IN COURT OF APPEALS
Lisa L. Bradley, Trustee for
the Sally G. Moore and
Robert A. Moore Revocable Living Trust,
First National Bank of Walker, NA,
March 28, 2006
Cass County District
File No. CX-03-948
Steven R. Hedges, James H. Gilbert Law Group, P.L.L.C., 10159 Wayzata Boulevard, Suite 250,
Keith J. Broady, Timothy C. Matson, Abdo, Abdo, Broady &
Satorius, P.A., 710 Northstar West, 625 Marquette Avenue, Minneapolis, MN 55402
David R. Marshall, Ryan T. Murphy, Fredrikson & Byron,
P.A., 200 South Sixth Street, Suite 4000, Minneapolis, MN 55402-1425 (for
and decided by Minge, Presiding Judge; Randall, Judge; and Crippen, Judge.
Stat. § 336.3-307(b) (2004) (section 3-307(b) of the Uniform Commercial Code)
and its accompanying statute of limitations, apply to claims against a payor
bank for honoring checks fraudulently written by a fiduciary.
2. Where the Uniform Commercial Code Article 3
applies to breach-of-fiduciary-duty claims, it preempts common law bases for
3. Where an answer indicates a statute of
limitations defense is raised and the opposing party has adequate opportunity
to contest the defense, it is not an abuse of discretion for the trial court to
consider the defense.
P I N I O N
asserts that the district court erred by applying section 3-307 of the Uniform
Commercial Code (UCC) (Minn. Stat. § 336.3-307 (2004)) and its three-year
limitation period (Minn. Stat. § 336.3-118(g) (2004)) to her claim rather than
section 8 of the Uniform Fiduciary Act (UFA) (Minn. Stat. § 520.08 (2004)) and
the general Minnesota
six-year statute of limitations (Minn. Stat. § 541.05 (2004)), and by rejecting
her common law claims. Further, appellant argues that the district
court abused its discretion by considering respondent’s summary judgment motion
and statute of limitations defense.
Because appellant had adequate notice and opportunity to respond to the
statute of limitations claim in the summary judgment proceeding, and because
the UCC applies to appellant’s claim and preempts her common law claims, the
limitation period in the UCC applies. We
Lisa L. Bradley is Trustee for the Sally G. Moore and Robert A. Moore Revocable
Living Trust. Sally and Robert Moore
established the trust and opened a trust checking account at respondent First
National Bank of Walker, N.A. When
Robert died, Sally amended the trust agreement and appointed appellant Bradley,
a tax professional in Arizona,
as successor trustee. Bradley became an
authorized signer on the trust account and could conduct transactions on behalf
of the trust.
1996, Sally again amended the trust agreement, appointing Minnesota attorney Glenn Smith as
co-successor trustee with Bradley. The
trust agreement provided that the signature of only one trustee was required to
withdraw funds from the trust account. When
Sally died in September 1996, Bradley and Smith assumed the trust’s
administration. Bradley forwarded income
from trust assets in Arizona to Smith in Minnesota. She allowed Smith to deal with the majority
of the daily trust duties, including oversight of its bank accounts.
noted that Smith missed several tax-filing deadlines and found him difficult to
contact. In October 1998, Bradley contacted
trust beneficiaries and learned that Smith had not made any distributions. Bradley examined records of the trust account
at First National and determined that Smith had depleted the trust account by writing
over 80 checks payable to himself personally for approximately $550,000. Smith had deposited these checks into his
personal account at Americana Bank (now Excel Bank); they cleared through the
banking system and were honored by First National.
July 13, 2000, Smith pleaded guilty to federal charges of mail fraud and
monetary transactions involving criminally-derived property. The federal court ordered Smith to pay
$530,000 in restitution. After payment
of $61,750 by Smith and $100,000 by the Minnesota
client security fund, the trust was still short $368,250. On July 25, 2003, Bradley initiated suit
against First National, asserting claims under the UFA, as well as common law claims in
negligence and contract. First National
moved for summary judgment, arguing that the UCC applied and that Bradley
failed to make a cognizable claim under section 3-307(b). Opposing summary judgment, Bradley continued
to argue that the UFA
applied. In its reply memorandum, First
National asserted that because the UCC provisions governed, the UCC’s
three-year statute of limitations barred her claim.
the hearing on First National’s summary judgment motion, Bradley objected to
consideration of the statute of limitations argument. She claimed it was not timely raised in the
summary judgment proceeding. The district
court granted First National’s summary judgment motion, finding that both the UFA and UCC applied to Bradley’s claims, that the UCC
superseded the UFA,
that the UCC’s limitation period (section 3-118(g)) controlled, and that the
time for bringing an action had expired.
