United States District Court, D. Kansas
MEMORANDUM AND ORDER
D. Crabtree United States District Judge.
case originated from a substantial cattle transaction gone
wrong. In simplest terms, plaintiff sold a million
dollars' worth of cattle to an individual who didn't
make good on his promise to pay. When plaintiff learned that
the buyer's check wouldn't clear, it was too late to
recover the cattle. So, plaintiff was out the cattle and
didn't receive the payment it was promised. Sensing that
it was unlikely to recover against the defaulting cattle
buyer, plaintiff has sued two defendants. The first is
Pinnacle Bank, the bank of the defaulting cattle buyer. The
second defendant is Dinsdale Bros., Inc., the company who
purchased the cattle from the individual who defaulted on his
promise to pay plaintiff.
spirited discovery and motion practice, all three parties
moved for summary judgment. See Docs. 102, 104,
& 110. In a Memorandum and Order entered late last year,
the court decided all three motions. See Doc. 125
(entered December 21, 2018). The court denied plaintiff's
summary judgment motion in its entirety. Defendant
Pinnacle's motion met the same fate. The ultimate
purchaser of the cattle-Dinsdale-fared slightly better. The
court granted Dinsdale's summary judgment motion against
plaintiff's claim for breach of contract, but denied the
rest of the motion. Altogether, these rulings meant that
plaintiff's claims for conversion, civil conspiracy, and
unjust enrichment against both defendants would proceed to
trial. Plaintiff's claim against Pinnacle for unjust
enrichment also survived for trial.
days after the summary judgment Order issued, Pinnacle Bank
filed a Motion to Reconsider. See Doc. 127. This
motion asked the court to reconsider its summary judgment
ruling on the conversion claim against the bank. Plaintiff
responded. See Doc. 131. Concluding that
Pinnacle's reconsideration motion raised substantial
legal questions, the court invited the parties to present
oral argument. See Docs. 130 & 133. On February
1, 2019, counsel thoughtfully argued the difficult issues
that inhere in the conversion claims. Pinnacle's
arguments persuaded the court that it was a mistake to begin
the trial with such substantial legal questions remaining
unresolved. So, the court vacated the approaching trial date
on its own motion. See Doc. 146.
preparing for the February 1 oral argument on the
reconsideration motion, the court encountered a statute that
the summary judgment briefs hadn't discussed, at least
not in any detail: Kan. Stat. Ann. § 84-4-303, part of
the Uniform Commercial Code (“UCC”), as adopted
in Kansas. To be fair, Pinnacle had cited UCC § 4-303 to
support the proposition that a bank may “honor checks
in any order.” Doc. 105 at 19 n.1 (Pinnacle's brief
supporting its summary judgment motion). And, plaintiff's
Reply cited that portion of Pinnacle's motion and the UCC
provision, arguing that Pinnacle had “concede[d] it
could have honored the checks in any order.” Doc. 121
at 27. But, that was the extent of the discussion. And
neither party cited the Kansas version of the statute, any of
the UCC Comments, or the Kansas Comments. And, most of all,
Pinnacle never argued that UCC § 4-303 supplanted the
Kansas conversion cases predating the statute's enactment
things about Kan. Stat. Ann. § 84-4-303 captured the
this provision asserts that it governs a bank's
“right or duty to pay an item or to charge its
customer's account for the item” when presented to
a bank for payment. Kan. Stat. Ann. § 84-4-303(a). These
rights and duties are at the heart of plaintiff's
conversion claim against Pinnacle.
the UCC Comments for § 4-303 provide helpful commentary
about this provision's role in the UCC's broader
regulation of banks, checks, and other commercial paper. One
part of this commentary states the obvious: A person who
writes checks “should have funds available to meet all
of them . . . .” Kan. Stat. Ann. § 84-4-303 UCC
cmt. 7. The Comment continues with guidance that is directly
pertinent to this dispute. The “drawer” of the
check- here, Charles Leonard, the person who purchased the
cattle from plaintiff but defaulted on his duty to pay for
them-“has no basis for urging one [check] should be
paid before another.” Id. And, the Comment
concludes with the most salient point of all: “[T]he
holders [of checks] have no direct right against the payor
bank in any event” unless that bank has
“accepted, certified, or finally paid a particular
item, or has become liable for it under Section 4-302.”
