

                United States Court of Appeals                            United States Court of Appeals
                    For the First Circuit                                For the First Circuit
                                         

No. 94-1670

                       INN FOODS, INC.,
                   D/B/A U.S. FOOD SERVICE,

                    Plaintiff, Appellant,

                              v.

                 EQUITABLE CO-OPERATIVE BANK,

                     Defendant, Appellee.

                                         

         APPEAL FROM THE UNITED STATES DISTRICT COURT

              FOR THE DISTRICT OF MASSACHUSETTS

         [Hon. William G. Young, U.S. District Judge]                                                                

                                         

                            Before

                    Torruella, Chief Judge,                                                      
                Cyr and Stahl, Circuit Judges.                                                         

                                         

Peter L.  Koff with  whom Robert  J. Diettrich and  Davis, Malm  &amp;                                                                              
D'Agostine, P.C. were on brief for appellant.                        
Antoinette D.  Hubbard with  whom Judith  Gail Dein  and Warner  &amp;                                                                              
Stackpole were on brief for appellees.                 

                                         

                       February 1, 1995
                                         

          STAHL,  Circuit  Judge.    Plaintiff-appellant  Inn                      STAHL,  Circuit  Judge.                                            

Foods,  Inc. ("Inn Foods"), secured a default judgment in the

amount  of   $1,084,524.13  against  Atlantic   Brands,  Inc.

("Atlantic").  During discovery to determine the availability

of assets  to satisfy  the judgment,  Inn Foods  learned that

Atlantic's president, Paget T.  Hodge ("Hodge"), had indorsed

a  $523,744.18  United   States  Treasury  check   ("Treasury

check"), payable  to Atlantic, for deposit  into his personal

account  at  defendant-appellee  Equitable Co-operative  Bank

("Equitable").  In the present case, Inn Foods seeks to reach

and  apply a never-asserted cause of action for conversion of

the  Treasury check  that  it contends  Atlantic has  against

Equitable.   Atlantic has never filed such a claim nor has it

ever indicated an  intent to do so.   Following cross-motions

for summary judgment, the district court entered judgment for

Equitable.  We affirm.

                              I.                                          I.                                            

           FACTUAL BACKGROUND AND PRIOR PROCEEDINGS                       FACTUAL BACKGROUND AND PRIOR PROCEEDINGS                                                               

          In  the early  1980's,  Hodge  formed  Atlantic,  a

closely held corporation based in Boston, Massachusetts, with

Hodge serving as Atlantic's  president.  The primary business

of  Atlantic  was  food  distribution.    In  1988,  Atlantic

obtained from  the  Department of  Defense Personnel  Support

Center ("DOD") a contract to supply frozen vegetables to DOD.

Atlantic subcontracted some of  its supply obligations to Inn

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Foods,  a California-based  wholesale  food  supplier,  which

agreed  to provide  a  portion of  the contracted-for  frozen

vegetables  to  DOD,  thus  partially  fulfilling  Atlantic's

contract obligations with DOD.  In November of 1988, Atlantic

breached  its contract with Inn  Foods by failing  to pay Inn

Foods for the vegetables it had delivered  to DOD.  Inn Foods

then sued Atlantic for the amount due and, in March of  1989,

obtained a default judgment.

          In  their  discovery   efforts  seeking  assets  to

satisfy the judgment, Inn Foods learned the following.  Hodge

maintained a personal checking account at Equitable, where he

had  been  a  regular  customer  for  more  than  ten  years.

Equitable  officials   knew  that  Hodge  was   president  of

Atlantic.  On December 8, 1988, Hodge appeared at Equitable's

office in  Lynn, Massachusetts, where he  indorsed to himself

the  Treasury check which was  in partial payment to Atlantic

for  the vegetables actually  supplied to  DOD by  Inn Foods.

Equitable   accepted  the  check  for  deposit  into  Hodge's

personal  account.   Equitable  then issued  to Hodge  a bank

check  payable to the  Bank of New  England in  the amount of

$450,000.   Equitable  debited  Hodge's account  accordingly.

