Baker v. National City Bank of Cleveland
| Decision Date | 13 February 1975 |
| Docket Number | No. 74--1908,74--1908 |
| Citation | 16 UCC Rep 298,511 F.2d 1016 |
| Parties | 16 UCC Rep.Serv. 298 George P. BAKER et al., Trustees of the Property of Penn Central Transportation Company, Plaintiffs-Appellees. v. NATIONAL CITY BANK OF CLEVELAND, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Frank C. Heath, John L. Stauch, Jones, Day, Cockley & Reavis, Cleveland, Ohio, for defendant-appellant.
Thomas R. Skulina, Cleveland, Ohio, Marvin Comisky, Goncer M. Krestal, Philadelphia, Pa., for plaintiffs-appellees.
Before MILLER and LIVELY, Circuit Judges, and McALLISTER, Senior Circuit Judge.
This appeal presents a single question: What requirements must a bank meet in order to effect a non-judicial setoff against the account of a customer? The facts are not in dispute and are stated in the comprehensive memorandum and order entered in the district court by Judge William K. Thomas. Baker, et al., Trustees v. National City Bank of Cleveland, 387 F.Supp. 1137 (N.D.Ohio 1974). The District Judge concluded that a non-judicial setoff is effected only when intent to set off is accompanied by some act of consummation and evidence of the consummated setoff in bank records. Id. at 1149. Upon a finding that National City Bank (NCB) had done no more on June 20, 1970 than declare an intention to set off the checking account of Penn Central against its demand note to the bank, the district court held that the Penn Central account was subject to a prohibition against setoff contained in Order No. 1 of the Penn Central reorganization proceedings issued on June 21, 1970. We affirm.
No cases have been cited, and we have found none, which state explicitly the steps which a bank is required to take in order to effectuate a setoff. The appellant argues here, as it did in the district court, that under controlling Ohio law a setoff is effective at the time a bank declares a setoff, and that bookkeeping entries are not required to accomplish the act. The cases cited in appellant's briefs do not hold this. On the other hand, there is language in the cited opinions which indicates that each bank took some overt step to consummate the act of setting off. In Bank of Marysville v. Windisch-muhlhauser Brewing Co., 50 O.St. 151, 33 N.E. 1054 (1893), the court stated that the bank had 'applied' the depositor's account to his debt prior to presentation of a check which was dishonored. Id. at 159, 33 N.E. 1054. In State ex rel. Warrensville Heights v. Fulton, 128 O.St. 192, 200, 190 N.E. 383, 386 (1934), in discussing a setoff, the Supreme Court of Ohio stated that '. . . the trust company was entitled to apply the deposit of relator in part satisfaction of the past-due obligations which the relator owed it.' (emphasis added). In referring to the right of setoff, the Supreme Court of the United States has written--
But, broadly speaking, it represents the right which one party has against another to use his claim in full or partial satisfaction of what he owes to the other. That right is constantly exercised by business men in making book entries whereby one mutual debt is applied against another. Studley v. Boylston Bank, 229 U.S. 523, 528, 33 S.Ct. 806, 808, 57 L.Ed. 1313 (1913) (emphasis added).
Language indicating that a setoff is accomplished by some affirmative act which provides record evidence of the transaction is used throughout the Boylston Bank opinion.
Appellant relies on Ohio Revised Code § 2309.19, which reads as follows:
When cross demands have existed between persons under such circumstances that if one had brought an action against the other a counterclaim could have been set up, neither can be deprived by the benefit thereof by assignment by the other, or by his death. The two demands must be deemed compensated so far as they equal each other.
This statute merely provides that a right to set off is not defeated by an assignment or by death of one of the parties to the debtor-creditor relationship. The section declares an automatic setoff upon death or assignment by providing that the two demands shall be 'deemed compensated.' It does not deal with the mechanics of effecting a setoff in other circumstances. 1
Noting that Pennsylvania has a defalcation statute similar to that of Ohio, appellant has cited a number of cases from that jurisdiction. While it is true that several of these opinions state it is not necessary that there be book entries before a bank may claim a setoff, nevertheless in each case it is clear that the bank performed some overt act to carry out its intent to set off. Goldstein v. Jefferson Title & Trust Co., 95 Pa.Super. 167 (1928); Aarons v. Public Service Building & Loan Association, 318 Pa. 113, 178, A. 141 (1935); Duffy v. Fifty-Eighth & Chester Ave. Building & Loan Association,325 Pa. 127, 189 A. 307 (1937). In each opinion, the court speaks of the bank's 'exercising' its right of setoff. This implies something more than a declaration of intent. In Goldstein, supra, the court held that the bank's refusal to pay its depositor's check was 'sufficient evidence of intention.' We do not read Judge Thomas' opinion to require that the bank 'first' make book entries charging one account and...
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