Court Opinion

ID: 9531728
Source: CourtListenerOpinion
Date Created: 2023-08-07 04:14:12.838603+00
Date Added: 2024-06-11T13:28:34.306379
License: Public Domain

ERICKSON, Circuit Judge
(concurring in part and dissenting in part).
I concur with that portion of the majority opinion which concludes that the trial court erred by failing to give the parties notice of its intention to treat the motion to dismiss as one for summary judgment. While it was the actions of Norwest that triggered the conversion of the motion to that of summary judgment and they can hardly claim surprise, it is the better practice to give all parties notice of the change of status. A motion for summary judgment goes to the merits of the case and the granting of that motion “operates to merge or bar the cause of action for the purposes of res judicata.” Wright, Miller and Kane, Federal Practice and Procedure: Civil 2d § 2712. Additionally, once the motion becomes one for summary judgment, the burden changes. All parties should be given the opportunity to present additional pertinent evidence in order that the court’s decision is based upon a comprehensive record.
In my opinion, the judgment of the trial court concerning the motion to dismiss should be affirmed.
This action concerns an alleged check-kiting scheme principally operated by John Ashley, a depositor and customer of the Credit Union, Norwest, as well as several other financial institutions. When the practice was halted by the actions of the Credit Union, Norwest was left with $50,-000 in checks drawn upon insufficient funds.
Norwest sued the Credit Union charging that the Credit Union was actively involved in the “check-kiting” scheme. Count I alleges a “participation theory,” wherein it is *564alleged that the Credit Union “knowingly participated in the check-kiting.” Count II alleges a “negligent supervision theory,” wherein it is alleged that the Credit Union did not adequately monitor and supervise its employee/manager, one Michael Geier.
“Check-kiting” is the practice of opening one or more accounts in several banks and “checks are drawn on one account and deposited in the other when neither account has any substantial funds.” Mid-Cal National Bank v. Federal Reserve Bank, 590 F.2d 761, 762, (C.A.9 1979). Taking advantage of the delay in the check collection process, checks are exchanged daily between these accounts, which continually shows credits of “uncollected funds.” The kite will collapse when one of the banks refuses to honor a check drawn upon “uncollected funds.” The bank first stopping the kite usually suffers the least loss.
Generally, banks allow customers to write checks on funds posted to their accounts which have not been finally paid by the bank upon which those funds were drawn. These are known as “uncollected funds.” The process of collecting those funds generally takes a couple of days. Town & Country State Bank v. First State Bank, 358 N.W.2d 387, 390 (Minn.1984). There is a fine line between the illegal act of “check-kiting” and the legal act of writing checks upon “uncollected funds.”
Norwest complains that the trial court erred in granting Credit Union’s motion to dismiss for failure to state a claim upon which relief can be granted. SDCL 15-6-12(b)(5). The motion is an attack upon the sufficiency of the pleadings.
This court has previously set forth the standards to be used in determining whether or not a Rule 12(b)(5) motion should be granted. Those standards are:
1. The complaint is to be construed in the light most favorable to the pleading party.
2. Facts, well plead, and not merely conclusions may be accepted as true and doubts are to be resolved in favor of the pleader.
3. Pleadings should not be dismissed merely because the court entertains doubts as to whether the pleader will prevail in the action.
4.Rules of procedure favor the resolution of cases upon the merits by trial or summary judgment rather than on failed or inartful pleadings.
Janklow v. Viking Press, 378 N.W.2d 875 (S.D.1985).
Under modern pleadings, and particularly SDCL 15-6-8(a)(l), a pleading “shall contain a short and plain statement of the claim showing that the pleader is entitled to relief.” This statute mirrors Rule 8(a)(2) of the Federal Rules of Civil Procedure. The objective of this statutes is to “avoid technicalities,” while “giving the opposing party fair notice of the nature and basis or grounds of the claim and a general indication of the type of litigation involved;.... ” Wright & Miller, Federal Practice and Procedure: § 1215. It is implicit that what is contemplated is a “statement of circumstances, occurrences, and events in support of the claim being presented.” Wright & Miller, supra.
The first inquiry is what facts, well pled, are stated in the complaint which put the defendant on notice as to the claim and grounds upon which it rests?
Examining Count I, Norwest claims:
1. ... Ashley ... has a checking account with Norwest, Credit Union, and three other financial institutions.
2. Credit Union, through it’s officers and agents, knowingly participated in a check-kiting scheme with ... Ashley. ...
3. That as a result of the participation of defendant in said check-kiting scheme, the plaintiff has incurred financial loss and damage in the amount of Fifty Thousand Dollars ($50,000.00).
4. That the conduct of the defendant amounted to oppressive and fraudulent conduct within the meaning of SDCL 21-3-2, entitling the plaintiff to exemplary damages.