The district court also found that the UCC preempted Bradley’s common
law claims. Bradley appeals.
I S S U E S
I. Did the district court err as a matter of
law in applying section 3-307(b) of the UCC, and its accompanying statute of
limitations, instead of section 8 of the UFA?
II. Does application of the
UCC preempt Bradley’s common law claims?
III. Did the district court
abuse its discretion in deciding the statute of limitations question?
appeal from summary judgment, the court must determine whether there are any
genuine issues of material fact and whether the district court erred in its
application of the law. State by Cooper v. French, 460 N.W.2d 2,
1990). Moreover, the court will view the
evidence in the light most favorable to the nonmoving party. Fabio
v. Bellomo, 504 N.W.2d 758, 761 (Minn.
1993). The district court’s legal
conclusions will be reviewed de novo. Lefto v. Hoggsbreath Enters., Inc., 581
N.W.2d 855, 856 (Minn.
The first issue is whether
the district court erred as a matter of law in applying the UCC, and the
accompanying shorter, three-year statute of limitations, instead of the UFA and the general
six-year statute of limitations.
Deciding which of these two uniform acts applies requires evaluation of
several considerations. At the outset,
we apply principles of statutory construction.
The most important principle and the starting point is the language of
the various statutes. See Minn. Stat. §§ 645.08, .16 (2004); see also Heaslip v. Freeman, 511 N.W.2d 21
(Minn. App. 1994), review denied
(Minn. Feb. 24, 1994). If laws conflict, the court
should try to construe them together to reconcile the conflict. Minn. Stat. § 645.26 (2004); In re Appeal of
Crow Wing County Attorney, 552 N.W.2d 278, 280 (Minn. App. 1996), review
denied (Minn. Oct. 29, 1996); see Caldwell v. City of Minneapolis,
486 N.W.2d 151, 156 (Minn. App. 1992) (“[W]ithout strong evidence that the two
provisions are irreconcilable, implied repeal of a prior enactment by a later
enactment is not favored.”), review denied (Minn. Aug. 4, 1992). If, however, the two provisions are
inherently inconsistent and there is no way to harmonize them, then the court
will apply the canons of construction. Barton
v. Moore, 558 N.W.2d 746, 751-52 (Minn. 1997). See
generally Minn. Stat. §§ 645.001-.51 (2004).
the UFA and the
UCC deal with the general subject matter of bank liability for fiduciary fraud
in writing checks. The UFA
“relieves banks of their common law duty of inquiring into the propriety of
each transaction conducted by a fiduciary.”
In re Lauer, 98 F.3d 378, 383 (8th Cir. 1996). The UFA
expressly provides that if the fiduciary draws a check upon the account of the
principal, the bank may pay the check without being liable to the principal,
unless the bank acts in bad faith or with actual knowledge of a breach of
fiduciary duty. UFA § 8.
Here, Bradley alleges that First National acted in bad faith by honoring
numerous checks that Smith made out to himself personally. UFA
§ 8 clearly applies to our situation. The
UFA does not
contain an independent statute of limitations.
Therefore, claims arising under the UFA are subject to a six-year statute of
limitations. See Minn. Stat. § 541.05 (providing that a six-year statute of
limitations applies where no other limitations period is expressly prescribed).
statutory language of the UCC is not as focused. Under the UCC, if an instrument is taken from
a fiduciary, the taker knows the person is a fiduciary, and the principal claims
a breach of fiduciary duty, four rules apply.
UCC § 3-307(b)(1) – (4). None of
the four rules use the word “bank;” however, the phrase “taken from a
fiduciary” is used, and the word “taker” is used repeatedly. Id. Although “taker” is an undefined term in the UCC, it certainly
applies to banks that directly receive the checks from the fiduciary. See
UCC § 3-307, cmts. 1-5 (containing numerous references to banks). It is less clear that it applies to a bank that
is not the initial “taker” from the fiduciary.
