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11/28/75 G & R Corporation, A v. American Security & Trust

November 28, 1975




Wright, McGowan and Tamm, Circuit Judges.


Appeal from the United States District Court for the District of Columbia (D.C.Civil 198-68). 1975.CDC.230



Plaintiff-appellee brought this action in the District Court for the District of Columbia to recover funds diverted by appellant from a joint venture account. Federal District Judge Howard F. Corcoran found that appellant had wrongfully applied the funds and entered judgment for appellee in the amount of $132,605.19 plus interest. On appeal, appellant argued that appellee had ratified any unauthorized diversion, that the District of Columbia Uniform Commercial Code (hereinafter U.C.C.) barred suit for certain of the monies, and that the trial court had improperly computed damages by failing to set off against the diverted sums the amount appellee had realized from tax savings and subsequent appreciation of property received by appellee from the third-party defendants. We have evaluated these claims and found them without merit; we therefore affirm the judgment of Judge Corcoran. I. Factual Background

This case arose out of disbursements of mutual venture funds for the payment of non-joint venture obligations. On October 5, 1964, Mr. and Mrs. Morris Rodman (sole owners of G & R Corporation) and Mr. and Mrs. Leonard Rodman entered into an agreement with Max Kraft and Oscar Margulies to construct Gateway Square, an apartment complex. The Rodmans were to contribute the land for the project; Kraft and Margulies were to serve as general contractors. The Rodmans, Kraft, and Margulies were at that time collaborating in the construction of another apartment project known as Gateway Gardens.

In order to finance Gateway Square, the Rodmans, Kraft, and Margulies obtained a construction loan in the amount of $2,500,000 from appellant bank American Security Savings & Trust Co. (hereinafter American Security). The loan agreement, which specified a completion date of March, 1967, provided that advances made under the loan were to be received in trust for the joint venture and that American Security had no obligation to assure the proper use of the Advances. J.A. at 52, para. 6. The agreement also gave American Security the right to take possession of the project in order to complete construction if the builders breached the loan agreement, id. at 53-54, para. 9, and to request evidence of proper application of advance proceeds before making further advances, id. at 60, para. 21.

The Rodmans, Kraft, and Margulies also executed a Guaranty Agreement to American Security at the time they received the construction loan. On its face, the Guaranty covered "all obligations and liabilities . . . of the Debtor to the Bank . . . ." Id. at 184. It then attempted in scattergun fashion to include all possible obligations, including debts "contracted by Debtor alone or jointly and/or severally with another or others . . . ." Id.

Following execution of the loan and Guaranty Agreement, the Rodmans, Kraft, and Margulies opened a joint venture checking account. The deposit agreement required two signatures for all checks: either Kraft or Margulies plus either Morris or Leonard Rodman. Id. at 67. Statements were to be sent to the joint venture at the office of Kraft and Margulies, the active partners in the joint venture.

The events which form the basis of this action began during the period of April 29, 1966 to October 5, 1966, when numerous disbursements were made from joint venture account funds to meet obligations of Kraft and Margulies on other projects. *fn1 American Security honored nine checks amounting to $63,603.76 although they did not carry the required Rodman signature. In addition, the bank diverted $51,031.02 from advances made to Gateway Square to pay Kraft and Margulies' indebtedness to American Security for prior projects. Finally, $17,970.41 was diverted to American Security by way of a debit memorandum signed by a bank officer to pay overdue interest on prior Kraft/Margulies loans.

In October, 1966 Kraft and Margulies revealed to the Rodmans the facts regarding these expenditures for nonproject obligations, whereupon the Rodmans immediately assumed management of the project. They notified American Security that all statements should be sent directly to them, rather than to Kraft and Margulies, and they executed a new signature card authorizing payment only of checks signed by Morris Rodman. The Rodmans also invested substantial amounts of their own funds to complete the project. They did not, however, notify American Security of the claims against it for wrongfully honoring the nine checks. In fact, they continued to pay interest on the entire amount despite their knowledge that portions of the advances had been directed toward payment of unrelated obligations.

