John Hancock Financial Services, Inc. v. Old Kent Bank

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RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2003 FED App. 0364P (6th Cir.)
File Name: 03a0364p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
JOHN HANCOCK FINANCIAL
SERVICES, INC.,
Plaintiff-Appellee/
Cross-Appellant,
v.
OLD KENT BANK,
Defendant-Appellant/
Cross-Appellee,
MICHIGAN NATIONAL BANK;
PATRICK W. SHERMAN;
STANDARD FEDERAL BANK,
successor by merger to
Michigan National Bank,
Defendants.
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Nos. 02-1288/1307
Appeal from the United States District Court
for the Eastern District of Michigan at Detroit.
No. 00-73879—Avern Cohn, Senior District Judge.
Argued: September 12, 2003
Decided and Filed: October 10, 2003
2 John Hancock Fin. Servs.
v. Old Kent Bank
Nos. 02-1288/1307
Before: MERRITT, MOORE, and GILMAN, Circuit
Judges.
_________________
COUNSEL
ARGUED: Molly E. McManus, WARNER, NORCROSS &
JUDD, Grand Rapids, Michigan, for Appellant. Francis R.
Ortiz, DICKINSON WRIGHT, PLLC, Detroit, Michigan, for
Appellee. ON BRIEF: Molly E. McManus, Nathaniel R.
Wolf, WARNER, NORCROSS & JUDD, Grand Rapids,
Michigan, for Appellant. Francis R. Ortiz, DICKINSON
WRIGHT, PLLC, Detroit, Michigan, for Appellee.
_________________
OPINION
_________________
RONALD LEE GILMAN, Circuit Judge. John Hancock
Financial Services, Inc., a Delaware corporation, sued Old
Kent Bank, a Michigan corporation, to recover check
proceeds converted by Old Kent and paid to one of John
Hancock’s agents, Patrick Sherman. The checks were drawn
on the accounts of several clients of John Hancock, were
made payable to John Hancock, and were entrusted to
Sherman to invest. Sherman instead indorsed the checks with
his own stamp and deposited them into his personal business
account with Old Kent. Over the course of seven years,
Sherman used this scheme to embezzle nearly $800,000 from
John Hancock and its clients.
The claims against Old Kent were based on common law
conversion, statutory conversion under the Uniform
Commercial Code (UCC), and negligence. John Hancock
filed a motion for summary judgment. Old Kent both
responded to John Hancock’s motion and filed its own motion

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v. Old Kent Bank
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for partial summary judgment, arguing that the three-year
statute of limitations had run on all checks deposited prior to
June 2, 1997.
The district court ruled in favor of John Hancock on the
basis of its UCC conversion claim, but also granted Old
Kent’s motion for partial summary judgment. On appeal, Old
Kent argues that the district court erroneously decided that the
bank’s forgery defense was without merit and that the district
court failed to address the bank’s contention that the
Michigan Tort Reform Act’s comparative-fault scheme
applied to UCC conversion claims. John Hancock disagrees,
and also argues that the discovery rule should be applied so
that it can recover on all checks unlawfully converted by Old
Kent, some dating back to 1993. For the reasons set forth
below, we AFFIRM the judgment of the district court.
I. BACKGROUND
A. Factual background
Sherman was a representative of John Hancock in
Michigan, where he sold insurance and investment products.
Beginning in 1993, he concocted a scheme to embezzle from
three of his John Hancock clients. The clients would write
checks payable to John Hancock for investment products or
insurance premiums. Sherman was authorized to accept these
checks on behalf of John Hancock. He would then indorse
the checks with a stamp that read: “Sherman and Associates
Financial Services.” Sherman maintained a checking account
at an Owosso, Michigan branch of Old Kent under the same
name as that on his indorsement stamp. Old Kent deposited
these checks into Sherman’s account, never questioning his
authority to deal in this manner with checks clearly made
payable to John Hancock. Approximately 71 checks were so
indorsed and deposited over a period of seven years.
