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Fort v. Suntrust Bank

United States District Court, D. South Carolina, Spartanburg Division

August 25, 2016

JOHN K. FORT, Chapter 7 Trustee for International Payment Group, Inc., Plaintiff,


          Bruce Howe Hendricks United States District Judge.

         This matter is before the Court on Defendant SunTrust Bank's (“SunTrust” or “Defendant”) Motion for Summary Judgment (ECF No. 31-7). For the reasons set forth in this Order, Defendant's Motion is granted in full.


         The U.S. Bankruptcy Court for the District of South Carolina, Judge Helen E. Burris presiding, submitted to this Court its Proposed Findings of Fact and Conclusions of Law (“Proposed Order”) (ECF No. 67-2) with respect to Defendant's Motion for Summary Judgment in Adversary Proceeding 10-80049-hb. The Bankruptcy Court recommends that this Court grant Defendant's Motion in part and deny it in part. The Proposed Order sets forth the relevant facts and standards of law on this matter, and the Court incorporates them herein without recitation, to the degree not inconsistent.[1]


         The underlying Adversary Proceeding was initiated on April 9, 2010 in the Bankruptcy Court pursuant to 28 U.S.C. §§ 157(a) and 1334 and Local Civil Rule 83.IX.01, D.S.C. Plaintiff John K. Fort (“Plaintiff” or “Trustee”), Chapter 7 Trustee for debtor International Payment Group, Inc. (“IPG”), filed a Complaint alleging causes of action for: (1) breach of contract accompanied by a fraudulent act, (2) aiding and abetting breach of fiduciary duty, (3) negligence and gross negligence, (4) breach of fiduciary duty, (5) tortious interference with contractual relations, (6) violation of the South Carolina Unfair and Deceptive Trade Practices Act, (7) violation of S.C. Code Ann. §§ 36-4A-102, et seq., and (8) conversion. (ECF No. 5-1.)

         IPG was a money service business licensed by the United States Treasury Department. IPG conducted various payment transactions on behalf of its customers, including foreign currency transactions that involved the purchase and sale of major currencies, wire transfers, drafts, and spot and forward contracts. In general, IPG's customer paid IPG for foreign currency and IPG, in turn, became obligated to pay the customer's beneficiary in that foreign currency. In order to facilitate these payment transactions, IPG needed to partner with a bank that could execute the transactions through its electronic banking systems, which need gave rise to the relationship between IPG and SunTrust. In this mutually beneficial relationship, SunTrust gave IPG access to its on-line foreign exchange (“OFX”) and online treasury management (“OTM”) systems to make the necessary trades and conveyances, and received a portion of the proceeds as a result. In January 2008, IPG discovered various defalcations by its CFO and reported the same to SunTrust. The gravamen of Trustee's claims in the Adversary Proceeding boil down to four core allegations: (1) SunTrust failed to properly account for funds deposited to and withdrawn from IPG's SunTrust accounts, resulting in “missing” IPG funds as evidenced by creditor claims in the bankruptcy, (2) unauthorized debits were made from IPG's SunTrust accounts, (3) SunTrust failed to properly execute payment orders issued by IPG and either kept the related funds or allowed them to be improperly disbursed, and (4) SunTrust caused IPG to fail by immediately and unnecessarily denying IPG access to the OFX and OTM systems, leading to IPG's filing for bankruptcy relief. Trustee is seeking damages from SunTrust for losses he contends were incurred by IPG as a result of SunTrust's alleged improper handling of account funds and alleged inappropriate reaction to the report of defalcations. SunTrust denies all wrongdoing and/or liability. Additionally, SunTrust contends that IPG's demise was the result of its own mismanagement and lack of internal controls.

