### IN THE COURT OF APPEALS OF TENNESSEE AT KNOXVILLE July 9, 2001 Sessi

on PERO’S STEA

K AND SPAGH

ETTI HOUSE and

LOUIS INN v. ELIZABETH JEAN HINKLE LEE and FIRST AMERICAN NATIONAL BANK and FIRST TENNESSEE BANK NATIONAL ASSOCIATION

Direct Appeal from the Circuit Court for Knox County Nos. 3-541-96 and 3-544-96 Hon. Dale C. Workman, Circuit Judge FILED OCTOBER 8, 2001 No. E2001-00254-COA-R3-CV

Plaintiffs’ action against defendant Bank was dismissed by the Trial Court on the ground the statu

te of limitation, Tenn.

Code Ann. §47-3-1 18(g) had run. O n appeal, we aff

irm.
Tenn. R. App. P.3 Appe al as of Right; Judgme

nt of the Circuit Cour

t Affirmed.

H ERSCHEL P ICKENS F RANKS , J., delivered the opinion of the court, in which D. M ICHAEL S WINEY , J., joined, and C HARLES D. S USANO , J R ., J., dissented and filed an opinion. . James S. Tipton, Jr., and W. Morris Kizer, Kno xville, Tennessee,

for Plaintiffs-Ap

pellants, Pero’s Steak and Spaghetti House and Louis Inn. Stephen G. Anderson, Knoxville , Tennessee, for Defendant-App

ellee, Fir st Tennessee Bank Nationa l Association.

OPINION

Plaintiffs action against Fi rst Tennessee Bank National Association (“Bank”) was held to be time-barred by the Trial Judge pursuant to Tenn. Code Ann. §47-3-118. Plaintiffs have appealed to this Co

urt. Pero’s Steak

and Spaghetti House and Louis Inn are businesses located in Knoxville,-2-

Tennessee, operated as general partnerships. The partners of the two bu sinesses eng aged Elmer Hinkle, as their gener

al bookkeeper to

handle Louis Inn

and Pero’s general bookkeeping, accounting and tax preparation. H

inkle did business un

der the name of H

inkle & Hinkle, a

family busine

ss including his wife and daughter, Elizabeth Hinkle Lee (“Lee”). Beg inning in 1985, Lee

handled all of the work for Pero’s and Louis Inn.

Between 1988 and 1995, Pero’s Steak and Spaghetti House wrote 54 checks for the payment of taxes and Louis Inn wrote 86 checks for the payment of taxes. Pero’s checks were drawn on First American Bank, where Pero’s did its banking. Th

e Louis Inn checks w

ere drawn on Fi

rst Tennessee Bank. All 140 che cks were made pa

yable to First Tennessee. All c

hecks were giv

en to Defendant Lee by Pero’s or L ouis Inn in order for her to present them to the Bank. Some of the 140 checks were presented for payment to the IRS accompanied by an IRS payment coupon. These checks and coupons were set aside by the Bank with similar d

eposits from other employers and would b e depo sited in the Bank’ s Treasury , Tax and Liabili

ty account. The Bank would th

en transmit

monies to the IRS with a tape identifying the portion to be credited to each employer’s identification number.

Not all of the checks were handled in the stated manner. Sometimes, Lee cashed the checks and usedsome or all of the p roceeds to buy

cashier’s chec

ks payable

to the state or the I

RS. Sometimes she deposited the checks in an account called the Hinkle & Hinkle Tax Account. Lee would then draw checks on the Hinkle Account to pay taxes owed by Pero’s and Louis Inn. In 1991, Pero’s was audited by the IRS. As a result of that audit, Pero’s was required to pay approximately $39,000.00 in back taxes, interest and penalties. On or about February

3, 1992, Pero’s received anoth

er notice from the

IRS stating tha

t no tax deposits were receiv ed during the fourth quarter of 1990, but four

checks had been written by Pero’s in the fourth quarter of 1990 each for the amount of $9,500.00, or a total of $38,000.00.

