John R. Fuller v. Community National Bank

03/27/2020

IN THE COURT OF APPEALS OF TENNESSEE

AT KNOXVILLE

October 15, 2019 Session

JOHN R. FULLER v. COMMUNITY NATIONAL BANK

Appeal from the Chancery Court for Hamilton County

No. 17-0630 Pamela A. Fleenor, Chancellor

No. E2018-02023-COA-R3-CV

Plaintiff John R. Fuller invested more than a million dollars with Jack Brown, who,

unbeknownst to Fuller, was running a Ponzi scheme that eventually resulted in Brown’s

involuntary bankruptcy and significant losses to numerous investors. Brown had several

accounts with Community National Bank (the bank). Brown later died and plaintiff was

unsuccessful in recovering from him or his estate. In this action, plaintiff sued the bank,

alleging negligence; fraud; aiding and abetting Brown’s fraud and breach of contract,

unjust enrichment, and breach of fiduciary duty; and violations of Tennessee’s versions

of the Uniform Fiduciaries Act, Tenn. Code Ann. § 35-2-101 (2015) et seq., and Uniform

Commercial Code, Tenn. Code Ann. §§ 47-3-307(b)(2) and 47-3-402(a) (2001). The trial

court granted the bank summary judgment. It held plaintiff’s action was barred by the

equitable doctrine of unclean hands, based on its finding that plaintiff “was using Brown

to launder his ill-gotten gains,” namely, “upwards of one million dollars in cash [plaintiff

kept] in safes to avoid paying income tax . . . accumulated from poker machines in his

store.” The trial court further held that plaintiff’s UCC claims were barred by the

applicable three-year statute of limitations, Tenn. Code Ann. § 47-3-118(g); that plaintiff

“set forth no facts that demonstrate a genuine issue that [the bank] had knowledge of any

breach of Brown’s fiduciary duty or had knowledge of such facts that its actions . . .

amounted to bad faith”; that plaintiff’s common law claims were displaced by the UCC;

that he could not establish an unjust enrichment claim because he did not confer any

benefit upon the bank; and that plaintiff failed to establish any damages stemming from

the bank’s conduct. We affirm.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court

Affirmed; Case Remanded

CHARLES D. SUSANO, JR., J., delivered the opinion of the court, in which D. MICHAEL

SWINEY, C.J., and THOMAS R. FRIERSON, II, J., joined.

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Whitney Durand, Chattanooga, Tennessee, for the appellant, John R. Fuller.

Joseph R. White and Joseph Alan Jackson II, Chattanooga, Tennessee, for the appellee,

Community National Bank.

OPINION

I.

Jack Brown ran a business called Brown’s Tax Service. He also was licensed to

sell annuities for several insurance companies. Brown persuaded plaintiff to buy two

annuities from Allianz Life Insurance Company for about $600,000. Not long thereafter,

Brown convinced plaintiff to withdraw the money from the annuities and invest it

directly with Brown. Plaintiff processed the withdrawal applications and sent them to

Allianz, which mailed checks to plaintiff at his post office address of record. Brown

intercepted these mailings, fraudulently forged plaintiff’s endorsements on the checks,

and deposited the money into his business checking account with the bank held by

Brown’s Tax Service. The bank’s records show that during the second half of 2008,

Brown presented five checks from Allianz, purportedly bearing plaintiff’s endorsement

signature, which totaled $292,853.46. Plaintiff also loaned Brown approximately

$948,000, evidenced by promissory notes from Brown to plaintiff, based on Brown’s

assurances that he could invest the money and earn a high rate of return.

Plaintiff owned and operated a gas station and convenience mart in the Soddy-

Daisy area. He testified that he received shipments of gasoline and diesel fuel from

Benton Oil Company, but because Benton “had a messed up bookkeeping system” and a

“malfunctioning computer,” it failed to bill plaintiff for over a million dollars’ worth of

fuel. When Benton caught the error, it eventually billed plaintiff $485,000. Plaintiff got

the money to pay the bill from Brown, who wrote him five checks drawn on the Brown’s

Tax Service account in total amount of $485,000. The ten above-referenced checks ̶ five

from Allianz to plaintiff bearing forged endorsements and misappropriated by Brown,

totaling $292,853.46, and five drawn from the Brown’s Tax Service account to plaintiff

totaling $485,000 ̶ are the only financial transactions involving plaintiff and the bank.

Plaintiff owned eight video poker machines that were in his convenience store,

which customers would use for gambling, that plaintiff testified were “played heavy.”

He put the cash profits from the machines in three safes. At times he had over a million

dollars in cash stored there. Plaintiff testified as follows:

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Q: You would, from time to time, deliver to Jack, in some --

what? In a briefcase or in a big box or --

A: Garbage bag. I mean, a big brown paper sack.

Q: A big paper sack. What was the -- how much money

would you give him at a time? Fifty thousand? A hundred

thousand?

A: At least a hundred thousand most of the time. One time,

fifty thousand.

* * *

Q: And did you hand over to Mr. Brown a million dollars in

cash?

A: Yes.

* * *

Q: And where did you have -- where did the other premium

for the Allianz annuities come from?

A: Out of my safe. I took money out of my safe and put it in

the bank. No, I didn’t put that in the bank. I give it to Jack

Brown, and Jack Brown probably run it through his check-

cashing deal.

* * *

Q: And why did you not -- why did you not put it in the

bank?

A: I didn’t feel comfortable doing that.

Q: And why is that?

A: Well, for one reason, I wanted to accumulate cash and

evade paying tax -- income tax on it.