         After a Motion to Withdraw Reference and return of the lawsuit to the Bankruptcy Court for pretrial matters, discovery was completed and the Bankruptcy Court considered the parties' pre-trial motions (including Trustee's Motion for Partial Summary Judgment, ECF Nos. 13-1, 15-1). Defendant moved, pursuant to Federal Rule of Civil Procedure 56, made applicable to the Adversary Proceeding by Federal Rule of Bankruptcy Procedure 7056, for entry of an Order granting summary judgment in its favor as to all causes of action asserted by Trustee. (ECF No. 31-7.) Trustee responded (ECF No. 61-1), and Defendant replied (ECF No. 64-1) in turn. After consideration of the extensive briefing, the arguments of counsel, and the voluminous factual record developed during discovery, the Bankruptcy Court recommended that Defendant's motion be granted in part and denied in part, submitting its Proposed Order to this Court accordingly. (ECF No. 67-2.)

         Subsequent to the Bankruptcy Court's issuance of its Proposed Order, both Defendant and Plaintiff filed timely objections. (ECF Nos. 67-5, 67-6.) The parties also responded to one another's objections. (ECF Nos. 68-1, 69-1.) The Court has thoroughly reviewed the record, the briefing, the Proposed Order, and the objections, and now issues the following ruling.


         U.S. District Courts have original jurisdiction over all bankruptcy matters and related proceedings. 28 U.S.C. §§ 1334(a), (b). Title 28, section 157 allows district courts to refer bankruptcy cases to the bankruptcy court. 28 U.S.C. § 157(a). The District of South Carolina has referred all bankruptcy cases to its bankruptcy court. Bankruptcy courts may decide “core” proceedings under title 11, which include “counterclaims by the estate against persons filing claims against the estate.” 28 U.S.C. § 157(b)(2)(C); Moses v. CashCall, Inc., 781 F.3d 63, 70 (4th Cir. 2015).[2] A bankruptcy court may also hear “non-core” claims, but, absent consent, it cannot finally resolve them and must instead submit proposed findings of fact and conclusions of law to its respective district court. 28 U.S.C. § 157(c)(1); Moses, 781 F.3d at 70.

         In Stern v. Marshall, 564 U.S. 462 (2011), the U.S. Supreme Court held that bankruptcy courts do not have constitutional authority to enter final judgments in certain core proceedings, despite their statutory authority to adjudicate those matters under § 157(b). Stern, 564 U.S. at 484. This is the case when the suit is “made of the stuff of the traditional actions at common law tried by the courts at Westminster in 1789, and is brought within the bounds of federal jurisdiction, ” because “the responsibility for deciding that [type of] suit rests with Article III judges in Article III courts.” Id. (citing Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 90 (1982)) (internal quotation and citation omitted). “[T]he question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.” Id. at 499. The Adversary Proceeding here involves so-called “Stern claims” because the various causes of action neither stem from the bankruptcy itself, nor would they be resolved in the claims allowance process. Neither party disputes this categorization.

         While Stern made clear that some claims labeled by Congress as “core” may not be adjudicated by a bankruptcy court in the manner contemplated by § 157(b), it did not address how the bankruptcy court should proceed under those circumstances. The U.S. Supreme Court answered this question in Executive Benefits Ins. Agency v. Arkison, 134 S.Ct. 2165 (2014). There the Supreme Court held that “[w]hen a court identifies a claim as a Stern claim, it has necessarily ‘held invalid' the ‘application' of § 157(b)-i.e., the ‘core' label and its attendant procedures-to the litigant's claim.” Id. at 2173. However, “If the claim satisfies the criteria of § 157(c)(1), the bankruptcy court simply treats the claims as non-core: The bankruptcy court should hear the proceeding and submit proposed findings of fact and conclusions of law to the district court for de novo review and entry of judgment.” Id. The claims in the instant case satisfy the criteria of § 157(c)(1), as they are “otherwise related to a case under title 11;” thus, the instructions provided in Executive Benefits apply here. Those instructions comport with how this case was actually handled pursuant to Judge Timothy M. Cain's Order of April 2, 2012. (ECF No. 2-2 at 4-7.) Moreover, that handling is in accordance with the Standing Order Concerning Title 11 Proceedings Referred Under Local Civil Rule 83.IX.01, Referral to Bankruptcy Judges, Misc. No. 3:13-mc-00471-TLW (D.S.C. Dec. 5, 2013). Accordingly, Judge Burris' Proposed Order on Defendant's Motion for Summary Judgment is before this Court for de novo review.

