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Rezac Livestock Commission Co., Inc. v. Pinnacle Bank

United States District Court, D. Kansas

June 26, 2019

PINNACLE BANK, et al., Defendants.


          Daniel D. Crabtree United States District Judge.

         This 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.

         After 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.

         Fourteen 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.

         While 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 in Kansas.

         Three things about Kan. Stat. Ann. § 84-4-303 captured the court's attention.

         First, 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.

         Second, 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.

         Third, 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 other.”).

         Altogether, 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.

         The 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. 127).

         The 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.

         The following pages explain why the court has reached this conclusion.

         I. Uncontroverted Facts

         Pinnacle's 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.[1]

         The 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.

         A. Involved Parties

         Plaintiff's 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.

         Defendant 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.[2] 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.

         Mr. 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.

         B. Mr. Leonard's Relationship with Dinsdale

         Mr. 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.[3]

         On 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.[4] 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).

         On 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.[5] Mr. Leonard turned down an offer from another buyer to purchase some of the cattle Mr. Leonard eventually would buy on September 29, 2015.[6]

         That 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.

         The 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.[7] 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[8]; 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.[9] Mr. Leonard instructed Dinsdale to wire that amount to his account and did not suggest that Dinsdale should wire those funds anywhere else.[10] 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.[11] 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, Colorado.[12]

         Mr. 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).

         C. Mr. Leonard's Relationship with Pinnacle

         Mr. 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.

         Mr. 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.

         Generally, 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.

         Account 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.[13]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 accounts.[14]

         Pinnacle 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 intra-day overdrafts.

         Mr. 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 ...

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