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Brown’s Ponzi scheme eventually collapsed when he ran out of money.

Involuntary bankruptcy proceedings commenced against him on November 9, 2012.

According to the complaint, 171 claims were filed against Brown, totaling $13,529,421.

The amended complaint further alleges that

Brown died on August 31, 2013. [Plaintiff] filed a claim as

an unsecured creditor for $947,759 that related to three loans

he made to Brown as a part of the Ponzi scheme. . . .

[Plaintiff] did not know that he had become a victim of the

Ponzi scheme until the bankruptcy proceedings. He did not

know about Brown’s unauthorized withdrawals from the

Allianz annuities until February 2015 during discovery

proceedings in a lawsuit. Consequently, he filed no

bankruptcy claim regarding the Allianz annuities[.]

On July 15, 2015, plaintiff filed a complaint against the bank and Allianz. He

voluntarily nonsuited that case, and then refiled the current action against the bank alone

on August 24, 2017. On May 29, 2018, plaintiff filed a “motion to exclude references to

prior conduct,” in which he stated that he

moves the Court to exclude any direct or indirect reference by

the [bank] of John or Elizabeth Fuller’s ownership or

operation of a gaming device or the failure of either of them

to report income or receipts from it on a federal, state or local

tax return or other type of report.

Plaintiff stated that “[t]he ownership and operation of a gaming device is a Class B

misdemeanor”; “[t]he failure to report the money received from users of a gaming device

and to pay sales tax on it is arguably a Class E felony”; and “[t]he failure to report

income on a federal tax return is a felony.” Plaintiff argued that his violation of state and

federal criminal statutes may not be used against him “in a civil case that has no

similarity to those acts.” The trial court entered an order deferring its ruling “given the

uncertainty of the relief requested” and held that “Plaintiff may renew his request when

defendant makes a specific offer of evidence or as otherwise appropriate.”

Following discovery, the bank moved for summary judgment. In a thorough 33-

page order, the trial court granted the bank summary judgment on all claims. The trial

court applied the unclean hands doctrine to bar plaintiff’s action, holding that his “prior

conduct is indeed connected to this litigation, and the relief he seeks, i.e. the return of his

ill-gotten gains, is inseparably connected with his own prior fraud.” In the interest of

judicial economy and efficiency, the court ruled alternatively upon all of the remaining

4

issues. Regarding plaintiff’s UCC claims for breach of fiduciary duty under Tenn. Code

Ann. § 47-3-307(b) and conversion under § 47-3-420(a), the trial court held that the

three-year statute of limitations at § 47-3-118(g) applies, it began to run in 2008 when the

checks at issue were negotiated, and plaintiff’s action initially filed in 2015 was not

timely. Regarding the Uniform Fiduciary Act (UFA) claim under Tenn. Code Ann. § 35-

2-104, the trial court held it required two elements: “(1) that a negotiable instrument was

‘payable or endorsed to a fiduciary as such’ AND (2) that the endorsee had knowledge of

the breach of fiduciary duty or had such knowledge of such facts that its action in taking

the instrument amounts to bad faith.” (Emphasis in original). The court held that the

undisputed material facts established that plaintiff could demonstrate neither of these

elements. The trial court made a similar finding regarding the closely-related UFA claim

under Tenn. Code Ann. § 35-2-107. Regarding the UFA claim under Tenn. Code Ann. §

35-2-109, the trial court held that statute to have been impliedly repealed by the

enactment of Tenn. Code Ann. § 47-3-307, as held by this Court in C-Wood Lumber Co.

v. Wayne Cnty. Bank, 233 S.W.3d 263, 278 (Tenn. Ct. App. 2007). The trial court also

followed the holding in C-Wood that that “the UCC effectively displaced any common-

law claims that [plaintiff] may have been asserting.” Id. Plaintiff’s unjust enrichment

claim was dismissed because he could not prove that he had conferred a benefit upon the

bank, an element of such a claim. The trial court held that Tennessee law does not

provide for a claim of aiding and abetting a breach of contract. The court further held

that the Tennessee Consumer Protection Act, Tenn. Code Ann. § 47-18-104(b)(27), “does

not provide a cause of action for aiding and abetting a TCPA violation.” The trial court

rejected plaintiff’s claim for aiding and abetting fraud based on its ruling that the bank

established that it “had no knowledge of Brown’s conduct prior to his bankruptcy and

further established that [the bank] did not provide substantial assistance to Brown.”

Finally, the court ruled that plaintiff did not establish any compensatory damages in this

case because the transactions involving him and the bank resulted in a net positive to

plaintiff in the amount of $192,146.54. Plaintiff timely filed a notice of appeal.

II.

The issues on appeal are quoted from plaintiff’s brief as follows:

The issues are whether the trial court erred in granting the

motion of [the bank] for summary judgment by holding that:

1. The knowledge of [the bank] about the existence of a Ponzi

scheme perpetrated by its customer, Brown, is a question of

fact that can be decided on a motion for summary judgment.

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2. The question of whether [the bank] gave substantial

assistance to Brown in maintaining the Ponzi scheme is one

that can be decided on a motion for summary judgment.

3. Tenn. Code. Ann. 47-18-104(b)(27), a part of Tennessee’s

Consumer Protection Act, precludes the bringing of this case

by a person other than the Attorney General of Tennessee.

4. Tennessee law does not permit the maintenance of an

action for aid and assistance to a breach of contract.

