Court Opinion

ID: 6317011
Source: CourtListenerOpinion
Date Created: 2022-02-23 22:05:57.002883+00
Date Added: 2024-06-11T09:00:33.016561
License: Public Domain

NOT DESIGNATED FOR PUBLICATION

                           STATE OF LOUISIANA

                            COURT OF APPEAL

                              FIRST CIRCUIT

                               2020 CA 1318

                         ST. FRANCISVILLE BK, LLC

                                  VERSUS

            JEC REAL ESTATE INVESTMENT, LLC, ET AL.
                                                      FEB232022
                            DATE OF JUDGMENT.

     ON APPEAL FROM THE TWENTIETH JUDICIAL DISTRICT COURT
        NUMBER 23164, DIVISION A, PARISH OF WEST FELICIANA
                            STATE OF LOUISIANA

             HONORABLE KATHRYN E. `BETSY' JONES, JUDGE

Curtis R. Shelton
                                        Counsel for Third Party Defendants -
Lee H. Ayres
                                        Appellants, Petro -Chem Operating
Ryan P. Telep                           Company, Inc., Lary L. Hock, and
R. Chaz Coleman
                                        Universal Energy, LLC
Shreveport, Louisiana

Sidney W. Degan, III                    Counsel for Third Parry Defendant/
Travis L. Bourgeois                     Third Party Plaintiff A
                                                              - ppellee, StarNet
New Orleans, Louisiana                  Insurance Company

Michael Keeley
C. Adams Brinley
Dallas, Texas

Phillip W. Preis                         Counsel for Defendant/Third Party
Baton Rouge, Louisiana                   Plaintiff/Defendant-Appellee,
                                         Delta Bank

                BEFORE: WHIPPLE, C. J., WELCH, AND CHUTZ, JJ.

Disposition: REVERSED AND REMANDED.
CHUTZ, J.

      The defendants appeal a summary judgment ordering them to return
 2,000, 000. 00 an attorney misappropriated from a client trust account and used to
pay an obligation he owed to the defendants. For the following reasons, we reverse

and remand this matter to the district court.

                FACTUAL AND PROCEDURAL BACKGROUND

      In November 2017, Delta Bank (Delta) hired James Rex Fair, Jr. ( Fair) to       act

as the closing attorney for a real estate transaction to be financed by Delta.        On

November 20, 2017, at 2: 18 p.m.,     Delta wire transferred $ 2, 435, 045. 41 to Fair' s

client trust account (the trust account) with the intent that he distribute the funds in

accordance with the settlement statement.       Immediately prior to the wire transfer,

the balance in the trust account was only $ 150, 701. 29. Approximately ten minutes

after receiving the Delta wire transfer, Fair initiated three wire transfers totaling
 2,000,000. 00 from the trust account to the following parties, who had no connection
with the proposed real estate transaction: $
                                                625, 000.00 to Universal Energy, LLC
Universal); $
                625, 000. 00 to Universal on behalf of Larry and Norma Hock; and
 750,000.00 to Petro -Chem Operating Company, Inc. ( collectively, the defendants).

No other deposits or transfers were made to the trust account between the receipt of

the Delta wire transfer and the initiation of the wire transfers to the defendants.

      Fair owed an obligation to the defendants in the amounts transferred because

they had previously deposited funds in those amounts with him to be held in escrow

pending a potential investment deal. Pursuant to escrow agreements between the

defendants and Fair, the defendants were entitled to the return of their funds if the

investment deal was not completed by certain specified dates.      The investment deal

was not finalized by the specified dates and, in fact, was never completed.           On

November 16, 2017, several days before the Delta wire transfer, the defendants

                                           2
demanded a return from Fair of the respective amounts they had deposited in escrow
in the trust account.      Fair made the November 20, 2017 wire transfers to the

defendants in response to these demands.

      After Fair unexpectedly passed away on January 7, 2018, a conservator was

appointed to handle the affairs of his law practice. Shortly thereafter, the conservator

notified Delta that the loan proceeds it had wire transferred to Fair were never sent

to the seller in accordance with the closing statement and, moreover, those proceeds
were not in the trust account.        Once Delta learned of the $ 2, 000, 000. 00 in wire

transfers to the defendants on the same date as Delta' s wire transfer, counsel for

Delta sent letters to the defendants demanding the return of the funds Fair wire
transferred to them.
                         A similar demand letter was sent to the defendants by counsel
for StarNet Insurance Company ( StarNet), which had previously issued a " Financial

Institutions Bond for Depository Institutions" (           Bankers Bond),        as    well   as   a

 Management Liability Insurance Policy,"               to Delta (   through Delta' s holding

company).   The defendants did not return any funds to Delta.