Sherman was able to cover up his embezzlements by
4 John Hancock Fin. Servs.
v. Old Kent Bank
Nos. 02-1288/1307
generating false accounting statements for his defrauded
clients.
The scheme was finally uncovered in March of 2000, by
which time Sherman had embezzled nearly $800,000. John
Hancock repaid the defrauded clients the money that they had
lost plus interest. It then demanded reimbursement from Old
Kent.
B. Procedural background
John Hancock sued Old Kent in August of 2000, claiming
common law conversion, statutory conversion under the
UCC, and negligence. The parties had earlier agreed to toll
the applicable three-year statute of limitations as of June 2,
2000. Old Kent did not dispute John Hancock’s factual
allegations or that the bank was partially at fault, but argued
that John Hancock should bear a portion of the loss. John
Hancock filed a motion for summary judgment in the fall of
2001. At the same time, Old Kent filed a motion for partial
summary judgment based upon the theory that the statute of
limitations barred recovery on all checks deposited more than
three years prior to the June 2, 2000 tolling agreement.
The district court granted John Hancock’s motion for
summary judgment on the UCC conversion claims, declining
to reach the claims of common law conversion or negligence.
It also granted Old Kent’s motion, thus limiting John
Hancock’s award to checks accepted for deposit by the bank
after June 2, 1997, plus prejudgment interest. This timely
appeal followed.
II. ANALYSIS
A. John Hancock’s conversion claim
On appeal, Old Kent argues that the district court erred in
granting summary judgment to John Hancock because

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v. Old Kent Bank
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comparative-fault principles allegedly apply to John
Hancock’s UCC conversion claim. We review the district
court’s grant of summary judgment de novo. Sperle v. Mich.
Dep’t of Corr., 297 F.3d 483, 490 (6th Cir. 2002). Summary
judgment is proper where no genuine issue of material fact
exists and the moving party is entitled to judgment as a matter
of law. Fed. R. Civ. P. 56(c). In considering a motion for
summary judgment, the district court must construe all
reasonable inferences in favor of the nonmoving party.
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S.
574, 587 (1986). The central issue is “whether the evidence
presents a sufficient disagreement to require submission to a
jury or whether it is so one-sided that one party must prevail
as a matter of law.” Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 251-52 (1986).
Old Kent contends that the district court erred in not
applying Mich. Comp. Laws § 440.3406 (hereafter referred to
as UCC § 3-406) to John Hancock’s claims. UCC § 3-406
provides in pertinent part that a party whose negligence
“substantially contributes to an alteration of an instrument or
to the making of a forged signature on an instrument is
precluded from asserting the alteration or the forgery against
a person who, in good faith, pays the instrument or takes it for
value or for collection.” UCC § 3-406(1). As noted above,
Sherman indorsed the checks with a stamp that read
“Sherman and Associates Financial Services.” The district
court held that the UCC’s preclusion defense did not apply to
John Hancock’s conversion claim, reasoning that Sherman’s
indorsement was not a forgery because it “did not appear to
be the genuine signature of the payee, John Hancock.” Old
Kent argues that the district court’s definition of “forged
signature” is too restrictive.
Because the UCC does not define the term “forged
signature,” Old Kent looked to Michigan law and the
comments to UCC § 3-406 for the meaning of the term. Old
Kent cites Pamar Enterprises, Inc. v. Huntington Banks of
6 John Hancock Fin. Servs.
v. Old Kent Bank
Nos. 02-1288/1307
Michigan, 580 N.W.2d 11, 15 (Mich. Ct. App. 1998), for the
proposition that “[p]ayment of a check with a missing
endorsement is the legal equivalent of payment over a forged
endorsement.” Pamar, however, gives no persuasive reason
for this result, and the Michigan Supreme Court has not
opined on the issue. Given the lack of a reasoned basis for
treating a missing indorsement as the legal equivalent of a
forged indorsement, we see no justification to extend Pamar
to a case like the present where there is in fact an indorsement
quite distinct from the named payee.
