Guardian Angel v. MetaBank

• Court: District Court, D. New Hampshire
• Decided: July 14, 2011
• Docket: CV-08-261-PB
• Status: Published

Opinion

Guardian Angel v. MetaBank CV-08-261-PB 7/14/11 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Guardian Angel Credit Union, on its own behalf and on behalf of a class of persons similarly situated

v. Case No. 08-cv-261-PB Opinion No. 2 011 DNH 111 MetaBank and Meta Financial Group

MEMORANDUM AND ORDER

This case was spawned by the actions of a rogue bank

employee who used her position at the bank to induce

approximately fifty different institutions to transfer funds to

the bank under the pretext that the funds would be used to

purchase certificates of deposit ("CDs"). The employee then

diverted the money into accounts at the bank that were under he

control and issued fraudulent CDs in the bank's name. The

scheme was eventually detected and the employee is now in

prison. The current action is an attempt by a class of victims

to recover against the bank. The named plaintiff is Guardian

Angel Credit Union. The defendants are MetaBank and its parent Meta Financial Group.1 The rogue employee is Charlene

Pickhinke.

Guardian Angel asserts three causes of action on behalf of

the class. First, it argues that MetaBank is liable for breach

of contract because Pickhinke had apparent authority to bind

MetaBank to agreements to issue the CDs. Second, it claims that

MetaBank is liable for negligently supervising Pickhinke.

Finally, it argues that MetaBank is vicariously liable for

conversion and other torts committed by Pickhinke. Guardian

Angel also seeks to recover attorney's fees on behalf of the

class.

The matter is before me on cross-motions for summary

judgment.

I. BACKGROUND

MetaBank is a federally chartered bank insured by the

Federal Deposit Insurance Corporation and headquartered in Storm

Lake, Iowa. Decl. of Danny 0. Reynolds, Doc. No. 103-2

1 MetaBank was formerly known as First Federal Savings Bank of the Midwest. In this Memorandum and Order, I refer to both defendants collectively as MetaBank.

2 ("Reynolds Decl."), at 4-5. Pickhinke was an employee of the

bank for approximately twenty-eight years, working at its Sac

City, Iowa branch. Id. at 5 7. Pickhinke eventually became an

office supervisor. Id. at 5 8. Her general duties included

opening new accounts for customers, marketing deposit accounts,

and increasing the volume of deposits for the bank. Dep. of

Danny Reynolds, Pis.' Ex. 100 ("Reynolds Dep."), at 54-58. In

performing these duties Pickhinke was authorized to issue CDs,

send and receive wire transfers, move money between accounts,

accept deposits, and open accounts, all without any oversight or

approval from superiors. Id. at 53-54; Navigant Consulting,

Inc. Report of Investigation of Potentially Fraudulent Employee

Acts at MetaBank, Inc., Pis.' Ex. 83A ("NCI Report"), at 5-6.

She also had access and authority to use MetaBank's forms and

stationary to process CD purchases. Reynolds Dep. at 60.

Although MetaBank has not produced written policies that

limit the authority of bank employees to issue CDs, there is

evidence in the record that it had policies in place when

Pickhinke worked there that would have required her to obtain a

supervisor's approval before: (1) issuing CDs "at or near

$100,000," (2) selling CDs to institutions outside of MetaBank's 3 geographic market in Iowa or South Dakota; or (3) using CD

brokers to sell CDs. Id. at 52, 58; Reynolds Decl. at 6-8.

Even if these policies existed - a point Guardian Angel contests

- the policies were not disclosed to customers or other third

parties. Reynolds Dep. at 52-59.

Pickhinke used a variety of CD brokers to find her victims.

A representative of one such broker, AVD Investments, testified

in a deposition that he was told by an unnamed MetaBank employee

at some point in 1995 that Pickhinke was the person that AVD

should contact with respect to CDs. Deposition of Ted Adams,

Doc. No. 103-13 ("Adams Dep."), at 26. AVD subsequently

obtained information from Pickhinke about her CD offerings and

shared it with potential customers and other CD brokers. Id. at

26-30.

Pickhinke induced Guardian Angel to purchase what it

thought was a $99,000 MetaBank CD in April 2005. At that time.

