Vip Mortgage Corp.. v. Bank of Am.

769 F.Supp.2d 20

VIP MORTGAGE CORPORATION, Plaintiff,

v.BANK OF AMERICA, N.A., Defendant,andTD Bank, N.A., Defendant.

Civil Action No. 08cv10562–NG.

United States District Court, D. Massachusetts.

Feb. 11, 2011.

Bradford E. Keene, The Law Offices of Bradford Eliot Keene P.C., Robert S. Wolfe, Robert Wolfe Associates, PC, Lynnfield, MA, for Plaintiff.Charles P. Kindregan, Looney & Grossman, Boston, MA, for Defendant.

MEMORANDUM AND ORDER RE: MOTIONS FOR SUMMARY JUDGMENT

NANCY GERTNER, District Judge.

Plaintiff VIP Mortgage (“VIP”) is a mortgage origination company that is no longer in business. Pl.'s Statement of Facts (“SOF”) ¶ 1 (document # 73); Def. SOF ¶ 2 (document # 70). It alleges that between April of 2005 and February of 2006, Mark Rhodes (“Rhodes”), the manager of its Stratford, Connecticut, branch office, deposited checks that were the property of VIP in the total amount of approximately $377,191.73 into an account that he created for this purpose. Pl.'s SOF ¶ 39. He had opened the sole proprietorship account in the name of Mark Rhodes dba (“doing business as”) VIP Mortgage without proper documentation at Hudson United Bank which has since been acquired by the defendant, TD Bank (“Bank”). Id. ¶ 12, 21. The Bank was later notified that Rhodes was a suspect in another check fraud scheme, and it issued a security report in August of 2005 that indicated fraud in his accounts. Id. ¶ 44–47. The Bank closed Rhodes' dba VIP account six months later but never notified VIP of any suspicious activity.

VIP now seeks to hold TD Bank liable for this fraud and brings claims against the Bank for negligence under the common law and the Uniform Commercial Code (“UCC”), conversion, civil conspiracy, and violations of the Connecticut Unfair Trade Practices Act (“CUTPA”). The matter is presently before the court on the parties' cross-motions for summary judgment. See Def.'s Mot. Summ. J. (document # 68); Pl.'s Mot. Partial Summ. J. (document # 71). For the reasons that follow, I GRANT in part and DENY in part Defendant's Motion for Summary Judgment; and I DENY Plaintiff's Motion for Summary Judgment.

I. BACKGROUND

On April 4, 2005, Rhodes opened an account at Hudson United Bank in the name of “Mark Rhodes dba VIP Mortgage.” Pl.'s SOF ¶ 12. At the time, he already had two accounts at the Bank, and his sister, Alicia Sadie (“Sadie”), was an employee there. Id. ¶ 10. Sadie in fact opened the account on his behalf. Id. ¶ 13. She did not demand, nor did he provide, a dba certificate as required by bank policy. Id. ¶ 17, 21, 30. See also Bank Policies, Pl.'s SOF, Ex. 12, 1169, 1198, 1006, 1015, 1210, 1211 (filed under seal). VIP Mortgage itself had no other dealings with Hudson United Bank. Def.'s SOF ¶ 34.

Between April 4, 2005 and February 10, 2006, Rhodes deposited a total of 52 checks that were payable to “VIP Mortgage” or “VIP Mortgage Corp.” into this account. Pl.'s SOF ¶ 37–40. He endorsed the checks with either his dba account number, a statement “for deposit only,” or a stamp stating “Pay to the Order of Hudson United Bank West Haven, CT, 06516–4408 021201503 for Deposit Only, Mark L. Rhodes dba VIP Mortgage.” Id. ¶ 38.

On August 23, 2005, the State of Connecticut served a search warrant on the Bank regarding checks of another mortgage company that had been deposited into personal accounts of Rhodes. Id. ¶ 44. In response, Hudson Bank issued an Internal Security Incident Report on August 25. The Report states:

The suspect is being investigated for depositing checks payable to other businesses/individuals into his account and most of the transactions have been done within the three year return possibility on forged endorsements. It seems that the suspect was able to, as indicated in the warrant, deposit these checks into his accounts with ease and I find that this is unusual as most experienced tellers will not accept checks payable to other businesses/individuals to be deposited into a wrongful account.

....

It should be noted that there were numerous other questionable deposits made to these accounts at HUB Stratford ... and the branch manager was notified to have their personnel scrutinize each of his deposits and not accept any items for deposit that are not payable to his accounts. Stratford Manager reports that he was able to determine that a Rhodes Account (ZIP Mortgage) [sic] is receiving large deposits which are being transferred into one of his personal accounts.

Security Incident Report, Pl.'s SOF, Ex. 18, at 2–3.