Id. In this case, plaintiff is the
“holder” of the relevant check. Plaintiff held
the check issued by the defaulting buyer, Mr. Leonard, on his
checking account with Pinnacle-the “payor bank”
referenced in the Comment.
timing matters. Kansas adopted § 84-4-303 in 1991. This
provision thus postdates almost all the case authorities that
the parties had relied on in their summary judgment papers.
The prior version of the statute-enacted in 1966-contains
almost identical provisions and UCC Comments. But,
differences in the Kansas Comments to the 1966 version of the
statute and its 1991 counterparts provide insight about
“the underlying policies and purposes” of §
84-4-303. Guar. State Bank & Tr. Co. v. Van Diest
Supply Co., 55 P.3d 357, 362 (Kan.Ct.App. 2002).
Specifically, the current Kansas Comment explains that when
checks arrive on the same day and together, they direct
payment exceeding the amount the customer has on deposit in
his account, the bank may decide how to pay those checks
without consulting the customer. See Kan. Stat. Ann.
§ 84-4-303 Kansas cmt. (“[T]he bank need not
contact the customer to determine which check should be
dishonored in order to mitigate the customer's loss. It
may pay either and, if it so chooses, dishonor the
these aspects of § 84-4-303 and its Comments persuade
the court that the provision has significant consequences for
the correct analysis of plaintiff's conversion claim
against Pinnacle. The court thus ordered the parties to
submit supplemental briefing about this statute, the UCC
Comments, and the provision's consequences for the
conversion claim. See Doc. 146.
parties now have submitted their briefs-Docs. 147 & 154
(Pinnacle), 148 (Dinsdale), 149 & 155 (plaintiff)-and the
court has considered them carefully. The court now is ready
to decide Pinnacle's pending Motion to Reconsider (Doc.
court has decided to grant Pinnacle's motion because the
court is convinced that it should have granted part of
Pinnacle's Motion for Summary Judgment (Doc. 104).
Specifically, this Order vacates the portion of Doc. 125
(Memorandum and Order dated December 21, 2018) denying
Pinnacle's summary judgment motion against
plaintiff's conversion claim. In place of that ruling,
the court now grants Pinnacle's summary judgment motion
(Doc. 104) against plaintiff's conversion claim against
Pinnacle. In all other respects, the December 21, 2018,
Memorandum and Order stands and remains the court's
ruling on summary judgment.
following pages explain why the court has reached this
motion for reconsideration doesn't challenge the
statement of uncontroverted material facts identified in the
summary judgment Order. See Doc. 125 at 2-16. The
court thus bases its decision here on the same summary
judgment facts it identified in that earlier Memorandum and
Order. To simplify review of this Order, the court
nonetheless recites those facts again, below.
summary judgment facts were stipulated by the parties in the
Pretrial Order (Doc. 101) or were uncontroverted for purposes
of the parties' summary judgment motions. In the summary
judgment Order, the court divided the following
uncontroverted facts into three sections: (A) the parties
involved in this case; (B) Mr. Leonard's relationship
with Dinsdale; and (C) Mr. Leonard's relationship with
Pinnacle. This Order uses the same convention.
business involves selling livestock at auction in St. Marys,
Kansas. Defendant Dinsdale's business involves feeding
cattle. Dinsdale purchases cattle from sellers, including
Charles D. Leonard d/b/a Leonard Cattle Company. Chris and
John “Sid” Dinsdale, alongside other Dinsdale
family members, own Dinsdale. Dinsdale purchases cattle from
six or seven dealers, including Mr. Leonard, who are licensed
under the Packers & Stockyards Act. And Dinsdale buys
about 70, 000 cattle per year.
