All American Auto Salvage v. Camp's Auto Wreckers

Decision Date01 August 1996
Citation679 A.2d 627,146 N.J. 15
Parties, 30 UCC Rep.Serv.2d 1 ALL AMERICAN AUTO SALVAGE, Plaintiff-Respondent, v. CAMP'S AUTO WRECKERS, Defendant. CITIBANK, SOUTH DAKOTA, N.A., Plaintiff-Respondent, v. Lisa A. COFFEY, Defendant.
CourtNew Jersey Supreme Court

Michael A. Lampert, Princeton, argued the cause, for appellant, First Fidelity Bank, N.A. (Saul, Ewing, Remick & Saul, attorneys; Mr. Lampert and Carl E. Ailara, Jr., on the briefs).

Steven P. McCabe, East Hanover, argued the cause, for respondents (Pressler & Pressler, attorneys).

Michael F. Spicer, Princeton, argued the cause, for amicus curiae, New Jersey Bankers Association (Jamieson, Moore, Peskin & Spicer, attorneys).

The opinion of the Court was delivered by

POLLOCK, J.

The primary issue is whether a bank may deduct a processing fee from a judgment debtor's general deposit account before paying the balance to a levying creditor. Another issue is whether the Superior Court may decide the issue in a summary proceeding under N.J.S.A. 2A:17-63.

The appeal involves two cases that were consolidated in the Appellate Division. In the first case, All American Auto Salvage v. Camp's Autowreckers, a judgment creditor, All American Auto Salvage (All American) levied on the account of Camp's Auto Wreckers (Camp's) at First Fidelity. The Special Civil Part of the Law Division permitted First Fidelity to deduct a processing fee before paying the balance in Camp's account. In the second case, Citibank, South Dakota, N.A. v. Coffey, the Special Civil Part ruled that First Fidelity had acted improperly in deducting a processing fee from the account of Lisa Coffey before paying the balance to the levying creditor, Citibank, South Dakota, N.A. (Citibank).

The Appellate Division held that First Fidelity could not deduct its processing fee before honoring the levy. It thus affirmed the order in Coffey and reversed and remanded in All American Auto Salvage v. Camp's Auto Wreckers, 281 N.J.Super. 266, 274, 657 A.2d 452 (App.Div.1995). We granted First Fidelity's petition for certification, 142 N.J. 515, 665 A.2d 1108 (1995), and now reverse both judgments.

I.

In the lead case, All American Auto, defendant, Camp's, opened a small-business account with First Fidelity on November 8, 1991. Pursuant to the deposit agreement, Camp's agreed to be bound by "all the rules, regulations, conditions, limitations, requirements and agreements which are heretofore and hereafter adopted by the Bank." Camp's also executed a resolution stating:

That any account of any type whatsoever that this corporation establishes at the Bank secures any and all indebtedness and liability of this corporation to Bank, however and whenever incurred or evidenced, whether direct or indirect, absolute or contingent, due, or to become due, and the corporation transfers and coveys to Bank all balances, credits, deposits, monies or items of any type whatsoever, now or hereafter, held by the Bank and Bank is authorized at any time to charge such indebtedness or liability against any such accounts or items whether or not the same is then due, and the Bank shall not be liable for dishonoring items where the making of such charge or charges results in there being insufficient funds in said account(s) to honor such items.

On March 19, 1993, First Fidelity amended its small-business-account fee-schedule. The new schedule stated that "[t]he Bank has a security interest in any service fees or charges to the account." First Fidelity charges a service fee of $60 for responding to levies on its depositors' accounts.

On August 17, 1993, All American obtained a judgment against Camp's. By serving a writ of execution, All American levied on Camp's account at First Fidelity for $1,068.10. First Fidelity investigated to ensure that the levy was on the correct account and searched its Customer Information System for any set offs or unpaid fees. It deducted $60 from the account balance of $940.65 for those processing services, leaving $880.65 to satisfy partially the levy. The Special Civil Part denied All American's motion to turn over the entire amount in Camp's account without deducting the processing fee.

First Fidelity processes over 15,000 levies annually. It maintains a separate department with six full-time employees whose only responsibility is to process claims of levying creditors. Although the processing fee is minimal, it adds up to a cumulative charge of over $900,000. In 45% of the cases, although no levy or processing fee is ultimately paid, the bank must still investigate and notify the Sheriff and the judgment creditor of the absence of an account relationship or available funds.

