SIEMENS FINANCIAL SERVICES, INC., Plaintiff-Appellant, v. HABAND COMPANY, INC., Defendant/Third-Party
Plaintiff-Respondent, v. TOTAL LOGISTIC SERVICES, INC., THOMAS J. RUELI, JERRY V. D'AQUINO and THE DURKIN GROUP, LLC., Third-Party Defendants.
DOCKET NO. A-2738-08T2
-- May 26, 2010
Richard G. Haddad (Outterbourg, Steindler, Houston & Rosen) argued the cause for appellant (Mr. Haddad and Law Offices of Charles Gruen, attorneys; Mr. Haddad and John Bougiamas (Otterbourg, Steindler, Houston & Rosen), on the briefs).Michael P. Pasquale argued the cause for respondent (McCarter & English, attorneys; Joseph T. Boccassini, of counsel; Mr. Boccassini, Mr. Pasquale, James C. Sheil, Onome Okpewho, and Thankam Varghese, on the briefs).Kelley Drye & Warren, and Richard M. Kohn (Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz) of the Illinois bar, admitted pro hac vice, and Roger A. Lewis (Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz) of the Illinois bar, admitted pro hac vice, attorneys for amicus curiae Commercial Finance Association (Joseph A. Boyle, Mr. Kohn, and Mr. Lewis, on the brief).
Siemens Financial Services, Inc. (Siemens) appeals from three summary judgment orders: one dated July 31, 2008, and two dated December 19, 2008. Collectively, these orders dismissed all counts in Siemens's complaint against Haband Company, Inc. (Haband). We affirm.
These are the salient facts. Haband is a mail-order retailer of clothing and apparel. Siemens's suit alleged that third-party defendant Jerry V. D'Aquino, Haband's Vice President of Operations, misled it into entering into an $8 million loan with Total Logistic Services, Inc. (TLS), a transportation and delivery services company. Siemens also alleged that Thomas Rueli, President and sole shareholder of TLS, conspired with D'Aquino.
TLS applied for a revolving line of credit with Siemens, an asset-based lender. Siemens in turn engaged third-party defendant The Durkin Group (Durkin) to perform an underwriting investigation and due diligence regarding TLS's finances. After a series of field visits, Durkin provided a written report indicating TLS's assets included over $4 million in accounts receivable from Haband. Based on this report, Siemens approved the loan to TLS, conditioned upon “[s]atisfactory completion of the Lender's due diligence.” Two weeks later, TLS reported to Siemens that the current amount of its accounts receivable totaled approximately $10 million, including thirteen invoices from Haband totaling $4.857 million. Rueli gave D'Aquino's telephone number to Siemens Vice President Keith Holler to confirm the amount of receivables.
Holler called D'Aquino. To verify that D'Aquino was a “representative” of Haband, Holler asked him about Haband's Georgia warehouse, its website, and its target audience.1 Holler then asked D'Aquino if Haband owed TLS $4.857 million in receivables. D'Aquino answered that the amount “seemed reasonable.” Holler gave D'Aquino four invoice numbers and D'Aquino confirmed the dollar amount on each invoice.
After the telephone call to D'Aquino, Siemens considered its due diligence complete and lent TLS an initial $8 million. Over the course of the next two years, Siemens lent TLS approximately $45 million to $60 million in revolving credit. TLS repaid this revolving balance at the rate of $2 million to $3.5 million per month.
In January 2006, the FBI revealed to both Haband and Siemens that D'Aquino had been secretly receiving kickback payments for years from Rueli. In return, he continually represented to Haband that TLS had the lowest shipping prices. However, upon learning of the fraud, Haband was able to immediately find several companies with cheaper shipping rates and quicker delivery times. D'Aquino had also falsely verified Haband's accounts receivable with TLS as being $4.857 million, when in reality Haband never owed more than $266,000.
Siemens terminated the loan upon learning of the fraud and demanded that TLS repay the loan at once. Rueli pleaded guilty to two counts of mail fraud: one for overstating accounts receivable to secure the Siemens loan and the other for the kickback payments to D'Aquino. D'Aquino pleaded guilty to two counts of aiding and abetting fraud and conspiring to defraud Siemens.
D'Aquino's actions violated two Haband policies. First, Haband's Controller, Anthony DelGuadio, testified that Haband had an unwritten policy that all accounts receivable inquiries were to go to DelGuadio. According to DelGuadio, this policy was verbally communicated to D'Aquino. Second, by accepting money from Rueli, D'Aquino also violated Haband's written policy forbidding employees from accepting gifts of any size from vendors. This policy was distributed to all employees.