In October, 1966, Kraft and Margulies assigned their interests in Gateway Square and the prior project, Gateway Gardens, to the Rodmans. The agreement, noting a debt of $675,000, specified that the value of the Kraft/Margulies interests in Gateway Gardens, i.e., $270,000, would be applied against their indebtedness; no credit was given for their interests in Gateway Square. The agreement also specified that the transfer would be deemed effective on January 1, 1966, thus giving the Rodmans any tax losses on the properties for that year. In addition, Kraft and Margulies gave the Rodmans a promissory note for $405,000. No payments were ever made on the note and in 1969 the Rodmans took a bad debt deduction for the unpaid obligation.

In March, 1967, Morris Rodman sought and obtained from American Security an extension of the construction loan until August of that year. He intimated to an American Security officer that certain monies had been mishandled, but did not at that time apprise the bank of any claims against it. The extension agreement ratified and confirmed the existing note and deed of trust.

The Rodmans executed the permanent financing note to the long-term financer Connecticut Mutual in June, 1967. The total amount paid to the bank in satisfaction of the construction loan included principal and interest on amounts applied to other projects. One week later, the Rodmans notified American Security of their claims against the bank for the improperly honored checks and for proceeds diverted from the advances.

At the first trial, which considered only the issue of liability, American Security unsuccessfully defended on the basis of express and implied ratification, waiver, estoppel, contributory negligence, and lack of proximate cause. The trial court had already rejected American Security's defense based on applicability of 28 D.C.Code § 4-406(4) (1963) in its Pretrial Order of March 20, 1972. J.A. at 25. The defense of "voluntary payment" was also disallowed by the trial court because it had not been raised until after entry of the Pretrial Order establishing issues. *fn2 Id. at 18-20, 233.

At the second trial, the trial court held that American Security was not entitled to any setoff for tax benefits or for profits eventually realized by the Rodmans from their acquisition of the Kraft/Margulies interest in Gateway Gardens.

On appeal to this court, appellant American Security urges four basic arguments:

(1) that 28 D.C.Code § 4-406(4) bars recovery of funds whose diversion was indicated in a bank statement sent more than one year prior to the time the Rodmans reported it to American Security;

(2) that American Security is not liable for the diverted amounts because the Rodmans were contributorily negligent and because the bank's payment was not the proximate cause of the Rodmans' loss;

(3) that the Rodmans are precluded from recovery from American Security because their subsequent conduct ratified the diversion of funds, because the Guaranty Agreement made the Rodmans responsible for the prior debts of Kraft and Margulies to which the diverted funds were applied, and because the Rodmans' voluntary payments operated as a waiver of claims; and

(4) that American Security can offset against its liability the tax benefits and resale profits the Rodmans received from property transferred to them by the joint obligors.

These arguments will be discussed seriatim. II. Applicability of 28 D.C.Code § 4-406(4)

Appellant bank attempts to show that two checks and a debit memorandum for which the Rodmans obtained judgment are non-recoverable because the District of Columbia Uniform Commercial Code bars the action. 28 D.C.Code § 4-406(4). The statute provides that the customer's negligence in examining his bank statement and notifying the bank may preclude him from recovering from the bank for payment of items bearing unauthorized signatures or material alterations. Id. § 4-406(1). This preclusion operates only if the items were paid "in good faith" and the bank acted with "ordinary care." Regardless of the negligence of the bank or the customer, however, a maximum one-year limitation is allowed for the customer to assert claims against the bank for these items. *fn3

In this case, two checks bearing Kraft's and Margulies' signatures were improperly paid on May 4 and 19, 1966. In addition, the debit memorandum for which the Rodmans were awarded recovery was charged to the joint venture account on April 29, 1966. These transactions were indicated in the May 25, 1966 statement sent to the partnership at Kraft's office, but no ...

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