This report was forwarded to the Legal Department and Regional Managers, but the Bank otherwise conducted no further investigation. Pl.'s SOF ¶ 56. After the report, the Bank continued to accept for deposit into the Mark L. Rhodes dba account checks payable to VIP Mortgage Corporation and VIP Mortgage. Id. ¶ 65. The Bank finally closed the Rhodes dba VIP Mortgage account in February of 2006, six months after the incident report. Id. ¶ 64.

The fraud continued. After Hudson United Bank closed his account, Rhodes opened “Mark Rhodes dba VIP Mortgage” accounts at Bank of America, where he deposited thirty-three checks payable to VIP Mortgage Corporation and VIP Mortgage, totaling $185,372.61. Id. ¶ 85, 88. It was not until May of 2006 that VIP discovered the fraud when the State of Connecticut searched VIP Mortgage's offices in Stratford, CT and found seventy loan files and financial documents indicating illegal activity. Id. ¶ 90. VIP finally fired Rhodes on May 10, 2006. Id. ¶ 91.

The Defendant, in turn, presents evidence to suggest that VIP Mortgage should have known that Rhodes was of suspect character. He had previously been convicted of a cocaine conspiracy and had changed his name from Sadie to Rhodes. Def.'s SOF ¶ 18. He had lied on the application for a name change and said that he had not been convicted of any crime. Id. ¶ 19–20. He was subject to garnishment orders for unpaid child support obligations in Georgia. Id. ¶ 23. He also had a large federal tax lien against him, and that lien was growing. Id. ¶ 21. The defendant alleges that VIP was aware of all of these facts and yet hired him and continued his employ. Id. ¶ 24. They did not check his references. Id. ¶ 17. They did, however, check the references of Rhodes' associate, whom he brought with him from his former employer. The reference stated that she had been fired for “embezzlement.” When VIP asked Rhodes about this fact, he stated that the employer was “just upset.” And VIP hired her anyway. Id. ¶ 15–16 (document # 70).

In March of 2006, an anonymous caller who called himself “Deep Throat” called VIP's principal, Gregory Deschenes, and told him that Rhodes was taking VIP checks and depositing them in his own bank accounts. Deschenes did not confront Rhodes or investigate further. Id. ¶ 27.

II. DISCUSSION

Summary judgment is appropriate only when all of the pleadings and supporting documents, viewed in a light most favorable to the non-moving party, present no genuine issue of material fact, and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). Upon a motion by the defendant, the court may grant summary judgment where the plaintiff fails to bring proof of an element essential to its case. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A plaintiff who moves for summary judgment has a higher burden. The court may grant summary judgment to the plaintiff only where the evidence is conclusive and no reasonable fact-finder could find otherwise. Scottsdale Ins. Co. v. Torres, 561 F.3d 74, 77 (1st Cir.2009).

When a federal court sits in diversity, it is to apply the substantive law of the state in which the injury occurred, or Connecticut in this case. See generally Cohen v. McDonnell Douglas Corp., 389 Mass. 327, 333, 450 N.E.2d 581 (Mass.1983).¹ To apply Connecticut law, I am to make my “best guess” as to what the Supreme Court of Connecticut might decide. See Liberty Mut. Ins. Co. v. Metro. Life Ins. Co., 260 F.3d 54, 65 (1st Cir.2001).

In this case, the plaintiff brings the following claims against TD Bank:

i. Violations of the common law and UCC for failing to exercise ordinary care in opening the dba account; accepting checks for deposit payable to VIP; and failing to close Rhodes' account after detecting fraud.² (Count I)

ii. Civil conspiracy for willful, wanton and reckless disregard of verification obligations. (Count III)

iii. Violations of CT Unfair Trade Practices (“CUTPA”)—engaging in “unfair or deceptive acts or practices in the conduct of any trade or commerce” in violation of Conn. Gen.Stat. § 42–110b(a). (Count V)

The plaintiff has moved for summary judgment on the first claim; and defendant has moved for summary judgment on all of the claims. I will consider each claim in turn.

A. Negligence

The plaintiff brings negligence claims against the Bank for i) wrongfully opening the dba account without a certificate; ii) accepting checks payable to VIP Mortgage for deposit in Rhodes' dba account; and iii) failing to terminate the account for six months after it became aware that Mr. Rhodes was committing fraud through the Bank. The second negligence claim—for unauthorized endorsements—is preempted and governed by the UCC. See Conn. Gen.Stat. § 42a–3–405(b). The first and third claims, however, arise under general common law negligence.

1. UCC—Fraudulent Endorsements

The UCC, as adopted in Connecticut, covers fraudulent endorsements in an employer/employee relationship. See Conn. Gen.Stat. § 42a–3–405. According to the statute,

“Fraudulent endorsement” means (I) in the case of an instrument payable to the employer, a forged endorsement purporting to be that of the employer, or (ii) in the case of an instrument with respect to which the employer is the issuer, a forged endorsement purporting to be that of the person identified as payee.

Conn. Gen.Stat. § 42a–3–405(a)(2). The first scenario (I) is the type of fraud in which Rhodes was engaged....