The next  day, Equitable took the Treasury  check directly to

the  Federal   Reserve   Bank  of   Boston,  which   credited

Equitable's  account.   Eventually,  Hodge withdrew  from his

                             -3-                                          3

personal account the balance  of the funds obtained  from the

Treasury check.

          By  deposition,  Equitable's senior  vice president

and  treasurer,  Arthur  E.  Horgan, testified  that  he  was

"uncomfortable" about the Hodge  transaction in light of both

the  sum involved and the  fact that Hodge  had deposited the

Treasury  check  into his  personal  account.   As  a result,

Horgan  "contacted  counsel   and  they   suggested  we   get

something, a certificate of  vote from the company indicating

that  .  .  .  Hodge  has authority  to  transact  business."

Equitable's  president, James  G. Perkins, then  called Hodge

and  requested that  Atlantic  provide  a  written  corporate

resolution stating  that Hodge  had authority to  indorse the

Treasury  check and  that he  was authorized  to deposit  the

check  into  his  personal  account.     Thereafter,  Perkins

received  a resolution  ("resolution"),  dated  December  17,

1988,  and  signed by  Wallace    Johnson, the  corporation's

secretary,  which  stated  that  the Board  of  Directors  of

Atlantic had unanimously:

               VOTED:     That,  Paget  Hodge,                                
               President  of  Atlantic Brands,
               Inc.  is  hereby authorized  to
               endorse   on   behalf  of   the
               Corporation  any checks  to his
               order, said  checks being drawn
               or  endorsed  payable  to  said
               Corporation,  and  deposit said
               checks to his personal account.

                             -4-                                          4

          After  Atlantic  defaulted, Inn  Foods  brought the

present action  against Equitable and others1  to satisfy its

judgment.    As  alluded  to above,  Inn  Foods's  theory  of

recovery   against  Equitable  has  two  principal  elements.

First, Inn Foods argues  that Atlantic has a cause  of action

for conversion against Equitable under Mass. Gen. L. ch. 106,

   3-419(1)(c).2  Second, as a judgment creditor, it seeks to

reach  and apply  Atlantic's unfiled  conversion claim.3   As

noted, Atlantic has never filed such a claim, nor has it ever

indicated  an intent to do  so.4  The  parties entered cross-

motions  for summary judgment.  After a hearing, the district

court  denied  Inn  Foods's motion  and  granted Equitable's.

From the  bench, the court ruled that  "the [i]ndorsement was

not a forgery  and [Hodge] had apparent  authority and indeed

[Atlantic] ratified his authority."  Alternatively, the court

                                                    

1.  Equitable is the only  defendant that is a party  to this
appeal.

2.  This is  a diversity-based action and  both parties agree
that  Massachusetts law  applies.   This  case  is, in  part,
governed  by  the Uniform  Commercial  Code  ("the Code")  as
adopted  by Massachusetts and appearing at  Mass. Gen. L. ch.
106.   References to this  statute will be  by section number
only.

3.  Mass. Gen. L.  ch. 214,    3(6) authorizes  an action  by
creditors to reach and apply an unsatisfied debt.

4.  From  the  record, it  appears  that  Atlantic ceased  to
function as an ongoing enterprise before the default judgment
occurred.  As for Hodge, he was a named defendant  below, but
failed  to answer.  Service  of process on  Hodge was made at
the Wormwood Scrubs prison in London, England.

                             -5-                                          5

ruled that Inn  Foods could  not reach  and apply  Atlantic's

putative cause of action.  This appeal followed.

                             II.                                         II.                                            

                          DISCUSSION                                      DISCUSSION                                                

          Inn  Foods now  argues that:   (1)  Atlantic has  a

cause of action for  conversion against Equitable because (a)

Hodge had  neither actual  nor apparent authority  to indorse

the Treasury check and deposit it into  his personal account,

and (b) Atlantic did  not ratify Hodge's actions; and  (2) it

may assert an  action to reach  and apply Atlantic's  unfiled

cause of action for conversion.  Although the appeal raises a

number  of   interesting  issues,   some  of  which   involve

apparently  unsettled  questions  of  Massachusetts  law,  we

resolve  the appeal by concluding  that, as a  matter of law,

Atlantic  ratified Hodge's  indorsement.   Before  discussing

ratification, we recite the standard of review. 

