Opinion ID: 2973303
Heading Depth: 2
Heading Rank: 1

Heading: Breach of Contract (Count I)

Text: Ms. Pavlovich argues that the Bank breached the Custody Agreement by following Cashel’s purportedly unauthorized instructions to direct money to Rx Remedy. This claim is without merit because the Bank’s disbursements pursuant to Cashel’s written directives were authorized by relevant agreements and, in any event, Ms. Pavlovich ratified the Bank’s activities. Under Ohio law, contract interpretation is a matter of law when a contract’s terms are clear and unambiguous. See Long Beach Ass’n, Inc. v. Jones, 697 N.E.2d 208, 209-10 (Ohio 1998). To -5- No. 04-4372 Pavlovich v. National City Bank establish a breach of contract, a plaintiff must show that a contract existed, the plaintiff performed, the defendant breached, and the plaintiff suffered damages. Wauseon Plaza Ltd. P’ship v. Wauseon Hardware Co., 807 N.E.2d 953, 957 (Ohio Ct. App. 2004). Since the other elements are undisputed, the only issue here is whether the Bank breached the Custody Agreement. The Custody Agreement required the Bank to “be responsible for the safekeeping of” Ms. Pavlovich’s investment assets entrusted to the Bank. Paragraph nine of the Custody Agreement further provided: The Custodian may safely rely and act upon any written direction delivered to it as provided herein, if purported to have been signed by me or by any one or more persons specifically authorized in writing by me and reasonably believed by the Custodian to be genuine. The Custodian may rely upon the continuance of any such authorization until notified in writing to the contrary . . . . In paragraph five, the Custody Agreement also limited the Bank’s obligations with respect to investment recommendations: The Custodian shall have no duty to and shall not review or make investment recommendations with respect to any property held hereunder. The Custodian shall sell, exchange, invest, and otherwise deal with the property only as I may direct in writing. As noted above, the concurrently executed Trading Letter gave Cashel “sole trading authority” over her “Fixed Income Account” and required the Bank “to accept all trades from [Cashel] unless notified to the contrary . . . .” The now disputed transactions involving Rx Remedy fell wholly within the framework of the Custody Agreement and the Trading Letter and persisted for several years without written objection. The Trading Letter provided written authorization, as required by the Custody -6- No. 04-4372 Pavlovich v. National City Bank Agreement, for Cashel to direct the investment of Ms. Pavlovich’s funds. Cashel exercised that authority by directing investments in Rx Remedy. The Bank had no reason to doubt the genuineness of Cashel’s authorization; after all, she had granted Cashel in the Cashel Contract “complete discretion” to invest her money. See Yochim v. First of Am. Bank-Michigan, No. 91-76283, 1994 U.S. Dist. LEXIS 19728, at -26 (E.D. Mich. Dec. 16, 1994) (holding that, even where the plaintiffs alleged “obvious self-dealing,” the custodian bank “was authorized to act on instructions of [a third party] it believed were genuinely made on behalf of clients”). The Bank did not violate the Custody Agreement by weighing in on her risky investment strategies, but, instead and unfortunately for her, followed Cashel’s written directions “to a tee.” See Abbott v. Chem. Trust, No. 01-2049-JWL, 2001 U.S. Dist. LEXIS 6214, at  (D. Kan. Apr. 26, 2001) (upholding a custodian agreement which required the bank to determine whether a particular investment was administratively feasible, but not whether it was fraudulent). Moreover, the Bank’s delay in instituting the five day rule was not a breach of the contract because the rule was not contractually required. She received monthly statements depicting these transactions but did not terminate Cashel’s authority until late 2000. When she did so, the Bank honored that written direction. Ms. Pavlovich’s primary argument to the contrary is that the Trading Letter limited Cashel’s authority to executing “trades” as opposed to simply transferring money without a stated purpose. This argument borders on the frivolous because, at least until the commencement of litigation, it was undisputed that the challenged disbursements purchased promissory notes with 12% interest and warrants to buy Rx Remedy stock. Ms. Pavlovich and her husband agreed with this characterization in their deposition testimonies. In a letter to Ms. Pavlovich’s husband and other investors, Bob -7- No. 04-4372 Pavlovich v. National City Bank Mooney, the apparent “brains” behind the family’s investments in Rx Remedy, described the investments as “loans” paying 12% interest “and about 18 warrants per $1000 per year.” Moreover, Ms. Pavlovich reported over $50,000 in interest income from Rx Remedy on her tax returns. Thus, since her money was exchanged for notes and warrants – albeit investments of dubious value – “trades” occurred. Even if the transactions were somehow outside the scope of the Custody Agreement and Trading Letter, Ms. Pavlovich ratified the Bank’s disbursements pursuant to Cashel’s directives, in the words of the District Court, “by accepting its actions and their consequences over the course of several years.” Pavlovich v. Nat’l City Bank, 342 F. Supp. 2d 718, 725 (N.D. Ohio 2004). “Ratification may be implied when there is actual knowledge of an agreement, acceptance of its benefits and a failure to repudiate within a reasonable time.” Young v. Int’l Bhd. of Locomotive Eng’rs, 683 N.E.2d 420, 425 (Ohio Ct. App. 1996); see also Campbell v. Hospitality Motor Inns, Inc., 493 N.E.2d 239, 242 (Ohio 1986) (per curiam). Ms. Pavlovich had actual knowledge of the Bank’s disbursements pursuant to Cashel’s investment decisions over her funds, as manifested by her deposition testimony and receipt of monthly statements for multiple years depicting the challenged transactions. She accepted the benefits of this investment activity by accepting the interest the notes paid and reporting the interest as income on tax returns. She further failed to repudiate Cashel’s authority until roughly eight years after that authority was granted. This case resembles others holding that a failure timely to object to transactions depicted in bank statements generally amounts to ratification. See White Castle Sys. v. Huntington Nat’l Bank, Columbus, 43 N.E.2d 737, 741 (Ohio Ct. App. 1941); First Nat’l Bank of Philadelphia v. Farrell, 272 F. 371, 376 -8- No. 04-4372 Pavlovich v. National City Bank (3d Cir. 1921); V. H. Juerling & Sons, Inc. v. First Nat’l Bank of Richmond, Indiana, 242 N.E.2d 111, 119 (Ind. Ct. App. 1968). Ms. Pavlovich argues to the contrary based on Cashel’s fraud in concealing the true nature of the transactions and on Ohio law’s ban on ratifying illegal conduct. These arguments focus on Cashel’s actions, not those of the Bank, and are unavailing because nothing the Bank did was fraudulent or otherwise unlawful. Ms. Pavlovich further argues that she did not ratify transactions occurring after a phone call from her husband to the Bank in January of 2000. In that conversation, Mr. Pavlovich recalled telling a Bank representative that “these transfers are not supposed to happen.” Even assuming that this instruction contained sufficient content to defeat ratification, the Custody Agreement prevented the Bank from heeding this direction because Mr. Pavlovich was not a party to the Custody Agreement and because the communication was not in writing as required by the Custody Agreement.