That is the situation with First National in the matter before us. The question is whether the clarity of the UFA in covering our
situation precludes application of the UCC’s three-year statute of limitations.
A. UCC Comments
The UFA’s provisions are
intertwined with the UCC and must be applied in that context. In this regard, the UCC comments contain the following
3-307 states rules for determining when a person taking an instrument has
notice of the claim which will prevent assertion of rights as a holder in due
course. It also states rules for
determining when a payor bank pays an instrument with notice of breach of
UCC § 3-307 cmt. 2. First National is the payor bank. This general recognition of the application of
the section to payor banks is significant.
B. First National as a “Taker”
resolving the question of the extent to which UCC applies, we must determine
whether First National can be considered a “taker” or to have “taken” the
check. We note that the concept of
“taker” is flexible. The “taker” of an
instrument is akin to the “holder,” a statutorily-defined term. See
UCC § 1-201(b)(21). The “holder” takes
the instrument or check from the maker and, after the initial transfer from the
first holder or taker, transfers the check to subsequent holders and takers. UCC § 3-307 does not require that every “taker”
in section 3-307 deal directly with the fiduciary. It only requires that there be an initial
transaction with the fiduciary. See UCC § 3-307(b)(i).
we should not be confused by multiple labels.
Any entity in the chain of possession of the check may have several
titles. For example, in the case before
us, Smith initially deposited the check with the Americana (Excel) Bank. Americana
was the initial “taker” and “holder,” and it was also the “depositary bank.” See
UCC §§ 1-201(b)(21), 4-105(2). First
National is the “payor bank” and the “drawee” of the draft. See UCC
§§ 3-103(a)(4), 4-104(a)(8), 4-105(3). In
addition, First National “took” the check in the check-clearing system, was the
bank from which the funds would ultimately be paid, and was the last holder or
taker before returning the check to the Moore Trust. This suggests First National is a “taker”
within section 3-307(b).
C. Comprehensiveness of the UCC
consideration is the comprehensive nature of the UCC. Only one section of the original version of
the UCC briefly addressed a bank’s notice of breach of fiduciary duty. See
Minn. Stat. §
336.3-304(2), (4)(e) (repealed 1992). That
section is the precursor of section 3-307.
UCC § 3-307, cmt. 1. Section
3-307 of the revised Article 3 more comprehensively addresses the problem of
fiduciary fraud and
is a part of the broad UCC framework for dealing with negotiable instruments
and bank deposits and collections. In a
very real sense, the UCC occupies the field. One of the principles of statutory
construction addresses this situation as follows:
REPEAL BY LATER LAW.
a law purports to be a revision of all laws upon a particular subject, or sets
up a general or exclusive system covering the entire subject matter of a former
law and is intended as a substitute for such former law, such law shall be
construed to repeal all former laws upon the same subject. When a general law purports to establish a
uniform and mandatory system covering a class of subjects, such law shall be
construed to repeal preexisting local or special laws on the same class of
subjects. In all other cases, a later
law shall not be construed to repeal an earlier law unless the two laws are
Minn. Stat. § 645.39. UFA
§ 8 deals with a matter that is also the subject of UCC § 3-307. To have parts of section 8 survive and parts
displaced leads to confusion and lack of predictability in the law. This weighs in favor of interpreting UCC §
3-307(b) to govern this situation.
D. UCC Repealer Provisions
UCC is generally the governing law in any area where it conflicts with prior
law. When Minnesota
adopted the UCC in 1965, our version of UCC § 10-102 specifically repealed UFA §§ 4, 5 and 6. Minn.
Stat. § 336.10-102(1) (1965). In their
place we enacted Minn. Stat. § 336.3-304(2) and (4)(e) (1990), which addresses
the same policies. Minn. Stat. Ann. §
code cmt., U.C.C. cmt. (West 1966).
Although no additional specific repealer language was included when revised
Article 3 was adopted, the general repealer section continued. Minn.
