YAHN & McDONNELL v. FARMERS BANK, ETC.
| Decision Date | 23 April 1982 |
| Docket Number | Civ. A. No. 78-361. |
| Citation | 538 F. Supp. 712 |
| Court | U.S. District Court — District of Delaware |
| Parties | YAHN & McDONNELL, INC., a Pennsylvania corporation, Plaintiff, v. FARMERS BANK OF the STATE OF DELAWARE, a Delaware corporation, Defendant, Third-Party Plaintiff, v. DELAWARE CANDY & TOBACCO SERVICE, a Joint Venture, Paul E. Kessler, M. Binder & Company, Delmar Merchandise Sales Co., Joint Venturers, Delaware Retail Stores, Inc., a Delaware corporation, and Insurance Company of North America, a Pennsylvania corporation, Third-Party Defendants, DELAWARE CANDY & TOBACCO SERVICE, a Joint Venture, and Delmar Merchandise Sales Co., Joint Venturer, Fourth-Party Plaintiffs, v. John M. GRAY, Fourth-Party Defendant, DELAWARE CANDY & TOBACCO SERVICE, a Joint Venture, and Paul E. Kessler, A Joint Venturer, Fourth-Party Plaintiffs, v. John M. GRAY and David Cohen, Fourth-Party Defendants. |
George H. Seitz, III, of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, Del., for plaintiff.
Martin I. Lubaroff and Robert J. Katzenstein of Richards, Layton & Finger, Wilmington, Del., for defendant and third-party plaintiff.
David Roeberg of Roeberg & Associates and Richard W. Pell of Tybout, Redfearn, Casarino & Pell, Wilmington, Del., for third-party defendants.
Edward B. Maxwell, II, of Young, Conaway, Stargatt & Taylor, Wilmington, Del., for fourth-party plaintiffs.
L. Kent Wyatt, Aerenson, Balick & Ferrara, Wilmington, Del., for fourth-party defendants.
Plaintiff, Yahn & McDonnell, is the holder of a negotiable certificate of deposit (CD), No. 4681, in the amount of $150,000, issued on July 12, 1976 by the defendant Farmers Bank of Delaware with maturity dated October 12, 1976. The CD is payable to the order of "Insurance Company of North America for Account of Delaware Candy and Tobacco Service" and on June 16, 1978, it was endorsed by Insurance Company of North America ("INA") to the order of plaintiff. On or about June 23, 1978, plaintiff presented the CD to defendant for payment. It was refused and the CD was dishonored.
Cross motions for summary judgment have been filed, each on the ground that there is no genuine issue of any material fact and that the respective moving parties are entitled to judgment as a matter of law.1 The motion of plaintiff is more specific, alleging that it is entitled to judgment on the following questions:
(1) Farmers has no valid defense for payment pursuant to 6 Del.C. § 3-603;
(2) Yahn & McDonnell is a holder in due course;
(3) Farmers Bank is absolutely liable to Yahn & McDonnell for the face amount of the certificate of deposit pursuant to 6 Del.C. § 3-419.
The following facts are not in dispute and provide a background for the present controversy.
In 1976 the main business of Delaware Candy and Tobacco Service ("Delaware Candy") was cigarette sales. In order for Delaware Candy to buy cigarette tax stamps on credit from the State of Delaware it was required to post a surety bond with the State of Delaware. Delaware Candy procured a bond dated June 30, 1976, from INA and caused the same to be delivered to the State of Delaware. The bond provided that Delaware Candy, as principal, and INA, as surety, were bound unto the State of Delaware in the penal sum of $150,000. So far as presently important, the condition of the bond was that if Delaware Candy promptly paid the cigarette taxes imposed by the State of Delaware, the obligation was to be void, otherwise it was to remain in full force and effect. (Exh. B to Berger affidavit, Doc. 135).
On or about July 12, 1976, Delaware Candy purchased CD 4681 from defendant and caused it to be delivered to INA to be held by it under a collateral agreement of that date. The agreement provided that CD 4681 should be held by INA as collateral security to protect it against all damages which it might sustain by reason of having executed the bond dated June 30, 1976 in favor of the State of Delaware. The collateral agreement provided further that in case of the termination of the liability of INA on all bonds without loss or damage, CD 4681 would be returned to Delaware Candy. (Exh. 1, to Young Dep., Doc. 111). On October 12, 1976, the maturity date of CD 4681, the defendant "rolled it over" by applying it to the purchase of a new CD, 4718. The amount and terms of CD 4718 were the same as those of CD 4681 except that the issuance and maturity dates of 4718 were October 12, 1976 and November 11, 1976, respectively. (Exh. C, attached to Aff. of Poplos, Doc. 134).
Delaware Candy and plaintiff began doing business with each other in 1977. Plaintiff "serviced" Delaware Candy's wholesale business by assembling orders for Delaware Candy customers and preparing invoices. (Gray Dep. pp. 22-28, Doc. 129). Later, in December, 1977, Delaware Candy entered into an agreement with plaintiff under which plaintiff purchased Delaware Candy's wholesale inventory and Delaware Candy agreed to buy cigarettes from plaintiff. (Exh. 3 to Gray Dep., Doc. 129).
