JOSEPH W. LINDLEY v. PADUCAH BANK & TRUST
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RENDERED:
OCTOBER 25, 2002; 10:00 a.m.
ORDERED PUBLISHED BY THE KENTUCKY SUPREME COURT:
September 10, 2003 (2002-SC-000990-D)
C ommonwealth O f K entucky
C ourt O f A ppeals
NO. 2001-CA-001765-MR
JOSEPH W. LINDLEY
v.
APPELLANT
APPEAL FROM MCCRACKEN CIRCUIT COURT
HONORABLE JEFF HINES, JUDGE
CIVIL ACTION NO. 00-CI-01306
PADUCAH BANK & TRUST
APPELLEE
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
EMBERTON, Chief Judge; DYCHE and HUDDLESTON, Judges.
HUDDLESTON, Judge:
Joseph W. Lindley appeals from a McCracken
Circuit Court judgment on the pleadings in favor of Paducah Bank &
Trust dismissing his complaint alleging that the bank was negligent
in failing to Aexercise good faith and use ordinary care@ in
handling the accounts of Lindley, Inc., a corporation Lindley and
his brother, Tommy Lindley, shared ownership of equally.
In his
complaint, Lindley further alleged that the failure of Paducah Bank
to
properly
manage
the
accounts
constitutes
a
breach
contract with Lindley, Inc. to which he is a beneficiary.
in
its
Lindley
also appeals from the court=s order denying his motion to alter,
amend or vacate the judgment against him.1
According to Kentucky Rules of Civil Procedure (CR)
12.03, any party may move for judgment on the pleadings after the
pleadings are closed Abut within such time as not to delay the
trial.@
However, A[i]f, on such motion, matters outside pleading
are presented to and not excluded by the court, the motion shall be
treated as one for summary judgment and disposed of as provided for
in [CR] 56, . . .@
Here, the motion filed by Paducah Bank was
entitled Amotion for judgment on the pleadings and/or motion for
summary judgment@; the court treated it as a motion for judgment on
the pleadings and we will review its judgment accordingly.2
the
purpose
of
testing
the
sufficiency
of
the
complaint
AFor
the
1
In its original order, the court mistakenly listed the
date of entry as March 25, 2001.
The court amended its prior
judgment to reflect the correct date, May 25, 2001, in its
subsequent order.
2
Lindley contends that his brother Tommy presented matters
outside the pleadings at several stages of the proceedings below,
presumes that the court considered those issues and, therefore,
argues that the motion should have been treated as a motion for
summary judgment. Although it is impossible to tell from the order
whether the court considered matters outside the pleadings, our
resolution of the instant case renders this issue moot and further
elaboration is unwarranted.
2
pleading
must
not
be
construed
against
allegations must be accepted as true.@3
the
pleader
and
the
Consistent with that
directive, the following factual summary is derived from the
complaint
and
represents
Lindley=s
version
of
the
events
in
question.
Lindley and Tommy formed Lindley, Inc. in 1992.
They
selected Peoples Bank & Trust as the bank for the corporation.
Lindley served as president of Lindley, Inc. which Abecame a
thriving
business
and
generated
owners, the only shareholders.
substantial
profits@
for
its
In early 1997, a dispute developed
between Lindley and Tommy concerning control of Lindley, Inc. and
litigation ensued with both brothers having legal representation.
During this period, Tommy removed corporate funds from Peoples Bank
without Lindley=s consent.
Tommy then opened two accounts at
Paducah Bank, a demand deposit account and an investment account,
in which he deposited the money.
On
October
30,
1997,
Lindley,
in
his
capacity
as
president of Lindley, Inc., sent a letter to Paducah Bank addressed
to its president, informing the bank that the aforementioned
accounts were opened without the necessary corporate approval and
requesting that the accounts be frozen.
It is undisputed that
Lindley did not procure a restraining order, injunction or other
process against Paducah Bank from a court of competent jurisdiction
or execute in favor of Paducah Bank, in form and with sureties
3
Pike v. George, Ky., 434 S.W.2d 626, 627 (1968).