Siemens sued Haband alleging fraudulent misrepresentation (Count One), negligent misrepresentation (Count Two), and collection of accounts receivable as assignee of TLS (Count Three). Haband moved for summary judgment on all three counts. Judge Bradley J. Ferencz granted summary judgment to Haband on Counts One and Two, but denied summary judgment on Count Three. Judge Ferencz found that “as a matter of law” D'Aquino “was clearly operating outside the scope of his employment” by committing a fraud. He rejected Siemens's argument that D'Aquino went along with the loan fraud as a benefit to Haband, so that TLS would stay in business and provide Haband with low shipping rates. The judge found that this argument “stretche[d] reality to the point wherein ․ no reasonable factfinder could come to that conclusion.” Judge Ferencz also found that there was no apparent authority, as Siemens had received no information from Haband that D'Aquino was the person to contact.
As to whether Siemens's due diligence methods were reasonable, Judge Ferencz found as follows:
The representation has been made that there's an industry standard that must go before a jury to determine whether or not the conduct of Siemens was reasonable or unreasonable. This Court notes that there was an accounting group, [T]he Durkin Group, if not on retainer, certainly employed by, for various purposes, Siemens Financial Services, who was directed to do investigation, before the closing, and wrote two reports.
The choice of Siemens not to have its financial arm, and I use that specifically and directly, do an appropriate due diligence investigation of a company to whom they would be lending ․ millions of dollars, quite frankly, shocks the conscience of this Court.
And if, in fact, that's due diligence in this industry, the Court finds that wholly unacceptable and shocking to have a financial institution, or financial arm, and not have that financial arm ensure that ․ that information relied upon is minimally valid.
On the question of reliance, the judge commented that the issue turned upon “what was relied upon and how long could it be relied upon.” Siemens had an ongoing obligation to verify TLS's financial status. Judge Ferencz found that “[t]o rely on sixty-day receivables ․ over the course of years, is not reasonable.”
Haband renewed its motion for summary judgment as to Count Three, which was an accounts receivable claim for unpaid monies that Haband allegedly owed to TLS for five days worth of shipping that occurred after Haband found out about the D'Aquino/Rueli fraud. Haband had obtained a final judgment by default against TLS in an amount in excess of $3 million for the two years worth of overbilling. Judge Jessica R. Mayer granted the motion, finding that as an assignee, Siemens was subject to the terms of the contract between TLS and Haband. Thus the amount Haband owed to TLS/Siemens for the five days of shipping was offset by the default judgment it had obtained against TLS/Siemens.
Siemens appeals contending that Judge Ferencz erred in granting summary judgment to Haband on Siemens's fraudulent misrepresentation claims “because there are no less than eight material disputed issues of fact which must be presented to a jury.” We disagree.
When reviewing a trial court's decision to grant summary judgment, we first decide whether there was a genuine issue of material fact, and if not, then determine whether the trial court's ruling on the law was correct. Jolley v. Marquess, 393 N.J.Super. 255, 267 (App.Div.2007) (citing Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J.Super. 162, 167 (App.Div.), certif. denied, 154 N.J. 608 (1998)). To determine whether there is a genuine issue of material fact, we consider whether “the competent evidential materials presented, when viewed in the light most favorable to the non-moving party, are sufficient to permit a reasonable factfinder to resolve the alleged dispute in favor of the non-moving party.” Brill v. Guardian Life Ins. Co., 142 N.J. 520, 540 (1995). All favorable inferences are given to the non-moving party, but disputed issues that are “of an insubstantial nature” will not overcome a motion for summary judgment. Id. at 530, 536. Furthermore, we will not hesitate to grant summary judgment where the evidence “is so one-sided that one party must prevail as a matter of law.” Id. at 540.
Siemens alleges the following are “material triable issues of fact,” that preclude summary judgment. Whether: (a) D'Aquino had actual authority to respond to the credit inquiry?; (b) D'Aquino had apparent authority to respond to the credit inquiry?; (c) Siemens justifiably relied on Haband's false confirmation?; (d) the initial $8 million loan was ever repaid?; (e) the industry standard of telephonic verifications of accounts receivable is proper?; (f) it is proper for a lender to use an outside consultant to conduct pre-loan due diligence?; (g) Haband, in fact, received a benefit of shipping prices that “couldn't be beat,” as testified by Haband's President; and (h) Haband had actual knowledge of TLS's billing improprieties, yet looked the other way because it was getting favorable billing terms? We disagree.
An agency relationship is formed when a principal company directs an agent to act on its behalf. Sears Mortgage Corp. v. Rose, 134 N.J. 326, 337 (1993). The authority to act on behalf of an agent falls into two categories: actual authority and apparent authority. Ibid. “Actual authority (express or implied) may ‘be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal's account.’ ” Jennings v. Reed, 381 N.J.Super. 217, 231 (App.Div.2005) (quoting Restatement (Second) of Agency § 26 (1958)).