In advocating for a broad definition of the term “forged
signature,” Old Kent also relies on the following official
comment to UCC § 3-406:
An insurance company draws a check to the order of
Sarah Smith in payment of a claim for a policy holder,
Sarah Smith, who lives in Alabama. The insurance
company also has a policyholder with the same name
who lives in Illinois. By mistake, the insurance company
mails the check to the Illinois Sarah Smith who indorses
the check and obtains payment. Because the payee of the
check is the Alabama Sarah Smith, the indorsement by
the Illinois Sarah Smith is a forged indorsement.
UCC § 3-406 cmt. 3. Old Kent argues that Sherman’s
indorsements are analogous to those of Illinois Sarah Smith’s
because they are both indorsements “by someone other than
the intended payee.” In rejecting this argument, the district
court noted that, unlike the hypothetical in Comment 3,
Sherman’s indorsement was completely different from the
payee’s. The district court reasoned that the use of a common
name in Comment 3 “supports the argument that a forged
signature must appear to be the genuine signature of the
intended payee.” This analysis is consistent with Comment
2 to UCC § 3-406, which suggests that the drafters intended
the term “forged signature” to be construed narrowly.
Comment 2 provides:

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Nos. 02-1288/1307 John Hancock Fin. Servs.
v. Old Kent Bank
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Section 3-406 refers to “forged signature” rather than
“unauthorized signature” that appeared in the former
Section 3-406 because it more accurately describes the
scope of the provision. Unauthorized signature is a
broader concept that includes not only forgery but also
the signature of an agent which does not bind the
principal under the law of agency. The agency cases are
resolved independently under agency law. Section 3-406
is not necessary in those cases.
UCC § 3-406 cmt. 2.
The district court defined the term “forged signature”
within the context of UCC § 3-406 as a signature
“substantially similar to the name of the intended signator
such that it appears genuine.” This definition is consistent
with both the common usage of the term “forged” and
Comments 2 and 3 above. See also UCC § 3-405 (defining
“fraudulent endorsement” as, “in the case of an instrument
payable to the employer, a forged endorsement purporting to
be that of the employer . . . .”). In sum, we agree with the
district court’s conclusion that Sherman’s indorsements were
not “forged signatures.” The district court therefore properly
declined to apply UCC § 3-406's preclusion defense to John
Hancock’s conversion claim against Old Kent.
As an alternative defense, Old Kent argues that the
comparative-fault principles of the Michigan Tort Reform
Act, Mich. Comp. Laws § 600.2957(1), were meant to be
applied to all claims for conversion, both statutory and
common law. No Michigan cases address this question, nor
is there any law in the Sixth Circuit that deals with the
applicability of a tort-reform scheme to UCC claims. The
district court did not reach this issue, and Old Kent cites no
relevant authority to support its argument.
In assessing the merits of Old Kent’s alternative defense,
we first look to how UCC § 3-406 allocates fault in the case
8 John Hancock Fin. Servs.
v. Old Kent Bank
Nos. 02-1288/1307
of forged instruments. Subsection 2 of UCC § 3-406 provides
as follows:
(2) Under subsection (1), if the person asserting the
preclusion fails to exercise ordinary care in paying or
taking the instrument and that failure substantially
contributes to loss, the loss is allocated between the
person precluded and the person asserting the preclusion
according to the extent to which the failure of each to
exercise ordinary care contributed to the loss.
A reading of the UCC suggests that if the above subsection is
triggered, the trier of fact allocates fault between the party
whose negligence substantially contributed to the forgery of
an instrument and the party who paid the instrument. The
UCC’s plain language does not direct the trier of fact to
allocate fault to the wrongdoer.
