Angela Ford v. Faisal Shah

Opinion

RENDERED: NOVEMBER 2, 2017 TO BE PUBLISHED

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u [5) ffi\ [E: ll (2 7" 7 Jl,&, flul~, pc_ ANGELA FORD; ANGELA FORD, P.S.C.; ATI APPELLANTS VENTURES, LLC; AND VILLA PARIDISIO, LLC

ON REVIEW FROM COURT OF APPEALS v. CASE NOS. 2014-CA-000762.& 2014-CA-00791 FAYETTE CIRCUIT COURT NO. 12-CI-03758

HAROLQ BAERG, JR.; KATHLEEN M. APPELLEES BAERG; AND FAISAL SHAH

OPINION OF THE COURT BY CHIEF JUSTICE MINTON

AFFIRMING AND REMANDING

Among the elements requiredynder our law to prove the tort of

conversion, the plaintiff must first prove that she has legal title to the

converted property and then prove the right to possess the property at the time

of the alleged conversion. Attorney Angela Ford filed this civil action asserting

the tort of conversion, claiming that Harold and Kathleen Baerg and Fasal

Shah should be required to disgorge large sums of money that Ford claimed

had been stolen from her by her attorr;iey, Seth Johnston, and transferred by

him to the Baergs and Shah. The trial court granted summary judgment. in

favor of Ford, but the Court of Appeals reversed the trial court's judgment,

holding that Ford failed to prove the essential elements of conversion mentioned above. On discretionary review, we affirm the opinion of the Court of

Appeals and remand this case to the trial court with direction to grant

summary judgment to the Baergs and to Shah.

I. FACTUAL AND PROCEDURAL BACKGROUND. Attorney Angela Ford received a large sum of legal fees for her work in

the notorious fen-phen lawsuit.1 Ford hired attorney Seth Johnston to help her

form several LLCs to manage and secrete these funds. Johnston then formed

two limited liability companies (LLCs), Villa Paridisio and ATI Ventures, to own

and manage the funds. Ford placed some funds into Villa Paridisio's PNC Bank

account and some into ATI Ventures's Republic Bank account. Johnston,

according to the record available to us, was the signatory on both LLCs' • accounts, later transferring Villa Paridisio's funds to BB&T, also an account

whe"re Johnston was named the ,sole signatory as revealed by the· available

record.

Johnston also represented Harold and Kathleen Baerg at this time. The

Baergs wished to engage in an I.R.C. § 1031 like-kind property exchange. And

they wanted Johnston to hold the proceeds from their sold property in an

intermediary company, Emerald Riverport, solely controlled by Johnston, until

they purchased new property to complete the § 1031 transaction.

Unknown to Ford and the Baergs, Johnston was involved in an extensive

scheme of fraud, theft, and illegal drug distribution. Johnston spent the

Baergs' proceeds from the sale of their property, placed in Emerald Riverport,

.1 See, e.g., Abbott v. Chesley, 413 S.W.3d 589(Ky.2013) 2 for his own scheme. When the Baergs wanted the money to purchase new

property under their§ 1031 transaction, Johnston wire-transferred funds from

Ford's Villa Paridisfo account to pay the seller of the new property. Johnsto~

also used funds from Ford's ATI Ventures account to purchase a cashier's

check, which he then negotiated to Zafar Nasir. Nasir later negotiated that I . .

cashier's check to Faisal Shah, who deposited the check's funds into his

personal bank account.

After discovering these fraudulent

action against Johnston, the Baergs, and Shah for conversion. Ford moved for

summaiy judgment against all parties, and the trial court granted Ford's I motion and found all parties liable. Shah and the Baergs appealed, and the

appellate court reversed the trial court's findings with respect to them, finding

that Ford could not prove the first two elements of conversion2-specifically,

that Ford lacked the requisite legal title or possessory rights to the allegedly

converted property. This court took this case on discretionaiy review.