Guardian Angel's office manager, Diane Gilbert, received a fax

proposing the investment from Jumbo Investments, Inc., a CD

broker that had learned of the offering from AVD Investments.

Deposition of Diane Gilbert, Doc. No. 103-7 ("Gilbert Dep."), at

64-65; deposition of Chris Duncan, Doc. No. 103-11 ("Duncan 4 Dep."), at 52-54. The fax stated that the CD would be issued by

MetaBank, and it specified that the investment proceeds should

be wired to MetaBank's account at the Federal Home Loan Bank

("FHLB"). Jumbo Fax, Doc. No. 103-9, at 1. The fax included a

fictitious mailing address, telephone number and fax number for

MetaBank. Reynolds Decl. 27-29. It also stated that

communications concerning the CD should be directed to

Pickhinke's attention. Jumbo Fax at 1. Gilbert took the fax to

Guardian Angel's CEO, Gerald Dumoulin, who was responsible for

Guardian Angel's investments. Gilbert Dep. at 45-47. Dumoulin

decided to purchase the CD based on the advertised interest rate

and the fact that MetaBank was FDIC-insured. Deposition of

Gerald Dumoulin, Doc. No. 103-6 ("Dumoulin Dep."), at 95.

After Guardian Angel decided to purchase the CD, it wired

$99,000 to MetaBank's FHLB account. Wire Detail, Doc. No. 103-

10, at 1. The Wire Detail identified MetaBank as the

beneficiary financial institution and Guardian Angel as the

originating financial institution. Id. at 1-2. Pickhinke then

sent Guardian Angel a letter on MetaBank stationary with an

original CD and signature card on a form that also included the

MetaBank logo. Reynolds Decl. at 5 15. The account number 5 provided on the fraudulent CD did not correspond with an actual

MetaBank account. Id. at 5 25. Pickhinke completed the

internal compliance paperwork for the wire, falsely listing an

entity other than Guardian Angel as the originator beneficiary.

Wire/Funds Transfer Transaction Record, Pi's Ex. 30A ("Wire

Record"), at 1. She subsequently transferred the funds out of

MetaBank's FHLB account and deposited them into the MetaBank

account that she had opened in a fictitious name. Reynolds

Decl. at 5 22. Guardian Angel renewed the unauthorized CD twice

before it discovered the fraud, once in April 2006 and once in

April 2007. Aff. of Gerald Dumoulin, Pis.' Ex. 112 ("Dumoulin

Aff."), at 2. Pickhinke paid Guardian Angel interest on the

fictitious account as it became due until her scheme was

discovered. Id.

Pickhinke began her criminal scheme in 1995 and succeeded

in stealing a total of approximately four million dollars from

approximately fifty institutional investors before she was

caught in 2007. NCI Report at 1. Her method of operation in

those cases was similar to the method she employed in her

dealings with Guardian Angel. Id. at 4-5.

6 II. STANDARD OF REVIEW

Summary judgment is appropriate when "there is no genuine

issue as to any material fact and the movant is entitled to

judgment as a matter of law." Fed. R. Civ. P. 56(a) . A party

seeking summary judgment must first identify the absence of any

genuine issue of material fact. Celotex Corp. v. Catrett, 477

U.S. 317, 323 (1986). The burden then shifts to the nonmoving

party to "produce evidence on which a reasonable finder of fact,

under the appropriate proof burden, could base a verdict for it;

if that party cannot produce such evidence, the motion must be

granted." Ayala-Gerena v. Bristol Myers-Squibb Co., 95 F.3d 86,

94 (1st Cir. 1996). On cross-motions for summary judgment, the

standard of review is applied to each motion separately. See

Am. Home Assurance Co. v. ACM Marine Contractors, Inc., 467 F.3d

810, 812 (1st Cir. 2006).

Il l . ANALYSIS

Plaintiffs assert claims for breach of contract, negligent

supervision, and conversion. They also seek to recover

attorney's fees. All of the plaintiffs' claims are governed by

Iowa law. See Doc. No. 58. 7 A. MetaBank's Summary Judgment Motion

1. Breach of Contract

Plaintiffs invoke the doctrine of apparent authority in

arguing that MetaBank is liable for breach of contract._

a. Law

Apparent authority is "authority which, although not

actually granted, has been knowingly permitted by the principal

or which the principal holds the agent out as possessing."