5. The following questions can be decided on summary

judgment pursuant to Tennessee’s Uniform Fiduciary Act: (a)

whether [the bank] knew that Brown was a fiduciary with

respect to [plaintiff], (b) whether it knew that Brown was

committing a breach of his obligations to [plaintiff], or (c)

whether it had knowledge of such facts that its actions in

depositing checks to Brown’s account that were payable to

[plaintiff] amounts to bad faith.

6. [Plaintiff’s] claims under Tennessee’s Uniform

Commercial Code are barred by a statute of limitations.

7. [The bank] has not been unjustly enriched.

8. [Plaintiff’s] ownership and operation of gambling devices

and failure to report income from them on tax returns

precludes his seeking relief in this litigation.

(Emphasis in original omitted.)

III.

In the recent case of TWB Architects, Inc. v. Braxton, LLC, 578 S.W.3d 879

(Tenn. 2019), the Supreme Court set forth the following guidance on our standard of

review of summary judgment:

A trial court should grant summary judgment when “the

pleadings, depositions, answers to interrogatories, and

admissions on file, together with the affidavits, if any, show

that there is no genuine issue as to any material fact and that

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the moving party is entitled to a judgment as a matter of law.”

Tenn. R. Civ. P. 56.04. In reviewing a trial court’s ruling on

a motion for summary judgment, we make a fresh

determination about whether the requirements of Rule 56

have been met. Rye v. Women’s Care Ctr. of Memphis, 477

S.W.3d 235, 250 (Tenn. 2015). Our review of the trial

court’s ruling is de novo, with no presumption of correctness.

On review, we accept the evidence presented by . . . the

nonmoving party as true; allow all reasonable inferences in its

favor; and resolve any doubts about the existence of a

genuine issue of material fact in favor of [the nonmoving

party].

In Rye, we stated our holding as follows:

[W]hen the moving party does not bear the

burden of proof at trial, the moving party may

satisfy its burden of production either (1) by

affirmatively negating an essential element of

the nonmoving party’s claim or (2) by

demonstrating that the nonmoving party’s

evidence at the summary judgment stage is

insufficient to establish the nonmoving party’s

claim or defense.

Rye, 477 S.W.3d at 264.

In Rye, we intended to “correct course, overrule Hannan [v.

Alltel Publ’g Co., 270 S.W.3d 1 (Tenn. 2008)], and fully

embrace the standards articulated in the Celotex trilogy.” Id.

Hannan’s summary judgment standard that “a moving party

who [does not bear the burden of proof at trial] must either

(1) affirmatively negate an essential element of the

nonmoving party’s claim; or (2) show that the nonmoving

party cannot prove an essential element of the claim at trial”

had proven to be unworkable. Hannan, 270 S.W.3d at 8–9

(emphasis added).

We intended for the summary judgment standard adopted in

Rye to apply to all parties, no matter which party filed the

motion for summary judgment.

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* * *

[I]f the moving party bears the burden of proof on the

challenged claim at trial, that party must produce at the

summary judgment stage evidence that, if uncontroverted at

trial, would entitle it to a directed verdict. Celotex Corp. v.

Catrett, 477 U.S. 317, 331, 106 S.Ct. 2548, 91 L.Ed.2d 265

(1986) (Brennan, J., dissenting) (citations omitted). The

burden then shifts to the nonmoving party to produce

evidence showing that there is a genuine issue of fact for trial.

Id. On the other hand, when the nonmoving party has the

burden of proof at trial, the burden shifting is the same as that

set forth by this Court in Rye—the moving party may either

negate an essential element of the nonmoving party’s claim or

show that the nonmoving party does not have sufficient

evidence to prove an essential element of its claim. Id.

(citations omitted).

* * *

The emphasis under the Rye standard is the evidence at the

summary judgment stage. Whether the nonmoving party is a

plaintiff or a defendant—and whether or not the nonmoving

party bears the burden of proof at trial on the challenged

claim or defense—at the summary judgment stage, “[t]he

nonmoving party must demonstrate the existence of specific

facts in the record which could lead a rational trier of fact to

find in favor of the nonmoving party.” Rye at 265. This is

the standard Tennessee courts must apply when ruling on

summary judgment motions regardless of which party bears

the burden of proof at trial.

TWB Architects, 578 S.W.3d at 887-89 (emphasis and brackets in original; internal

citations omitted).

IV.

A. Unclean Hands Doctrine

As this Court has recently observed,

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The doctrine of unclean hands is a maxim of equity that

allows a court “to decline to grant relief to parties who have

willfully engaged in unconscionable, inequitable, immoral, or

illegal acts with regard to the subject matter of their claims.”

In re Estate of Boote, 265 S.W.3d 402, 417 (Tenn. Ct. App.

2007) (footnote omitted). A court of equity cannot be used to

aid a party in “profiting from [his or] her own misconduct.”

Emmit v. Emmit, 174 S.W.3d 248, 253 (Tenn. Ct. App.

2005). But this defense has limitations: “it must be confined

to the particular matter in litigation and the conduct

complained of must have injured the party making the

complaint.” Edmisten v. Edmisten, No. M2001–00081–

COA–R3–CV, 2003 WL 21077990, at *7 (Tenn. Ct. App.

May 13, 2003); see Nolen v. Witherspoon, 187 S.W.2d 14,

16 (Tenn. 1945); Coleman Mgmt., Inc. v. Meyer, 304 S.W.3d

340, 352–53 (Tenn. Ct. App. 2009).

Williams v. Hirsch, No. M2016-00503-COA-R3-CV, 2018 WL 2383612, at *7 (Tenn.