2 The elements of conversion are: (1) the plaintiff had legal title to the converted property; (2) the plaintiff had the right to possess the property at the time of the conversion; (3) the defendant exercised dominion over the plaintiff's property· in a way that deprived the plaintiff of its use and enjoyment; (4) the defendant intended to interfere with the plaintiff's possession; (5) the plaintiff demanded return of the property and the defendant ~efused; (6) the defendant's act was the legal cause of the plaintiff's loss of the property; and (7) the plaintiff suffered damages from the loss of the property. Kentucky Ass'n of Ctys. AU Lines Fund Trust v. McCl.endon, 157 S. W.3d 626, 630 n.12 (Ky. 2005). 3 II. ANALYSIS.

A. Standard of Review. We review a trial court's granting of a party's summary judgment motion

de novo.3' "On appeal, '[t]he standard of review ... of a summary judgment is

whether the circuit judge correctly found that there were no issues as to any

material fact and that the moving party was entitled to a judgment as a matter

of law."'4

B. Ford Cannot Satisfy the First Two Elements of Conversion. The Baergs correctly argue that Johnston, as the sole signatory on the

Villa Paridisio bank accounts at PNC Bank and BB&T, possessed, at the least,

apparent authority over those bank accounts. Shah argues the same-

Johnston remained the sole signatory on the ATI Ventures bank account at

Republic Bank, and thus Johnston possessed apparent authority over that

bank account. The Baergs and Shah argue that, through his apparent·

authority, Johnston divested Ford oflegal title and possessory rights when

Johnston completed the wire transfer in the Baergs' case and the negotiation

and deposit of the cashier's c~eck in Shah's case.

As stated previously, the first two elements of conversioh require the

plaintiff, Ford, to (1) have legal title over the property in question and (2) the

right to possess the property at the time of the conversion. In other words, if

3 Caniffv. CSXTransp., Inc., _438 S.W.3d368, 372 (Ky. 2014). 4 Id. (quoting Pearson ex reL Trent v. Nat'lFeeding Sys., Inc., 90 S.W.3d 46, 49 (Ky. 2002)). 4· Ford does not possess legal title over or the right to possess the property in

question, her conversion claims against the Baergs and Shah fail.

1. Johnston Possessed Apparent Authorl.ty to Act on Behalf of Ford When Managing her LLCs' Bank Accounts. ' A signatory is "A person or entity that signs a document, personally or

through an agent, and thereby becomes a party to an agreement. "5 For the

purposes of this case, the most important feature of designation as a signatm:y

is the vesting of signatory authority in the signatory. Signatory authority is the

"License to make a decision, esp. to withdraw money from an .account or ~o

transfer a negotiable instrument. "6 In other words, when an individual is

designated as a signatory, that individual possesses some type of authority to

act on behalf of the principal who designated the individual as a signatory.

Recall that Ford designated Johnston as a signatory on both her Villa

Paridisio and ATI Ventures bank accounts. So Johnston possessed some type

of authority over these accounts. The Baergs and Shah correctly argue that, at

the ve:ry least, Johnston possessed apparent authority to transfer funds from

these accounts to third parties, thereby eventually validly divesting Ford of any

legal title br right to possess the transferred funds in both cases.

"Apparent authority .. .is not actual authority but is the authority the

agent is held out by the principal as possessing. It is a matter of appearances

s Signatory, Black's Law Dictionazy (10th ed. 2014). 6 Signatory Authority, Black's Law Dictionazy (10th ed. 2014). 5 on which third parties comes to rely. "7 "An agent is said to have apparent

authority to ·enter transactions on his or her principal's behalf with a third

party when the principal has manifested to the third party that the agent is so .