Pinnacle Bank is a banking organization that is organized and
operates under Nebraska law, but it conducts business at
several locations in Kansas. Some members of the Dinsdale
family own interests in both Dinsdale and
Pinnacle. Specifically, Chris and Sid Dinsdale
are members of the Board of Directors of Pinnacle Bancorp,
Pinnacle's holding company. Sid Dinsdale is Chairman of
Pinnacle's board, and Roy Dinsdale-Chris and Sid
Dinsdale's father-is Vice Chair of the board. Mark Hesser
is President of Pinnacle Bancorp and a Director of Pinnacle
Bank. Marc Hock is President and a Director of Pinnacle Bank.
Spencer Kimball and Steve Zey are Market Presidents. And Todd
Roth is a Risk Manager.
Leonard operated as a cattle dealer from 1992 to 2015; his
business involved buying and reselling cattle to cattle
feeders. Mr. Leonard had a longstanding business relationship
and friendship with the Dinsdale family. He also had been a
long-time customer of Pinnacle.
Mr. Leonard's Relationship with Dinsdale
Leonard made “dealer transactions” by purchasing
cattle for his own account and reselling them to cattle
feeders. These transactions include cattle purchased on
commission. Mr. Leonard organized and paid for the trucking
and insurance used to transport cattle he had purchased to
his buyers. He used the same trucking dispatch service and
insurance policy for each cattle transport. When Dinsdale
purchased cattle from Mr. Leonard, Mr. Leonard had purchased
the cattle from a sale barn, paid the sale barn for the
cattle, and issued a separate invoice to Dinsdale. In earlier
cattle sales, Dinsdale received good title to the cattle it
purchased from Mr. Leonard.
September 28, 2015, Dinsdale employee David Wahlert called
Mr. Leonard, and the two spoke briefly over the phone. They
discussed the cattle market, and Mr. Wahlert asked Mr.
Leonard which sale he was attending the next day. Mr. Leonard
replied that he planned to attend an auction in St. Marys,
Kansas. The two did not discuss cattle prices. Mr. Wahlert
told Mr. Leonard that Dinsdale was in the cattle market and
agreed to talk to Mr. Leonard again the next day. Before their
September 28 conversation, Mr. Wahlert did not know whether
Mr. Leonard planned to attend a cattle sale the next day or,
if so, which auction he planned to attend. Though Mr. Wahlert
knew where Mr. Leonard had attended auctions in the past, Mr.
Wahlert did not know Mr. Leonard had attended one of
plaintiff's auctions before. Mr. Wahlert never had heard
of plaintiff's sale barn in St. Marys, Kansas, and he
never had communicated with any representative of plaintiff.
Neither Mr. Wahlert nor any Dinsdale representative directed
Mr. Leonard to attend the St. Marys auction. Instead, Mr.
Leonard attended the auction in St. Marys almost every
Tuesday, and he purchased cattle “[a]bout every
time” he attended it. Mr. Leonard only attended the
later part of the St. Marys auctions, when yearlings-or young
calves-were sold. Doc. 103 at 9 (citing Leonard Dep.
172:20-173:1, 185:11-14, 188:16-189:21).
September 29, 2015, Mr. Leonard called Mr. Wahlert before the
auction, and the two talked again. Mr. Wahlert told Mr.
Leonard that Dinsdale was interested in buying heifers under
800 pounds and steers under 900 pounds. The two did not
discuss price or quantity during this call. Mr. Leonard
turned down an offer from another buyer to purchase some of
the cattle Mr. Leonard eventually would buy on September 29,
day, Mr. Leonard attended the auction at plaintiff's sale
barn in St. Marys, and plaintiff sold Mr. Leonard some
cattle. Mr. Leonard purchased some steers weighing more than
900 pounds, and plaintiff memorialized this purchase in a
document called “Buyer Recap” and with invoices
that identify “Leonard Cattle Co” as the buyer.
Doc. 103-2. Neither plaintiff nor Mr. Leonard provided these
invoices to Dinsdale. The Packers & Stockyards Act
required Mr. Leonard and plaintiff, who both had licenses and
bonds under that statute, to memorialize the sale accurately.
Plaintiff did not know that Mr. Leonard had spoken with a
Dinsdale representative before the sale on September 29.