Ct. App., filed May 25, 2018) (brackets in original). In In re Estate of Boote, we noted

that “[a]ny willful act regarding a litigated matter which would be condemned and

pronounced as wrongful by fairminded persons is sufficient to trigger the doctrine of

unclean hands.” 265 S.W.3d 402, 417 n.26. “The application of the doctrine of unclean

hands is within the chancery court’s discretion, and we review the court’s decision under

the abuse of discretion standard.” Spirit Broadband, LLC v. Armes, No. M2015-00559-

COA-R3-CV, 2017 WL 384248, at *5 (Tenn. Ct. App., filed Jan. 27, 2017) (quoting

Coleman Mgmt., Inc. v. Meyer, 304 S.W.3d 340, 348 (Tenn. Ct. App. 2009)).

The facts pertinent to the inquiry of whether the trial court abused its discretion in

applying the unclean hands doctrine are undisputed. They are established almost entirely

by plaintiff’s own deposition testimony, which we have quoted above. The trial court

found as follows:

[The bank] established that Plaintiff kept upwards of one

million dollars in cash in safes to avoid paying income tax.

He accumulated this cash from poker machines in his store.

When the IRS audited [plaintiff], he did not disclose the

money in his safe. Plaintiff took this cash in brown paper

bags to Brown in exchange for Allianz annuities and

promissory notes. Plaintiff took a $750,000 capital loss on

these promissory notes on his 2012 income tax return.

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Plaintiff cancelled his annuities and when Allianz refunded

the annuity checks, Brown deposited them into his [Brown’s

Tax Service] account then cut other checks to Plaintiff.

* * *

Plaintiff did not dispute these facts. Plaintiff just argues his

prior deeds are not connected with this litigation. This Court

disagrees.

Chapter 14 of Title 39 is entitled “Money Laundering

Offenses.”

T.C.A. § 39-14-903(a)(1) provides:

It is an offense to knowingly use, conspire to

use or attempt to use conduct or attempt to

conduct a financial transaction or make other

disposition with the intent to conceal or disguise

the nature, location, source, ownership or

control of the criminally derived proceeds.

What the Court determines is that, in actuality, Plaintiff was

using Brown to money launder his ill-gotten gains. This

Court is cognizant that it is not trying a criminal case against

Plaintiff for money laundering. This Court is further aware

that in ruling on this motion it must view the evidence in the

light most favorable to Plaintiff. However, Plaintiff did not

dispute these facts. Nor did Plaintiff submit an affidavit

providing any other explanation for his conduct.

On appeal, plaintiff does not challenge any of the trial court’s factual findings, but

continues to argue that his unlawful conduct is too attenuated and distant to relate to his

action against the bank.

As the Supreme Court stated over a century ago,

The principle is general, and is one of the maxims of the

court, that he who comes into a court of equity, asking its

interposition in his behalf, must come with clean hands; and if

it appears from the case made by him or by his adversary that

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he has himself been guilty of unconscionable, inequitable, or

immoral conduct in and about the same matters whereof he

complains of his adversary, or if his claim to relief grows out

of or depends upon or is inseparably connected with his own

prior fraud, he will be repelled at the threshold of the court.

C.F. Simmons Med. Co. v. Mansfield Drug Co., 23 S.W. 165, 168 (Tenn. 1893)

(emphasis added); accord Spirit Broadband, 2017 WL 384248 at *6. In this case,

plaintiff’s own testimony draws a straight line from the money he unlawfully gained by

his illegal video poker machines, hid from the IRS in acts of tax fraud, and tried to

“launder” through Brown via cash deliveries in brown paper bags, to the funds he is

trying to recover from the bank, based on its transactions with Brown. Under these

circumstances, we cannot say that the trial court abused its discretion in applying the

unclean hands doctrine to reject plaintiff’s claims. In Southern Coal & Coke Co. v.

Beech Grove Mining Co., 381 S.W.2d 299, 303 (Tenn. Ct. App. 1963), this Court made

the following apt observation:

Conscience does not defile itself in sanctioning the

enforcement of a just and clean cause of action, even though

attempts may have been made to improperly influence its

favor; but when it actively interposes its aid to secure the

fruits of unfair and unscrupulous dealings, it becomes a party

to the scheme and encourages the practice of devious ways

that corrupt the place of its habitat.

The trial court correctly noted that its finding of unclean hands is dispositive and

fatal to plaintiff’s claims. See C.F. Simmons Med. Co., 23 S.W. at 168; (claimant with

unclean hands “will be repelled at the threshold of the court”); Segal v. United American

Bank, No. W2004-02347-COA-R3-CV, 2005 WL 3543332, at *5 (Tenn. Ct. App., filed

Dec. 28, 2005); Alexander v. JB Partners, 380 S.W.3d 772, 776 (Tenn. Ct. App. 2011)

(“Once found to exist, the doctrine of unclean hands repels the unclean plaintiff at the

steps of the Courthouse”). However, the trial court also fully addressed and disposed of

all of plaintiff’s claims and issues in the alternative, in the interest of judicial economy

and efficiency. We will do the same.

B. Uniform Commercial Code Claims

Plaintiff brought claims under the UCC for breach of fiduciary duty and for

conversion. Tenn. Code Ann. § 47-3-307 provides, in pertinent part, as follows:

11

(b) If (i) an instrument is taken from a fiduciary for payment

or collection or for value, (ii) the taker has knowledge of the

fiduciary status of the fiduciary, and (iii) the represented

person makes a claim to the instrument or its proceeds on the

basis that the transaction of the fiduciary is a breach of

fiduciary duty, the following rules apply:

(1) Notice of breach of fiduciary duty by the fiduciary is

notice of the claim of the represented person.