3
acceptable to the bank, a bond indemnifying the bank.
An agent or
representative of Paducah Bank Aled [Lindley] to believe@ that the
accounts had been frozen as a result of his letter providing
Anotice
of
the
improprieties@
and
Arelied
he
upon@
that
representation.
Apparently,
Paducah
Bank
continued
to
allow
Tommy
unfettered access to the corporate accounts Adespite having actual
knowledge@ of the ongoing dispute between Lindley and Tommy until
March 30, 1999.
By letter of that date, counsel for Paducah Bank
notified both brothers and their respective counsel that it would
refuse to honor any drafts drawn on the corporate accounts that did
not appear to be issued in the ordinary course of business.
Ultimately, Lindley and Tommy resolved their dispute by entering
into a settlement agreement pursuant to which Tommy purchased
Lindley=s interest in Lindley, Inc.
alleges,
Aforced
to
accept
a
However, Lindley was, he
settlement@
that
awarded
him
significantly less than the Atrue value of his share@ of the
corporation because Paducah Bank permitted withdrawals from the
corporate
accounts
that
Aweakened
the
financial
position
of
Lindley, Inc.,@ causing the value of Lindley=s interest to decrease.
Lindley
subsequently
filed
a
complaint
alleging
two
causes of action against Paducah Bank, the first being a negligence
claim
and
the
second
characterized
as
a
breach
of
contract.
Specifically, Lindley claimed that the bank Aknew or should have
known that the corporate accounts were being misused and being used
4
without proper corporate authority”; Athe acts and omissions@ with
respect to these accounts Aconstitutes negligence under the law”;
as a direct and proximate result of this negligence, Lindley
suffered damages in excess of the minimum jurisdictional amount for
the circuit court, including Aa diminution in the value of his
share of Lindley, Inc. and Alosses attributable to the forced
settlement@; and the damages sustained by Lindley were Aknown by
Paducah Bank and/or were reasonably foreseeable.@
Next, Lindley alleged that the failure of Paducah Bank to
properly handle the accounts Aconstitutes a breach of the contract
between Paducah Bank and Lindley, Inc.@; Lindley was both a direct
beneficiary and a third-party beneficiary of the aforementioned
contract; as a direct and proximate result of that breach Lindley
suffered damages as described in relation to the negligence claim;
and the damages Lindley sustained as a result of the breach were
Aknown by Paducah Bank and/or were reasonably foreseeable.@
In response, Paducah Bank filed a motion for judgment on
the pleadings and/or summary judgment, citing the following grounds
in support thereof:
(1) Because Lindley did not comply with the mandatory
provisions of Kentucky Revised Statutes (KRS) 287.800,
Paducah Bank was not authorized to freeze the accounts;
(2) Lindley=s claims are derivative in nature and cannot
be maintained by him individually;
5
(3) Lindley neglected to name Lindley, Inc. as a party in
his complaint as required by CR 19; and
(4) Under CR 17, an action must be prosecuted by the
Areal party in interest,@ i.e., Lindley, Inc. as opposed
to Lindley.
In
his
response,
Lindley
refuted
these
contentions,
arguing that the existence of genuine issues of material facts
precluded
the
court
from
granting
Paducah
Bank=s
therefore, discovery should be allowed to proceed.
motion
and,
As set forth by
Lindley, those issues include: (1) whether Tommy breached his
fiduciary duty to Lindley; (2) whether Paducah Bank Aaided and
abetted@ Tommy in breaching that duty; (3) whether Paducah Bank
assured Lindley that the two corporate accounts had been frozen;
and (4) whether Lindley properly relied upon those assertions.
In an order entered on May 25, 2001, the court dismissed
the complaint against Paducah Bank with prejudice and ordered
Lindley to pay the costs of the action.
His subsequent motion to
alter, amend or vacate that judgment was denied in an order entered
on July 31, 2001.
It is those orders which precipitated the
current appeal.
