Opinion ID: 793222
Heading Depth: 2
Heading Rank: 1

Heading: Uniform Fiduciaries Law

Text: 7 Watson first argues that genuine issues of material fact exist as to American Express's liability under the UFL. We review a district court's grant of summary judgment de novo. Nunley v. Dept. of Justice, 425 F.3d 1132, 1135 (8th Cir.2005). 8 The UFL is the Missouri codification of the Uniform Fiduciaries Act, 3 which alters the common law with respect to the duties of parties who deal with fiduciaries. In re Lauer, 98 F.3d 378, 382-83 (8th Cir.1996) (citing Trenton Trust Co. v. Western Sur. Co., 599 S.W.2d 481, 490 (Mo.1980) (en banc)). The UFL's purpose is to reliev[e] banks of their common law duty of inquiring into the propriety of each transaction conducted by a fiduciary and to prevent banks and others who typically deal with fiduciaries [from being] held liable for a fiduciary's breach of duty absent either (1) `actual knowledge' of the breach or (2) knowledge of sufficient facts to constitute `bad faith.' Id. at 383 (citing Trenton, 599 S.W.2d at 491-92). 9 The UFL provision applicable to the present case states: 10 If a check or other bill of exchange is drawn by a fiduciary as such, or in the name of his principal by a fiduciary empowered to draw such instrument in the name of his principal, the payee is not bound to inquire whether the fiduciary is committing a breach of his obligation as fiduciary in drawing or delivering the instrument, and is not chargeable with notice that the fiduciary is committing a breach of his obligation as fiduciary unless he takes the instrument with actual knowledge of such breach or with knowledge of such facts that this action in taking the instrument amounts to bad faith. If, however, such instrument is payable to a personal creditor of the fiduciary and delivered to the creditor in payment of or as security for a personal debt of the fiduciary to the actual knowledge of the creditor, or is drawn and delivered in any transaction known by the payee to be for the personal benefit of the fiduciary, the creditor or other payee is liable to the principal if the fiduciary in fact commits a breach of his obligation as fiduciary in drawing or delivering the instrument. 4 11 Mo. Rev. St. § 469.270 (emphasis added); see also Unif. Fiduciaries Act § 5 (1922). Under the first sentence of the statute, Watson asserts that a genuine issue of material fact exists as to whether American Express acted in bad faith in violation of the UFL when it took checks drawn on Watson's corporate checking account as payment for the personal debt of Mayfield and her husband. In response, American Express argues that it did not take the checks knowing facts that would support a bad-faith finding. 12 Watson also contends that, under the second sentence of the statute, a genuine issue of material fact exists whether American Express had actual knowledge that the checks Mayfield wrote were for Mayfield's personal debt or for her personal benefit. American Express maintains that no evidence exists that it had actual knowledge that the checks were written by Mayfield, a fiduciary, in payment of her personal debt or for her personal benefit.
13 The UFL does not define bad faith; however, it does define good faith. Trenton, 599 S.W.2d at 492. Good faith means that the act is in fact done honestly, whether it be done negligently or not. Id. (quoting Mo. Rev. St. § 469.240(2)). [M]ere negligence is insufficient to amount to `bad faith.' However, it is not entirely accurate to equate `bad faith' with `dishonesty,' if the latter term is taken to denote a high degree of moral guilt, or evil motives. Id. The test of bad faith is whether it is commercially unjustifiable for the person accepting a negotiable instrument to disregard and refuse to learn facts readily available. Where circumstances suggestive of the fiduciary's breach become sufficiently obvious it is `bad faith' to remain passive. Id. (explaining that the term bad faith in the UFL is borrowed from the Uniform Negotiable Instruments Act). 14 To establish bad faith, Watson had to show American Express knew or disregarded knowledge that Mayfield was breaching her fiduciary duty. In re Broadview Lumber Co., 118 F.3d 1246, 1251 (8th Cir.1997) (applying Missouri law). [M]ere suspicious circumstances are insufficient to show bad faith. Johnson v. Citizens Nat'l Bank of Decatur, 30 Ill.App.3d 1066, 334 N.E.2d 295, 297, 300 (1975) (reviewing Illinois's version of the UFA, which is identical to Missouri's UFL). Furthermore, many legitimate reasons [exist as to] why an agent and principal might engage in odd checking practices. Id. at 300; see also United Catholic Parish Schs. of Beaver Dam Educ. Assoc. v. Card Servs. Center, 248 Wis.2d 463, 636 N.W.2d 206, 208-211 (2001) (holding that Card Services Center acted in good faith in taking corporate checks from a fiduciary to pay the fiduciary's credit card bills because the checks had no facial irregularities, could have been for a legitimate reimbursement by the company for purchases the fiduciary made on the company's behalf, and were drafted over a seven-year period by the fiduciary without any complaint from the company). Ultimately, the burden of employing honest fiduciaries rests on the principal. Johnson, 334 N.E.2d at 300. 