(2) In the case of an instrument payable to the represented

person or the fiduciary as such, the taker has notice of the

breach of fiduciary duty if the instrument is (i) taken in

payment of or as security for a debt known by the taker to be

the personal debt of the fiduciary, (ii) taken in a transaction

known by the taker to be for the personal benefit of the

fiduciary, or (iii) deposited to an account other than an

account of the fiduciary, as such, or an account of the

represented person.

Regarding plaintiff’s conversion claim, Tenn. Code Ann. § 47-3-420 states:

(a) The law applicable to conversion of personal property

applies to instruments. An instrument is also converted if it is

taken by transfer, other than a negotiation, from a person not

entitled to enforce the instrument or a bank makes or obtains

payment with respect to the instrument for a person not

entitled to enforce the instrument or receive payment. An

action for conversion of an instrument may not be brought by

(i) the issuer or acceptor of the instrument or (ii) a payee or

endorsee who did not receive delivery of the instrument either

directly or through delivery to an agent or a copayee.

* * *

(c) A representative, including a depositary bank, who has in

good faith dealt with an instrument or its proceeds on behalf

of one who was not the person entitled to enforce the

instrument is not liable in conversion to that person beyond

the amount of any proceeds that it has not paid out.

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The applicable statute of limitations in found at Tenn. Code Ann. § 47-3-118(g), stating:

Unless governed by other law regarding claims for indemnity

or contribution, an action (i) for conversion of an instrument,

for money had and received, or like action based on

conversion, (ii) for breach of warranty, or (iii) to enforce an

obligation, duty, or right arising under this chapter and not

governed by this section must be commenced within three (3)

years after the cause of action accrues.

In C-Wood Lumber Co., this Court held as follows:

The statute of limitations in Tenn. Code Ann. § 47–3–118(g)

begins to run when the fiduciary or corporate employee

negotiates each check. The Tennessee Supreme Court, noting

that “[n]egotiable instruments are intended to facilitate the

rapid flow of commerce by providing certainty and finality in

commercial transactions,” has explicitly declined to apply the

discovery rule to actions involving the conversion of

negotiable instruments. Pero’s Steak & Spaghetti House v.

Lee, 90 S.W.3d 614, 623–24 (Tenn. 2002).

233 S.W.3d at 283 (internal citations omitted). In this case, the five checks at issue were

negotiated by Brown in 2008. Plaintiff initially brought an action against the bank in

2015. Plaintiff acknowledges the holdings in C-Wood and Pero’s Steak & Spaghetti

House, but argues that the Supreme Court recognized an exemption to its holding when a

plaintiff can establish fraudulent concealment. Pero’s Steak & Spaghetti House, 90

S.W.3d at 624 (“Absent fraudulent concealment, three years should be more than ample

time for a plaintiff to discover a conversion claim.”). The High Court in Pero’s

examined the fraudulent concealment claim and affirmed the trial court’s grant of

summary judgment, stating:

In Shadrick v. Coker, 963 S.W.2d 726 (Tenn.1998), this

Court explained that to establish fraudulent concealment, a

plaintiff must prove the following: (1) that the defendant took

affirmative action to conceal the cause of action or remained

silent and failed to disclose material facts despite a duty to do

so; (2) that the plaintiff could not have discovered the cause

of action despite exercising reasonable care and diligence; (3)

that the defendant had knowledge of the facts giving rise to

the cause of action; and (4) that the defendant concealed

13

material facts from the plaintiff by withholding information

or making use of some device to mislead the plaintiff, or by

failing to disclose information when he or she had a duty to

do so. Id. at 735–36.

* * *

. . . the plaintiffs have failed to establish a genuine issue of

material fact as to fraudulent concealment. Even assuming a

genuine issue of material fact exists as to the other required

elements, our review of the voluminous record reveals that no

genuine issue of material fact exists as to First Tennessee

having “had knowledge of the facts giving rise to the cause of

action.” The plaintiffs’ assertion that, for purposes of

fraudulent concealment, First Tennessee should be charged

with such knowledge because it had a duty to inquire as to the

maker’s intent with respect to the special deposits is without

merit. Fraudulent concealment requires proof of actual

knowledge. See Ray v. Scheibert, 484 S.W.2d 63, 72 (Tenn.

Ct .App.) (cert. denied 1972) (cited with approval [in] Benton

v. Snyder, 825 S.W.2d 409, 414 (Tenn.1992)); Whaley v.

Catlett, 103 Tenn. 347, 356, 53 S.W. 131, 134 (1899)

(“Certainly, we would not be justified in assuming fraud in

order to prevent the running of the statute of limitations.”).

This record contains no proof indicating that First Tennessee

had actual knowledge that Lee was mishandling the plaintiffs’

checks. Instead, the facts indicate that First Tennessee was

negligent in following its own procedures, and as a result,

lacked knowledge of the facts giving rise to the cause of

action.

Id. at 625. A similar situation is presented here. In the present case, plaintiff has

presented no evidence suggesting that the bank had actual knowledge of Brown’s

mishandling of the checks from Allianz to plaintiff. Moreover, in plaintiff’s response to

the bank’s motion for summary judgment, he stated that he “does not presently possess

proof of all of these elements [of a fraudulent concealment claim] but may have it at

trial.” The Supreme Court, in Rye and CWB Architects, has made it abundantly clear

that although a party should be given fair opportunity and time to discover and provide

evidence supporting a claim, saying “I might be able to get some proof before trial” does

not shield one from a properly-supported summary judgment motion. We affirm the

14

judgment of the trial court that plaintiff’s UCC claims were barred by the statute of

limitations.

