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#2211 signed 4-3-96



In Re:



CASE NO. 92-41602-7







ADV. NO. 93-7130



This proceeding is before the Court on cross-motions for summary judgment. Defendant Capital City State Bank and Trust (the Bank), the successor to Southwest Bank & Trust, seeks summary judgment on both counts of the complaint. Steven J. Martens, the chapter 7 trustee in this case, filed the two-count complaint and seeks summary judgment on count 1. The trustee is represented by Ann Lamborn Baker of Wright, Henson, Somers, Sebelius, Clark & Baker of Topeka, Kansas, and Edward J. Nazar of Redmond, Redmond & Nazar of Wichita, Kansas. The defendant is represented by Gary H. Hanson of Stumbo, Hanson & Hendricks of Topeka, Kansas.


Debtor Homestead Land Title Company (Homestead) sold title insurance and provided escrow and closing services for buyers and sellers of real property before it filed for bankruptcy on August 28, 1992. Homestead was an agent and fiduciary for the closing and escrow customers who deposited money with the company for purposes of buying and selling real estate. Prepetition, Homestead had four deposit accounts at Southwest Bank & Trust (Southwest). With money from one of these accounts, it bought two certificates of deposit (c.d.'s) and then pledged them as collateral for loans it had with Southwest. The trustee contends all the money in that account belonged to escrow customers, not to Homestead, and that Southwest knew or should have known this was so. The Bank concedes that Homestead deposited money from escrow customers into the account but denies all the money in it belonged to escrow customers. In the event the trustee succeeds in proving that all the money belonged to escrow customers, the Bank also denies that Southwest knew or should have known this fact. After Homestead filed a chapter 11 bankruptcy, with no objection from the debtor-in-possession, the Court granted Southwest stay relief to apply the two c.d.'s and other collateral against Homestead's debts to it. In Count I of his complaint, the trustee seeks to recover the amount of the two c.d.'s from the Bank.

Three of Homestead's accounts at Southwest required two signatures to authorize transfers from the accounts. Nevertheless, Southwest often honored one-signature checks drawn on the accounts or honored one-person requests to make other transfers. Southwest routinely sent Homestead monthly statements along with cancelled checks and transfer tickets. Before it filed for bankruptcy, Homestead never complained to Southwest about the transfers instigated by a single person. The Bank contends that Homestead ratified Southwest's honoring of one-person transfers because Homestead was a family business and its president-owner established a course of dealing that led Southwest to believe one-person transfers were authorized despite the corporate resolution requiring two signatures for transfers. The Bank does concede that Southwest employees often contacted Homestead to seek another signature or approval for a transfer. Sometime after these events occurred, Southwest merged with the Bank.

The trustee commenced this proceeding on September 3, 1993, about one year after Homestead filed for bankruptcy. Count II of the complaint asserts that, as Southwest's successor, the Bank is strictly liable for all the one-person transfers. The trustee has since discovered, and contends, that although Southwest apparently always transferred the money to the named payee or transferee, some of the transfers were made to a payee or transferee who was not a creditor of Homestead; some of these transfers were made to pay personal obligations of Homestead's president, and others improperly moved money belonging to closing and escrow customers into Homestead's operating account. Such transfers, the trustee alleges, damaged Homestead.


Federal Rule of Civil Procedure 56, governing grants of summary judgment, is made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7056. Rule 56 provides that this Court must grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." In considering a motion for summary judgment, the Court must examine all the evidence in the light most favorable to the party against whom summary judgment is sought. Summary judgment is inappropriate if an inference can be deduced from the facts which would allow the nonmovant to prevail. The court must consider factual inferences tending to show triable issues in the light most favorable to the existence of those issues. Where different ultimate inferences may properly be drawn, summary judgment should be denied. United States v. O'Block, 788 F.2d 1433, 1435 (10th Cir. 1986).

A. Count I - Recovery of Proceeds of Certificates of Deposit

The Bank contends that, under the trustee's allegations, the two c.d.'s were not property of Homestead's bankruptcy estate, and the trustee has no standing to avoid Homestead's transfer of them. For the first point, it relies on a Tenth Circuit case involving a suit to recover money the debtor had overcharged someone. Turley v. Mahan & Rowsey, Inc. (Mahan & Rowsey, Inc.), 817 F.2d 682 (10th Cir. 1987). Affirming the lower courts' conclusion the debtor held the money in constructive trust for the plaintiff, the Circuit declared the money subject to the constructive trust never became property of the bankruptcy estate, citing 11 U.S.C.A. §541(a)(1) and (c)(2). Id. at 684. For the second point, the Bank relies on cases which, premised on Moore v. Bay (In re Sassard & Kimball, Inc.), 284 U.S. 4 (1931), hold that a trustee may avoid transfers only to recover property distributable in equal dividends on all allowed unsecured claims.

The Bank's arguments would be more significant if, as between Homestead and the Bank, Homestead had not been the legal owner of the c.d.'s when it filed for bankruptcy. After filing for bankruptcy, Homestead continued to operate its business as authorized by §1108. As with all debtors-in-possession, the Bankruptcy Code imposed on Homestead a duty to be accountable for all property it received. §1106(a)(1) and §704(2). In addition, due to the nature of its business, Homestead had a continuing fiduciary duty to its customers to properly account for their money. If the trustee is correct that both c.d.'s were purchased with money which belonged to Homestead's customers, then Homestead's acquiescence in Southwest's stay relief motion violated these duties. If Southwest knew the money belonged to Homestead's customers, Southwest helped Homestead violate its duties to its customers, and a constructive trust should be imposed on the money in the Bank's hands. See Merrill v. Abbott (In re Independent Clearing House Co.), 41 B.R. 985, 1000 (Bankr.D.Utah 1984). Had Homestead or Southwest informed the Court the c.d.'s were purchased with Homestead's customers' money, stay relief would of course have been denied. In essence, through §544(b), the trustee is trying to recover money so it can be distributed to its rightful owners, as Homestead should have distributed it in the first place. The Bank's motion for summary judgment on Count I must be denied.