In Citibank, South Dakota, N.A. v. Coffey, the defendant, Lisa Coffey, opened a personal account with First Fidelity. Coffey agreed to be bound by "all rules and regulations and any amendments thereto promulgated by Federal and state authorities, the Federal Deposit Insurance Corporation, and Bank." The Personal Account Agreement stated:

You agree to pay any service fees which apply to your Account and to pay special fees for services such as stop payment orders and dishonored checks. The Bank has a security interest in your account for any fees you haven't paid. The amount of the fees may change from time to time. You will be given prior notice of any change in fees. The notice may be sent by mail or included with the periodic statement of your Account, if one is sent.

The Agreement also provided that

[i]f you owe the Bank money for any reason, the Bank can, without prior notice, charge any Account you have with the Bank for the amount owed.

Coffey failed to pay charges on her Citibank Visa Card. Citibank obtained a $1,707.28 default judgment against Coffey, and levied on the $477.58 balance in her First Fidelity account. First Fidelity investigated the matter and deducted its $60 processing fee.

The trial court granted Citibank's motion for an order turning over the balance of the account without a deduction for First Fidelity's processing fee. 281 N.J.Super. 311, 314, 657 A.2d 475 (Law Div.1994).

In Coffey, the Special Civil Part held in part that Coffey was not indebted for the processing fees until after Citibank had levied on the account. Thus, First Fidelity did not have a common-law right to set off the processing fee. Id. at 315, 657 A.2d 475. The court also determined that the Bank's security interest in the account did not give it priority over the levying creditor. According to the court, the language of the deposit agreement applied only to fees incurred in the past, and "[s]ince no debt existed until after the levy, the security interest provided for by the Agreement had not attached." Id. at 317, 657 A.2d 475.

The Appellate Division affirmed substantially for the reasons stated by the Special Civil Part. 281 N.J.Super. 266, 269, 657 A.2d 452 (App.Div.1995). It supplemented its opinion by discussing the issue "whether the security interest allegedly created in either situation gives the bank priority over a levying judgment creditor." Id. at 271, 657 A.2d 452. The court rejected the bank's claim of a security interest, reasoning that the bank had no possessory interest to control withdrawals, a prerequisite to a perfected security interest.

II.

First Fidelity claims that both a common-law security interest and a right of set off support its deduction of the processing fees. We turn first to common-law security interests.

A.

As defined by statute, a "security interest" is "an interest in personal property or fixtures which secures payment or performance of an obligation." N.J.S.A. 12A:1-201(37). N.J.S.A. 12A:9-104(k) specifically excludes security interests in deposit accounts. "Such transactions are often quite special, do not fit easily under a general commercial statute and are adequately covered by existing law." N.J.S.A. 12A:9-104, 1972 Official Comment to U.C.C., p 7; see also Pittsburgh Nat'l Bank v. United States, 657 F.2d 36, 39 (3d Cir.1981) (stating that Article 9 of the UCC does not apply to bank's set off of amount due on loan against depositor's checking account); Gillman v. Chase Manhattan Bank, 73 N.Y.2d 1, 537 N.Y.S.2d 787, 794 n. 1, 534 N.E.2d 824, 831 n. 1 (1988) (same); Duncan Box & Lumber Co. v. Applied Energies, Inc., 165 W.Va. 473, 270 S.E.2d 140, 142 (1980) (holding that UCC does not apply to security interests in deposit accounts even when created for the purpose of providing collateral for the bank); Barkley Clark & Barbara Clark, The Law of Bank Deposits, Collections and Credit Cards p 18.03, at 18-6 (Revised ed. 1995 & Supp.1996).

Under the common law, however, parties may provide specifically for a security interest in an agreement. Gillman, supra, 537 N.Y.S.2d at 794, 534 N.E.2d at 831 (finding security interest in demand deposit account created by language in security agreement). Security interests in general deposit accounts may arise by a pledge or an assignment. See Peoples Nat'l Bank v. United States, 777 F.2d 459, 461 (9th Cir.1985). First Fidelity does not contend that a security interest arose by assignment. It claims, however, that such an interest arose from the depositor's pledge of sufficient funds in the account to satisfy the processing fees.

Generally speaking, a pledge is a security interest in personal property created by a bailment to secure payment of a debt or performance of a service. See Ray A. Brown, The Law of Personal Property § 15.1, at 469 (3d ed. 1975); 72 CJS Pledges § 1 (1987). To be effective, a pledge requires 1) a pledgor and a pledgee; 2) a debt or obligation; 3) an agreement to create a security interest; and 4) possession of the pledged property by the pledgee. See CJL Co. v. Bank of Wallowa County (In re CJL Co.), 71 B.R. 261, 264 (Bankr.D.Or.1987); 72 CJS Pledges § 5 (1987).

No one disputes that the depositor acts as pledgor and the Bank as pledgee. The deposit agreements, moreover,...

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