In re T & T Parts Warehouse, Inc., Bankruptcy No. NG 83-02933
| Decision Date | 14 April 1984 |
| Docket Number | Adv. Proceeding No. 83-1513.,Bankruptcy No. NG 83-02933 |
| Parties | In re T & T PARTS WAREHOUSE, INC., Debtor. OMAHA NATIONAL BANK, a National Banking Association; Huntington National Bank, Dayton, Ohio, a National Banking Association; and Fort Wayne National Bank, a National Banking Association, Plaintiffs, v. T & T PARTS WAREHOUSE, INC., and Old Kent Bank and Trust Company, Defendants. |
| Court | U.S. Bankruptcy Court — Western District of Michigan |
Warner, Norcross & Judd, Grand Rapids, Mich., for Old Kent Bank & Trust Co.
Law, Weathers & Richardson, Grand Rapids, Mich., for Omaha Nat. Bank.
Huff, Kreis, Enderle, Callander & Hudgins, Kalamazoo, Mich., for defendant, T & T Parts Warehouse, Inc.
Clary, Nantz, Wood, Hoffius Rankin & Cooper, Grand Rapids, Mich., for Huntington Nat. Bank of Dayton, Ohio.
Rhoades, McKee & Boer, Grand Rapids, Mich., for Fort Wayne Nat. Bank.
DeGroot, Triant, Conklin & Carpenter, P.C., Grand Rapids, Mich., for Creditors' Committee.
McShane & Bowie, Grand Rapids, Mich., for debtor.
Day, Sawdey, Flaggert & Porter, Grand Rapids, Mich., for Nat. Acceptance Corp. of America.
This adversary proceeding is brought by three banks to determine their interest in funds deposited in debtor's account in a fourth bank. The defendant bank, Old Kent Bank and Trust Company (Old Kent), of Grand Rapids, Michigan, filed a motion to dismiss.
The motion to dismiss is filed pursuant to Bankruptcy Rule 7012(b) and Fed.R.Civ.P. 12(b)(6).
Westlake v. Lucas 537 F.2d 857 (6th Cir. 1976)
For the purpose of disposing of Old Kent's motion to dismiss, the findings of fact are determined by following Westlake v. Lucas, supra.
Involved here is what is known as check kiting. In its most simple operation, the kiter, who has no money, opens accounts at Bank A and Bank B. He then writes a check on April 1 for $5,000 to his creditor on Bank A. On April 2, he deposits a check for $5,000 written on his account at Bank B in his account at Bank A and continues to do so each two days thereafter. On April 3 and every two days thereafter he deposits a $5,000 check written on Bank A in Bank B. See Marshall & Wright, Taking the Wind Out of the Kite!, Mag. Bank Ad., Apr. 1983 at 62-66. The kite usually comes to a grinding halt when one bank realizes what is happening and refuses to credit a deposited check until paid by the drawee bank. The kiter takes advantage of the time lag between the delivery or deposit of the check and its payment by the payor bank.
The debtor and defendant, T & T Parts Warehouse, Inc. (T & T) is one of eight affiliates which have filed petitions under Chapter 11 of Title 11 of the United States Code. T & T did business in Grand Rapids, Michigan, and had a bank account with Old Kent. Omaha Spring Service, Inc. (Omaha Spring), another affiliate, did business in Omaha, Nebraska, and had a bank account with plaintiff, Omaha National Bank, a National Banking Association (Omaha National). T & T Parts of Dayton, Inc. (Dayton) did business in Dayton, Ohio, and had its bank account in Plaintiff, Huntington National Bank, Dayton, Ohio, a National Banking Association (Huntington). Fort Wayne National Bank, a National Banking Association (FWNB), also became a victim of the check kiting operations of T & T and its associates. This check kiting took place during October and November of 1983. Because it was more alert, because it had a more sophisticated computer or because it was at the center of the whole scheme, Old Kent was the first bank to become aware of the check kiting. It, then, refused to credit checks to T & T accounts until paid by the payor bank and returned checks on T & T accounts. On November 8, 1983, Old Kent set off against T & T accounts the sum of $56,356.06 to pay off the principal and interest on a debt owed it by T & T or an affiliate. On November 21, 1983, Omaha National obtained a temporary restraining order through a State Court which, inter alia, restrained T & T, its affiliates, and Old Kent from "removing, withdrawing, transferring, drawing upon, encumbering or releasing any or all funds * * in the account(s) of defendant T & T Parts Warehouse, Inc., at Old Kent Bank and Trust Co." On the same day, T & T and its affiliates filed their voluntary petitions for relief under Chapter 11 in this Court. This adversary proceedings was commenced November 30, 1984.
As a result of the check kiting, the accounts of T & T or its affiliates are overdrawn as follows:
Omaha National $334,749.00
Huntington 99,960.00
FWNB 493,172.24
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Total $927,881.24
It is not clear from the pleadings as to the amount on deposit in T & T's account in Old Kent at the time of filing the petition but the amount was around $400,000. Old Kent asserts a right to set off $73,000.00 owed to it by T & T or one of its affiliates and has moved for relief from stay to permit it to do so.
The Court is faced with two issues:
1. Does Old Kent have the right of set off against the funds in the accounts of T & T or its affiliates?
2. Do the plaintiff banks have a right to recover from Old Kent the pre-petition set off?
As to the first issue, this Court has jurisdiction. Under the Model Interim Rule this would be a core bankruptcy matter as it involves the issue of whether a certain asset is an asset of the estate. But, I have difficulties with the second issue. If it is a related proceeding I can hear the proofs and make a report with recommendations to the district judges. Is this a related case? As the briefs are not clear on this issue and as I will be denying the motion to dismiss on the basis of the first issue, I will reserve any comment on the second issue for determination at the time of trial and upon submission of further briefs.
11 U.S.C. Section 553 provides in part:
"(a) Except as otherwise provided * * this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case, * *"
The right of set off as to bank deposits has been recognized on numerous occasions. McDaniel Nat. Bank v. Bridwell 74 F.2d 331 (8th Cir., 1934) But, the debts must be mutual.
" 4 Collier on Bankruptcy ¶ 553.04 (15 Ed.1983)
It is not disputed that Old Kent has a valid claim against the estate. But, has the estate a valid claim against Old Kent? It is the claim of plaintiffs that the claim to the bank deposit is in them and not the estate. They rely on the doctrine of constructive trust as recognized in Michigan. Over one hundred years ago, the Michigan Supreme Court held that where an agent deposited proceeds of a bond belonging to his principal, the bank could not set off its claim against the agent even though it has no knowledge of the agency. Burnett v. The First National Bank of Corunna. 38 Mich. 630 (1878) Ever since, Michigan has consistently used the equitable device of the constructive trust to reach just results.
Kent v. Klein 352 Mich. 652, 91 N.W., 2d 11 (1958); Union Guardian Trust Co. v. Emery 292 Mich. 394, 290 N.W. 841 (1940); Long v. Earle 277 Mich. 505, 269 N.W. 577 (1936); Gillen v. Wakefield State Bank 246 Mich. 158, 224 N.W. 761 (1929); Patek v. Patek 166 Mich. 446, 131 N.W. 1101 (1911); Carley v. Graves 85 Mich. 483, 48 N.W. 710 (1891); Arndt v. Vos 83 Mich. App. 484, 268 N.W.2d 693 (1978).
Kent v. Klein, Supra, was an interesting case. A mother decided to divide her real estate among five of her children. Because her son John was not well, the deed to his share was made out to a daughter, Edith. This deed was recorded but retained by another son. There was no indication that Edith knew of this deed until sometime after its recording. After John's death, Edith refused to...
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