Magnusson Agency v. Pub. Entity Nat'l Co.-Midwest, 560 N.W.2d

20, 2 5-26 (Iowa 1997); see also Chismore v. Marion Sav. Bank,

268 N.W. 137, 139 (Iowa 1936).

Iowa courts have looked to the Restatement (Third) of

Agency when resolving issues of apparent authority. See

Frontier Leasing Corp. v. Links Eng. LLC, 781 N.W.2d 772, 776

~ Plaintiffs also argue that MetaBank is liable solely because it accepted deposits from the plaintiffs into its FHLB account. Plaintiffs claim that MetaBank's acceptance of the deposits created a contract regardless of whether Pickhinke acted with actual or apparent authority. The cases plaintiffs cite for this proposition are distinguishable, as they held that a depositor has a right to recover money it deposits into its own account. See Andrew v. Colo. Sav. Bank, 219 N.W. 62, 64 (Iowa 1928); Officer v. Officer, 94 N.W. 947, 948 (Iowa 1903). Plaintiffs' deposits were made to MetaBank's FHLB account and were transferred to Pickhinke's fraudulent personal account. No deposits were ever made into any of the plaintiffs' personal accounts. (Iowa 2010). The Restatement provides that a person acts with

apparent authority "when a third party reasonably believes the

actor has authority to act on behalf of the principal and that

belief is traceable to the principal's manifestations."

Restatement (Third) of Agency § 2.03 (2006) .

In explaining this concept, the Restatement identifies

several legal principles that are relevant here. First, the

Restatement notes that a principal's manifestations may result

from conduct as well as words. Thus, "if the principal places a

person in a position or office with specific functions or

responsibilities, from which third parties will infer that the

principal assents to acts by the person requisite to fulfilling

the specific functions of responsibilities, the principal has

manifested such assent to third parties." Id. at § 1.03, cmt.

b. In such a case, "[a} third party who interacts with the

person, believing the manifestation to be true, need not

establish a communication made directly to the third party by

the principal to establish the presence of apparent authority. .

. ." Id. This is true even if the principal's manifestations

are unintended. Id. at § 1.03, cmt. d.

9 Second, the Restatement recognizes that a principal's

undisclosed limitations on an agent's actual authority will not

limit the scope of the apparent authority that results from the

principal's manifestations. Id. at § 2.03, cmt. c

("Restrictions on an agent's authority that are known only to

the principal and the agent do not defeat or supersede the

consequences of apparent authority for the principal's legal

relations, apart from the principal's legal relations with the

agent"). Further, a third party ordinarily has no duty to

inquire into undisclosed limits on an agent's apparent

authority. Id. at § 3.03, cmt. b.

Third, a principal's manifestations of apparent authority

need not be communicated directly by the principal to the third

party to give rise to apparent authority. An "indirect route"

of transmission may well be sufficient as long as it was

reasonable under the circumstances for the third party to

conclude from the manifestations that the person has authority

to act on the principal's behalf. See id. at § 3.03, cmt. b;

see also id. at § 2.03, cmt c (noting that apparent authority

can be based on "statements made by others concerning an

actor's authority that reach the third party and are traceable 10 to the principal").

b. Analysis

MetaBank argues that no reasonable jury could find that

Pickhinke acted with apparent authority in her dealings with the

class because there is no evidence in the record to suggest that

MetaBank ever made any "representations" directly to any members

of the class concerning Pickhinke's authority to issue CDs.

This argument is based on the mistaken premise that apparent

authority can arise only from statements that are made directly

by a principal to the third party that is making a claim of

apparent authority. As I have explained, MetaBank's premise is

false because apparent authority can arise from nonverbal

manifestations by the principal and those manifestations need

not be communicated directly by the principal to the third party

as long as the third party's reasonable belief in the agent's

apparent authority is traceable to the principal's

manifestations.

