Business Law

Estate of Bass v. Regions Bank, Inc. (11th Cir.) – Court affirmed ruling that the Georgia uniform commercial code preempts common law conversion and negligence claims

The following is a case update written by Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal., Ret.), analyzing a recent decision of interest:

The United States Court of Appeals for the Eleventh Circuit determined that Section 11-3-420 of the Georgia Uniform Commercial Code (UCC) governing conversion of instruments preempted common law conversion and negligence claims arising from a bank’s disbursement of funds to a third party.  The court’s decision was also instructive about pleading form, ruling that “shotgun pleading” resulted in an unintelligible complaint that failed to meet the specificity required by Ashcroft v Iqbal, 556 U.S. 662 (2009).  Estate of Bass v. Regions Bank, Inc., 2020 WL 284094 (11th Cir. Jan. 21, 2020).

To view the opinion, click here.

FACTS

David Bass instructed Fidelity Investments to write a check to his sister-in-law, Ruth Barr, consisting of his entire retirement savings from his Fidelity 401k account.  The purpose of the check was to set up an IRA account for Bass that would be administered by Ruth.  Following Bass’ instructions, Fidelity sent a check to Bass made out to “Ruth A. Barr Plan Admin TR IRA FBO: David Bass.”  Bass reviewed the check and gave it to Ruth.  She deposited the check into her general business account, entitled “B&B Accounting and Tax Services,” at Regions Bank and spent all of the money for personal purposes.  Bass died shortly thereafter.

The administrator of Bass’ estate filed nearly identical complaints in the district court against Fidelity and Regions, which were consolidated for purposes of the Circuit Court appeal.  The complaints purported to state claims for relief for breach of contract and breach of fiduciary duty against Fidelity only and for negligence and conversion under common law and separately under the UCC against both Fidelity and Regions.  The gist of the factual claims against the institutions was that both should have known of the retirement purposes of the funds in question and should have taken steps to prevent the money from ending up in Ruth’s business account where she could misspend it.  Both defendants filed motions to dismiss under Rule 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure.

The district court granted the motion as to the breach of contract and fiduciary duty claims for the failure to state sufficient explicit facts to support a claim for relief on those grounds.  It granted the motion as to the UCC claims based on lack of standing.  Finally, the district court dismissed the common law conversion and negligence claims as being preempted by the UCC.  The Circuit Court affirmed the district court as to the contract and fiduciary duty claims, vacated the dismissal of the UCC claims because those rulings were incapable of meaningful review, and affirmed the district court’s ruling that the common law negligence and conversion claims were preempted by the Georgia UCC.

REASONING

The ruling with universal significance is the court’s determination that the UCC preempted common law conversion and negligence claims against both defendants.  Georgia adopted Section 11-3-420 (Conversion of Instruments) of the UCC without modification, so its reasoning could be generally applied in any state or federal action where the UCC has been similarly implemented.

The Circuit Court commenced its analysis of the preemption issue by looking at UCC Section 11-1-103(b) which governs generally the coexistence of common law claims with the statutory provisions, stating that “the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other validating or invalidating cause shall supplement [the Georgia UCC’s] provisions.”  Accordingly, a common law tort action may sometimes coexist where the transaction is also governed by the UCC.  The court noted, however, that UCC Section 1-103(b) also specified an exception to such coexistence of claims if the cause of action is “displaced by the particular provisions” of the UCC.

The Circuit Court was tasked with determining whether Section 11-3-420, which dictates under what circumstances a person can recover from a bank when a bank improperly pays the proceeds of a check to a third party, displaces common law claims of conversion and negligence.  The court noted that although the case law had not provided a precise test regarding such displacement, courts have developed a few considerations that are important: (1) whether the code “provides a comprehensive remedy for the parties to a transaction” [citation omitted]; (2) whether the code “expressly articulates the legal duties of the parties” [citation omitted]; (3) whether a common law action would generally “thwart the purposes of the Code” id.; and (4) whether allowing a parallel common law action would “introduce[e] conflicting burdens of proof and potentially allow[ ] for inconsistent verdicts.”

Finding that Section 11-3-420 provides a comprehensive remedy for the conduct alleged in the complaint – i.e. that Regions and Fidelity improperly paid the proceeds of the check to a third party – and that a parallel cause of action would thwart the purposes of the Code because it could introduce different necessary factual elements and burdens of proof, the court held the UCC displaced those common law torts.

When affirming the dismissal of the contract and fiduciary duty claims and vacating as unreviewable the UCC rulings by the district court, the court reinforced its long-standing condemnation of “shotgun pleading.”  It defined shotgun pleading as a complaint “incorporating by reference each and every allegation contained” in the proceeding paragraphs of the complaint, as the Estate of Bass had done.  Such practice was condemned because it resulted in unintelligible pleadings that violate the basic specificity requirements of Federal Rule of Civil Procedure 8(a)(2) and Iqbal.

AUTHOR’S COMMENTS

The universal adoption of the UCC in almost every state and the provision under most state laws that their courts may rely on decisions from other jurisdictions for interpretation of the UCC makes the Eleventh Circuit’s reasoning here persuasive in both state and federal courts countrywide.  And it really does make sense, where the common law elements for conversion already vary from state to state and the general burden of proof for negligence is well established by statutory and case law from state to state.  The purpose of a uniform code – to provide predictability in commercial transactions which encourage the mobility of commerce – is well served by having a bank’s liability for paying checks to third parties be uniformly determined.

The pleading rule adopted by the Eleventh Circuit should be generally acknowledged in any federal court in the country.  In California, where this author practices, the incorporation by reference of all preceding paragraphs of a complaint is ubiquitous among practitioners.  As the court here drilled home, it often results in unintelligible claims for relief, especially in any complaint which has more than one defendant, complex factual background, and multiple theories of recovery.  I would suggest that an attorney drafting a complaint should customize each claim for relief, alleging only those paragraphs necessary to state with specificity why a claim exists as to the particular defendant in question to avoid a motion to dismiss under the Supreme Court pleading standard as established by Iqbal.

These materials were written by Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal., Ret.), a member of the ad hoc group, with editorial contributions by Corey Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, a member of the ad hoc group and the Chair of the CLA Business Law Section. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.

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