      Extensive litigation resulted from Fair' s misappropriation of the Delta loan

proceeds from the trust account. The prospective seller in the sale the loan proceeds

were intended to finance filed suit naming Delta, among others, as a defendant. Delta
therein filed a third -party demand against StarNet. In its petition, Delta asserted

StarNet   was   liable    for   the   losses   Delta    sustained    as   a   result   of Fair' s

misappropriation both under the Bankers Bond and the liability policy it had issued.

Delta and StarNet eventually reached a settlement, and Delta assigned all of its rights

against the defendants to StarNet.

       In its capacity as Delta' s assignee, StarNet filed a third -party demand against

the defendants asserting a revendicatory action for the return of property, as well as

claims for conversion, fraud, civil conspiracy, and unjust enrichment.                    StarNet

                                                3
prayed for judgment against the defendants for $ 1, 849, 298. 71, which it asserted was

 the amount Fair transferred to the [ the defendants] that is identifiable and

traceable."'
                  Subsequently, on July 6, 2020, StarNet filed a motion for summary
judgment against the defendants for $2, 000,000.00, plus legal interest. In its motion,
StarNet argued it was entitled, as Delta' s assignee, to             a return of the " stolen" loan

proceeds transferred to the defendants based on claims for a revendicatory action,
conversion, and unjust enrichment.           Thereafter, the defendants filed a cross motion

for summary judgment seeking dismissal of StarNet' s claims.

       Following a hearing on StarNet' s motion for summary judgment, the district

court granted the motion and signed a judgment on August 26, 2020, ordering the
defendants, collectively, to pay StarNet a total of $2, 000,000. 00, plus legal interest.

Each defendant was ordered to pay the amount they had received from Fair by wire
transfer, i.e.,   Larry Hock $ 625, 000. 00,       Universal Energy, LLC $ 625, 000. 00,            and

Petro -Chem Operating Company $ 750, 000. 00.'- In its oral reasons for judgment, the

district court concluded the funds the defendants received could be tracked through

its various transfers between banks, and, therefore, were " in effect the same money"
Delta wire transferred to Fair and must be returned by the defendants since Fair stole
those funds from Delta.           The district court rejected StarNet' s claim of unjust

enrichment, finding Fair was the only party at fault and the only party unjustly
enriched by his actions. Additionally, on September 3, 2020, the district court signed

a judgment holding the defendants' motion for summary judgment was moot as a

result of the summary judgment in favor of StarNet.

1 This figure is reached by subtracting $ 150,701. 29 ( the balance in the trust account immediately
prior to Delta' s wire transfer) from $2, 000, 000. 00 ( the total amount transferred to the defendants).

2 The district court certified the judgment as a final judgment pursuant to La. C. C. P. art. 1915( B)
since it filly resolved StarNet' s third -party demand against the defendants, and there was no
overlap of factual or legal issues with the only remaining claim in this suit, a third -party demand
involving different parties.
                                                    4
       The defendants now appeal the August 26, 2020 summary judgment in favor
of StarNet. In five assignments of error, they argue the district court committed legal
and factual error: 1)    in failing to distinguish between stolen things and things

obtained by fraud for purposes of applying La. C.C. art. 521; 2) in finding the funds
transferred by Fair to the defendants were the same funds Delta wire transferred to

the trust account; 3) in concluding a party without fault can be liable for conversion;

4) in failing to apply comparative fault; and 5) in determining there were no issues
of material fact regarding the amount of Delta' s actual damages.

                               SUMMARY JUDGMENT

       After there has been an opportunity for adequate discovery, a motion for
summary judgment shall be granted if the motion, memorandum, and supporting
documents admitted for purposes of the motion for summary judgment show there
is no genuine issue as to material fact and the mover is entitled to judgment as a
matter of law. La. C. C. P. art. 966( A)(3) & (       4).   Appellate courts review evidence de

novo under the same criteria that govern the district court' s determination of whether

summary judgment is appropriate. Alvarado v. Lodge at the Bluffs, LLC, 16- 0624
La. App. 1st Cir. 3/ 29/ 17), 217 So. 3d 429, 432, writ denied, 17- 0697 (La. 6/ 16/ 17),

219 So. 3 d 340. The burden of proof rests with the mover. La. C. C.P. art. 966( D)( 1).

All reasonable inferences that may be drawn from the record are to be viewed in the

light most favorable to the non -movant, and all doubts should be resolved in favor
of the non -movant. Hines v. Garrett, 04- 0806 ( La. 6/ 25/ 04), 876 So. 2d 764, 765

per curiam).