The Complaint against First Tennessee Bank alleged that the Bank had eng aged in a joint conversion w

ith Lee, allow

ing her to cash o

r deposit a number of

checks for her

own credit. Eve ntu all y, a trial ensued over this dispute before a jury, and jury verd icts were returned for the plaintiff

which were ultimately set aside by the Tr ial Judge and a new trial granted before another Judge. On August 18, 2000, the Bank filed a Motion for Partial Summary Judgment basedupon its a

ffi rmative defense, i.e., the statute of limitations. The plaintiffs also filed a joint Motion for Partial Summary Judgment. Acting on the Motions, the Trial Court granted the Bank’s Motion for Partial Summar y Judgment,

butdenied plaintiffs’ Motion. In light of this decision, there remained no dispute regarding the claims of plaintiffs not time-barred by the Court’ s holding, and the stipulation of the amount of those claims, toget her with the gra

nt of partial summa

ry judgmen

t, were reflected in the Court’s Order and Final Judgment of October 5, 2000.

Our review of summar

y judgments

in volves pur ely a question of law, with no-3-

presumption of correctness of the lower court’s judgment, and we are required to review the record to determine if the requi rements of Tenn. Code Civ. P. 56 have been met. Staples v. C.B.L. & Associates, Inc., 15 S.W.2d 83 (Tenn. 2000).

Prior to 1996, the statute

of limitations on ac

tions for convers

i on of negot iable instruments

was not a separate statute, b ut rat her was governed by the statute of limitations for property to

rt actions. The following action

s shall be commenc

ed within three (3) years

from the accruing of the cause of action: . . . ( 2) Act ions for the detention or conversion of personal pro pert y. Tenn. Code A nn. § 28-3-105. See McConnico v. Third Nat’l Bank , 499 S.W.2d 874, 891 (Tenn. 1973) (applying general limitation period for conversion of personal property “

absent an approp

riate limitation in the Uniform Commer cial Co de”). In app lying this g

eneral limitation p

rovision to causes of action for the conversion of negotiable instruments, this Court employed the discovery r

ule and held that the statut

e of limitations run

s from “the time when the plain tiff knew or rea

sonably should have known that a cause of action existed.” Pacific Properties v. Home Federal Bank , 1995 WL 59112, *4 (Tenn. Ct. App. 1995) (cit ing Stone v. Hinds , 541 S.W.2d 598, 599 (Tenn. Ct. App. 1976). After

the Pacific Properties decision, the legislature adopted § 47-3-11 8(g) in June of 1995, establishing a specific statute of limitations for conversion of negotiable instruments and plac ing that stat ute within the Uniform Commercial Code section of the Tennessee Code. The statute became e

ffective on June 1,

1996 and provides: (g) Unless governed by other law regar ding claims for indemnity or contribution, an action (i) for th

e conversi on or an instrument, for money had and received, or like action based on convers ion, (ii) for brea

ch of warranty

, or (ii i) to enforce an obligation, duty, or

right arising u

nder this chapter

and not governe

d by this section must be commenced

within three (3) y

ears after the

[cause of action] a

ccrues. Tenn. Code Ann. § 47-3-118.

Plaintiffs argue that

§ 118(g) does no

t apply because it beca

me effective a

fter their cause of action accrued. They argue that their a ction accrued in March

of 1996, after they pursued an investigation of

an IRS levy on

their bank acco

unt, which had req

uired First Tenn

essee Bank to remit to the IRS $24,386.48 from the accounts of Louis Inn at the B ank, for an alleged underpayment of federal payroll taxes.

The Trial Court found that even if the discovery rulewas applicable (which the Court found did not apply), the plaintiffs’ action would still be time-barred because they knew o r had reason to know of the conversion of the checks by February of 1992, and the action was not brought-4-

until August of 1996.

Plaintiffs argue that upon receiving the notice from the IRS on February 3, 1992, that they believed Lee, to whom they gave their checks, when she

told them that a mistake had been made and that no additional taxes were act ually owed, a

nd contend that they did not discover the conv ersion of the checks then, because of their reliance upon their long-standing profe ssional relationship

with Lee. They

claim that they onl

y became a

ware of the conv

ersion after the

IRS placed a levy on their bank account with the Bank in 1995.