Stat. § 336.10-102(1) (1992). It states
that, “[e]xcept as provided in the following section, all laws and parts of
laws inconsistent with this chapter are hereby repealed.” Id. This places the sections of the UFA that have not been
specifically repealed in an ambiguous status unless they clearly are not
duplicated by the UCC. Principles of
statutory construction direct that we consider laws that are later in point of
time to prevail when in conflict with earlier laws. Minn. Stat. § 645.26, subd. 4.
instruct the courts that the legislature does not intend unreasonable results. Minn.
Stat. § 645.17(1), subd. 1. If the UCC
statute of limitations does not apply in this case because First National is a
payor bank that did not deal personally with or directly “take” the checks in
question from Smith, then First National would be subject to the longer
six-year statute of limitations.
However, if First National had been the depositary and payor bank and had dealt directly with Smith in his deposit of
the checks, First National would be subject to the shorter, three-year statute
of limitations. It is unreasonable to
have a longer statute of limitations and greater exposure when a bank defendant
plays a more limited role in a transaction, and a shorter, more protective
statute if the bank has greater involvement.
Similarly, the possibly
limited role of constructive knowledge and bad faith under the UCC compared to
the UFA would
then provide narrower liability/exposure for the depositary/payor bank than for
the bank that only acted as the payor.
This inconsistency is not logical or reasonable.
F. Other States
argues that a consideration favoring the continued application of UFA is consistency in
interpretation of the UCC, and points to the decision of Coeur d’Alene Mining Co. v. First Nat’l Bank of N. Idaho, 118 Idaho 812, 800 P.2d 1026
(1990). We recognize that there is a
policy favoring consistent judicial interpretation and application of the
uniform laws. See Minn.
Stat. § 645.22; UCC § 1-103(a)(3). In Coeur d’Alene Mining, the Idaho Supreme Court examined
UFA § 9 and the earlier version of UCC § 3-304(2),
found that that earlier version of the UCC was consistent with the UFA, and concluded that the
result would be the same under both statutes.
at 818-19, 800 P.2d at 1032-33. However,
Mining is based on the original draft of Article 3 of the UCC. Id. As previously noted, the original section 3-304
has been expanded substantially in the current section 3-307 and it is not
clear the Idaho court would have reached the same conclusion under the current
law. Furthermore, since the Idaho court found the
two provisions had the same meaning and lead to the same conclusion, there was
no difference in the result. In this
sense, it was a false conflict. Coeur
Mining is not helpful in resolving our case.
sum, although we
recognize that this decision is not without countervailing considerations, we
conclude the UCC pervasively occupies this field of law and that the
district court properly concluded that the UCC’s three-year statute of
limitations barred Bradley’s claim.
second issue is whether the UCC preempts Bradley’s common law claims. Although Minnesota courts have yet to address
specifically whether UCC Article 3 bars common law claims, case law points in
that direction. See Hapka v. Paquin Farms, 458 N.W.2d 683, 688 (Minn. 1990) (holding that Article 2 of the
UCC preempts common law claims); Hedged
Inv. Partners v. Norwest Bank Minn., 578 N.W.2d 765, 770-71 (Minn. App.
1998) (holding that Article 4A of the UCC preempts common law claims where they
are inconsistent or duplicative). But see Minn. Stat. § 604.10 (2004)
(providing that where economic loss doctrine applies, UCC Article 2 does not
preempt common law claims).
statute itself demonstrates that the legislature intended for it to be a
comprehensive liability scheme. “Section
3-307 is intended to clarify the law by stating rules that comprehensively cover
the issue of when the taker of an instrument has notice of breach of a
fiduciary duty and thus notice of a claim to the instrument or its proceeds.” UCC § 3-307, cmt. 1. In addition, the Minnesota Supreme Court has
indicated that it favors an approach which recognizes the comprehensive, and
exclusive, liability scheme of the UCC. Superwood Corp. v. Siempelkamp Corp.,
311 N.W.2d 159, 162 (Minn.
1981) (“To allow tort liability in commercial transactions would totally
emasculate these provisions of the U.C.C.