                                      DISCUSSION

       Based on our de novo review, we find StarNet failed to establish it was entitled

as a matter of law to judgment awarding recovery from the defendants of the fiords

misappropriated by Fair.

                                                  s
           It is undisputed that Fair violated his fiduciary duty to Delta when he
misappropriated the closing funds Delta transferred to him by using the funds to pay
his personal obligations to the defendants rather than distributing the fiends in
accordance with the closing statement. See Louisiana State Bar Association v.

Nabonne, 539 So. 2d            1207, 1209 ( La. 1989).           Nevertheless, that fact is not

dispositive of the issue of whether StarNet, as Delta' s assignee, is entitled to recover
the funds misappropriated by Fair from the good faith beneficiaries of wire transfers
who received the funds in satisfaction of legitimate obligations owed to them by
Fair.

           Louisiana Revised Statutes 9: 38053 is part of the Uniform Fiduciaries Law
    aka the Uniform Fiduciaries Act (UFA))           and provides:

         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 his
         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 ofthe fiduciary, to the actual knowledge ofthe 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

3
  Citing La. C. C.P. art. 1005, StarNet argues the defendants waived the right to assert the " good
faith" affirmative defense provided in La. R.S. 9: 3805 by failing to plead it in the district court.
An affirmative defense raises a new matter that constitutes a defense to the action and will have
the effect of defeating the plaintiffs demand on its merits, even assuming the allegations in the
plaintiff s petition are true. The purpose of requiring affirmative defenses to be affirmatively pled
is to give the plaintiff fair and adequate notice of the nature of the defense. Therefore, a defendant
is not required to raise an issue as an affirmative defense if it does             not   raise   a"   new
matter."
           Succession of Ciervo v. Robinson, 19- 0140 (La. App. 1 st Cir. 12/ 12/ 19), 291 So. 3d 1063,
1075.  In this case, while the defendants did not plead the UFA as an affirmative defense, the
essence of the defense provided by La. R. S. 9: 3805 is that the payee was in good faith and/ or had
no knowledge of the fiduciary' s breach of duty. In this case, StarNet' s petition itself put those
matters at issue in that it alleged the defendants knew all along Fair had wired the defendants loan
proceeds stolen from Delta and, in fact, conspired with Fair to convert Delta' s funds so that Fair
could repay his obligations to them. Accordingly, because consideration of La. R.S. 9: 3805 raises
no new matters unfairly surprising StarNet, the defendants did not waive the right to have this
issue considered.

                                                    3
        the principal if the fiduciary in fact commits a breach of his obligation
        as fiduciary in drawing or delivering the instrument.
For purposes of applying the provisions of the UFA, wire transfers are treated as
being analogous to a check.` See Richards v. Platte Valley Bank, 866 F.2d 1576,

1580- 81 ( 10th Cir. 1989);
                                U.S. Commodity Futures Trading Comm' n v. U.S. Bank,
N.A., ( N.D. Iowa 2014), 2014 WL 6474183, at *
                                                            26 n. 11; Nations Title Insurance

of New York, Inc. v. Bertram, 140 Ohio App.3d 157, 163, 746 N.E.2d 1145,

1150 ( 2000); In re Petters Co., Inc., 565 B. R. 154, 165- 66, (
                                                                 Banks. D. Minn. 2017).

In order for a payee of a check or other bill of exchange to be liable for the receipt
of misappropriated funds under this provision, the payee must have acted in bad faith
or had actual knowledge of the          misappropriation.      Seago, Patrick, Carmichael &

Miller v. State Farm Mutual Automobile Insurance Company, 521 So.2d 674, 678
 La. App. 1st Cir. 1988); Pargas, Inc. v. Estate of Taylor, 416 So.2d 1358, 1361

La. App. 3d Cir. 1982). See also In Re: Tutorship ofAngela Marie Mitchell, 519

So. 2d 764, 768 ( La. 1988).