Where the discovery r

ule is applicable, the statute of limitations begins to run when plaintiff knows or in exercis

e of reasonable

care and dilige

nce should

know, that an injury hasbeen sustained as a result of wrongful or tortious conduct by the defendant. See Shadrick v. Coker , 963 S.W.2d 726, 733 (Tenn. 1998). The plaintiff is deemed to have discovered the right of action if he is aware of facts suffici

ent to put a reason

able person on not

ice that he has suf

fered an injury

as a result of wrongful conduct. See Roe v. Jefferson , 875 S.W.2d 653, 657 (Tenn. 1994).

Against the backdrop of an IRS audit in 1991 where plaintiffs were required to pay back taxes, interest and penalties, the February 3, 1992 notice to plaintiff

s stating that no de

posits were made for the four

th quarter of 1990

would put a reaso

nable perso

n on notice that either the Bank had not made

payment to th

e IRS or Le

e had not made the

deposits. The Trial Judge held th

e discovery

rule does n

ot apply, but plaintiffs argue that §118(g) do es no t apply because it became effective after their cause of action accrued. However, the statute of limitations codified at §47-3-118 does not shorten a ny applicab

le statute of limita

tions. At all relevant time

s actions for conv

ersion of negot

iable instruments m

ust have been brought wi

thin three years of the accrual of the ca use of action. The discovery rule is an equ itable exception to the general rule that the statute of limitations begins to run as soon as the underlying cause of action accrues. See Menichini v. Grant , 995 F.2d 1224, 1229 (3d Cir. 1993); Palmer Mfg. and Supply, Inc. v. BancOhio Nat’l Bank , 637 N.E.2d 386, 389-91 (Ohio Ct. App. 1994). Also see Teeters v. Currey , 518 S.W.2d 512, 517 (Tenn. 1974) (referring to the discovery rule as an “ equitable doctrine ”. The overwhelming weight of authority is to the effect

that the discovery rule does not apply to neg otiable instrument

theft. See, e.g., Menichini ; Kuwait

Airways Corp. v. American Security Bank , 890 F.2d 456, 461-63 (D.C. Cir. 1989); Stefano v. First Uni o n N at’l Bank of Virginia

, 981 F.Supp. 417, 421 (E.D. Va. 1997); Haddad’s of Illinois, Inc. v. Credit Union 1 Credit Union , 678 N.E.2d 322-32 5-26 (Ill. App . Ct. 1997); Husker News Co. v. Mahaska State Bank , 460 N.W.2d 476, 477-78 (Iowa 1990); Insurance Co. of North America v

. Manufacturers

Bank of Southfield

, 338 N.W.2d 214, 216 (Mich Ct. App. 1983); Smith v. Fr

ankli n Custodian Funds, Inc
. , 726 So.2d 144, 148 (Miss. 1998); Gerber v. Manufacturers

Hanover Trust

Co. , 315 N.Y.S.2d 601, 603 (N.Y. Civ. Ct. 1970); Palmer Mfg. and Supply, Inc. v. BancOhio Nat’l Bank , 637 N.E.2d 386, 389-91 (Ohio Ct . App. 1994); Fuscellaro

v. Industrial Nat’l Corp

. , 368 A .2d 12 27, 12 31 (R. I. 1977); Wang v. Farme rs State Bank of Winner , 447 N.W.2d 516, 518 (S.D. 1989) ; Lyco v. Acquisit ion 1984, L.P. v. The First Nat’l Bank of-5-

Amarillo , 860 S.W.2d 117, 119 (Tex. Ct. App. 1993).

Where a party not engaging in f raudulent concealment asserts the statute of limitations defense, most courts have refused to apply the d

iscovery r ule to negotiable ins

truments, finding it contrary to UCC policies of finality and n egotiabili ty. See e.g. Palmer Mfg. and Supply, Inc. v. BancOhio Nat’l Bank , 637 N.E.2d 386, 389-91 (Ohio Ct. App. 1994).