A.  Standard of Review                                  

          Summary  judgment is  appropriate  when the  record

reflects "no genuine issue as to any material fact and  . . .

the moving party is entitled to judgment as a matter of law."

Fed. R.  Civ. P.  56(c).   Our  review of  an order  granting

summary  judgment  is  de  novo.    See,  e.g.,  Vasapolli v.                                                                      

Rostoff,  39 F.3d  27,  32 (1st  Cir. 1994).   We  review the                   

record in  the light most  favorable to the  nonmoving party,

                             -6-                                          6

and  we indulge  all  reasonable inferences  in that  party's

favor.  Id.                       

B.  Ratification                            

          Inn  Foods's conversion theory rests on the premise

that Hodge was  not authorized to indorse  the Treasury check

to  himself for deposit into his personal account.  Under the

Code, conversion takes place when an instrument "is paid on a

forged  indorsement."       3-419(c)(1).   This  section  has

generally  been interpreted to  permit actions for conversion

where  a  negotiable instrument  has been  paid on  either an

"unauthorized"  or a "forged" indorsement.   D &amp;  G Equip. v.                                                                      

First Nat'l Bank of  Greencastle, 764 F.2d 950, 955  (3d Cir.                                            

1985)  (collecting   cases).      Signatures   on  commercial

instruments are "presumed to be genuine or authorized."    3-

307(1)(b).5  Under  the Code,  "[a]ny unauthorized  signature

may be ratified"  by the principal.     3-404(2).   We assume

but do not  decide that Inn Foods  met its initial burden  of

establishing that Hodge's signature on the Treasury check was

unauthorized when  presented.   Thus, we proceed  directly to

the question of whether Atlantic ratified Hodge's signature. 

          Unless   they   are  displaced   by   a  particular

provision, general common law principles, including  those of

                                                    

5.  The  presumption remains  "unless and  until evidence  is
introduced  which  would  support   a  finding  of  its  non-
existence."    1-201(31).

                             -7-                                          7

agency,  supplement the  Code.     1-103;  see also  Terry v.                                                                      

Kemper  Ins. Co., 456 N.E.2d 465, 467 (Mass. 1983) (Code does                            

not  displace  settled  principles  of agency  law).    Under

Massachusetts  law, ratification  of an  agent's acts  may be

express  or  implied  and,  as  a  general  proposition,  the

principal  must have  full knowledge  of all  material facts.

See, e.g., Puritan  Medical Ctr. v. Cashman, 596 N.E.2d 1004,                                                       

1008 (Mass.  1992);  Perkins v.  Rich,  415 N.E.2d  895,  898                                                 

(Mass. App. Ct. 1981),  aff'd, 429 N.E.2d 1135 (Mass.  1982).                                         

Massachusetts courts, however, do not always require that the

principal have  actual knowledge.  There  may be ratification

when the  principal "purposely shut[s]  his eyes to  means of

information within  his own possession and  control."  Torpey                                                                         

v. Interstate  Equip. Leasing Corp.,  760 F.2d 364,  365 (1st                                               

Cir. 1985) (quotation omitted);  see also Puritan, 596 N.E.2d                                                             

at  1008  (ratification  may  be  implied  where  corporation

directors have  "knowledge of such facts  or circumstances as

would put a reasonable person on inquiry and which would lead

to full discovery") (quotation omitted).  