Scholarly commentary discussing UCC § 3-406 confirms
this interpretation. Comparative negligence was incorporated
into the UCC as part of the 1990 amendments to Articles 3
and 4. JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM
COMMERCIAL CODE § 19-1 (4th ed. 1995). In drafting the
revised Article 3, the authors “attempted to provide an
‘underlying policy and rationale . . . based on the balanced
principles that all parties in the payment and collection
process have a responsibility to exercise ordinary care and
that the failure by any party to fulfill that responsibility
should result in that party bearing an appropriate share of any
[resulting] loss.’” Judy C. Norris, Tips on Litigating Issues of
Forgery, Fraud, and Conversation [sic] in a Comparative
Negligence Setting, 51 Consumer Fin. L.Q. Rep. 247, 247
(1997).
One legal scholar has explained that UCC § 3-406 seeks to
encourage “the free circulation of commercial paper by
applying the principle that as between two innocent persons
the one who is negligent should bear the loss caused by a

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v. Old Kent Bank
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third person’s wrongdoing.” RONALD A. ANDERSON,
ANDERSON ON THE COMMERCIAL CODE § 3-406:4 (3d ed.
1998) (emphasis added). Another commentator has similarly
noted that § 3-406(b) “contemplates a splitting of a loss
between two negligent parties.” JAMES J. WHITE & ROBERT
S. SUMMERS, UNIFORM COMMERCIAL CODE § 19-3 (4th ed.
1995) (emphasis added).
The fact that UCC § 3-406 does not allocate fault to the
wrongdoer—as opposed to the negligent parties—is
significant in determining whether Michigan’s Tort Reform
Act applies in this case. This latter Act, passed in 1995,
provides that in actions “based on tort or another legal theory
seeking damages for personal injury, property damage, or
wrongful death, the liability of each person shall be allocated
under this section by the trier of fact, and . . . in direct
proportion to the person’s percentage of fault.” Mich. Comp.
Laws Ann. § 600.2957(1). The Act also provides that when
considering percentages of fault, the trier of fact shall assess
“the fault of each person, regardless of whether the person is,
or could have been, named as a party to the action.” Id.
Unlike the UCC, the Tort Reform Act allocates fault to the
wrongdoer in actions “based on tort or another legal theory
seeking damages for personal injury, property damage, or
wrongful death.” Id. Tension thus exists between these
statutes.
We conclude that this tension must be resolved in favor of
not applying Michigan’s Tort Reform Act to UCC conversion
actions. Because the UCC more specifically relates to the
allocation of fault with respect to the conversion of
instruments than does the Tort Reform Act, the UCC controls.
See Hill v. Sacka, 666 N.W.2d 282, 291 (Mich. Ct. App.
2003) (noting that when statutes conflict concerning the
allocation of fault, the statute “more specific to the subject
matter than the general statutes regarding allocation of fault
. . . controls.”).
10 John Hancock Fin. Servs.
v. Old Kent Bank
Nos. 02-1288/1307
We also note that our decision accords with that of the
Eleventh Circuit in Federal Insurance Company v. NCNB
National Bank of N.C., 958 F.2d 1544, 1551-52 (11th Cir.
1992), where the Eleventh Circuit discussed the possibility of
applying comparative-fault principles to UCC conversion
claims, but then declined to do so. The court quoted the New
York Court of Appeals at length, including the point that “[i]t
is not for the courts to unsettle the UCC’s carefully drawn
balance by introducing comparative fault principles taken
from tort law.” Putnam Rolling Ladder Co. v. Manufacturers
Hanover Trust Co., 546 N.E.2d 904, 908 (N.Y. 1989). We
agree with this analysis.
The district court declined to reach John Hancock’s
common law conversion claim altogether, holding that its
holding on the UCC claim made such consideration
unnecessary. As Old Kent points out, however, there is recent
case law in Michigan that applies comparative-fault principles
to intentional torts. See Lamp v. Reynolds, 645 N.W.2d 311,
315-16 (Mich. Ct. App. 2002) (applying comparative-fault
principles where the motocross racetrack owners’ wilful and
wanton conduct in failing to remove a tree stump from the
edge of their racetrack caused a motocross racer’s injuries).
