Regions Bank v. The Provident Bank, Inc.

On August 25, 1998, Morningstar Mortgage Bankers, Inc. (Morningstar) obtained a line of credit (LOC) from the Provident Bank, Inc. (Provident) (defendant) to fund Morningstar’s origination of residential-mortgage loans. Morningstar was to sell the mortgage loans to third-party investors and use the sale proceeds to repay its borrowings on the LOC. In January 1999 and March 2000, Provident suspended the LOC after Morningstar failed to timely repay Provident. On April 5, 2000, after Provident learned of an alleged forgery committed by Morningstar in connection with the closing of a mortgage loan, Provident demanded that Morningstar repay all outstanding borrowings on the LOC within 10 days. Morningstar’s chief executive officer, Angela Daidone, told Provident she would sell some land she owned and wire the proceeds into Morningstar’s deposit account at Provident, which Provident could then set off to repay the amount owed on the LOC. Instead of selling her land, however, Daidone diverted to Morningstar’s deposit account at Provident funds that Morningstar borrowed on a new, separate line of credit from Regions Bank (Regions) (plaintiff). The funds borrowed from Regions, like the funds borrowed from Provident, were supposed to have been used by Morningstar to originate mortgage loans. On April 13, 2000, after the diverted funds were wired into Morningstar’s deposit account at Provident via the Federal Reserve Wire Transfer Network (Fedwire), Provident was notified by the bank that sent those funds that they may have been sent to Provident in error. The next morning, Provident applied the amount in Morningstar’s deposit account against Morningstar’s outstanding indebtedness to Provident. Later that day, Provident received a copy of an in rem foreclosure complaint by the Federal Bureau of Investigation against Morningstar that alleged Morningstar had defrauded Provident and Regions. Regions demanded that Provident return the diverted funds. After Provident refused, Regions sued Provident, asserting various state-law claims, including conversion, unjust enrichment, receipt of stolen property, and wrongful setoff. The district court granted summary judgment to Provident, holding that Regions’ state-law claims were preempted by Article 4A of the Uniform Commercial Code. Regions appealed.