authorized, and the third party reasonably relies on that manifestation."B "That

a principal did not approve an individual transaction does not change the fact

that an agent can have apparent authority to make the signature and thus

engage in the transaction, at least when viewed from the perspective of the

bank."9

Without question, as a signatory, Johnston possessed the authority to

transfer funds from the bank accounts of Villa Paridisio and ATI Ventures to

third parties from the perspective of BB&T and Republic Bank. This is the

entire reason an individual designates a signatory on a bank account-to vest

authority in that individual to make transfers from one's bank account and to

have the bank recognize that authority. BB&T and Republic Bank reasonably

relied on Johnston's status as a signatory when transferring funds from the

LLCs' bank accounts to the respective third parties at Johnston's direction. In

sum, there is no question that Johnston possessed apparent authority to act

on behalf of Ford when managing her LLCs' bank accounts.

1Mark D. Dean, P.s.'c. v. Commonwealth Bank & Trust Co., 434 S.W.3d 489, 499 (Ky. 2014) (quoting Mill St. Church of Christ v. Hogan, 785 S.W.2d 263, 267 (Ky. App. 1990)). . s i'ing v. Beverly Enterprises, Inc., 376 S.W.3d 581, 594 (Ky. 2012); see also · Restatement (Third) of Agency§ 2.03 (2006) ("Apparent authority is the power held by an agent or other actor to affect a principal's legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of th!=! principal and that belief is traceable to the principal's manifestations."). 9 Mark D. Dean, 434 S.W.3d at 500. ·6 2 . .Johnston's Apparent Authority Allowed Title to Transfer Validly from the LLCs' Bank Accounts to Respective Third Parties. As a signatory, Johnston committed two transfers vital to determining

the end result of this case. Regarding the Baergs, Johnston wire-transferred

funds from Ford's Villa Paridisio account to pay the seller of the new property.

Regarding Shah, Johnston used funds from Ford's ATI Ventures account to

purchase a cashier's check, which he later negotiated to Zafar Nasir, who then

negotiated the check to Shah, who deposited the funds from the cashier's

check into his personal bank account.

a. The Wire Transfers. Regarding Johnston's wire transfer from Villa Paridisio to the seller's

designated third parties, as a matter of law, "Title to funds in a wire transfer

passes to the beneficiary bank upon acceptance of a payment order."10 So

when Johnston validly ordered BB&T to wire money to the seller's designated

third parties, the completion of the transfer of valid title occurred upon those

third parties acceptance by the payment order. 11 At that point in time, Ford

lost all her claim to title and possession. Because Ford no longer has title over

or the right to possess the funds, Ford cannot satisfy the first two elements of

her conversion claim against the Baergs and her claim against them fails.

10 Regions Bank v. Provident Bank, Inc., 345 F.3d 1267, 1277 (11th Cir. 2003); 7 Anderson U.C.C. § 4A-209:7 (3d. ed.). Although only persuasive authority, Regions Bank has been heavily cited and relied upon by both parties and the Court of Appeals in this case. Clearly, if the receiving bank in the wire transfer "know[s] or [has] reasonable cause to believe that the property [has] been obtained through commission of a theft offense," then title would not validly pass. Regions Bank, 345 F.3d at 1277. . Here, there is absolutely no evidence that the [bank] receiving Johnston's wire transfers had any knowledge or reason to believe that the transfers were fraudulent. So UCC Artide 4A is not being used "as a shield for fraudulent activity." Id. at 1276. u Ag;ain, Johnston possessed valid apparent authority to complete this transfer. 7 b. The Negotiation of the Cashier's Check. Regarding Johnston's purchase and negotiation of the cashier's check,

Johnston validly possessed the ability to enforce the cashier's check because

he validly purchased the cashier's check using Ford's funds through his

apparent authority over Ford's ATI Ventures bank account.12 Once Johnston

•negotiated the cashier's check to Nasir, Johnston's ability to enforce the

cashier's check passed to Nasir.13 Nasir then negotiated the check to Shah,

who .later deposited the funds into his personal account, at which point Ford

lost all title and possessory rights in the funds. 14 Because Ford no longer has

any possessory rights in the funds, she cannot satisfy the second element of a

conversion action, and thus her claim fails.