CR 12.03 is the Kentucky counterpart of Federal Rule of
Civil Procedure 12(c); both have been construed as meaning Athat a
judgment on the pleadings can be granted only if, on the admitted
6
material facts, the movant is clearly entitled to a judgment.@4
Such a motion is to be determined solely on the pleadings and
relief must be denied if there is a material issue of fact.5
For
the purposes of a motion for judgment on the pleadings, the moving
party admits Anot only the truth of all of his adversary=s wellpleaded allegations of fact and fair inferences therefrom, but also
the untruth of all of his own allegations which have been denied by
his adversary.@6
Thus, the question presented is one of law
requiring an examination of the pleadings.
Applying those principles here, a careful review of the
pleadings reveals that the dispositive question is whether KRS
287.800 is applicable.
As the construction and application of
statutes is a matter of law, our review is de novo.7
In essence,
Lindley=s argument on appeal is that the court misapplied the law,
KRS 287.800, to the facts; this has also been recognized as an
issue which is reviewed de novo.8
If possible, a statute should be construed Aso as to
effectuate the plain meaning and unambiguous intent expressed in
4
Archer v. Citizens Fidelity Bank & Trust Co., Ky., 365
S.W.2d 727, 729 (1963).
5
Id.
6
Id.
7
Bob Hook Chevrolet Isuzu v. Commonwealth of Kentucky,
Transportation Cabinet, Ky., 983 S.W.2d 488, 490 (1998).
8
Id. at 491.
7
the law.@9
KRS 287.800, Recognition of adverse claim to a deposit,
provides as follows:
Notice to any bank doing business in the Commonwealth of
any adverse claim to a deposit standing on its books to
the credit of any person shall not be effective to cause
the bank to recognize the adverse claim unless the
adverse claimant shall either:
(1) Procure a restraining order, injunction, or
other appropriate process against the bank from a court
of competent jurisdiction, where the person to whose
credit the deposit stands is made a party to the action
and served with summons; or
(2) Execute to such bank, in form and with sureties
acceptable to it, a bond indemnifying the bank from any
and all liability, loss, damage, costs, and expenses, for
and on account of the payment of the adverse claim or the
dishonor of any check or other order of the person to
whose credit the deposit stands on the books of the bank.
Lindley argues that KRS 287.800 does not apply as it is
not an adverse claim against a deposit made at Paducah Bank that is
at issue here but the Aaiding and abiding a fiduciary (Tommy
Lindley) in an enterprise wherein the individual is bre[a]ching his
fiduciary relationship to the other shareholder”; his argument is
9
Id. at 492.
8
based on a faulty premise, namely that Adeposit@ encompasses only
individual transactions.
In an attempt to clarify his position,
Lindley emphasizes that it is the withdrawals from the accounts in
question
rather
than
the
deposits
to
them
which
are
of
significance, misunderstanding the term Adeposit@ as employed in the
present context.
Pursuant to KRS 287.900(d), a A>Deposit= has the meaning
accorded it in the Federal Deposit Insurance Act, as amended, and
regulations promulgated thereunder@ which is codified at 12 U.S.C.
secs. 1811 et seq.
Under the Act, a Adeposit@ is defined as:
the unpaid balance of money or its equivalent received or
held by a bank or savings association in the usual course
of business and for which it has given or is obligated to
give credit, either conditionally or unconditionally, to
a commercial, checking, savings, time, or thrift account,
or which is evidenced by its certificate of deposit,
thrift certificate, investment certificate, certificate
of indebtedness, or other similar name, or a check or
draft drawn against a deposit account and certified by
the bank or savings association, or a letter of credit or
a
traveler=s
check
on
which
the
bank
or
savings
association is primarily liable . . . .10
10
12 U.S.C. sec. 1813(l)(1) (2002). See Federal Deposit
Insurance Corporation v. Philadelphia Gear Corp., 476 U.S. 426, 106
S. Ct. 1931, 90 L. Ed. 2d 428 (1986).
9
In light of the foregoing, no credible argument can be
made that the term Adeposit,@ as referenced in KRS 287.800, is
subject to the narrow interpretation promoted by Lindley.