The trustee's motion for summary judgment is based on the assertion that there is no factual dispute that Southwest knew or should have known that Homestead used its customers' money to purchase the c.d.'s and so lacked authority to grant Southwest a security interest in them and allow Southwest to obtain unopposed stay relief. The Bank responds that, although its motion was based on the theory the trustee could not recover even if Southwest had such knowledge, it does not concede that Southwest did in fact have knowledge. There is some evidence to support the trustee's assertions, but inferences must be drawn from the evidence to reach any conclusion regarding Southwest's knowledge. The evidence submitted also permits reasonable inferences that lead to the conclusion Southwest did not have the requisite knowledge. Consequently, the trustee's motion must also be deneid.

B. Count II - One-Person Transfers

The Bank raises several defenses to the trustee's claims to recover the amounts Southwest transferred from Homestead's accounts upon the authorization of one person: (1) some of the transfers are barred by a one-year limit fixed by K.S.A. 1995 Supp. 84-4-406; (2) the trustee erroneously seeks recovery on a theory of strict liability, and Homestead suffered no damage from Southwest's action; and (3) Homestead ratified Southwest's honoring of one-person transfers. The Court will address these contentions in turn.

K.S.A. 1995 Supp. 84-4-406 provides in pertinent part:

(f) Without regard to the care or lack of care of either the customer or the bank a customer who does not within one year after the statement or items are made available to the customer (subsection (a)) discover and report the customer's unauthorized signature . . . is precluded from asserting against the bank the unauthorized signature.

(This statute was amended by L. 1991, ch. 296, §105, eff. Feb. 1, 1992, but the Court believes the amendment made no changes affecting the Bank's argument.) The trustee contends this provision constitutes a statute of limitation which is extended by §108(a) of the Bankruptcy Code. However, the Kansas Comment to the prior version of this subsection states: "It should be emphasized that these limits are not statutes of limitation for the filing of lawsuits, but are periods within which the customer must initially report the problem to the drawee bank." As such, the provision falls with §108(b) rather than (a). Section 108(b) provides:

Except as provided in subsection (a) of this section, if applicable nonbankruptcy law . . . fixes a period within which the debtor . . . may file any pleading, demand, notice, or proof of claim or loss, cure a default, or perform any other similar act, and such period has not expired before the date of the filing of the petition, the trustee may only file, cure, or perform, as the case may be, before the later of--

(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or

(2) 60 days after the order for relief.

The filing of this adversary proceeding was, so far as the materials presented indicate, the first notice the Bank had from Homestead or its representative of the problem with the one-person transfers. The proceeding was filed more than 60 days after the order for relief, so the trustee's claims are covered by §108(b)(1). The Court is aware of nothing that would have suspended the running of the time period fixed by K.S.A. 1995 Supp. 84-4-406(f) when Homestead filed for bankruptcy. The parties agreed Southwest routinely sent Homestead monthly statements with cancelled checks and transfer tickets; these monthly statements would have satisfied K.S.A. 1995 Supp. 84-4-406(a) and started the running of the one-year period under 84-4-406(f). Consequently, Count II of the trustee's complaint is barred for any transfers reported on monthly statements made available to Homestead more than one year before September 3, 1993. The materials provided do not enable the Court to identify any more specifically the transfers covered by this conclusion.

The Court agrees with the Bank that Southwest's improper honoring of one-person transfers does not give rise to liability for all amounts so transferred, but only to the extent Homestead suffered damages. See Hall v. Mid-Century Ins. Co. 248 Kan. 847, 851-52 (1991) (bank not liable for depositing check without joint payee's endorsement where deposit did not damage payee). Nevertheless, the Bank has been made aware that the trustee contends Homestead did suffer damage as a result of at least some of the one-person transfers because they paid personal obligations of Homestead's president or moved customers' money into Homestead's operating account. The Court believes the trustee should now be given thirty days to amend his complaint to add allegations of any damages he contends Homestead suffered. The Bank may then object if it feels the amendment is prejudicial in some way.

The Bank cites only an Illinois and a Utah case to support its argument that Homestead ratified the honoring of one-person transfers by failing to complain about the practice. See Kores Carbon Paper & Ribbon Mfg. Co. v. Western Office Supply, 110 N.E.2d 461 (Ill. App. 1953); Movie Films, Inc., v. First Security Bank, 447 P.2d 38 (Utah 1968). The trustee responds that the Bank's theory is more accurately one of estoppel rather than ratification. The Court need not resolve this legal dispute at this time, but instead simply concludes the uncontroverted facts do not establish the Bank's theory. For example, the Bank has not established that any corporate officer other than Homestead's president knew that Southwest was honoring one-person transfers. In addition, the Bank concedes that Southwest often contacted Homestead to seek a second signature or authorization; thus, Southwest itself may not have believed the two-person requirement had been modified by the parties' course of dealing.

C. Conclusion

For these reasons, the Court concludes both motions for summary judgment on Count I must be denied. The Bank's motion for summary judgment on Count II is granted to the extent the monthly bank statements which reported one-person transfers were made available to Homestead more than one year before September 3, 1993, but is otherwise denied.


Dated at Topeka, Kansas, this _____ day of April, 1996.





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