C. Uniform Fiduciary Act Claims

Plaintiff brought a claim under Tenn. Code Ann. § 35-2-104, which provides as

follows:

If any negotiable instrument payable or endorsed to a

fiduciary as such is endorsed by the fiduciary, or if any

negotiable instrument payable or endorsed to the principal is

endorsed by a fiduciary empowered to endorse such

instrument on behalf of the principal, the endorsee is not

bound to inquire whether the fiduciary is committing a breach

of the fiduciary’s obligation as fiduciary in endorsing or

delivering the instrument, and is not chargeable with notice

that the fiduciary is committing a breach of the obligation as

fiduciary unless the endorsee takes the instrument with actual

knowledge of such breach or with knowledge of such facts

that the action in taking the instrument amounts to bad faith.

If, however, such instrument is transferred by the fiduciary in

payment of or as security for a personal debt of the fiduciary

to the actual knowledge of the creditor, or is transferred in

any transaction known by the transferee to be for the personal

benefit of the fiduciary, the creditor or other transferee is

liable to the principal if the fiduciary in fact commits a breach

of the obligation as fiduciary in transferring the instrument.

(Emphasis added). Based on the italicized portion quoted above, the trial court held that,

assuming arguendo that the bank is an “endorsee,” it was not required to inquire whether

Brown was breaching a fiduciary duty to plaintiff in negotiating the checks with forged

endorsements. The court also cited and relied upon our opinion in Copper Cellar Corp.

v. Miller, No. 03A01-9607-CV-00239, 1997 WL 206798, at *6 (Tenn. Ct. App., filed

Apr. 29, 1997), wherein we interpreted the statute at issue as follows:

We acknowledge that the cashier’s check in this case

constitutes a negotiable instrument that was payable to

Taylor, Copper Cellar’s fiduciary. However, T.C.A. § 35-2-

104 only applies to negotiable instruments “payable or

endorsed to a fiduciary as such.” Id. (emphasis added). The

cashier’s check at issue here was made payable simply to

15

“Taylor and Associates.” It contained no reference to

Taylor’s or Taylor and Associates’ status as a fiduciary of

Copper Cellar. Thus, T.C.A. § 35-2-104 is not applicable to

the facts of this case, and Copper Cellar’s claim under that

provision is without merit.

The trial court correctly held that the checks at issue here similarly did not refer to Brown

as a fiduciary. As in Copper Cellar, Tenn. Code Ann. § 35-2-104 is inapplicable to the

facts in the present case.

Tenn. Code Ann. § 35-2-107 states, in pertinent part, as follows:

If a deposit is made in a bank or savings institution to the

credit of a fiduciary as such, the bank or savings institution is

authorized to pay the amount of the deposit or any part

thereof upon the check of the fiduciary, signed with the name

in which such deposit is entered, without being liable to the

principal, unless the bank or savings institution pays the

check with actual knowledge that the fiduciary is committing

a breach of the fiduciary’s obligation as fiduciary in drawing

the check or with knowledge of such facts that its action in

paying the check amounts to bad faith.

For plaintiff to state a cause of action under this statute, he must demonstrate that (1) a

deposit was made with the bank to the credit of “a fiduciary as such” and (2) the bank (a)

had actual knowledge that Brown was breaching his fiduciary obligation in drawing the

checks or (b) had knowledge of such facts that the bank’s action in paying the checks

amounted to bad faith. As the trial court found, the bank “established that none of the

checks at issue were payable or endorsed to a fiduciary ‘as such.’ ”

There is no evidence in the record establishing that the bank had actual knowledge

that Brown was plaintiff’s fiduciary. Brown deposited the money from the checks into

his Brown’s Tax Service account. Assuming arguendo that an account in the name of a

“tax service” places the bank on notice of a fiduciary relationship, we proceed to examine

what the undisputed facts show regarding the bank’s knowledge and whether it could

possibly be found to have been acting in bad faith. These concepts were examined at

length by the federal district court in McLemore v. Regions Bank, 2010 WL 1010092

(M.D. Tenn., filed Mar. 18, 2010), affirmed on other grounds, McLemore v. Regions

16

Bank, 682 Fed.3d 414 (6th Cir. 2012).1 The McLemore court quoted this Court’s

explanation of the UFA’s purpose in C-Wood, wherein we stated:

The UFA was designed to facilitate banking transactions by

relieving depositary banks of the responsibility of assuring

that an authorized fiduciary used entrusted funds for proper

purposes. It is based on the assumption that a fiduciary will

properly apply funds entrusted to him or her, and it places the

burden on the principal to employ honest fiduciaries. It also

specifically rejects the idea that negligence on the part of a

third person dealing with a fiduciary is sufficient to shift the

risk of fiduciary misconduct from the principal to the third

party.

2010 WL 1010092, at *5 (quoting C-Wood, 233 S.W.3d at 274) (internal citations

omitted in original). McLemore further states as follows:

a bank is liable to a principal for a fiduciary’s illegal

withdrawal or transfer of funds if, and only if, the bank had

“actual knowledge” that the fiduciary was breaching his or

her fiduciary duty or had “knowledge of such facts that its

action . . . amounts to bad faith.” Tenn. Code Ann. §§ 35–2–

107, 35–2–109. Anything less is insufficient to support

liability.

The UFA does not define “bad faith,” although it does define

“good faith”: “A thing is done ‘in good faith,’ within the

meaning of this chapter, when it is in fact done honestly,

whether it is done negligently or not.” Id. § 35–2–102(b).

The obvious implication is that a bad-faith act is done

dishonestly.