As there
is no dispute that Paducah Bank received Amoney or its equivalent@
from Lindley, Inc. which it Aheld@ in the Ausual course of business@
and was obligated to credit to the corporation=s accounts, the
question becomes whether Lindley=s claim was adverse to those
Adeposits.@
Adverse means A[o]pposed; contrary in resistance or
opposition to a claim, application or proceeding.11
An adverse
claim is defined as AAn alleged right of one person asserted
against the interest of another person.@12
By definition, then, in
asserting his alleged right to the funds contained in the Lindley,
Inc. accounts, i.e., deposits, Lindley was advancing a claim that
was contrary or Aadverse@ to the interests of the corporation as
evidenced by the language of his complaint.
In fact, his request
to freeze the accounts was in direct conflict with the instructions
of Lindley, Inc. and personifies an Aadverse@ action; the statute
applies.
Paducah Bank was left in the untenable position of having
to choose between competing claims for the same money with the
potential for liability existing regardless of its decision.
287.800 was enacted to resolve this dilemma.
11
Black=s Law Dictionary, p. 53 (6th Ed. 1990).
12
Id.
10
KRS
In French Bank of California v. First National Bank of
Louisville,13 this Court was faced with a situation which resembles
the current one.
French Bank mistakenly transferred money to First
National which innocently received it and made the deposit as
instructed.14
Ten days later, French Bank informed First National
of its error but failed to procure an injunction or court order or
execute a bond indemnifying First National from any liability as
mandated by KRS 287.800.15
As First National had Airrevocably
changed its position to its detriment once it credited the money to
the customer=s account@ since it would have been liable for damages
caused to the customer by wrongful dishonor, we found that First
National could not be required to make restitution.16
In so doing,
we observed that the enactment of KRS 287.800 a year earlier seemed
to have answered the question posed by adverse claims against
deposits.
Our reasoning is equally valid today:
Under the new statute, French Bank would have had to
obtain
a
court
order
or
execute
an
acceptable
indemnifying bond in order to withdraw or hold the
deposit.
established
The
Uniform
similar
Commercial
requirements
against negotiable instruments.
13
Ky. App., 585 S.W.2d 431 (1979).
14
Id.
15
Id.
16
Id. at 432.
11
Code
for
had
adverse
already
claims
KRS 355.3-603.
The
policy is sound, and with or without the new statute, it
is appropriate in this situation. * * * First National
could either ignore the claim, until protected, and incur
the wrath of French Bank, or honor the claim and subject
itself to damages by its customer for potential wrongful
dishonor, a no-win situation.
The protection was not
provided, and we agree with the trial court that the law
in this situation was for First National.
Many
states,
including
statutes similar to KRS 287.800.
sound modern banking.
California,
have
They are necessary for
They reaffirm the determination
that it is commercially inappropriate and impractical to
subject a bank to liability for wrongful dishonor because
of an adverse claim against the deposit, when the claim
is unaccompanied by sufficient indemnity, an injunction,
or court order.17
Contrary
to
Lindley=s
assertions, the
Lindley,
Inc.
accounts constitute deposits for the purposes of KRS 287.800, his
request to freeze those accounts is properly characterized as an
adverse claim according to its plain meaning and French Bank is
therefore
directly
on
point.
Accordingly,
Paducah
Bank
is
protected from liability as French Bank necessarily dictates the
outcome
17
here,
dispensing
with
the
Id. at 432-433.
12
need
to
address
Lindley=s
remaining arguments.
Because Lindley failed to comply with the
mandatory provisions of the governing statute, KRS 287.800, he
cannot now be heard to complain of the evil it was designed to
remedy.
The McCracken Circuit Court judgment is affirmed.
ALL CONCUR.
BRIEF FOR APPELLANT:
BRIEF FOR APPELLEE:
Dennis L. Null
LAW OFFICES OF NULL, THOMAS,
SAMSON & PAITSEL
Mayfield, Kentucky
James B. Brien, Jr.
Bryan E. Wilson
NEELY & BRIEN
Mayfield, Kentucky
13
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