Clearly, the legislature did not intend for tort law to circumvent the
statutory scheme of the U.C.C.”), overruled
on other grounds by Hapka v. Paquin Farms, 458 N.W.2d 683 (Minn. 1990).
court has stated that “the Minnesota Supreme Court has emphasized the value of
maintaining an exclusive set of remedies for commercial transactions. . .
. We see no reason to sacrifice the
certainty and consistency of the U.C.C. remedies to preserve common law
remedies for conversion of negotiable instruments.” Halla
v. Norwest Bank Minn., N.A., 601 N.W.2d
449, 451 (Minn.
App. 1999), review denied (Minn. Dec.
14, 1999). UCC Article 3 covers the
conversion of negotiable instruments, which the court addressed in Halla.
UCC § 3-420(a). Although
dealing with a different section of Article 3, we conclude that the same
reasoning is applicable in the instant case and that the UCC preempted
Bradley’s common law negligence and contract claims. This result is consistent with and reinforces
the conclusion we reached previously with respect to the relationship between
the UCC and the UFA
in this case.
final issue is whether it was improper for the district court to consider First
National’s UCC statute of limitations defense.
This is partly an issue of prejudice and partly an issue of compliance
with rules. Although an adverse decision
on the merits is obviously prejudicial, prejudice is a question of fundamental
fairness. Prejudice may be demonstrated
by lack of notice, procedural irregularities, or lack of a meaningful
opportunity to respond to the motion. Septran, Inc. v. Indep. Sch. Dist. No. 271,
555 N.W.2d 915, 920 (Minn. App. 1997), review denied (Minn. Feb. 27, 1997). Bradley argues that First National first
raised the defense in its reply memorandum in support of summary judgment and,
therefore, Bradley lacked a meaningful opportunity to respond. Minn. R. Gen. Pract. 115.03(c) governs the
procedures applicable to dispositive motions: “The moving party may submit a reply memorandum,
limited to new legal or factual matters raised by an opposing party’s response
to a motion . . . .” Unresponsive, novel
legal arguments should not be considered if part of the moving party’s reply
statute of limitations is an affirmative defense. Minn.
R. Civ. P. 8.03. “An affirmative defense
must be pleaded specifically and the failure to do so results in a waiver of
the defense.” Rhee v. Golden Home Builders, Inc., 617 N.W.2d 618, 621 (Minn. App. 2000)
(reversing the district court where it allowed the defendant to orally amend
its answer at the summary judgment hearing to include a statute of limitations
defense, and then ruling in favor of the defendant on that ground). But the district court may allow a statute of
limitations defense to be asserted for the first time on a motion for summary
judgment, even if not properly pleaded. Oreck v. Harvey Homes, Inc., 602 N.W.2d
424, 427-28 (Minn. App. 1999), review
Jan. 25, 2000).
National’s answer contains two recitations of applicable defenses. Defense two states, “The claims asserted in
the Complaint are barred or reduced by contractual limitations and/or statutory
limitations.” In addition, defense seven
states, “The claims asserted in the Complaint are barred by statute.” Although likely boilerplate pleading
provisions, they gave Bradley some notice prior to the summary judgment hearing
that First National had a statute of limitations defense. As a result, Bradley’s position is
distinguishable from the plaintiff in Rhee. See
617 N.W.2d at 621.
even if the consideration of the statute of limitations argument was improper,
Bradley was not prejudiced by such consideration in the sense that she was
treated fundamentally unfairly. Both
First National’s motion for summary judgment and Bradley’s opposition
aggressively disputed whether the UCC or UFA
applied to Bradley’s claim. That First
National eventually argued for the UCC statute of limitations, especially where
it contended that other substantive provisions of the UCC were determinative,
should not have been a surprise to Bradley.
Furthermore, it is unclear what additional arguments Bradley would make
even with more time, as she had already vigorously contested the application of
the UCC. Under the circumstances, we conclude
that because Bradley has had full opportunity to address this issue, the
district court did not abuse its discretion in considering First National’s
defense of statute of limitations.
D E C I S I O N
sum, we hold that Bradley’s breach-of-fiduciary-duty claim is governed by the UCC’s
three-year statute of limitations.
Further, application of the UCC’s comprehensive liability scheme
preempts Bradley’s common law claims.
Finally, the district court did not abuse its discretion by considering
these claims on summary judgment.