In the present case, it is undisputed that MetaBank

employed Pickhinke, that it gave her apparent authority to issue

the CDs without the approval of supervisors, and that it allowed

her to open accounts, authorize funds transfers into the bank's 11 FHLB account, and issue communications to third parties on the

bank's letterhead. It is also undisputed that MetaBank accepted

deposits into its FHLB account from the victims and, over the

course of several years, did nothing to suggest to the victims

that it did not endorse the actions that Pickhinke ostensibly

undertook on its behalf. There is also evidence in the record

to suggest that at least one of the CD brokers that was involved

in causing the victims to participate in Pickhinke's fraudulent

scheme was told by MetaBank that Pickhinke was the person to

deal with at the bank with respect to CDs. When this evidence

is viewed in the light most favorable to the plaintiffs, it is

more than sufficient to permit a reasonable jury to conclude

that MetaBank's actions were sufficient manifestations of

Pickhinke's apparent authority to issue CDs on the bank's behalf

to induce a reasonable person in the plaintiffs' position to

believe that she in fact had that authority.

A reasonable jury could also conclude from the record that

the actions of the CD brokers that caused plaintiffs to believe

that they were purchasing CDs from MetaBank are traceable to

MetaBank's own manifestations of Pickhinke's authority.

Although a reasonable jury might eventually decide otherwise, it 12 certainly could conclude from the present record that the CD

brokers made the representations to the victims that they made

concerning Pickhinke's criminal scheme because MetaBank cloaked

her with the apparent authority to act on its behalf. Under

these circumstances, MetaBank cannot defeat the plaintiffs'

contract claim simply by asserting that the bank's

manifestations of apparent authority were not communicated

directly from MetaBank to the plaintiffs.

MetaBank also faults the plaintiffs for failing to

investigate the scope of Pickhinke's authority to act on behalf

of MetaBank before attempting to purchase the CDs, claiming that

several internal policies prevented Pickhinke from being

authorized to issue the kind of CDs involved in her scheme.

This argument is a non-starter. As I have explained, a third

party ordinarily will not be faulted for failing to uncover

undisclosed limitations on an agent's authority when the

principal's manifestations concerning the agent's authority

reasonably lead third parties to believe that the agent is

authorized to undertake the action in question on the

principal's behalf. The case that MetaBank cites is not to the

contrary. In Carson v. Chicago, M & St. P. R. Co., 164 N.W. 13 747, 750 (Iowa 1917), the court endorsed the general principal

that "those dealing with agents are bound to know the extent of

the agent's authority." However, the court went on to also

state that liability may nonetheless attach where "the party

dealing with the agent has been misled to his injury by the

principal's having clothed the agent with apparent or ostensible

authority to do the things he has done in excess of authority."

Id. Taken together, these two rules essentially lay out a duty

to be aware of an agent's actual authority and an exception to

that duty where apparent authority has been manifested. Here,

as I have explained, a jury could find both that the plaintiffs

reasonably believed that Pickhinke had apparent authority to

issue CDs on MetaBank's behalf and that those beliefs are

traceable to MetaBank's manifestations of Pickhinke's apparent

authority. Under these circumstances, MetaBank cannot escape

liability by seeking to blame the plaintiffs for failing to

uncover its undisclosed limitations on Pickhinke's actual

authority.

MetaBank also makes a somewhat opaque claim that plaintiffs

have proffered insufficient evidence to support a contract claim

even if Pickhinke had apparent authority to issue CDs on 14 MetaBank's behalf. This argument is also without merit. If

Pickhinke had apparent authority to act on MetaBank's behalf, it

is quite clear that she used CD brokers to communicate offers to

sell MetaBank CDs to the plaintiffs and that they accepted those

offers by depositing funds into MetaBank's FLHB account.

MetaBank plainly breached the contracts that resulted from this

course of conduct if Pickhinke had apparent authority to act on

its behalf by failing to return the principal and any

undistributed interest when the CDs became due. I need go no

further to dispose of MetaBank's challenge to plaintiffs'

contract claim.

2. Negligent Supervision

Plaintiffs argue that MetaBank is liable for negligently

hiring, retaining, and supervising Pickhinke. MetaBank argues

that it is entitled to summary judgment with respect to this

claim because a bank does not owe third parties a duty to use

reasonable care in hiring, retaining, and supervising employees.

I reject this argument.