Only a handful of Tennessee courts have addressed the

meaning of “bad faith.” In McConnico v. Third National

Bank, 499 S.W.2d 874 (Tenn. 1973), the court, although

primarily discussing “bad faith” under the Uniform

Commercial Code, equated bad faith with dishonesty. Id. at

881–82 (discussing Tenn. Code Ann. § 35–2–109, which was

1

The district court’s decision interpreting Tennessee’s version of the UFA, Tenn. Code Ann. §

35-2-107, as regards the concepts of a bank’s knowledge of violation of a fiduciary duty and bad faith,

was not appealed to the Sixth Circuit. McLemore, 682 Fed.3d at 424-25.

17

then numbered section 35–210, and holding that “there is no

showing of such conduct as would evidence dishonesty and

consequently such bad faith under the [UCC] statute”); see

also C–Wood Lumber, 233 S.W.3d at 284 (noting that, under

the UFA, a plaintiff must “prove [ ] that the bank was acting

dishonestly”).

* * *

In applying the UFA, courts in other jurisdictions have

consistently held that a bank acts in bad faith if “the facts and

circumstances [surrounding the fiduciary’s breach] are so

cogent and obvious that to remain passive would amount to

deliberate desire to evade knowledge because of a belief or

fear that inquiry would disclose a defect in the transaction.”

In other words, whether a bank has acted in bad faith turns on

whether it knew facts that were sufficiently suggestive of the

fiduciary depositor’s breach of duty.

This requires more than a showing that the bank was

negligent. C–Wood Lumber, 233 S.W.3d at 274; see also

O’Neal v. Southwest Mo. Bank (In re Broadview Lumber

Co.), 118 F.3d 1246, 1251 (8th Cir.1997) (“ ‘Bad faith’

requires something more than mere negligence and can be

found where the [bank] disregards circumstances that are

suggestive of a breach and are sufficiently obvious such that

it is in bad faith to remain passive.”) (applying Missouri law).

As the Supreme Court of Pennsylvania has explained,

negligence does not negate a bank’s good faith:

Even a failure to inquire under suspicious

circumstances will not negate “good faith,”

unless the failure to do so is due to a deliberate

desire to evade knowledge because of a belief

or fear that inquiry would disclose a vice or

defect in the transaction. Conversely, if a bank

has knowledge that a fiduciary intends to

appropriate trust funds to his own use, and that

to release funds to him will aid a breach of trust,

then the bank will be held to have acted in “bad

faith.”

18

Robinson Protective Alarm Co. v. Bolger & Picker, 512 Pa.

116, 516 A.2d 299, 304 (Pa. 1986) (citations omitted), quoted

in In re Mushroom Transp. Co., 382 F.3d 325, 344 (3d

Cir.2004).

Thus, to show that the defendant had “knowledge of such

facts that its action . . . amounts to bad faith,” Tenn. Code

Ann. §§ 35–2–107, 35–2–109, the plaintiffs must show that

the circumstances surrounding Stokes’ and 1Point’s

transactions so clearly suggested a breach of fiduciary duty

that Regions’ failure to investigate was a conscious effort to

avoid knowledge of Stokes’ wrongdoing. The plaintiffs

cannot merely show that the defendant was negligent in not

discovering Stokes’ fraud or not undertaking reasonable

efforts to monitor its depositors.

McLemore, 2010 WL 1010092, at *5-7 (internal citations and footnotes omitted; brackets

in original).

In the present case, the evidence that sheds light on the question of what the bank

knew, and when it knew it, is contained in excerpts from the depositions of several bank

officers, including its president, former vice president and Bank Secrecy Act officer,

former loan officer, and former manager at the branch Brown did his banking. Also in

the record is the unsworn declaration of the bank’s CFO and senior vice president.2

There is nothing in this testimony that suggests any employee of the bank had knowledge

that Brown was committing a breach of his fiduciary duty in depositing the checks to his

business account. There is nothing in the record that suggests the bank was aware of

Brown’s forgeries of plaintiff’s signature, or that it had any reason to suspect them. The

bank employees testified that they did not suspect Brown of any wrongdoing, nor did

they have any reason to, until, at the earliest, shortly before the bankruptcy proceedings

began against Brown. This time frame is some three to four years after the checks to

plaintiff were deposited. Plaintiff himself testified as follows:

Q: Do you know people in the community – has anybody

ever told you that the bank did something wrong in this whole

situation?

2

Plaintiff proffered the testimony of Jerrold D. Farinash, the bankruptcy trustee in the

involuntary bankruptcy cases of Brown, his wife, and Brown’s Tax Service. The trial court ruled that

Farinash’s testimony “is inadmissible both as a lay witness and as an expert witness,” and plaintiff has not

appealed that ruling.

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A: In the community, no.

Q: No one has ever told you that the bank did anything

wrong.

A: Well, yeah, I’ve heard it -- I know they done something

wrong, because they took the checks without my signature.

Q: Okay. Well, besides that, has the bank done anything

wrong, other than receive forged checks?

A: In my opinion, no. That’s my opinion.

In short, the evidence in the record fully supports the trial court’s conclusion that

“plaintiff has set forth no facts that demonstrate a genuine issue that [the bank] had

knowledge of any breach of Brown’s fiduciary duty or had knowledge of such facts that

its actions in depositing the checks amounted to bad faith.” Consequently, we affirm the

trial court’s grant of summary judgment on plaintiff’s claim based on Tenn. Code Ann. §

35-2-107. We also affirm the trial court’s ruling that Tenn. Code Ann. § 35-2-109 has

been repealed by implication by the UCC provision found at Tenn. Code Ann. § 47-3-

307, as recognized by this Court in C-Wood, 233 S.W.3d at 278 (“Because Tenn. Code

Ann. § 47–3–307 and Tenn. Code Ann. § 35–2–109 cannot be construed harmoniously,

Tenn. Code Ann. § 47–3–307 prevails and governs all transactions occurring after its

effective date”).

