Aaron Ferer & Sons Ltd. v. Chase Manhattan Bank, Nat. Ass'n, s. 280

• Decision Date: 14 March 1984
• Docket Number: D,Nos. 280,281,s. 280
• Citation: 731 F.2d 112
• Court: U.S. Court of Appeals — Second Circuit
• Parties: AARON FERER & SONS LIMITED, Plaintiff-Appellant, v. The CHASE MANHATTAN BANK, NATIONAL ASSOCIATION, Defendant-Appellee. WILLIAMS & GLYN'S BANK LIMITED, Plaintiff-Appellant, v. The CHASE MANHATTAN BANK, NATIONAL ASSOCIATION, Defendant-Appellee. ockets 83-7420, 83-7424.

Page 112

731 F.2d 112

AARON FERER & SONS LIMITED, Plaintiff-Appellant, v. The CHASE MANHATTAN BANK, NATIONAL ASSOCIATION, Defendant-Appellee.

WILLIAMS & GLYN'S BANK LIMITED, Plaintiff-Appellant, v. The CHASE MANHATTAN BANK, NATIONAL ASSOCIATION, Defendant-Appellee.

Nos. 280, 281, Dockets 83-7420, 83-7424.

United States Court of Appeals, Second Circuit.

Argued Oct. 31, 1983.

Decided March 14, 1984.

Ludwig A. Saskor, New York City (Smith, Steibel, Alexander & Saskor, P.C., George M. Donaldson, Mary G.B. Boney, New York City, of counsel), for plaintiffs-appellants.

Andrew J. Connick, New York City (Milbank, Tweed, Hadley & McCloy, John C. Maloney, Jr., John B. Madden, Jr., New York City, of counsel), for defendant-appellee.

Before FEINBERG, Chief Judge, and NEWMAN and PRATT, Circuit Judges.

GEORGE C. PRATT, Circuit Judge:

Plaintiffs, Williams & Glyn's Bank, Ltd. (Williams & Glyn's) and Aaron Ferer & Sons, Ltd. (Ferer-London), appeal from a judgment of the United States District Court for the Southern District of New York, Honorable Thomas P. Griesa, Judge, entered after a jury trial, dismissing their joint actions against defendant, The Chase Manhattan Bank (Chase). Williams & Glyn's and Ferer-London sued Chase for money had and received, breach of fiduciary duty, negligence, misrepresentation, and for rescission of releases exchanged between Chase and Williams & Glyn's. Plaintiffs alleged that money lent by Williams & Glyn's to Ferer-London had been converted by Ferer-London's American parent corporation, Aaron Ferer & Sons Co. (Ferer-Omaha), which had used the money to repay loans owing to Chase, and that Chase knew the money actually belonged to plaintiffs. At the close of evidence the trial court directed a verdict in Chase's favor on the breach of fiduciary duty and negligence counts. Thereafter, the court set aside the jury's special verdicts, which found that Chase had misrepresented or concealed material facts connected with the release, and instead held that the release was not tainted with fraud, was valid, and barred Williams & Glyn's entire action. Finally, the trial court determined that Ferer-London failed to prove its count for money had and received, and it dismissed both complaints. We affirm.

I. BACKGROUND

Before addressing the legal issues, we must undertake a detailed review of the essential facts. Ferer-Omaha is a Nebraska corporation that bought and sold metal both in the United States and abroad. Defendant Chase Manhattan Bank is a national bank with offices in New York and London. Chase provided much of the financing for Ferer-Omaha's operations, and had a perfected security interest in all of Ferer-Omaha's property.

Plaintiff Ferer-London is an English corporation and a wholly owned subsidiary of Ferer-Omaha. Ferer-London was also engaged in the metal trading business. Ferer-London's purchases were financed in part by Chase, and in part by plaintiff Williams & Glyn's, an English bank with offices in London and New York.

A. Chase's Credit Arrangement with Ferer-Omaha

In April 1970 Ferer-Omaha entered into a credit and security agreement with Chase and the United States National Bank of Omaha (USNB), a local bank acting as agent for Chase. Chase perfected its security interest in Ferer-Omaha's property by filing financing statements in Nebraska, New York, and other jurisdictions where Ferer-Omaha did business. Chase and USNB provided Ferer-Omaha with a revolving line of credit which permitted Ferer-Omaha to borrow up to $5 million determined by a "borrowing base" formula. The borrowing base consisted of 90% of Ferer-Omaha's accounts receivable and an allowance of $1 million for inventory. In exchange, Ferer-Omaha agreed to assign its accounts receivable directly to Chase. Assignments and copies of the invoices representing the amounts due on the accounts were sent weekly to Chase.