As time went on, Delaware Candy became more and more indebted to plaintiff. At plaintiff's insistence Delaware Candy entered into an agreement dated May 16, 1979, with plaintiff designated "Assignment." (Cohen Dep. Exh. 2, Doc. 133).2 In it Delaware Candy acknowledged that CD 4681 was pledged with INA pursuant to the agreement dated July 12, 1976, as security for a surety bond issued by INA to the State of Delaware. It stated further that the surety bond was about to be terminated as a result of the termination of any liability or obligation by Delaware Candy to the State of Delaware to post such a bond. Anticipating this, the Assignment stated further that Delaware Candy assigned to plaintiff a security interest in CD 4681. As a result of erroneous information which had been given to Harvey Porter, the attorney for plaintiff, for which defendant had no responsibility, the Assignment described CD 4681 as having a maturity date of July 12, 1978, instead of its actual maturity date of October 12, 1976.
As Delaware Candy had expected when it executed the "Assignment" the State of Delaware wrote Delaware Candy and returned the bond which INA had issued, stating that the bond was being returned "since all cigarette taxes due from you have been paid, there is no longer a need for this bond." (Exh. A to Berger Aff., Doc. 135).
Thereafter, under the terms of the collateral agreement dated July 12, 1976, INA became obligated to return CD 4681 to Delaware Candy, since INA had no further obligation under its bond to the State of Delaware. Instead of doing this, on June 16, 1978, at the direction of Delaware Candy, INA caused CD 4681 to be delivered to plaintiff, endorsed by INA as follows:
Full return of collateral in accord with assignment instructions, pay to the order of Yahn & McDonnell, Inc.
Insurance Company of North America BY: s/ Walter G. Young Walter G. Young Secretary
On or about June 23, 1978, plaintiff presented CD 4681 to defendant for payment which defendant refused.
CD 4681 is a certificate of deposit and a negotiable instrument under the Delaware Uniform Commercial Code, 6 Del.C. § 3-104.
Defendant contends that CD 4681 was paid when it was rolled over for CD 4718. When a roll over occurs the second instrument, here CD 4718, pays the first instrument, CD 4681. In the banking industry the roll over procedure is used to pay the first instrument. The affidavit of Poplos is to this effect (Doc. 134, ¶ 4) and is not disputed. The problem here arises because when CD 4681 was rolled over and CD 4718 was issued, CD 4681 was left in the possession of INA. On November 11, 1976, defendant paid CD 4718 by crediting the account of Delaware Candy at the bank.
Plaintiff argues that the roll over of CD 4681 did not result in payment for several reasons. First, that the CD itself stated that it is payable "only upon presentation and surrender of this certificate" (which was not done). Second, that under the Delaware Uniform Commercial Code, 6 Del.C. § 1-101 et seq., a party is discharged only by payment to a "holder", § 3-603. A "holder" is a person in possession of the instrument, § 1-201(20).3 Plaintiff argues that at the time of the roll over INA, and not Delaware Candy, was the "holder" of CD 4681. Third, it is not controverted that reasonable banking practice requires the surrender of a CD after it has been cashed or rolled over. In the instant case this had not occurred.
Plaintiff's argument that the roll over did not constitute payment of CD 4681 is fallacious. If the defendant had refused to roll over CD 4681 in 1976 when Delaware Candy requested it, the refusal would have been justified for the reasons plaintiff has urged. Plaintiff, however, erroneously fails to attribute significance to the fact that the roll over in fact had been consummated. If Delaware Candy had not directed INA to deliver CD 4681 to plaintiff, INA would have returned it to Delaware Candy as the indemnity agreement between Delaware Candy and INA required. If thereafter plaintiff had brought suit against defendant on CD 4681, a defense of payment would have been sustained. Otherwise, the result would have been that Delaware Candy would be paid $300,000 when it had only deposited $150,000 with defendant. One payment of $150,000 would have occurred on November 11, 1976 when 4718 matured and a second payment of $150,000 would have occurred when CD 4681 was presented in the suppositious case. A Court would never countenance Delaware Candy being paid twice the amount it had deposited with defendant. The only reason for considering plaintiff as holding a different, more favorable position than that assumed by Delaware Candy in the hypothetical case would be if plaintiff enjoyed holder in due course status. Unless he did, he would have taken CD 4681 subject to the defense of payment. § 3-306(b).
Since defendant has established that the defense of payment exists plain...
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Yahn & McDonnell, Inc. v. Farmers Bank of State of Del.
...stated that in June 1978, plaintiff "had notice of the maturity date and had reason to know that [the certificate] was overdue." 5 538 F.Supp. at 716. In reaching its conclusion, the court held that a certificate of deposit is overdue once it matures. Such a characterization may be accurate......
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...addressed an appeal from theDistrict of Delaware, which decided cross-motions for summary judgment. Yahn & McDonnell, Inc. v. Farmers Bank of Delaware, 538 F. Supp. 712, 713 (D. Del. 1982), vacated by Yahn v. McDonnell, Inc. v. Farmers Bank of Delaware, 708 F.2d 104 (3d Cir. 1983). The plai......