c. Cheapest Cost Avoider Principle. With respect to Ford's claims against the Baergs and Shah, we assert a

further justification for our holding in this unfortunate case. The "cheapest

cost avoider'' economic principle states, in the words of Judge Posner, "that the

dufy to avoid a loss should be placed on the party that can prevent the lqss at

· 12. There is an argument that once Johnston purchased the cashier's check, Ford lost possessory rights at that point in time. But as the Court of Appeals aptly noted, there is debate about this concept. Cf Gregory E. Maggs Determining the Rights and Liabilities of the Re.mitter of a Negotiable Instrument: A Theory Applied to Some Unsettled Questions, 36 B.C.L. Rev. 619, 654-55 (1995). Because of this debate, and because this case is conclusively decided differently, we need not resolve this debate at this time. 13 "Transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument.... " KRS 355.3-203(2).

14 When a general deposit is made by a bank's customer (account holder) at the bank, title to the generat deposit passes from the depositor to the bank, with the bank undertaking a duty to repay. Ann Graham, Banking Law§ 9.02[1] (1997); Dean Witter Reynolds, Inc. v. Variable Annuity Life Ins. Co., 373 F.3d 1100, 1107-08 (10th Cir. 2004). 8 lower cost. "15 In this case, Ford was the party in the best position to prevent

her loss. She entrusted Johnston with unconstrained authority to handle her

funds. Had she properly vetted Johnston or monitored her accounts, she could

have terminated his status as a signatory or never even have bestowed upon

him sole signatory status, preventing her own loss. Ford's status as the

cheapest cost avoider in this case further cements our holdings.

d. Johnston is Not a "Thief'' for Purposes of Determining Title Transfer. Ford argues to us the well-established rule that "a robber or thief cannot

as against the owner pass title to ... stolen property, even to a bona fide

purchaser for v~ue" 1 6 when she insists that she never lost title to the funds

eventually transferred to the Baergs and Shah. But Johnston is not a "thief' in

this specific context~ohnston possessed apparent authority over Ford's LLCs'

bank accounts by virtue _of his signatory authority granted to him by Ford. And

when Johnston exercised his authority over the accounts, it was as if Ford

herself was the actor. So Johnston cannot be considered a "thief' in this

context.

III. CONCLUSION.

Angela Fotd no longer possesses title to or a possessory interest in the

funds transferred in the Baergs' case, nor does she possess an interest in the

funds transferred in Shah's case. For those reasons, Ford cannot maintain a

15 Wachovia Bank, N.A. v. Foster Bancshares, Inc., 457 F.3d 619, 622 (7th Cir. 2006). 16 People's Nat Bank v. Jones, 61 S.W.2d 17, 19 (Ky. 1933); See In re Newpower, 233 F.3d 922, 929 (6th Cir. 2000); Restatement (Second)·ofTorts § 229 cmt. d. (1965); Bogert, Trust & 'J;'rustees § 476 (2d~ ed. 1978). 9 conversion action against these parties, and her claim fails as a matter of law.

We affirm the Court of Appeals in reversing the trial court's grant of Ford's

motions for summary judgment and remand the case to the trial court with

instructions. to enter summary judgment in favor of the Baergs and Shah.

All sitting. All concur.

COUNSEL FOR APPELLANTS:

Angela Margaret Ford l

Mindy Barfield Brett Nolan · Dinsmore & Shohl, LLP

COUNSEL FOR APPELLEE FAISAL SHAH:

Stephen M. O'Brien III David Coomer Stephen M. O'Brien, III, PLLC

COUNSEL FOR APPELLEES KATHLEEN M. BAERG AND HAROLD BAERG JR.:

John F. Billings John Nathanael Billings Christopher L. Thacker Stephen Wilson Billings Law Firm, PLLC.