Opinion ID: 2973303
Heading Depth: 2
Heading Rank: 3

Heading: Unauthorized Wire Transfers (Count III)

Text: -11- No. 04-4372 Pavlovich v. National City Bank Ms. Pavlovich’s unauthorized wire transfers claim also has no merit because Cashel had actual and apparent authority to direct disbursements from the custody account and because Ms. Pavlovich ratified Cashel’s directives. Under Ohio’s adoption of Uniform Commercial Code provisions pertaining to wire transfers, a bank must refund its customers the amount of any unauthorized transfers. See Ohio Rev. Code Ann. § 1304.59(A) (West 2005). A payment order is authorized if the person identified as the sender “authorized the order or is otherwise bound by it under the law of agency.”4 Ohio Rev. Code Ann. § 1304.57(A) (West 2005). The official comments confirm that “[t]he issue is one of actual or apparent authority of the person who caused the order to be issued in the name of the customer.” Ohio Rev. Code Ann. § 1304.58 cmt. 1 (West 2005). Cashel had actual authority in directing the disbursements. Actual authority is the authority that the principal intentionally grants to an agent. See Nat’l City Bank v. Rhoades, 779 N.E.2d 799, 804 (Ohio Ct. App. 2002) (citing Restatement (Second) of Agency § 7 (1958)). By executing the Investment Management Contract with Cashel, Ms. Pavlovich expressly granted “complete discretion” to Cashel to invest her funds. It is difficult to imagine a more intentional grant of actual authority. See Grabowski v. Bank of Boston, 997 F. Supp. 111, 124 (D. Mass. 1997) (“If [a third party] had general authority over the account, the Bank is not liable for” the third party’s unauthorized withdrawals.). In addition, Cashel had apparent authority to direct the Bank’s disbursements. Apparent 4 A bank may also avoid responsibility for improper transfers if the transfer is “verified” pursuant to a statutory provision not applicable here. See Ohio Rev. Code Ann. § 1304.57(B) (West 2005). -12- No. 04-4372 Pavlovich v. National City Bank authority is “the power to affect the legal relations of another person by transactions with third persons . . . arising from . . . the other’s manifestations to such third persons.” Master Consol. Corp. v. BancOhio Nat’l Bank, 575 N.E.2d 817, 822 (Ohio 1991) (quoting Restatement (Second) of Agency § 8 (1958)). Ms. Pavlovich made a direct manifestation to the Bank of Cashel’s authority to direct the investments of her funds when she executed the Trading Letter and Custody Agreement. As discussed above, the Trading Letter authorized the precise activity of which Ms. Pavlovich now complains. Under Ohio’s agency law, a principal may ratify the conduct of her agent even if that conduct was initially unauthorized so that the conduct becomes binding on the principal. See Campbell v. Hospitality Motor Inns, Inc., 493 N.E.2d 239, 240 (Ohio 1986) (per curiam). Ms. Pavlovich ratified Cashel’s authority to direct her investments because of her actual knowledge of the transactions coupled with her acceptance of their benefits and her failure to repudiate within a reasonable period of time. See id. at 242; Young v. Int’l Bhd. of Locomotive Eng’rs, 683 N.E.2d 420, 425 (Ohio Ct. App. 1996). D. Negligence (Count IV) and Ohio’s Economic-Loss Rule Ms. Pavlovich claims that the Bank was negligent in failing to administer her account with ordinary care and to safe-keep her investment assets. This negligence claim is barred by Ohio’s economic-loss rule in that, although there is privity of contract between her and the Bank, recovery for purely economic loss is not based upon a tort duty independent of contractually created duties. Under Ohio law, “[t]he economic-loss rule generally prevents recovery in tort of damages for purely economic loss.” Corporex Dev. & Constr. Mgmt., Inc. v. Shook, Inc., 835 N.E.2d 701, -13- No. 04-4372 Pavlovich v. National City Bank 704 (Ohio 2005). The economic-loss rule applies in a tort action only when economic loss is unaccompanied by personal injury or property damage. See Chemtrol Adhesives, Inc. v. Am. Mfrs. Mut. Ins. Co., 537 N.E.2d 624, 629-30 (Ohio 1989). Economic losses include not only diminution in value and consequential losses like lost profits, see id. at 629, but also, as the term’s name implies, the loss of electronic funds and failed investments. See Sovereign Bank v. BJ’s Wholesale Club, Inc., 395 F. Supp. 2d 183, 204 (M.D. Pa. 2005) (money lost through unauthorized credit card charges was purely economic loss); McCutcheon v. Kidder, Peabody & Co., 938 F. Supp. 820, 823 (S.D. Fla. 1996) (applying the economic-loss rule to a securities case); Grynberg v. Agri Tech, Inc., 10 P.3d 1267, 1269-70 (Colo. 2000) (en banc) (losses from cattle investment program were purely economic losses); Calcagno v. Personalcare Health Mgmt., Inc., 565 N.E.2d 1330, 1339 (Ill. App. Ct. 1991)(“Economic losses encompass objectively verifiable monetary losses . . . .”). Following this authority, Ms. Pavlovich’s monetary losses from funds disbursed to Rx Remedy were purely economic losses. Ohio law prevents the recovery of purely economic losses in a negligence action either where there is no “privity or a sufficient nexus that could serve as a substitute for privity” or where recovery of such damages is not based upon a tort duty independent of contractually created duties. See