Bmo Harris Bank N.A. v. Salin Bank & Trust Co.

442 F.Supp.3d 1075

BMO HARRIS BANK N.A., Plaintiff,

v.SALIN BANK AND TRUST COMPANY, Defendant.

No. 1:18-cv-03263-SEB-TAB

United States District Court, S.D. Indiana, Indianapolis Division.

Signed March 2, 2020

Jacob V. Bradley, Lucy Renee Dollens, Quarles & Brady LLP, Indianapolis, IN, for Plaintiff.

Darren Andrew Craig, Emily Schmale, Frost Brown Todd LLC, Indianapolis, IN, William T. Repasky, Pro Hac Vice, Frost Brown Todd LLC, Louisville, KY, for Defendant.

ORDER DENYING DEFENDANT'S MOTION FOR JUDGMENT ON THE PLEADINGS

SARAH EVANS BARKER, JUDGE

On October 23, 2018, Plaintiff BMO Harris Bank N.A. ("BMO Harris") initiated this lawsuit asserting common law claims for unjust enrichment, conversion, and replevin.¹ [Dkt. 1]. Defendant Salin Bank and Trust Company ("Salin") filed its answer on November 16, 2018. Now before us is Salin's Motion for Judgment on the Pleadings, pursuant to Federal Rule of Civil Procedure 12(c). [Dkt. 23]. For the reasons set forth herein, we DENY Salin's Motion for Judgment on the Pleadings.

Factual Background

BMO Harris's Complaint is based on the following alleged facts, taken as true for the purposes of this Order.

BMO Harris, a national banking organization, executed a construction loan agreement with its customer, North & Maple, LLC ("North & Maple"), for a construction project, on which Midwest Form Constructors, LLC ("Midwest") served as the general contractor. Compl. ¶¶ 6-7. Midwest maintained a bank account and borrowing relationship with Defendant Salin. Id. ¶ 8. BMO Harris repeatedly funded advances from its construction loan with North & Maple, directing the advances to Midwest's account at Salin for the benefit of North & Maple. The advances were to be used for the completion of North & Maple's construction project; they were not furnished for Midwest's individual benefits, debts, or obligations. Id. ¶¶ 9-10.

On March 12, 2018, Midwest and North & Maple notified BMO Harris that it was not to advance further loan proceeds to Midwest. Instead, BMO Harris was instructed to transfer all future proceeds to the agent of Midwest's bonding company, Atlas Funds Control, LLC ("Atlas") at a different bank. Id. ¶ 12. Consistent with this directive, on March 21, 2018, BMO Harris received directions from North & Maple to wire loan proceeds in the amount of $1,199.443.07 to Atlas. BMO initiated the wire transfer in the requested amount on March 23, 2018; however, it mistakenly wired the funds to Midwest's account at Salin. Id. ¶¶ 13-14.

That same day, Salin accepted the wire transfer and credited the funds into Midwest's bank account. Id. ¶ 15. Salin then withdrew $1.2 million from Midwest's account with the intent of applying the money as a credit on a loan between Midwest and Salin. Id. ¶ 18. Prior to Salin's completion of this set off, however, BMO Harris issued a recall request to Salin notifying Salin of the mistake and demanding that Salin return the improperly transferred funds to BMO Harris. Salin did not return the funds, instead completing its set off. Id. ¶¶ 19-20, 23.

Prior to the mistaken wire transfer, Salin knew Midwest was experiencing financial problems. Id. ¶ 11. Additionally, at the time it accepted the wire transfer, Salin knew or should have known that the transfer had to have been committed mistakenly because no significant deposits were expected as a consequence of Midwest's deteriorating financial condition. Id. ¶¶ 16-17. Salin nonetheless completed its set off of the transferred funds with the actual and/or constructive knowledge that the wire transfer was completed in error. Id. ¶ 18.

Analysis

I. Standard of Review

Federal Rule of Civil Procedure 12(c) permits a party to move for judgment after the pleadings are closed, but early enough not to delay trial. We review motions for judgment on the pleadings under the same standard by which we review motions to dismiss for failure to state a claim under Rule 12(b)(6). Buchanan-Moore v. County of Milwaukee , 570 F.3d 824, 827 (7th Cir. 2009). To survive a motion for judgment on the pleadings, "a complaint must state a claim to relief that is plausible on its face." Bishop v. Air Line Pilots Ass'n, Int'l , 900 F.3d 388, 397 (7th Cir. 2018). At minimum, a plaintiff is required to support its complaint with some specific facts. Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). In determining the sufficiency of a claim under this standard, the court considers all allegations in the nonmovant's pleading to be true and draws such reasonable inferences as required in the nonmovant's favor. Jacobs v. City of Chi. , 215 F.3d 758, 765 (7th Cir. 2000).

