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Prime Health Services, Inc. v. Capital Bank, N.A.

United States District Court, M.D. Tennessee, Nashville Division

March 21, 2017




         Pursuant to Federal Rule of Civil Procedure 12(b)(6), Capital Bank, N.A. and Capital Bank Financial Corporation filed a Motion to Dismiss (“Motion”) (Doc. No. 36) the Complaint for failure to state a claim upon which relief can be granted. For the reasons that follow, the Motion will be GRANTED in part and DENIED in part.

          I. Background

         This case arises from the embezzlement of $5.3 million dollars from Prime Health Services, Inc. (“Prime”) by its acting Chief Financial Officer (“CFO”), Steven Rawlins (“Rawlins”). (Doc. No. 6, at ¶¶ 1-2.) The central allegation is that Kenneth Goddard (“Goddard”), former Senior Vice President at Capital Bank, N.A. (“Capital Bank”), negligently allowed Rawlins to embezzle funds from Prime's account with Capital Bank to his personal account. (Id.) Rawlins was convicted of embezzlement in federal court for his actions against Prime. (Doc. No. 36, at 1 (citing United States v. Rawlins, 1:15-cr-00377-AJN, Doc. No. 89, (S.D.N.Y. Nov. 16, 2015)).) Prime seeks damages from Capital Bank for allowing Rawlins' embezzlement by negligently supervising and retaining Goddard, who aided and abetted Rawlins' breach of fiduciary duty to Prime. (Doc. No. 6, at ¶ 1.) Prime claims Capital Bank Financial Corporation (“CBF”) is vicariously liable for the negligent supervision and negligent retention of Goddard by Capital Bank because it shares employees, officers and directors with its subsidiary Capital Bank. (Id. at ¶¶ 86-87, 97-98.)

         II. Factual Allegations

         According to Prime, Rawlins developed an embezzlement scheme involving Prime funds held by Capital Bank. (Doc. No. 6, at ¶ 23.) With Prime's approval and authority through Goddard, Rawlins applied for and received a term loan and line of credit from Capital Bank on behalf of Prime. (Id. at ¶ 25.) The loan and line of credit were formalized and executed through a Loan and Security Agreement on January 13, 2013. (Id. at ¶ 31.) Rawlins was Prime's primary contact with Capital Bank. (Id. at ¶ 25.) Pursuant to the Loan and Security Agreement, Prime was required to provide Capital Bank with monthly financial data and financial statements, which it did not do, (id. at ¶¶ 50-52), and Capital Bank did not question. (Id. at ¶¶ 53-55)

         According to Prime, Capital Bank approved the loan and line of credit “in contravention” of its internal policies because it did not receive tax returns, income statements, balance sheets and other documents typically relied upon by Capital Bank before approving Prime's loan. (Id. at ¶ 29.) When Capital Bank discovered its failure, Goddard was directed to obtain the missing documentation. (Id. at ¶¶ 33-34.) In an email to Prime's CEO, requesting this documentation, Goddard admitted that Capital Bank had been “negligent” in closing the loan and line of credit absent proper documentation. (Id. at ¶ 35.) Goddard subsequently received the documentation but neither he nor anyone else at Capital Bank reviewed it. (Id. at ¶ 38.) Prime alleges that these actions constituted a violation of both the Loan and Security Agreement and Capital Bank's internal policies and procedures. (Id. at ¶¶ 2, 29, 38-39, 42, 46, 50-7.)

         Rawlins induced Capital Bank to wire Prime funds into his personal accounts over 180 times. (Id. at ¶¶ 41, 44.) Additionally, Rawlins signed checks on Prime's behalf that transferred funds from Prime's Capital Bank account into accounts of Rawlins' shell companies over 80 times. (Id. at ¶ 41.) These wires and checks were reviewed and approved by Goddard. (Id.) Capital Bank questioned one of the suspicious transactions made by Rawlins in 2012, but, nevertheless, continued to approve the transfers. (Id. at ¶ 44.) Prime claims that these actions violated both Capital Bank's internal policies and procedures and “standard banking industry practices requiring exercise of ordinary duty of care.” (Id. at ¶ 42.)

         In March 2013, Capital Bank informed Prime's CEO that it had terminated Goddard for not collecting the appropriate financial reports and documents from Prime. (Id. at ¶¶ 68-69.) Capital Bank initiated an investigation of the Prime account and discovered the extent of Rawlins' embezzlement. (Id. at ¶ 75.) In the three months it allegedly took Capital Bank to fully investigate Rawlins' fraud, he transferred an additional $780, 000 of Prime's funds into accounts he owned or controlled. (Id. at ¶ 71.)

         III. Legal Standard

         Under Rule 12(b)(6), the Court must take all the factual allegations in the complaint as true. Ashcroft v. Iqbal, 556 U.S. 662, 677 (2009). To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. Id. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Id. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice. Id.; see also Warren v. Warrior Gold Capital, LLC, 126 F.Supp.3d 988 (E.D. Tenn. 2015) (denying defendant's motion to dismiss plaintiff's negligent training and supervision claim because the complaint presented enough facts to state a plausible claim for relief).

         IV. Analysis

         A. Negligent Supervision and Retention

          The crux of Prime's negligent supervision and retention claims (Counts One and Two) is that Goddard's negligence (and by extension, Capital Bank's) facilitated Rawlins' embezzlement to the detriment of Prime. (Doc. No. 6, at ¶ 2.) Prime also alleges that CBF, a subsidiary of Capital Bank, is vicariously liable for ...

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