Corporex Dev. & Constr. Mgmt., Inc., 835 N.E.2d at 703, 705; Foster Wheeler Enviresponse, Inc. v. Franklin County Convention Facilities Auth., 678 N.E.2d 519, 529 (Ohio 1997). In the instant case, the Custody Agreement and Trading Letter created privity of contract. However, Ms. Pavlovich has not identified any tort duty owed by the Bank independent of contractually created obligations. With respect to similar custody arrangements, courts in other jurisdictions have -14- No. 04-4372 Pavlovich v. National City Bank prevented plaintiffs from bringing tort actions where the defendant bank owed no duty of care independent of its contractual obligations. See Abbott v. Chem. Trust, No. 01-2049-JWL, 2001 U.S. Dist. LEXIS 6214, at  (D. Kan. Apr. 26, 2001) (“Because the custodian agreement specifically defined [the bank’s] duties with respect to these matters, extracontractual tort duties regarding these matters are precluded.”); Yochim v. First of Am. Bank-Michigan, No. 91-76283, 1994 U.S. Dist. LEXIS 19728, at -30 (E.D. Mich. Dec. 16, 1994) (“Because the Court has found that [the bank] did not breach its fiduciary or contractual duties, and because plaintiffs have not identified any other independent duties allegedly breached by [the bank], [the negligence count] will be dismissed.”). Accordingly, we hold that the economic-loss rule bars Ms. Pavlovich’s negligence claim. E. Aiding and Abetting Tortious Conduct (Count VII) Ms. Pavlovich’s final allegation is that the Bank aided and abetted the tortious conduct of Cashel and others generally by executing Cashel’s instructions to transfer money from her custodial account. This claim also must fail because Ohio law is unsettled whether this cause of action exists and, regardless, Ms. Pavlovich cannot establish a prima facie case. It is unclear whether Ohio recognizes a common law cause of action for aiding and abetting tortious conduct.5 Compare Aetna Cas. & Sur. Co. v. Leahey Constr. Co., 219 F.3d 519, 533 (6th 5 A cause of action for aiding and abetting tortious conduct is created, if at all, by Ohio law. Although the Bank argues that this claim raises a federal question, the Bank has fallen far short of convincing us not to apply Justice Holmes’ statement, as more recently interpreted by the Supreme Court, that, in the “vast majority” of cases, a “suit arises under the law that creates the cause of action.” See Merrell Dow Pharms. Inc. v. Thompson, 478 U.S. 804, 808 (1986) (quoting Franchise Tax Bd. of the State of California v. Constr. Laborers Vacation Trust for S. California, 463 U.S. 1, 8-9 (1983), and Am. Well Works Co. v. Layne & Bowler Co., 241 U.S. 257, 260 (1916)) (internal quotation marks omitted). -15- No. 04-4372 Pavlovich v. National City Bank Cir. 2000) (“[W]e conclude that the Supreme Court of Ohio would recognize aiding and abetting liability if squarely faced with the issue . . . .”) with Federated Mgmt. Co. v. Coopers & Lybrand, 738 N.E.2d 842, 853 (Ohio Ct. App. 2000) (“Ohio does not recognize a claim for aiding and abetting common-law fraud.”); see also Pavlovich v. Nat’l City Bank, 342 F. Supp. 2d 718, 734-36 (N.D. Ohio 2004) (discussing this conflict in more detail). Even if the Supreme Court of Ohio would recognize this claim, Ms. Pavlovich would not prevail. Section 876(b) of the Second Restatement of Torts provides the basis for “modern application of civil aiding and abetting” and requires two elements: “(1) knowledge that the primary party’s conduct is a breach of duty and (2) substantial assistance or encouragement to the primary party in carrying out the tortious act.” Aetna Cas. & Sur. Co., 219 F.3d at 532-33 (quoting Andonian v. A.C. & S., Inc., 647 N.E.2d 190, 192 (Ohio Ct. App. 1994)). The first element requires a showing of “actual knowledge,” or perhaps merely “general awareness,” of the primary party’s wrongdoing. See id. at 533-34. Ms. Pavlovich can establish neither for the reasons the District Court aptly recounted: NCB had no duty to review the investment recommendations made by Cashel. Furthermore, Mrs. Pavlovich never shared her investment goals with NCB so as to make NCB aware that Cashel was perhaps overstepping its discretion . . . and she never objected to NCB after receiving and reading her monthly statements. Additionally, neither NCB employee responsible for administering Mrs. Pavlovich’s Account saw anything to raise a concern of possible fraud on the part of Cashel. Finally . . . Mr. Pavlovich’s January 2000 phone call was too vague to put NCB on notice of Cashel’s tortious conduct. In rather conclusory fashion, Plaintiff argues that NCB should have had a general -16- No. 04-4372 Pavlovich v. National City Bank awareness of the tortuous conduct after having observed the rollover transactions, the rise and fall of the available cash balance in the Pavlovich Account, and the institution of the five-day rule in January 2000. However, this evidence, without more, does not give rise to a genuine issue of material fact. Plaintiff has not offered any evidence that these events were either caused by or the result of Defendant’s knowledge of tortuous conduct on the part of Cashel. Pavlovich, 342 F. Supp. 2d at 735-36 (internal citations to the record omitted). Accordingly, whether or not Ohio law recognizes a common law action for aiding and abetting tortious conduct, Ms. Pavlovich’s claim fails.