Plaintiff didn't know where Mr. Leonard planned to
deliver the cattle until after the sale. And Mr. Leonard did
not inform plaintiff in advance of the sale the weight or
type of cattle he sought. After the sale, Mr. Leonard
instructed plaintiff to send the cattle to D&D, a feedlot
in Colorado. Plaintiff's owner, Dennis Rezac, testified
that would have sold the cattle in question to Mr. Leonard
notwithstanding Mr. Leonard's communication with a buyer
before the auction “because he had been doing it over
time.” Doc. 103 at 11 (citing Rezac Dep. 134:13-135:3).
Later in the day on September 29, 2015, Mr. Leonard and Mr.
Wahlert spoke on the phone yet again; Mr. Wahlert confirmed
that Dinsdale would purchase the cattle from Mr. Leonard.
morning after the sale, Mr. Leonard's office wrote
plaintiff a check for $980, 361 from Mr. Leonard's
account with Pinnacle for the cattle purchase. Mr.
Leonard's office mailed this check to plaintiff.
Dinsdale's name is not on the check, and Mr. Leonard
never showed the check to Dinsdale. Mr. Leonard did not tell
Dinsdale the amount he had paid plaintiff for the cattle, and
Dinsdale did not receive an invoice or other documentation
about this cattle purchase. Mr. Leonard's office
also prepared invoices for Mr. Leonard's cattle sale to
Dinsdale. Plaintiff's name does not appear on the
invoices, the invoices do not list commissions or orders, and
the invoices state that “100% of sales made by Leonard
Cattle Company are on a sold to basis.” Doc. 103-4. Mr.
Leonard listed himself as the only seller shown on these
invoices, as he had done for earlier transactions with
Dinsdale; the Packers & Stockyards Act
required Mr. Leonard to identify the seller on the invoice
accurately. Also, Mr. Leonard sent just these invoices to
Dinsdale; he didn't send any internal worksheets, and he
never suggested to Dinsdale that he had prepared internal
worksheets. Mr. Leonard instructed Dinsdale to pay the
invoices by wire transfer, as he did with most of his larger
deals and as he had done in all his earlier transactions with
Dinsdale. Mr. Leonard instructed Dinsdale to
wire that amount to his account and did not suggest that
Dinsdale should wire those funds anywhere else. The
wiring instructions appeared on the invoice to Dinsdale. Mr.
Leonard used trucking dispatch and insurance policy he
usually used when delivering the cattle to Dinsdale, and Mr.
Leonard bore the risk of loss until the cattle arrived at
their destination. Mr. Leonard arranged for trucks to
transport the cattle he planned to buy on the morning of the
auction. Mr. Leonard testified that Dinsdale had a right to
reject the cattle. Dinsdale received the cattle on
September 30, 2015, and it placed these cattle at D&D
Feedlot West in Iliff, Colorado, and OTR Feedlot in Proctor,
Leonard never received: (1) authority to write checks for
Dinsdale or a Dinsdale “checkbook”; (2) signatory
authority from Dinsdale; (3) vehicles from Dinsdale; (4)
Dinsdale letterhead, logos, business cards, or apparel; (5)
mileage or fuel reimbursements from Dinsdale; or (6) a 1099
or W-2 form from Dinsdale. Mr. Leonard maintained a separate
business from Dinsdale, with his own books and records. Mr.
Leonard's business with Dinsdale concluded when he sold
cattle to Dinsdale. Mr. Leonard also paid federal income
taxes on the September 29, 2015, cattle purchase; it was
based on the difference between the price he paid plaintiff
for the cattle and the price for which he sold the cattle to
Dinsdale. He reported the gain from this transaction as
“dealer markup” and not as agent's
commission. The Packers & Stockyards Act also required
Mr. Leonard to file annual reports with the Packers &
Stockyards Administration that included transactions Mr.
Leonard undertook as a dealer or agent. Plaintiff reported
that Mr. Leonard undertook the September 29, 2015,
transaction as a dealer, not a commissioned agent. And Mr.
Leonard's 2015 report under the Packers & Stockyards
Act listed all his purchases as “Livestock Dealer
Purchases” and not as purchases “bought on
commission for the account of others.” Doc. 103 at
14-15 (quoting Doc. 103-7 at 2).