Iowa has followed the Restatement (Second) of Agency in

recognizing the tort of negligent hiring, supervision and

retention. See Kiesau v. Bantz, 686 N.W.2d 164, 171-72 (Iowa 15 2004). The Restatement explains the tort by stating that

A person conducting an activity through servants or other agents is subject to liability for harm resulting from his conduct if he is negligent or reckless . . . (b) in the employment of improper persons or instrumentalities in work involving risk of harm to others; (c) in the supervision of the activity; or (d) in permitting, or failing to prevent, negligent or other tortious conduct by persons, whether or not his servants or agents, upon premises or with instrumentalities under his control.

Id. (citing Restatement (Second) of Agency § 213 (1957)) . This

tort allows a plaintiff to recover damages from an employer for

torts committed by an employee even when the employee's conduct

is outside the scope of employment if "the employer's own

wrongful conduct has facilitated in some manner the tortious act

or wrongful conduct of the employee." Id. at 172.

MetaBank attempts to challenge this basic tort law concept

by citing cases in which courts have determined that a bank

cannot be held liable for failing to prevent an unaffiliated

third party from using an account at the bank to commit fraud.

See, e.g., Eisenberg v. Wachovia Bank, N.A., 301 F.3d 220 (4th

Cir. 2002). These cases, however, do not involve claims for

negligent hiring, supervision, and retention, and did not

16 involve the wrongful actions of bank employees. That a bank

does not have a general duty to protect non-customers from torts

involving its accounts says nothing about its duty to adequately

supervise its employees. As the cases cited by MetaBank do not

create a special rule for banks that exempts them from liability

for failing to properly hire and supervise their employees, this

argument fails.

3. Vicarious Liability

Plaintiffs' third claim seeks to hold MetaBank vicariously

liable for conversion and other torts committed by Pickhinke.

Iowa follows the general common law rule in most other states in

recognizing that an employer is vicariously liable for the tort

of an employee only if the employee committed the tort while

acting within the scope of his or her employment. Godar v.

Edwards, 588 N.W.2d 701, 705 (Iowa 1999). An act is within the

scope of one's employment "where such act is necessary to

accomplish the purpose of the employment and is intended for

such purpose." Id.

Plaintiffs acknowledge the general rule but they contend

that the Iowa Supreme Court has also adopted a special rule of

vicarious liability in Godar that permits a finding of vicarious 17 liability for acts committed outside the scope of employment if

the court determines "that the loss resulting from the servant's

acts should be considered as one of the normal risks to be borne

by the business in which the servant is employed." Id. at 706.

This "rule" is best understood, however, as an additional factor

in the analysis of a vicarious liability claim rather than a

distinct theory of liability.

The facts of Godar v. Edwards itself bear out this

conclusion. After stating both the rules noted above, the Iowa

Supreme Court held that when Edwards, a school curriculum

director, committed sexual abuses against students, those acts

could not be said to be in furtherance of the objectives of any

school district programs. Id. at 707. Specifically, the court

noted that "[t]he fact that Edwards' alleged conduct was

incidental to duties authorized by the school district as

curriculum director does not support a finding that the conduct

furthered the educational objectives of the school district."

Id. Thus, far from indicating that furthering the employer's

objectives is not a necessary element of vicarious liability,

the court explicitly relied on it in denying liability.

18 Here, as in Godar, Pickhinke's fraudulent scheme did not in

any way further the objectives of MetaBank. While her

fraudulent conduct may have been incidental to duties authorized

by her employer, that is not sufficient. Similarly, the de

minimus benefits realized by MetaBank in the form of wire

transfer fees were merely incidental benefits and were not

intended as part of Pickhinke's scheme.

Plaintiffs also rely on Riggan v. Glass, No. 7-065, 2007

Iowa A p p . LEXIS 344 (Iowa C t . A p p . Mar. 28, 2007), for the

proposition that furthering the objectives of the employer is

not required. That case, however, undermines rather than

supports plaintiffs' argument. In Glass, the CEO of a bank

wrote fraudulent loans for customers and deposited the proceeds

in his own account. Id. at *2. In finding that vicarious

liability was not precluded as a matter of law, the appeals

court noted first that "[o]ne of the purposes of his illegal

conduct was to create the false impression that [the bank] had

no bad loans and was extremely profitable." Id. at *12. Only

after determining that Glass intended, at least partially, to

benefit his employer, did the court go on to address whether the

criminal conduct was a normal risk that should be borne by the 19 bank. Id. Thus the language cited by plaintiffs about "normal

risks to be borne," when looked at in the context of the cases

that use it, was clearly not meant to replace the requirement

that an employee act and intend to accomplish the purpose of the

employer.