         The Court shall grant summary judgment “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(a). The movant bears the initial burden of demonstrating that summary judgment is appropriate; if the movant carries its burden, then the burden shifts to the non-movant to set forth specific facts showing that there is a genuine issue for trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). If a movant asserts that a fact cannot be disputed, it must support that assertion either by “citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials;” or “showing . . . that an adverse party cannot produce admissible evidence to support the fact.” Fed.R.Civ.P. 56(c)(1).

         Accordingly, to prevail on a motion for summary judgment, the movant must demonstrate that: (1) there is no genuine issue as to any material fact; and (2) that he is entitled to judgment as a matter of law. As to the first of these determinations, a fact is deemed “material” if proof of its existence or non-existence would affect disposition of the case under applicable law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). An issue of material fact is “genuine” if the evidence offered is such that a reasonable jury might return a verdict for the non-movant. Id. at 257. In determining whether a genuine issue has been raised, the court must construe all inferences and ambiguities against the movant and in favor of the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962).

         Under this standard, the existence of a mere scintilla of evidence in support of the non-moving party's position is insufficient to withstand a summary judgment motion. Anderson, 477 U.S. at 252. “Genuineness” of the disputed issue(s) “means that the evidence must create fair doubt; wholly speculative assertions will not suffice.” See Ross v. Communications Satellite Corp., 759 F.2d 355, 364 (4th Cir. 1985). “Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted.” Anderson, 477 U.S. at 248.

         As would be true for a matter referred to a U.S. Magistrate Judge, the Bankruptcy Court, through its Proposed Order, has made only a recommendation to this Court. The responsibility to make a final determination remains with the district court. See Mathews v. Weber, 423 U.S. 261, 270-71 (1976). As such, the standard of review for objections to the Proposed Order is de novo, and the Court may accept, reject, or modify the Proposed Order, in whole or in part, or recommit the matter with instructions. See 28 U.S.C. § 636(b)(1)(C).


         In the Proposed Order, the Bankruptcy Court recommends that Defendant's Motion for Summary Judgment be granted to dispose of Trustee's causes of action for (1) breach of contract accompanied by a fraudulent act, (2) aiding and abetting breach of fiduciary duty, (3) tortious interference with contractual relations, (4) violation of the South Carolina Unfair and Deceptive Trade Practices Act, (5) violation of S.C. Code Ann. §§ 36-4A-102, et seq., and (6) conversion. (ECF No. 67-2 at 37.) Correspondingly, the Bankruptcy Court recommends that Defendant's motion be denied and that trial proceed on Trustee's causes of action for (1) negligence and gross negligence, and (2) breach of fiduciary duty. (Id.) Both Defendant and Trustee assert various objections to the Bankruptcy Court's Proposed Order, which the Court will now address.[3]

         A. Negligence and Gross Negligence

         Defendant first objects to the Bankruptcy Court's conclusions regarding the negligence and gross negligence cause of action, [4] specifically the following language from the Proposed Order:

There is some evidence of a lack of internal controls over the foreign exchange department at SunTrust, although the relationship of that evidence to the demise of IPG is unclear on this record. There is a dispute regarding the appropriateness of SunTrust's actions in response to the report of Pfaff's theft and if SunTrust acted inappropriately, there is evidence to support damage incurred as a result. For this reason, summary judgment should be denied for this cause of action.

(ECF No. 67-2 at 33.) Defendant asserts that the Bankruptcy Court: (a) overlooked contractual provisions governing the relationship between the parties, the effect of which preclude Trustee's negligence claims; (b) failed to conclude that the Trustee's claim for gross negligence was barred, even though there is no evidence, and it did not make a finding, that SunTrust engaged in wanton or intentional misconduct toward IPG, as required in order for this claim to withstand summary judgment; (c) failed to conclude that the Trustee's claims for negligence were barred as a matter of law, even though it made no finding that SunTrust owed a duty sounding in negligence to IPG; and (d) overlooked the legal significance of its finding that IPG was not, in fact, damaged by SunTrust's breach of any such alleged duty. (ECF No. 67-5 at 3-4.)