Chase's control over the accounts receivable assigned to it was achieved through the use of a "lock box", which was really nothing more than a post office box in Chase's name. Ferer-Omaha's invoices bore a legend that requested its customers to remit payment directly to the lock box in New York City. Use of the lock box insured that Chase and USNB retained control over the receivables and also served to expedite receipt and recordation of payments. Chase collected checks from the lock box and deposited them into a cash collateral account maintained by it for Ferer-Omaha. While the funds in the cash collateral account belonged to Ferer-Omaha, transfers from that account were controlled by Chase pursuant to the borrowing base formula. If there was insufficient collateral to support the debt owed to Chase, it had the option of applying funds from the cash collateral account to reduce the loans in accordance with the credit and security agreement. The evidence showed, however, that the funds received in the cash collateral account were usually transferred immediately to Ferer-Omaha's operating account.

B. Course of Dealing Between Ferer-Omaha and Ferer-London

In late 1970 Ferer-Omaha's president, Harvey Ferer, formed an English subsidiary, Ferer-London, to assist Ferer-Omaha in the metal trading business. Harvey Ferer also planned to use Ferer-London to trade in metal futures contracts on the London Metal Exchange (LME). Chase extended a small line of credit to Ferer-London, and financed specific copper purchases by Ferer-London on a transaction-by-transaction basis.

The usual operating arrangement between Ferer-Omaha and Ferer-London was that the copper purchased by Ferer-London would be transferred to Ferer-Omaha for refining and sale to end users. Ferer-Omaha paid for the shipping and refining, and determined the selling price of the copper. After receipt of the sales proceeds, Ferer-Omaha would be reimbursed for its expenses, Ferer-London would be repaid the original purchase price, and any profit would then be divided between parent and subsidiary. The arrangement between the companies was never set out in writing.

Ferer-Omaha usually invoiced its sales of Ferer-London's copper on Ferer-London invoices. Although Ferer-London's invoices did not bear the legend directing payment to the Chase lock box, most of the purchasers of the Ferer-London copper through Ferer-Omaha followed their customary practice and sent payments there anyway. The funds would pass through the collateral account, into the operating account, and Ferer-Omaha would then repay Ferer-London from that account.

C. The Codelco Copper

In 1973 Harvey Ferer, acting for Ferer-Omaha, contracted with Corporacion del Cobre (Codelco) in Chile for the monthly purchase of partially refined copper. Ferer-Omaha did not have sufficient credit at Chase to purchase all of the copper it contracted for, so at Harvey Ferer's request, Ferer-London purchased some of the monthly shipments. Two Ferer-London purchases from Codelco were financed by Chase.

In August 1973 Williams & Glyn's began financing Ferer-London's purchases of copper from Codelco. The terms of the loans from Williams & Glyn's to Ferer-London were not reduced to writing anywhere other than in the credit applications Ferer-London filed to procure letters of credit from Williams & Glyn's. With respect to the Codelco copper Williams & Glyn's never filed a financing statement, security agreement, or any other document to perfect a lien in England or in any jurisdiction in the United States until after most of the Codelco copper had been sold.

At first Codelco did not realize that it was dealing with both Ferer-Omaha and Ferer-London as buyers. Consequently, some of the earlier contracts mistakenly named Ferer-Omaha as buyer, when in fact, Ferer-London was the buyer. Ferer-Omaha returned the contracts, and Codelco changed most of them to show Ferer-London as buyer. Codelco's invoices listed the buyer's name, address, Codelco contract number, and a letter of credit number. The invoices also showed the name of the vessel the copper was to be shipped on, the date and place of shipping, and the destination.

Both Ferer-Omaha's and Ferer-London's purchases of Codelco copper were invoiced on a provisional basis, based on an estimated copper content. Following assay, a final invoice was issued. If the final invoice was lower than the provisional invoice, then Codelco owed a refund for overpayment; conversely, if the final invoice was higher than the provisional invoice, then a balance was due from the buyer.

When the ships bearing Codelco copper reached the United States, Ferer-Omaha performed its usual services by arranging for further refining and sale. However, instead of invoicing the sales of Ferer-London's refined Codelco copper on Ferer-London's invoices, as had been its prior practice, Ferer-Omaha invoiced the Codelco copper sales on its own forms and assigned the invoices to Chase. Notwithstanding those assignments, however, until March 1974 Ferer-Omaha was diligent in sending Ferer-London sufficient funds to enable Ferer-London to repay the loans it owed to Williams & Glyn's.

D. The Crisis

Serious delays in payments from Ferer-Omaha to Ferer-London on Codelco copper sales began in March 1974. On April 20, 1974, two Ferer-London directors flew to Omaha and met with Harvey Ferer seeking to accelerate payments. During the course of the meeting Harvey Ferer revealed that he had diverted $12 million of Ferer-London's Codelco proceeds to pay LME margin calls. The Ferer-London directors returned to London and informed Williams & Glyn's of Ferer-Omaha's problems. They also told Williams & Glyn's that Chase had a security interest or "charge" over all of Ferer-Omaha's receivables.

Two days later, on April 22, 1974, Harvey Ferer told Chase officials about the potential loss of $25 million because of his speculation on the LME. He also told Chase representatives that Ferer-London owed $12 million to Williams & Glyn's that could not be repaid because the funds had been diverted to pay...