15 Not only must the payee act honestly, but the payee must also act in a commercially reasonable manner to have acted in good faith. American Express processes over a million payments a day by electronic means—the only practical means to accomplish the task. We consider electronic, automated check processing to be commercially reasonable. DBI Architects P.C. v. Am. Express Travel-Related Serv. Co., 388 F.3d 886, 895 (D.C.Cir.2004); see also Mo. Rev. St. § 400.3-103(a)(7) (stating that reasonable commercial standards do not require a bank that processes checks by automated means to examine the check if the failure to examine it is not in violation of the bank's prescribed procedures and such procedures do not unreasonably vary from general banking usage). Where a bank or payee electronically processes checks pursuant to its normal procedures and does not employ automated procedures that unreasonably vary from general banking usage, no genuine issue of material fact exists as to whether the payee's automated processing of checks is commercially reasonable. Id. 16 In this case, American Express acted in good faith when it accepted the checks from Mayfield as payment for her husband's credit card bills because it acted honestly and in a commercially reasonable manner. First, like the bank in Broadview, American Express acted honestly because it had no knowledge that Mayfield was Watson's fiduciary nor did Watson produce evidence that any of American Express's employees knew that Mayfield was breaching her fiduciary duties to Watson. In addition, like the bank in Johnson, American Express had no previous relationship with Watson to alert American Express to Mayfield's breach of her fiduciary duties. Also, American Express had no reason to suspect that it would have a problem collecting payment on the checks because they contained no facial irregularities. Finally, Mayfield drafted the checks over a four-year period without any complaint from Watson to American Express that Mayfield had no authority to pay for her husband's credit card with corporate checks. 17 In addition to acting honestly, American Express acted in a commercially reasonable manner by using an automated processing system. Watson does not argue that American Express violated its own procedures when it processed the checks. Also, Watson has not provided any evidence that American Express's automated procedures unreasonably vary from general banking usage. 18 Therefore, we conclude that no genuine issue of material fact exists as to whether American Express acted in bad faith in violation of the first sentence of § 469.270.
19 Several sections of the UFL, including § 469.270, provide that a person who deals with the fiduciary will be held liable to the principal if he has actual knowledge that the fiduciary is committing a breach of his obligation as fiduciary. Trenton, 599 S.W.2d 481 at 491 (internal quotations omitted). Actual knowledge means a present awareness that a fiduciary is breaching his or her duties. Id. [A] person dealing with a fiduciary would be subject to liability to the principal if he were presently aware that the fiduciary `is defrauding his principal,' that he is misappropriating trust funds, or that the funds are `being used for private purposes.' Id. (quoting Southern Agency Co. v. Hampton Bank of St. Louis, 452 S.W.2d 100, 105 (Mo.1970)). 20 Under the second sentence of § 469.270, a payee becomes liable for a fiduciary's breach if either: 21 (1) the check is payable to a personal creditor of the fiduciary and delivered to the creditor to pay the fiduciary's personal debt to the actual knowledge of the creditor, or (2) the check is drawn and delivered in any transaction known by the payee to be for the personal benefit of the fiduciary. 22 Chouteau Auto Mart, Inc. v. First Bank of Mo., 55 S.W.3d 358, 360 (emphasis in the original). A fiduciary's mere deposit in a personal account does not give the payee notice of a fiduciary's breach of duty. Id. at 361. Known by the payee to be for the personal benefit of the fiduciary does not include deposit of corporate checks in a fiduciary's personal account. Id. Under the UCC, knows means actual knowledge; therefore, [b]ecause the UCC and the UFL use identical phrases, both must be interpreted to require actual knowledge by the payee that the transaction is for the personal benefit of the fiduciary. Id. Constructive knowledge under the UFA is insufficient to impose liability upon the payee because the UFA limits liability to relatively uncommon cases in which the person who deals with the fiduciary knows all the relevant facts. County of Macon v. Edgcomb, 274 Ill.App.3d 432, 211 Ill.Dec. 136, 654 N.E.2d 598, 602 (1995) (reviewing Illinois's version of the UFA, which is identical to Missouri's UFL). 23 Here, for American Express to be liable to Watson, it must have been aware at the time of the transactions that Mayfield was breaching her fiduciary duties to Watson. First, the mere fact that American Express credited the payments made by Mayfield to her husband's account does not charge it with actual knowledge that the funds were received for payment of a fiduciary's debt or in a transaction for the fiduciary's benefit. American Express had no actual knowledge that Mayfield was Watson's fiduciary when it processed the checks; thus, it could not have known that Mayfield was using fiduciary funds to pay her personal obligations. Second, the checks were for payment on Mayfield's husband's account, not on her own personal account. Accordingly, we hold that American Express did not violate the second sentence of § 469.270 because it did not have actual knowledge that the checks were in payment of a personal debt of Mayfield or were drawn and delivered in a transaction actually known by American Express to be for Mayfield's personal benefit.