         “Negligence is the breach of a duty of care owed to the plaintiff by the defendant.” Savannah Bank, N.A. v. Stalliard, 734 S.E.2d 161, 163 (S.C. 2012). In order to succeed on his negligence claim, Trustee must plead and prove that (1) SunTrust owed a duty of care to IPG, (2) SunTrust breached that duty by a negligent act or omission, (3) SunTrust's negligent act or omission resulted in damage to IPG, and (4) IPG's damages proximately resulted from SunTrust's breach of duty. Id. at 163-64. Failure to establish any of these elements results in failure of the claim. Richardson's Restaurants, Inc. v. Nat'l Bank of S.C., 403 S.E.2d 669, 672 (S.C. Ct. App. 1991).

         “Gross negligence is ‘the intentional, conscious failure to do a thing that is [i]ncumbent upon one to do, or the doing of a thing intentionally that one ought not to do.'” Pilot Indus. v. S. Bell Tel. & Tel. Co., 495 F.Supp. 356, 362 (D.S.C. 1979) (quoting Ford v. Atl. Coastline R.R., 168 S.E. 143 (S.C. 1932)). In other words, in order to sustain a claim for gross negligence, Trustee must plead and prove reckless, willful, or wanton conduct “committed in such a manner or under such circumstances that a person of ordinary reason or prudence would then have been conscious of it as an invasion of the plaintiff's rights.” Rogers v. Florence Printing Co., 106 S.E.2d 258 (S.C. 1958). South Carolina courts recognize gross negligence only “when the defendant has failed to exercise a slight degree of care.” Pilot Indus., 495 F.Supp. at 362 (citing Wilson v. Etheredge, 52 S.E.2d 812 (S.C. 1949)). “Proof of error or mistake alone has been held to be insufficient to make out a case of gross negligence.” Id. (citing Halsted v. Postal Telephone Co., 85 N.E. 1078 (N.Y. 1908)). Additionally, in the context of negligence actions, South Carolina law defines reckless, willful, and wanton conduct as that conduct which evinces a conscious failure to exercise due care. Berberich v. Jack, 709 S.E.2d 607, 612 (2011) (citing Yaun v. Baldridge, 134 S.E.2d 248, 251 (1964)).

         As the basis for his negligence claims, Trustee alleged that SunTrust owed numerous duties to IPG, including: (a) to exercise due care in accounting for and documenting foreign exchange transactions; (b) to properly supervise its employees in its foreign exchange system; (c) to develop and enforce a system of internal controls to comply with federal banking laws; (d) to engage in safe and sound banking practices; and (e) to comply with federal rules and regulations; and (f) to provide IPG and its clients due diligence as required by the USA Patriot Act and the Financial Crimes Enforcement Network. (ECF No. 5-1 at 9.) The Complaint did not cite any agreement, written or otherwise, between SunTrust and IPG wherein SunTrust assumed these specific duties. (See id.) As to the conduct that allegedly constitutes breach, Trustee pled simply: “Notwithstanding these duties, Defendant breached these duties in a negligent, grossly negligent, wanton, or reckless manner.” (Id.)

         The Bankruptcy Court correctly found that IPG agreed to be bound by and acknowledged receipt of Suntrust's Rules and Regulations for Deposit Accounts (“Rules and Regulations”), which provide, in pertinent part, that “SunTrust may discontinue or refuse to offer you any account, service or product at any time.” (ECF No. 67-2 ¶ 65.) The Rules and Regulations further state:

Liability Limitation
[SunTrust] shall not be liable for any liability, loss or damage that may arise when we are acting in accordance with applicable laws, regulations, rules, these rules and regulations, or our agreements with any financial institutions regarding the transaction of your business ...

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