II. Discussion

Salin moves for judgment as a matter of law on the grounds that Article 4A of Indiana's Uniform Commercial Code (the "UCC") provides the exclusive source of rights and remedies for all financial institutions participating in the nation's wire transfer system. Because BMO Harris does not plead a claim under the UCC, Salin argues that BMO Harris's complaint must be dismissed. BMO Harris disagrees, asserting that, while Article 4A governs wire transfers generally, it does not provide the exclusive governing body of law for common law claims so long as they are not inconsistent with the provisions of Article 4A. Specifically, BMO Harris asserts that Article 4A is silent with respect to claims based on a theory that a beneficiary bank accepted funds with the actual or constructive knowledge that the transfer was done in error. In reply, Salin reiterates its contention that Article 4A preempts any and all common law claims related to the disputed wire transfer. It additionally asserts that if Article 4A does not exclusively govern this dispute, BMO Harris has not plausibly alleged that Salin "knew or should have known" the transfer was completed erroneously.

Before turning to the parties' respective arguments, we shall briefly review the statutory scheme which provides the relevant backdrop to the parties' dispute, that is, Article 4A of the UCC as enacted by Indiana. Ind. Code §§ 26-1-4.1-101 et seq.² Article 4A, as recognized in its Official Commentary,³ generally governs financial institutions participating in the modern funds transfer system. As explained therein:

A deliberate decision was also made to use precise and detailed rules to assign responsibility, define behavioral norms, allocate risk and establish limits on liability, rather than to rely on broadly stated, flexible principles; and Funds transfers involve competing interests—those of the banks that provide funds transfer services and the commercial and financial organizations that use the services, as well as the public interest. These competing interests were represented in the drafting process and they were thoroughly considered. The rules that emerged represent a careful and delicate balancing of those interests and are intended to be the exclusive means of determining the rights, duties and liabilities of the affected parties in any situation covered by particular provisions of the Article. Consequently, resort to principles of law or equity outside of Article 4A is not appropriate to create rights, duties and liabilities inconsistent with those stated in this Article.

Official Comment to § 4A-102.

Article 4A defines a "funds transfer" as:

[T]he series of transactions, beginning with the originator's payment order, made for the purpose of making payment to the beneficiary of the order. The term includes any payment order issued by the originator's bank or an intermediary bank intended to carry out the originator's payment order. A funds transfer is completed by acceptance by the beneficiary's bank of a payment order for the benefit of the beneficiary of the originator's payment order.

Ind. Code. § 26-1-4.1-104(a). The parties agree that, when the disputed wire transfer occurred, BMO Harris's customer, North & Maple, was both a "sender" and "originator," BMO Harris was the "originator's bank," Salin was both the "beneficiary's bank" and the "receiving bank," and Midwest was the "beneficiary." [Dkt. 23, at 8; Dkt. 30, at 4]. The parties further agree that the wire transfer, although issued mistakenly, was an "authorized order" pursuant to Article 4A,⁴ [Dkt. 30, at 14], which was accepted when Salin credited the funds to Midwest's bank account on March 23, 2018. Their agreement ends there.

Pursuant to these undisputed conditions, Salin argues that Article 4A provides the exclusive governing law for its rights and responsibilities upon acceptance of the funds. Specifically, Salin asserts that Section 211 of Article 4A provides the rules and remedies for a financial institution who mistakenly wire transfers money to another. Section 211 provides, in relevant part:

(a) A communication of the sender of a payment order canceling or amending the order may be transmitted to the receiving bank orally, electronically, or in writing[.]

(b) Subject to subsection (a), a communication by the sender canceling or amending a payment order is effective to cancel or amend the order if notice of the communication is received at a time and in a manner affording the receiving bank a reasonable opportunity to act on the communication before the bank accepts the payment order.

(c) After a payment order has been accepted, cancellation or amendment of the order is not effective unless the receiving bank agrees or a funds-transfer system rule allows cancellation or amendment without agreement of the bank.

Ind. Code § 26-1-4.1-211. Thus, says Salin, Section 211 provides the mechanisms by which the issuing bank may seek to recover the transferred funds. Pursuant to § 211(b), a recall notice such as the one issued by BMO Harris binds the receiving bank only if it is received before the receiving bank's acceptance of the transferred funds. Here, it is uncontested that Salin accepted the wire transfer prior to receiving the recall notice. In such circumstances, § 211(c) delineates three instances when the...