Conversely, apparent authority “ ‘is created as to a third person by written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the third person to believe that the principal consents to have the act done on his behalf by the person purporting to act for him.’ ” Ibid. (quoting Restatement (Second) of Agency § 27 (1958)). Apparent authority imposes liability upon the principal because the principal's actions have misled a third party into believing that the agent has the authority to act on its behalf. Ibid. The pivotal question is whether the principal has “placed the agent in such a situation that a person of ordinary prudence, conversant with business usages and the nature of the particular business, is justified in presuming that such an agent has authority to perform the particular act in question[.]” Mann v. Interstate Fire & Cas. Co., 307 N.J.Super. 587, 595-96 (App.Div.1998) (citation omitted). If a plaintiff produces evidence “which would justify a finding in his favor, he is entitled to have the question submitted to the jury.” Id. at 596.
According to Siemens, several facts demonstrate that D'Aquino had actual and apparent authority to respond to the accounts receivable inquiry. Siemens suggests D'Aquino's decision-making authority “exceeded the limited authority that Haband claimed D'Aquino had in its [answers to interrogatories.]” Siemens points out that DelGuadio said in his deposition that D'Aquino was “in charge of the TLS relationship” and that the contract between TLS and Haband listed D'Aquino as the person to receive all notices regarding TLS. Siemens also argues D'Aquino's vice president title (which was printed on his business cards) and the fact that he is the “fourth highest paid executive” (earning about $312,000 a year) indicates he would have actual authority to verify the receivables.
However, none of these alleged facts alone or in conjunction with one another support Siemens's proposition that D'Aquino had actual or apparent authority to verify the accounts receivable. The record indicates that D'Aquino had no actual authority to verify accounts receivable. Haband's CFO testified that D'Aquino and other executives were explicitly told that any inquiries into Haband's accounts receivable were to be directed to DelGuadio. Siemens has presented no evidence to the contrary. Siemens also argues in its reply brief that D'Aquino was “the person who signed off on payment of invoices to TLS.” However, the record indicates that it was DelGuadio who approved the payment of TLS invoices and that D'Aquino had no role in the processing of payment. Siemens's contentions are therefore “bare conclusions ․ without factual support” and are not sufficient to overcome a finding of summary judgment. U.S. Pipe & Foundry Co., 67 N.J.Super. 384, 399-400 (App.Div.1961).
As to apparent authority, D'Aquino's very title indicates he is in charge of operations, not the accounting or finance department. Although a layperson may assume a vice president title comes with more authority than D'Aquino actually had, a large lending company such as Siemens should know that a company of Haband's size would have a separate accounting department. No reasonable factfinder could conclude that Siemens, “conversant with business usages” of the types of borrowers, was “justified in presuming” that the “Vice President of Operations” would be the appropriate person to contact about invoice balances. Mann, supra, 307 N.J.Super. at 596-97. Nor did Haband's “words or any other conduct” cause Siemens to reasonably believe D'Aquino had apparent authority to verify the accounts receivable. Jennings, supra, 381 N.J.Super. at 231. Indeed, Siemens relied upon contact information and statements that Rueli/TLS had provided, not Haband.
Siemens next argues that D'Aquino was acting within the “scope of his employment” and thus Haband should be liable under the doctrine of respondeat superior. Haband argues to the contrary, maintaining that D'Aquino's criminal act “was not actuated by a purpose to serve or benefit Haband.”
Pursuant to the doctrine of respondeat superior, liability will be imposed upon an employer for the injuries its employee causes to a third party if the employee was “acting within the scope of his or her employment.” Carter v. Reynolds, 175 N.J. 402, 409 (2003). An act is within the scope of employment if “a) it is the kind [the employee] is employed to perform; b) it occurs substantially within the authorized time and space limits; and c) it is actuated, at least in part, by a purpose to serve the [employer].” Id. at 411 (citing Restatement (Second) of Agency § 228 (1958). “Conduct of a servant is not within the scope of employment if it is ․ too little actuated by a purpose to serve the master.” Ibid. The most essential principle is that “once the [employee] has abandoned his duty and acted in furtherance of his own interest, then the doctrine of respondeat superior does not apply.” Gotthelf v. Prop. Mgmt. Sys., Inc., 189 N.J.Super. 237, 241 (App.Div.1983) (citation omitted).