D. Other Claims

Plaintiff also brought claims for negligence, aiding and abetting Brown’s breach of

fiduciary duty, aiding and abetting breach of contract, aiding and abetting fraud, aiding

and abetting Brown’s alleged violation of the Tennessee Consumer Protection Act, and

unjust enrichment. The C-Wood opinion provides the following guidance for addressing

claims based on theories other than the UCC:

The drafters of the UCC set out to preserve and, where

necessary, clarify and conform the law merchant with modern

commercial practice. The Code does not purport to codify the

entire body of law affecting the rights and obligations of

parties to commercial transactions. Thus, unless “displaced”

by particular provisions of the UCC, other principles of law

and equity that are consistent with the UCC remain valid.

20

Even though the UCC does not supplant all the law applicable

to commercial transactions, it is still the primary source of the

commercial law rules for the areas it governs because it

represents the considered choices of its drafters and of the

Tennessee General Assembly about the appropriate policies

to be furthered in the transactions it covers. . . . [W]hile

generally applicable principles of law and equity can be used

to supplement the UCC, they may not be used to supplant the

UCC’s provisions or the purposes or policies these provisions

reflect.

Courts determining whether common-law or other non-UCC

claims and remedies have been displaced by the UCC have

emphasized the policies favoring certainty and uniformity.

Thus, the prevailing view now is that when the UCC provides

a comprehensive remedy for the parties to a transaction,

common-law and other non-Code claims and remedies should

be barred.

Articles 3 and 4 of the UCC embody a delicately balanced

statutory scheme governing the endorsement, negotiation,

collection, and payment of checks. They provide discrete

loss-allocation rules uniquely applicable to banks. While this

scheme is not comprehensive, it is nearly so. Therefore,

courts dealing with “hard cases” should be hesitant to

recognize common-law or non-U.C.C. claims or to employ

common-law or non-UCC remedies in the mistaken belief

that they are dealing with one of the rare transactions not

covered by the UCC.

The weight of the case law comes down against permitting

common-law actions to displace the UCC’s provisions

regarding transactions governed by Articles 3 and 4.

Accordingly, a large number of courts have refused to

recognize common-law or non-UCC claims in general, and

specifically common-law or non-UCC negligence claims or

conversion claims, arising from transactions governed by

Articles 3 or 4. The transactions at issue in this case fall

squarely within the scope of Articles 3 and 4. Therefore, C–

21

Wood’s claims against the bank and the scope of the remedies

available to C–Wood are governed solely by the UCC.

C-Wood, 233 S.W.3d at 280-82 (internal citations and footnotes omitted). Under these

principles espoused in C-Wood, we affirm the trial court’s holding that plaintiff’s non-

UCC claims are unavailable in this action based on “the endorsement, negotiation,

collection, and payment of checks.” Id. at 281.

Regarding plaintiff’s claim for aiding and abetting breach of contract, we affirm

the trial court’s holding that Tennessee law does not recognize such a claim. Plaintiff

cites only one Tennessee case in his argument to the contrary. This case is designated as

a memorandum opinion that has “no precedential value . . . and shall not be cited or relied

on for any reason in any unrelated case.” Court of Appeals Rule 10.

E. Compensatory Damages

The trial court held that plaintiff did not demonstrate any compensatory damages

in this case, stating as follows:

Defendant established that (1) the checks at issue, which were

deposited into Brown accounts at [the bank], totaled

$292,853.46, and (2) the checks Plaintiff admitted to

receiving, which were drawn on the BTS account at [the

bank], totaled $485,000. Thus Defendant established that

[the] banking transactions did not cause [plaintiff] to lose any

money. Rather he received $192,146.54 more from [the

bank] than he deposited. The Court determines Defendant has

negated an essential element of Plaintiff’s claims, that is

Plaintiff was not damaged.

Plaintiff does not dispute [the pertinent statements of

undisputed material fact]. Plaintiff merely asserts that [the

bank] is liable to him for all the damages he suffered as a

result of Brown’s Ponzi scheme arguing [the bank] facilitated

the Ponzi scheme. Plaintiff cites no authority for this

position. The Court concludes Defendant’s motion for

summary judgment on grounds that Plaintiff has not

demonstrated any damages is well-taken.

22

This analysis is pertinent to the extent of showing that under the particular facts presented

here, the specific transactions involving plaintiff and the bank resulted in a net gain to

plaintiff, not a loss. However, this fact, standing alone, would likely not support a grant

of summary judgment, if plaintiff had been able to present facts establishing a genuine

issue of material fact to support one of his viable claims. In other words, if plaintiff had

been able to point to facts raising a genuine issue regarding whether the bank had

“knowledge of such facts that its action in paying the check[s] amount[ed] to bad faith,”

Tenn. Code Ann. § 35-2-107, he may have been able to proceed in attempting to persuade

a trier of fact that the bank had such knowledge as would render it potentially liable. But

as our analysis above makes clear, plaintiff did not present any such evidence here, and

thus, summary judgment was correctly granted.

V.

The judgment of the trial court is affirmed. Costs on appeal are assessed to the

appellant, John R. Fuller. The case is remanded to the trial court for collection of costs

assessed below.

_______________________________

CHARLES D. SUSANO, JR., JUDGE

23