In Re: Michael J. Rovell, Debtor-Appellant, Michael J. Rovell v. American National Bank

Citations: 194 F.3d 867; 39 U.C.C. Rep. Serv. 2d (West) 1147; 1999 U.S. App. LEXIS 26519; 1999 WL 959660Docket: 98-3778

Court: Court of Appeals for the Seventh Circuit; October 21, 1999; Federal Appellate Court

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Michael J. Rovell, the debtor-appellant, filed an appeal against American National Bank (ANB) regarding a claim of negligent misrepresentation connected to an overpayment to a private investigator. Initially, the bankruptcy court ruled that banks are not considered "suppliers of information" and found that Rovell did not reasonably rely on the bank's representations. The district court reversed this aspect, classifying banks as suppliers but upheld the bankruptcy court's conclusion that Rovell's reliance was unreasonable and thus not compensable. The case stemmed from a transaction where Rovell's firm mistakenly overpaid the investigator, leading to an attempt to stop payment. During a critical conversation between Rovell's associate, Lisa I. Fair, and ANB's representative, Linda Williams, Fair claimed Williams confirmed the check had not cleared and did not inform her of the need for a check number to stop payment. This disagreement over the conversation's content is central to the case's outcome. The appellate court ultimately affirmed the bankruptcy court's findings regarding unreasonable reliance.

Williams recalled that Fair requested a stop payment on checks 1084 and 1086, which had not yet cleared. Williams, utilizing her twenty-six years of banking experience, processed the stop-payment order and advised Fair to wait before issuing a replacement check, though she did not specifically mention the need for a check number. The stop-payment took effect the next business day. However, before this order was confirmed, a check for $38,250 was cashed. Two days later, Fair wrote and mailed a replacement check for $27,284.50, which was also cashed, resulting in an overdraft in Rovell's account. Rovell failed to respond to the stop-payment confirmation or review his account statements, only addressing the issue after incurring penalties for the overdraft.

In October 1995, Rovell filed for voluntary bankruptcy under Chapter 11, and ANB claimed a secured line of credit for $50,081.25. Rovell objected, seeking to reduce this claim due to losses from overpayment to Pretty Eyes, alleging breach of contract and negligent misrepresentation by the bank regarding the stop payment. The bankruptcy court denied Rovell's claims, citing that the bank was not liable under Illinois law for negligent misrepresentation, as it was not considered a "supplier of information." The district court reversed this finding but agreed with the bankruptcy court that Rovell's reliance on the bank's statements was unreasonable.

On appeal, Rovell contested the standard of review applied by the district court regarding the bankruptcy court's finding of unreasonable reliance. He also argued that the evidence presented, including conflicting witness testimonies, did not sufficiently support the finding that the bank had not negligently misrepresented the procedure for stopping payment. Under Illinois law, a plaintiff must demonstrate reasonable reliance on misrepresented facts to succeed in a negligent misrepresentation claim, which the bankruptcy court found Rovell failed to do by issuing a replacement check prematurely.

An appellate court reviews a lower court's factual findings under a "clearly erroneous" standard, while legal questions are reviewed de novo. Rovell asserts that "reasonable reliance" is a mixed question of law and fact, warranting de novo review. This claim is partially supported by case law, as reasonable reliance involves applying legal principles to established facts. However, the bankruptcy court's finding on reasonable reliance is still subject to clear error review, as established by precedent. The distinction between the review standards for Fourth Amendment cases, which require uniformity in legal principles, and the assessment of reasonable reliance in negligent misrepresentation cases is emphasized. While Ornelas introduces some ambiguity regarding the review of mixed questions, it does not support a blanket de novo standard for all such questions. The case of Cook v. City of Chicago illustrates this by affirming that applying a legal doctrine to specific facts is subject to deferential review, akin to the analysis required for determining reasonable reliance.

Three critical factors—need for uniformity, correct application of doctrine, and institutional competence—were essential in the Ornelas case but absent in Cook and the current matter, influencing the standard of review for mixed questions of law and fact. Reasonable reliance is case-specific, reducing the need for plenary review to avoid inconsistency. Unlike fundamental constitutional rights, reasonable reliance does not demand strict appellate oversight. Trial judges and juries are better suited to assess the nuanced facts of whether one party induced another to rely on their representations.

The established circuit rule states that reasonable reliance determinations are reviewed for clear error. Rovell's reliance on In re Marrs-Winn was incorrect, as that case involved solely legal conclusions, which warrant de novo review. In this instance, both law and facts are clear, focusing on the application of law to specific facts. The appellate court will not overturn the lower court's decision merely because it might have reached a different conclusion.

The bankruptcy court's finding that Rovell could not reasonably rely on Williams' advice about stopping a check was not clearly erroneous. Both Fair and Williams provided credible testimonies. Fair recalled providing Williams with a general range for the check number and received incorrect assurances about the check's status, while Williams remembered Fair supplying specific check numbers and advising to delay issuing a replacement check. There was uncertainty in their accounts, but both were plausible, supporting the bankruptcy court's conclusion.

Two parties have differing but honestly held memories of a conversation regarding a payment issue. Both the bankruptcy judge and district judge determined that a reasonable person would not rely on either party's account of the exchange. Specifically, it was unreasonable for Williams to send a replacement check based on his recollection, which included a warning to wait a few days. Additionally, Williams expressed concerns about the payee's reputation, which should have alerted a reasonable person to potential risks. 

Accepting Fair's version of events, it was still unreasonable to issue a replacement check without written confirmation that the original check had been stopped. Fair's information for the stop-payment order was incomplete, missing crucial details like the check number, which is essential for stopping a check, a fact deemed common sense by the courts. Rovell's failure to wait for confirmation or to review relevant documentation further illustrated a lack of reasonableness. His urgency to resend a check to a payee who had not cashed a previously issued larger check lacked justification. 

Consequently, the record supports the conclusion that there was no reasonable reliance, affirming the bankruptcy court's denial of Rovell's negligent misrepresentation claim. The district court's decision is upheld.