Siemens argues that determinations of whether an employee acts within the scope of employment “present factual issues that should not be decided on summary judgment.” We disagree. The question of whether an employee's conduct is outside the scope of employment “is decided by the court if the answer is clearly indicated[.] Mason v. Sportsman's Pub, 305 N.J.Super. 482, 499 (App.Div.1997) (quoting Restatement (Second) of Agency § 228(1)(d), comment d (1958)). We have been inclined to affirm summary judgment dismissals in cases where the employee's actions were criminal and not actuated by a purpose to serve the employer. See, e.g, Gotthelf, supra, 189 N.J.Super. at 240 (affirming summary judgment where property management employees were acting outside scope of employment when they stole items from tenants' apartments); Snell v. Murray, 121 N.J.Super. 215, 216 (1972) (affirming summary judgment where on-duty police officer who shot and robbed a man was “palpably” not acting within scope of employment).
Although an employee may be acting within the scope of employment if a tortious or criminal act is done on the employer's behalf, Roth v. First Nat'l State Bank of N.J., 169 N.J.Super. 280, 286 (app.Div.) certif. denied, 81 N.J. 338 (1979), we find such is clearly not the case here. D'Aquino was was not accepting illegal kickbacks to benefit Haband, but rather to benefit TLS and himself.
Siemens also contends that its “reliance on [D'Aquino's] representation was reasonable and in accordance with industry practices.” Siemens accurately argues that the issue of reasonable reliance is generally a question for the jury. See, e.g., Richie & Pat Bonvie Stables, supra, 350 N.J.Super. 579, 589 (App.Div.2002) (“[R]easonable [reliance] is a jury question and evidence of the custom and usage in the industry, ․ may have relevance.”). However, here, Judge Ferencz concluded that Siemens's due diligence was so unreasonable it “shock[ed] the conscience” of the court. We agree.
Siemens hired a professional company to assist them with due diligence, yet Holler testified he did not know whether Durkin had physically verified the cash remittances or actual checks to verify Haband's alleged receivables. Instead, Siemens based its lending decision on a “one minute” conversation with D'Aquino, a person it had not verified actually worked with accounts receivable or had anything to do with Haband's finances. Though Holler testified that this is common in his line of business, industry custom and practice is not dispositive in determining the reasonableness of Siemens's reliance.2 Sasco 1997 Ni v. Zudkewich, 166 N.J. 579, 591 (2001).
Siemens argues that it “is entitled to an adverse inference against Haband, particularly in opposition to summary judgment, where D'Aquino invoked his Fifth Amendment privilege.” However, Siemens makes no specific arguments as to what adverse inferences should be drawn from D'Aquino's deposition testimony. Further, even if an adverse inference could be drawn from D'Aquino's silence, an employer “c[an] rebut any adverse inference that might attend the employee's silence, by producing contrary testimonial or documentary evidence.” RAD Services, Inc. v. Aetna Cas. and Surety Co., supra, 808 F.2d, 271, 275 (3d Cir.1983). Because D'Aquino signed a lengthy plea agreement detailing his involvement in the fraud, it is likely that any adverse inference could be overcome.
Siemens also contends that Judge Mayer erred “in granting summary judgment to Haband on the claim for collections of accounts receivable and in denying Siemens's cross-motion on that claim because Haband actually used TLS's services after Haband had knowledge of wrongful conduct by TLS and by its own vice president” and “because Haband had actual notice of the alleged overbilling.” Siemens argues that “Haband's default judgment against a defunct TLS should not be held against Siemens.” Siemens also contends that Haband waived its right to collect the $3 million that TLS had overcharged it. Therefore, Siemens argues that Judge Mayer erred in offsetting Siemens's $250,000 claim against Haband's $3 million claim. Siemens's argument fails for two reasons.
First, as Judge Mayer found, as a TLS assignee, Siemens was subject to all the terms of the contract between TLS and Haband and thus “stands in the shoes” of TLS. James Talcott, Inc. v. H. Corenzwit & Co., 76 N.J. 305, 310 (1978). As a result, Siemens was subject to the defenses that Haband could assert against TLS, including set-offs. Ibid. Siemen's argument that Haband waived its right to collect the overcharges is incorrect because Haband has already obtained a default judgment. A valid default judgment bars re-litigation of the issue. In re Miloszar, 238 B.R. 266, 269 (D.N.J.1999) (citing Evangel Baptist Church v. Chambers, 96 N.J.Super. 367 (Ch. Div.1967)).
1. FN1. In pre-trial deposition, Holler testified that it was a common industry practice to make verification telephone calls to confirm accounts receivable before a loan closing. The head of Siemens's asset-based lending unit, Michael Coiley, testified that in his twenty years of experience he had also verified accounts receivable via telephone.
2. FN2. Because we find that Siemens was unreasonable in relying upon D'Aquino's verification in making the initial $8 million loan, we need not address Siemens's argument concerning whether the initial balance was ever repaid.