former name, as the beneficiary instead of Huntington.

Approved Mortgage therefore unwittingly provided these altered wire instructions to MVP National Title Company ("MVP Title") when it sought to fulfill the payoff requests. MVP Title then initiated funds transfers by sending payment orders with the altered wire instructions to its bank, BankUnited.

Following these instructions, BankUnited sent payment orders to Truist in the amount of $217,108.33 on July 30, 2021, and in the amount of $333,536.65 on August 4, 2021. Truist accepted the transfers and applied the funds to an account at Truist matching the account number on the altered wire instructions. This account, which belonged to AER Operations, LLC ("AER Operations"), did not match the other information provided in these instructions. The instructions identified Truist, not AER Operations, as the transfer's beneficiary. The AER Operations account listed an address in Tillamook, Oregon, rather than the Columbus, Ohio, address given in the instructions.

This situation was not the first sign of suspicious activity connected to the AER Operations account. Less than two weeks earlier, on July 22, 2021, Truist had stopped a wire transfer of $116,306.51 intended for the same account on suspicion of fraud or other irregularity.

On August 9, 2021,² Arthur Rubiera, AER Operations's registered agent, traveled from his home in Oregon to a Memphis, Arkansas, branch of Truist. Despite Truist's past concerns with the AER Operations account and the other indicia of suspicious activity, Truist employees provided Rubiera with $546,658 in cashier's checks drawn from the AER Operations account. Rubiera then distributed the cashier's checks to other parties who converted the funds into cryptocurrency.

Because the wired funds never reached Huntington, Approved Mortgage paid off the two customers' mortgages with its own funds. MVP Title, the originator of the funds transfers, assigned to Approved Mortgage any claims it might have against Truist.

B.

In 2022, Approved Mortgage brought this action against Truist in Indiana state court. Truist subsequently removed the case to the United States District Court for the Southern District of Indiana, asserting diversity of citizenship.

Once in federal court, Approved Mortgage filed an amended complaint bringing three distinct claims. The first two of these claims were brought under Article 4.1 of the Indiana UCC, Indiana's adoption of Article 4A of the UCC. The first claim alleged that Truist had violated Indiana Code § 26-1-4.1-207(a) by accepting payment orders which referred to a nonexistent or unidentifiable account. The second claim alleged that Truist violated Indiana Code § 26-1-4.1-207(b)(2) by accepting the payment orders despite knowing that the beneficiary's name and beneficiary's account number identified different persons. In both, Approved Mortgage asserted that, either in its own capacity or as MVP Title's assignee, it was entitled to a refund of the misapplied funds under Indiana Code § 26-1-4.1-402(d) and that Approved Mortgage suffered damages as a result of the transfers.

Approved Mortgage's third claim alleged common law negligence. Approved Mortgage alleged that Truist breached its duty to act with ordinary care, to use sound banking practices, and to act in a commercially reasonable manner when it failed to flag the AER Operations account as suspicious before the funds transfers occurred and when it allowed Rubiera to withdraw the funds from the account despite the indicia of suspicious activity.

In its Rule 12(b)(6) motion to dismiss this amended complaint, Truist submitted that both Section 207 claims failed because neither Approved Mortgage nor MVP Title were in privity with Truist. It further contended that Approved Mortgage's negligence claim could not proceed because it was preempted by Article 4.1 and alternatively that Truist owed Approved Mortgage no duty of care under Indiana law.

The district court granted Truist's motion to dismiss all three of Approved Mortgage's claims with prejudice. The district court determined that privity was required for Approved Mortgage's Section 207 claims. It reasoned that Section 207 identifies circumstances in which the acceptance of a funds transfer cannot occur. It also noted, however, that Section 207 does not provide a remedy when funds are nevertheless transferred despite the strictures of Section 207. Approved Mortgage therefore must look to the refund provision of Section 402(d) for its remedy. Then, relying on both the plain language of Section 402(d) and the reasoning of the Court of Appeals for the Second Circuit in Grain Traders, Inc. v. Citibank, N.A., 160 F.3d 97 (2d Cir. 1998), the district court determined that Section 402(d) only obligates a receiving bank to refund the sender from which it received the payment. Applying this privity requirement, the district court concluded that Approved Mortgage, as MVP Title's assignee, had no valid Section 402(d) refund remedy (and therefore no Section 207 claims) against Truist; BankUnited, not Truist, was the receiving bank of the payment orders sent by MVP Title.

Finally, the district court concluded that the negligence claim was preempted because "the harm of which Approved Mortgage complains is in reality a direct result of Truist's acceptance of the wire transfers and the resulting payment of funds to AER Operations," and the "acceptance of wire transfers and liability for losses associated with wire transfers is expressly addressed in the UCC." Approved Mortg. Corp. v. Truist Bank, 638 F. Supp. 3d 941, 953 (S.D. Ind. 2022). The district court did not address whether Truist owed Approved Mortgage a duty of care under Indiana law. Approved Mortgage timely appealed.

IIDISCUSSION

We review the grant of a Rule 12(b)(6) motion to dismiss de novo, accepting as true the complaint's well-pleaded allegations and drawing all reasonable inferences in the plaintiff's favor. Chaidez v. Ford Motor Co., 937 F.3d 998, 1004 (7th Cir. 2019).

Approved Mortgage submits that the district court erred in holding that its Section 207 claims required privity. It also contends that its common law negligence claim is not preempted by Article 4.1.

Our "primary goal" when interpreting an Indiana statute "is to determine and follow the legislature's intent." Lake Imaging, LLC v. Franciscan All., Inc., 182 N.E.3d 203, 207 (Ind. 2022). "The best evidence of this intent is the statutory language itself, which, when given its plain and ordinary meaning, should apply 'in a logical manner consistent with the statute's underlying policy and goals.' " Id. (quoting Cubel v. Cubel, 876 N.E.2d 1117, 1120 (Ind. 2007)). We look...