## Facts

- Investors were defrauded in a Ponzi scheme operated by Johann M. Smith and associates through entities known as the Heartland Financial Group, including Lincoln Fidelity.
- Agnes N. Conder, as trustee, alleged she and other investors wrote checks to fund supposed investments, but the funds were misused; investor losses were about $35 million.
- Conder wrote multiple checks (including one up to $150,000) payable to “Johann M. Smith Escrow Agent.”
- Smith (or someone acting for him) applied a deposit stamp directing payment to Union Planters Bank “for deposit only” into a “Lincoln Fidelity Escrow Account,” listing an account number belonging to Lincoln Fidelity, not Smith.
- Union Planters Bank accepted the checks for deposit into Lincoln Fidelity’s account despite the absence of an endorsement by the named payee.
- After the checks were paid, funds were disbursed from the Lincoln Fidelity account to participants in the scheme.
- Conder sued the depositary bank in federal court under Indiana law for conversion and negligence; the district court dismissed under Rule 12(b)(6), and Conder appealed.

## Issues

1. Whether a drawer who voluntarily issued checks may sue the depositary bank for conversion under Indiana’s U.C.C./conversion law when the checks were deposited without the named payee’s endorsement into another entity’s account.
2. Whether Indiana law permits a negligence claim by a non-customer drawer against the depositary bank for accepting such deposits, or whether the U.C.C.’s remedial scheme displaces that claim.

## Decision

- The Seventh Circuit affirmed dismissal for failure to state a claim.
- The conversion claim failed because Indiana’s U.C.C. conversion remedy does not extend to a drawer who voluntarily issued the checks on these facts.
- The negligence claim failed because the bank owed no independent tort duty to Conder beyond the U.C.C.’s allocation of rights and liabilities, and allowing negligence would conflict with that scheme.

## Legal Principles

- A missing or ineffective payee endorsement may prevent a depositary bank from becoming a “holder” or holder in due course, but that defect alone does not create a conversion claim for the drawer who authorized issuance of the check.
- Under Indiana’s U.C.C. framework, conversion of an instrument is oriented toward protecting the payee/owner (or other person entitled to enforce), not a drawer who intentionally parted with the funds by issuing the check.
- Where the U.C.C. provides a detailed set of rules and remedies for check processing and bank collection activities, it displaces common-law negligence theories that would reallocate losses inconsistently with that statutory scheme.
- Absent a recognized independent duty under Indiana law, a depositary bank is not liable in negligence to a non-customer drawer for failing to detect suspicious circumstances surrounding a customer’s deposits.

## Conclusion

The court held that investors who voluntarily wrote checks to a fraudster could not shift their losses to the depositary bank through a drawer-based U.C.C. conversion theory or an independent negligence claim, because the U.C.C. does not grant the drawer that conversion remedy and it displaces tort claims that would alter its loss-allocation rules.


Conder v. Union Planters Bank, N.A., 384 F.3d 397 (7th Cir. 2004)