But Old Kent makes no claim that John Hancock committed
an intentional tort, and Lamp provides no support for Old
Kent’s argument that comparative fault should apply to a
statutory conversion claim based upon a lack of due care. We
therefore reject Old Kent’s comparative-fault defense, and
affirm the grant of summary judgment to John Hancock on its
statutory conversion claim.
B. Old Kent’s statute of limitations defense
John Hancock, in its cross-appeal, argues that the district
court erred in granting Old Kent’s motion for partial summary
judgment, which barred John Hancock’s recovery on all
checks deposited more than three years before the June 2,

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v. Old Kent Bank
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2000 tolling agreement. This reduced John Hancock’s
recovery from approximately $800,000 to about $444,000.
Application of the “discovery rule” would have deferred the
commencement of the three-year statute of limitations until
John Hancock actually discovered the conversion, or until it
should have discovered the conversion through the exercise
of reasonable diligence, whichever first occurred. See Blakely
v. U.S., 276 F.3d 853, 861, 869-70 (6th Cir. 2002) (noting that
the discovery rule could apply to Blakely’s claim for fraud
against the Oxford Bank for allegedly facilitating the
wrongful taking of Blakely’s assets by the government in a
civil-forfeiture action, but holding that Blakely’s claim failed
for other reasons).
John Hancock asserts that because it did not discover the
conversion until April of 2000, the district court should have
applied the discovery rule to allow it to pursue its claims for
all 71 checks converted by Old Kent. In holding that the
discovery rule should not apply in this case, the district court
reasoned that “there is strong public policy favoring finality
on a conversion claim on a negotiable instrument.” We agree.
Because jurisdiction in this case is based upon diversity of
citizenship between John Hancock and Old Kent, “we apply
state law in accordance with the then controlling decision of
the highest state court.” Bailey Farms, Inc. v. NOR-AM
Chemical Co., 27 F.3d 188, 191 (6th Cir. 1994). Where the
state supreme court has not yet addressed the issue presented,
we must anticipate how that court would rule. Id. Although
the Michigan Supreme Court has not decided the issue of
whether the discovery rule applies to UCC conversion claims,
the Michigan Court of Appeals addressed this issue in
Brennan v. Edward D. Jones & Co., 626 N.W.2d 917, 919
(Mich. Ct. App. 2001), where the court noted that statutes of
limitations are designed to “promote judicial economy and
protect defendants’ rights.” The discovery rule has been
applied “to prevent unjust results when a plaintiff would
12 John Hancock Fin. Servs.
v. Old Kent Bank
Nos. 02-1288/1307
otherwise be denied a reasonable opportunity to bring suit due
to the latent nature of the injury or the inability to discover the
causal connection between the injury and the defendant’s
action.” Id. (internal quotation marks omitted).
In Brennan, the court held that the discovery rule was
inapplicable to a claim for conversion. Id. at 920. The court
reasoned that “strong public policies favoring finality in
commercial transactions, protecting a defendant from stale
claims, and requiring a plaintiff to diligently pursue his claim
outweigh the prejudice to plaintiffs and militate against
applying the discovery rule in the context of commercial
conversion cases.” Id. at 920.
Like the Brennan court, the Third Circuit has rejected
application of the discovery rule in UCC conversion cases:
Although a few courts apply the discovery rule to
negotiable instrument theft on essentially equitable
grounds, the tide of case law runs strongly against this
approach. Where a party not engaging in fraudulent
concealment asserts the statute of limitations defense,
most courts have refused to apply the discovery rule to
negotiable instruments, finding it inimical to UCC
policies of finality and negotiability.
Menichini v. Grant, 995 F.2d 1224, 1229-30 (3d Cir. 1993).
We find the reasoning of the Michigan Court of Appeals
and the Third Circuit convincing, and anticipate that the
Michigan Supreme Court would agree. Accordingly, we
affirm the district court’s grant of Old Kent’s motion for
summary judgment, barring John Hancock from collecting
on checks deposited more than three years before June 2,
2000.

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III. CONCLUSION
For all of the reasons set forth above, we AFFIRM the
judgment of the district court.

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