Mr. Leonard's Relationship with Pinnacle
Leonard maintained a business checking account at Pinnacle
for his cattle business, which was how Mr. Leonard made his
living; the account was known as Account 161. Spencer Kimball
was one of the people at Pinnacle who managed deposit
accounts. Mr. Kimball also helped manage Pinnacle's loan
relationship with customers such as Mr. Leonard.
Leonard and his wife maintained multiple accounts at
Pinnacle, and Mr. Leonard took out loans from the bank. They
were customers of Pinnacle before the fall of 2015. Mr.
Leonard used Account 161, which Pinnacle administered in
Gretna, Nebraska, to pay for cattle and other business
expenses; he also used the account for personal uses. In 2014
and 2015, Mr. Leonard purchased cattle from 150 different
sale barns and had 175 to 200 customers. He ran all his
purchases and sales through Account 161. Mr. Leonard filed
for bankruptcy in 2015 and is not a party in this case.
checks that Pinnacle customers write on their accounts are
presented to Pinnacle as debits against those accounts. The
Federal Reserve Bank or other clearing facilities typically
present these checks for payment, usually in the evening. If
an account lacks sufficient funds to cover the amount of a
check or checks presented against the account, Pinnacle
learns of this insufficiency the next morning. Pinnacle then
decides whether it will honor the checks nonetheless.
Specifically, Mr. Kimball was charged with making this
decision by 10:00 a.m. the day after such checks were
presented to Pinnacle. Pinnacle customers may deposit funds
in several ways. These include cash deposits, wire transfers,
or third-party checks. Mr. Leonard's deposits in
September and October 2015 were primarily wire transfers or
third-party checks. His online bank statements show credits
and debits, and the last balance the statements show on a
particular date reflects the balance at the end of the
corresponding day. This balance includes all checks or other
debits that had hit the account and all deposits made to the
account, even if those deposits included uncleared checks.
161 lacked sufficient funds to cover the presented checks
several times in September and early October 2015. Mr.
Kimball, once he was notified of the insufficiency in Account
161, contacted Mr. Leonard, let him know about the
insufficiency, and asked how he intended to cover the checks
presented. Mr. Leonard responded by describing deposits he
intended to make that day to cover the amounts of the checks
presented. If Mr. Kimball was satisfied with Mr.
Leonard's anticipated deposits, he normally would decide
to honor the presented checks. For most of September 2015,
Mr. Leonard made deposits into Account 161 that exceeded the
deficit created by the checks presented the day before.
Pinnacle knew about Mr. Leonard's process of writing
checks to purchase cattle before receiving deposits to cover
these checks. Pinnacle also knew that Mr. Leonard's
account was overdrawn in August 2015.In late summer or
early fall 2015, Pinnacle president Marc Hock had informed
Chris Dinsdale that Mr. Leonard, along with several other
Pinnacle clients, were overdrawing their
extended “provisional credit” to Mr. Leonard in
Account 161 for checks third parties had deposited in this
account. Provisional credit represents a credit for
third-party checks that had not yet cleared the Federal
Reserve (or other clearing agency). Mr. Leonard or his
assistant deposited dozens of checks in Account 161, and one
did not clear: a check for $221, 818.39 that a third
party-Feller Co.-had deposited. This check failed to clear
because Feller Co. stopped payment on it. Also, when a
Pinnacle customer writes checks on an account exceeding the
amount of cleared funds in it, but the account also has
uncollected deposited funds, Pinnacle refers to this
situation as a “daylight overdraft” or an
“intra-day overdraft.” This kind of overdraft
typically lasts for just one day, and later-usually the next
day-the third-party checks clear and are deposited into the
account. Notwithstanding the short duration of the overdraft,
Pinnacle notifies customers who experience daylight or
Leonard attended plaintiff's livestock auction and
purchased the cattle at issue in this case. Once Mr. Leonard
received paperwork from plaintiff for these cattle, he
reported this information to his assistant in Nebraska, Ms.
Tammy Nichols. Ms. Nichols prepared and sent a check to
plaintiff for the purchase amount: $980, 361.45. For
simplicity, this order refers to that ...