         In the instant case, there is no evidence the defendants were in bad faith or
had knowledge of the misappropriation of Delta' s funds.
                                                         Prior to requesting the

return of their funds from Fair, the defendants asked that he provide proof of funds.
Fair provided them with a letter purportedly from an official at Sabine State Bank
stating the balance in the trust account as of November 14, 2017, was $3, 159, 285. 85,

which was more than adequate to cover the amount of the defendants' deposited

funds. While that purported balance does not correspond to the actual balance shown

4 Louisiana Revised Statutes 9: 3813 provides that the provisions of the UFA should be interpreted
and construed so as to effectuate its general purpose to make uniform the law of those states which
enact it. See also Guaranty Bank &
                                          Trust Company of Alexandria v. C & R Development
Company, 260 La. 1176, 1183- 84, 258 So. 2d 543, 545 ( 1972); La. C. C. art. 13 ( laws on the same
subject matter should be interpreted in reference to each other); 20 La. Civ. L. Treatise, Legislative
Laiv & Procedure § 7: 7 ( 2020) ( review of other statutes may include federal laws and the laws of

other states and case law construing them).

                                                  7
on Fair' s bank statement for that date, the defendants had no actual knowledge of

that fact or reason to doubt the accuracy           of the stated balance.'     Moreover, the

amounts the defendants received from Fair were the exact amounts they had
deposited with him.
                        Finally, there is no question Fair had authority in his capacity
as a fiduciary to initiate wire transfers of funds from his law firm' s trust account.

        Further, we find no merit in StarNet' s argument that the defendants are liable

for the return of the funds under the last sentence of La. R.S. 9: 3805 because they
knew Fair transferred the funds to thein in payment of his personal debts to them.

Even assuming arguendo that a party holding funds in escrow is a debtor of the

funds' owner, in considering La. R.S. 9: 3805, courts have looked to more than the

mere fact that the misappropriated funds were used by the fiduciary to pay a personal
debt.
        In Seaga, this court held the plaintiff was not entitled under La. R.S. 9: 3805

to recover misappropriated funds from the payees who received the funds, even

though the funds were used to pay the fiduciary' s personal debts for insurance
premiums and repairs to her personal vehicle.             In applying La. R.S. 9: 3805, the
Seago Court relied on the fact that       neither payee "   had actual knowledge that [ the

fiduciary] had misappropriated the funds she gave as payment for her personal

obligations"
               or acted in bad faith in accepting the checks as payment for the

fiduciary' s obligations. Seago, 521 So. 2d at 678. ( Emphasis added.) Similarly, in

Guaranty Bank, the Supreme Court looked not merely at the fact that the fiduciary
used corporate funds to pay a personal debt. Rather, the Supreme Court held the

bank was in bad faith because it had before it clear evidence of a probable

misappropriation since it was both the drawee bank and payee of the corporate

checks the fiduciary used to pay his personal debts to the bank. Guaranty Bank,

258 So. 2d at 547.   In the instant case, however, there was absolutely no evidence of

 There is no evidence in the record indicating how Fair produced this letter.

                                                8
bad faith by the defendants or of anything putting them on notice of a probable
misappropriation of Delta' s funds.

       While Delta was clearly a victim of Fair' s misdeeds and we are sympathetic

to its plight, the record is devoid of any evidence that the defendants had actual

knowledge of the misappropriation or acted in bad faith in accepting the wire
transfers as payment for the obligations Fair owed them. Accordingly, the district

court erred in ordering the defendants to return the funds they received by wire
transfer from Fair.     Under La. R.S. 9: 3805, StarNet was not entitled to recover the

misappropriated funds from the defendants in the absence of the defendants' bad
faith or actual knowledge of the misappropriation.' See Seago, 521 So. 2d at 678.

                                        CONCLUSION

       For these reasons, the August 26,
                                                      2020 district court judgment granting

summary judgment in favor of third -party plaintiff, StarNet Insurance Company,
holding third -party defendants, Universal Energy, LLC, Larry Hock, and Petro -
Chem Operating Company, Inc., collectively, liable for $ 2, 000, 000. 00 is hereby
reversed.
             This matter is remanded to the district court for further proceedings
consistent with this opinion.          All costs of this appeal are assessed to StarNet

Insurance Company.

       REVERSED AND REMANDED.

G The present situation presents competing interests of innocent parties between protecting the
security of ownership and protecting the security of transaction.     See Tanya Ann Ibieta, The
Transfer of 014,nership of' Movables, 47 La. L. Rev. 841 ( 1987). In enacting La. R.S. 9: 3805, it
appears the legislature has indicated that precedence should be given in those situations where the
provision is applicable to protecting the security of transaction.

                                                  E