Plaintiffs have not pointed to any facts indicating that

Pickhinke intended to benefit MetaBank when she issued

fraudulent CDs and created false accounts to use the funds to

her own personal benefit, and without such facts its arguments

that employee theft is a normal risk in the banking industry

that should be borne by MetaBank are insufficient as a matter of

law .

4. Attorney's Fees

Finally, Plaintiffs seek attorney's fees in this matter.

Iowa law allows a "rare exception" to the general rule against

awarding attorney's fees where a party "has acted in bad faith,

vexatiously, wantonly, or for oppressive reasons." Hockenberg

Equip. Co. v. Hockenberg's Equip. & Supply Co., 510 N.W.2d 153,

158 (Iowa 1993). Hockenberg noted that the standard includes

"voluntary blindness or an intentional failure to discover or

prevent the wrong." Id. at 159 (internal brackets omitted). 20 Plaintiffs argue that MetaBank's actions illustrate willful

blindness to Pickhinke's fraudulent scheme because the bank

ignored its own Wire Transfer Policy, did not act on a 2005

audit that found its internal wire transfer controls inadequate,

and received two warnings related to Pickhinke that resulted in

internal investigations. Plaintiffs' argument fails, however,

because the Hockenberg decision went on to make clear that

"[t]hese terms envision conduct that is intentional and likely

to be aggravated by cruel and tyrannical motives." Id. In

fact, the court held that the standard for attorney's fees is

more stringent than the test for punitive damages, which is the

"willful and wanton disregard for the rights of another." Id.

Plaintiffs have not identified facts even close to

satisfying this standard. It is undisputed that MetaBank did

not participate in Pickhinke's scheme, had no knowledge of it,

and took prompt action to end the scheme as soon as it became

aware of it. The investigations of Pickhinke cited by

plaintiffs concerned only her use of vacation time and did not

discover the fraudulent scheme underlying this case.

Finally, plaintiffs argue that they should be granted

attorney's fees because MetaBank has been "stubbornly 21 litigious." See United Fire & Cas. Co. v. Shelly Funeral Home,

Inc., 642 N.W.2d 648, 658 (Iowa 2002); Clark-Peterson Co., Inc.

v. Indep. Ins. Assocs, Ltd., 514 N.W.2d 912, 916 (Iowa 1994).

In Clark-Peterson, attorney fees were denied in an insurance

case where the defendants "merely believed no coverage existed

under the policy." 514 N.W.2d at 916. Similarly, here

defendants have simply litigated in good faith, and have not

advanced frivolous arguments. The fact that MetaBank's motion

for summary judgment is partially granted by this order, while

the remaining claims are sufficiently disputed to survive

summary judgment, supports this conclusion. MetaBank is

entitled to summary judgment on plaintiffs' claim for attorney's

fees.

B. Plaintiffs' Summary Judgment Motion

Plaintiffs have filed their own motion for summary

judgment. It is, however, a rare case in which the party with

the burden of proof will be entitled to summary judgment. This

is not such a case. It is sufficient to dispose of the motion to

note that the motion must be denied because facts material to

its resolution remain in genuine dispute.

22 IV. CONCLUSION

For the reasons stated above I grant MetaBank's motion for

summary judgment (Doc. No. 103) in part and deny it in part and

deny plaintiffs' motion for summary judgment (Doc. No. 102) in

its entirety.

SO ORDERED.

/s/Paul Barbadoro Paul Barbadoro United States District Judge

July 14, 2011

cc: Christopher T. Meier, Esq. Randall F. Cooper, Esq. Bruce Felmly, Esq. Christine B. Cesare, Esq. Howard M. Rogatnick, Esq. Ronald Joshua Bliss, Esq. Cathryn E. Vaughn, Esq.