In adopting

the UCC in this State, the Legislature codified the purposes and policy of the Code: (a) to simplify, clar ify and modernize the law governing commercial transactions; (b) to permit the contin ued expansion of commer cial practice th

rough custom, usage and agreement of the parties; and (c) to make uniform the law among the va

rious jurisdictions

. Tenn. Code Ann. § 47-1-102(2).

Statutory uniformity is a principle to be applied in construing the UCC in Tennessee. Wakefield v. Crawley , 6 S.W.3d 442, 450 (Tenn. 1999).

To be in conformity with other jurisdictions, Tennessee should likewise abandon the use of the discovery rule in actions for conversio n of negotiable instruments absent fraudulent concealment

on the p art o f the defendant asserting the statute of limitations defense. However, plaintiffs argue that they should not be p revented from

relying upon the discovery r ule that was applied in Pacific Proper ties prior to the codification of the statute of li

mitations in the U.C.C

. While the statute of limita tions itself remain

ed at three y

ears, the effe

ct of the new statu

te is to eliminate the discovery rule from cases of conversions of ne gotiable in struments. This, in turn, effectively

limits the time in

which a person has to bring a claim f or conversion. Ho

wever, it is well established that a

newly eff ective statute

of limitations cannot extinguish a cause of action that has already accrued, without

giving the plaintiff a reasonable opportunity to bring suit after the changes. See Pacific Eastern Corp. v. Gulf Life Co. , 902 S.W.2d 946, 956 (Tenn. Ct. App. 1995).

The Legislatur

e adopted the stat

ute of lim

ita tions provision for conversion of negotiable

instruments in June of

1995, but delay

ed its effective

date until June 1, 1996. Tenn. Code Ann. §47-3-118. Assuming without deciding that pla

intiffs had a cons

titutionally

vested right to the benefit of the discovery rule, plaintiffs concede they learned of the injurious transactions after the IRS levied on their bank account in 1995 and before the statute became effective. Yet they did not bring an action against the Bank during the yea r in which the Legislature delayed the effective date of the statute and

give no valid re

ason why the

y waited unt

il August 29, 1996 to bring this action, after the statute had become effective. As we said in Pacific Eastern Corp. v. Gulf Li fe Co., 902-6-

S.W.2d 946 (Tenn. App. 1995):

[a]n amendment that shortens an existing statute of limitations cannot extinguish a cause of action that has

already a

ccrued without g

iving the plaintif

f a reasonable opportunity

to bring suit after the effective da te of the amendment. (Citations omitted). Id. 956. The Legislature gave such parties a reasonable time to bring their action, i.e., one year from the pa ssage of the statute before it became effective. According ly, indulging the plaintiffs ’ right to apply the discovery rule, they had a reasonable time to bring their action, which they failed to do before the statute became effective.

Fin all y, plaintiffs argue that the fraudulent concealment doctrine tolled the statute of limitations rega

rdless of whethe

r they should

have discovere

d their cause of a

ction, or not. In Shadrick v. Coker

, 963 S.W.2d 726 (Tenn. 1998), the Supreme Court addressed the issue of frau

dulent concealme

nt: To establish fraudu

lent concealmen

t, a plaintif

f must prove (1) that the defendant took af firmative action to conceal the cause of action or remained silent and failed to disclose material facts despite a duty to do so and,(2) the plaintiff could not have discovered the cause of action despite exercising reasonable care and dilig ence.

. . . The third essential element of fraudulent concealment is knowledge on the part of the defendant of the facts giving rise to the cause of action. In other words, the defendan t must be aw are of the wro ng.

. . . The fourth an d fina l essential eleme nt of fraudulent c

oncealment is a concealment

of material information from the plaintiff. Concealment “may consist of withholding information or maki ng use of some device to mislead” the plaintiff in order to exclude suspicion or prevent inquiry. We hold that the plaintiffs have neither pled nor offered evidence to esta

blish a prima facie case of f

raudulent conce

alment. We affirm the judg

ment of the Trial Co

urt, and remand w

it h the cost of the appeal assessed to plaintiffs Pero’s Steak and Spaghetti House and Louis Inn.-7- _________________________ H ERSCHEL P ICKENS F RANKS , J.