          Inn Foods argues that  because the record is devoid

of any  indication that  Atlantic had  full knowledge  of the

facts, no ratification occurred.  We  do not agree.  We think

the only reasonable conclusion to be drawn from the record is

that  Atlantic ratified  the  transaction with  knowledge  at

least   sufficient  to  satisfy  the  "deliberate  ignorance"

                             -8-                                          8

standard  recited  above.   The  language  of the  resolution

itself  speaks directly to  the two critical  elements of the

Treasury check transaction.  The resolution authorizes  Hodge

to both indorse checks  on behalf of the corporation,  and to

deposit those  checks into  his personal account.   Moreover,

the resolution was dated nine days after Hodge  presented the

Treasury check to Equitable.  At a minimum, the terms of  the

resolution as well  as the  surrounding circumstances  should

have alerted Atlantic's directors that "something was afoot,"

Perkins, 415 N.E.2d at 898 (quotation omitted), especially in                   

light of the  directors' duty to keep themselves  informed of

the corporation's affairs.  See, e.g., Puritan, 596 N.E.2d at                                                          

1008;6 Perkins, 415 N.E.2d at 898.                           

          Inn Foods  makes the  additional argument  that the

resolution  does  not ratify  the Treasury  check transaction

because its language is cast in prospective terms only.  Even

if we  were  to agree,  Massachusetts  law makes  clear  that

ratification can  be implied when a  principal with knowledge

                                                    

6.  The Puritan court  noted that the failure of directors to                           
discharge their duty  of supervision does not  always lead to
ratification.   Puritan, 596 N.E.2d  at 1008.   In Puritan, a                                                                      
corporation's  director sought to interpose ratification as a
defense  to  self-dealing.    The present  case  involves  an
entirely  different set  of circumstances  as a  third party,
Equitable,   sought  assurances  from   Atlantic  as  to  the
authority of Hodge, an Atlantic agent.  Under these facts, we
think   Atlantic  would   be   estopped  from   denying   the
applicability of the duty to supervise. 

                             -9-                                          9

makes no effort to repudiate a  transaction.7  Irving Tanning                                                                         

Co.  v.  Shir,  3 N.E.2d  841,  842  (Mass.  1936); see  also                                                                         

Restatement  of  Agency  2d      94  ("An  affirmance  of  an

unauthorized transaction  can be  inferred from a  failure to

repudiate it.").  The rationale for this rule is plain.  When

a  principal fails to disavow  promptly an act  of his agent,

such  a failure both thwarts  a damaged third party's ability

to  mitigate   the  effects   of  an  unauthorized   act  and

perpetuates an inference of authority reposed in the would-be

agent.   See Boice-Perrine Co.  v. Kelley, 137  N.E. 731, 733                                                     

(Mass. 1923).  Again, we do not think there can be reasonable

dispute   that   Atlantic   had  sufficient   knowledge   for

ratification and,  there is no indication in  the record that

Atlantic ever sought to repudiate this transaction.

          In  short,  Atlantic  had sufficient  knowledge  to

ratify  by  either  acting (as  it  purported  to  do in  the

resolution)  or  not  acting  (thereby  acquiescing  in   the

Treasury check  transaction).  Either route leads to the same

conclusion:     Atlantic  ratified  Hodge's  indorsement  and

deposit.  Because Hodge's  signature was authorized, Atlantic

                                                    

7.  On this  point, we  disagree with Inn  Foods's contention
that Puritan, 596 N.E.2d at 1008, should be read as requiring                        
that a  benefit accrue  to  the principal  from the  disputed
transaction  before  an implied  ratification  can  be found.
While benefits  received are  certainly strong evidence  that
the  principal acquiesced in  the agent's  transaction, other
Massachusetts  cases make  clear that  ratification can  take
place  in the absence of  such a benefit.   See, e.g., Boice-                                                                         
Perrine Co. v. Kelley, 137 N.E. 731 (Mass. 1923).                                   

                             -10-                                          10

has  no conversion  cause  of action  against Equitable  and,

thus, Inn Foods's claim must fail.  

                             III.                                         III.                                             

                          CONCLUSION                                      CONCLUSION                                                

          For the  reasons discussed  above, the decision  of

the district court is

          Affirmed.  Costs to appellee.                      Affirmed   Costs to appellee                                                  

                             -11-                                          11