In Count II, Norwest claims:
1. ... Ashley ... has a checking account with Norwest, Credit Union, and three other financial institutions.
*5652. ... Michael Goyer (Geier), an employee of the defendant, knowingly participated with said Ashley ... in a check-kiting scheme.
3. ... Defendant was guilty of negligence in the supervision, management and control of said employee, Mike Geyer, which negligence proximately caused damage to this plaintiff in the amount of Fifty Thousand Dollars ($50,000.00).
It is critical to the entire analysis of Norwest’s cause of action that Norwest admits that financial institutions do not generally owe a duty to other financial institutions to discover and disclose check-kiting schemes. Norwest provided the court with an extensive analysis of existing case law in this area and agreed that since competing financial institutions deal at arms length; have their own means of detecting check-kiting; and need no protection from one another; there is no duty between competing institutions. Mid-Cal, supra, at 763. The exceptions to this general rule are as follows:
1. Where some special relationship has been established, either by a fiduciary or confidential relationship.
2. Where there was a contractual relationship.
3. There is a duty created by law. Mid-Cal, supra, at 763.
4. There exists actual misrepresentation or fraud.
Citizens National Bank v. First National Bank, 347 So.2d 964 (Miss.1977).
Norwest argues that a duty is created by SDCL 20-8-1. That statute mandates that “every person is responsible for injury to the ... property ... of another caused by his willful acts or caused by his want of ordinary care of skill.” The majority accepts this argument. In regard to Count I, the majority concludes that “if Norwest can establish the Credit Union ‘knowingly participated’ in a check-kiting scheme and that Credit Union’s conduct was ‘oppressive and fraudulent,’ Norwest is entitled to recover.”
In the first instance, the “well-pled facts” which Norwest relies upon are contained in the phrase “knowingly participated.” Since for the purpose of this motion we do not look behind the pleadings, but rely solely upon the “well-pled facts” within the pleadings, we are stuck with determining what the term “knowingly participated” means. This court does not have to accept every allegation as true, but rather only the “well-pled facts.” In this instance, given the peculiar nature of check-kiting schemes and more importantly, the general rule that no duty exists between competing financial institutions to disclose such schemes, it is my conclusion that the phrase “knowingly participated” is nothing more than a sweeping legal conclusion cast in the form of a factual allegation.
The majority places some emphasis on the fact that the Credit Union did not request a more definite statement, and it filed an answer. There is nothing in the rules of procedure that require a defendant to correct the flaws of the plaintiff. One might more reasonably ask why Norwest chose to fight the motion to dismiss, rather than amending its pleadings?- Those are questions of tactics, which are facts outside the pleadings and need not be considered.
Additionally, in regard to Count I, plaintiff alleges that the Credit Union’s conduct was “oppressive and fraudulent.” These pleadings then run afoul of the mandate set forth in SDCL 15-6-9(b) which requires that “all averments of fraud ... shall be stated with particularity.”
Count II is an action in negligence. “There can be negligence only if the allegedly negligent party breached a legal duty owed to another.” Mid-Cal, supra, at 763. Small v. McKennan Hospital, 403 N.W.2d 410 (S.D.1987). Here, as in Count I, Nor-west’s dilemma is to create an actionable duty and corresponding liability where they admit none previously existed. While arguing that liability should attach in this instance, Norwest is trying to carve out a careful exception to the general rule, which it embraces, rather than opposes. The reason for this tactic is obvious. While Nor-west wants its $50,000.00 in this instance, it would rather not be sued in the next instance when being more diligent than its competitor, Norwest exposes the check-kiting scheme first and the loss belongs to its competitor.
*566In essence, in Count II, Norwest is asking that the duty to control the conduct of a third person to prevent him from doing physical harm to another be extended to that of harm to property (or monetary harm.) This same request was addressed and found wanting in Mid-Cal, supra, at 763. Norwest has not offered a compelling reason to create or extend a duty in this situation. It is interesting that Norwest did not ask this court to ignore the reasoning of other jurisdictions and, in this case of first instance in South Dakota, determine that there is a duty to disclose check-kiting schemes as soon as they are discovered. The reason is obvious. To continually permit one financial institution to sue another each time a check is dishonored because there are accompanying signs of “check-kiting” would seem to cause uncertainty, delay and total confusion in commercial transactions. It would change the entire banking industry, and even Norwest does not want that remedy.
As to Count II, I would affirm the trial court’s decision. As to Count I, I would affirm the trial court’s decision, but remand and allow the plaintiff to be given an opportunity to amend his complaint to set forth ultimate facts which support the conclusion that Credit Union “knowingly participated” in this check-kiting scheme.