Baker v. National City Bank of Cleveland

• Decision Date: 12 June 1974
• Docket Number: Civ. A. No. C 73-214.
• Citation: 387 F. Supp. 1137
• Parties: George P. BAKER et al., Trustees of the Property of Penn Central Transportation Company, Plaintiffs, v. NATIONAL CITY BANK OF CLEVELAND, Defendant.
• Court: U.S. District Court — Northern District of Ohio

387 F. Supp. 1137

George P. BAKER et al., Trustees of the Property of Penn Central Transportation Company, Plaintiffs, v. NATIONAL CITY BANK OF CLEVELAND, Defendant.

Civ. A. No. C 73-214.

United States District Court, N. D. Ohio, E. D.

June 12, 1974.

COPYRIGHT MATERIAL OMITTED

Thomas R. Skulina, Cleveland, Ohio, Marvin Comisky, Goncer M. Krestal, Philadelphia, Pa., for plaintiffs.

Frank C. Heath, John L. Strauch, Jones, Day, Cockley & Reavis, Cleveland, Ohio, for defendants.

MEMORANDUM AND ORDER

WILLIAM K. THOMAS, District Judge.

Plaintiffs George P. Baker, Richard C. Bond and Jervis Langdon, Jr., are trustees of the property of the Penn Central Transportation Company (Penn Central), the debtor in proceedings No. 70-347 in the United States District Court for the Eastern District of Pennsylvania (Reorganization Court). Penn Central is presently undergoing reorganization pursuant to the authority of section 77 of the Bankruptcy Act, 11 U.S.C. § 205. Defendant National City Bank of Cleveland (NCB) is a duly organized national bank existing under the laws of the United States of America with its principal office in Cleveland, Ohio.

Plaintiffs have instituted this action under section 23 of the Bankruptcy Act, 11 U.S.C. § 46, to recover Penn Central property that plaintiffs allege is held by NCB as an adverse claimant. The property that is the subject of this action is Penn Central's checking account No. XXX-XXX-X at NCB, in the amount of $927,333.30 (hereafter $927,000). By its answer NCB claims that on Saturday, June 20, 1970, it set off this entire deposit against Penn Central's unpaid loan indebtedness of $3,000,000. As will later be developed defendant relies on a declaration of set-off embodied, it contends, in an exchange of telephone calls on Saturday afternoon, June 20, 1970, between NCB's chairman of the board and chief legal officer, and the chief legal officer and manager of the checking accounts department in which Penn Central's checking account was maintained.

Penn Central sent a letter agreement to NCB on March 3, 1970, confirming the terms of a new arrangement whereby NCB would become a "so-called `swingline' bank in the amount of $3,000,000 . . . in lieu of NCB's standby credit." On March 11, 1970, NCB accepted through its vice president, John Hildt, the terms of the agreement which stated that "borrowing shall be repaid by Penn Central upon NCB's demand." On April 28, 1970, Penn Central borrowed the full $3,000,000 pursuant to the terms of the March 3, 1970 letter agreement. Remaining unpaid on June 20, 1970, the $3,000,000 loan was then due as a demand obligation at the time NCB claims it effected a set-off.¹

On Sunday, June 21, 1970, at 5:40 p. m., United States District Judge William C. Kraft for the Eastern District of Pennsylvania, determined that Penn Central's petition for reorganization was filed in good faith and he approved the petition as properly filed under section 77 of the Bankruptcy Act. Thereupon Judge Kraft entered an order that stated in paragraph 10:

All persons, firms and corporations, . . . holding for the account of the Debtor deposit balances or credits be . . . restrained and enjoined from . . . off-setting the same, or any thereof, against any obligation of the Debtor, until further order of this Court. In the Matter of Penn Central Transportation Co., Debtor, No. 70-347 (E.D.Pa., June 21, 1970). Emphasis added.

Plaintiffs request that this court issue an order declaring invalid the claimed set-off of the Penn Central checking deposit balances. It requests that this court order NCB to restore to the Penn Central checking account, as property of the plaintiff trustees,

all deposit balances of Penn Central with defendant as the same existed prior to defendant's attempted set off, with interest from June 21, 1970 to the date of restoration, and to honor plaintiffs' withdrawals therefrom.

Succeeding Judge Kraft as the Reorganization Court, Judge John P. Fullam conducted summary proceedings with respect to nine banks (of the remaining 142 banks with then existing Penn Central accounts no set-off was claimed) that purported to set off the debtor's bank deposits against loans due those banks. In the decision reported as Penn Central Transportation Co. v. National City Bank of Cleveland, Ohio, 315 F. Supp. 1281 (E.D.Pa.1970), aff'd 453 F. 2d 520 (3 Cir.), cert. denied 408 U.S. 923, 92 S.Ct. 2493, 33 L.Ed.2d 334 (1972), Judge Fullam ordered eight banks and the ninth, NCB (but only to the extent of $22,666.30, a Penn Central deposit which the bank received and set off on June 22, 1970), to restore to the debtor's account all balances as they existed on June 21, 1970. However, with respect to NCB's alleged set-off of $927,000 of June 20, 1970, the court stated:

It is apparent that no violation of the Order is properly chargeable; moreover, the existence of a substantial adverse claim renders inappropriate for summary disposition the question of the validity of that setoff. 315 F. Supp. at 1285.

At the trial held by this court no oral testimony was offered. By agreement the record comprises NCB documents, other documents, and deposition testimony of NCB's officers and employees. The evidence essentially is not in dispute, though the parties draw different inferences from the evidence. The controlling issue presented for decision is whether NCB effected a valid set-off on Saturday afternoon, June 20, 1970.² Under uniformly accepted law this claim of set-off is a defense which NCB must prove. 20 Am.Jur.2d § 152 at 360-61 (1967).

I.

The parties at the oral argument took opposing positions as to what law this court should apply in considering NCB's defense of set-off. The plaintiff trustees insist that federal law is controlling, although no federal common law of set-off has been cited. Defendant NCB insists that state law controls and cites set-off statutes of Ohio and Pennsylvania and court decisions of both states that apply these statutes.

Both parties refer the court to Susquehanna Chemical Corp. v. Producers Bank & Trust Co., 174 F.2d 783 (3 Cir. 1949), a decision affirming a reorganization court's refusal to honor a bank's set-off of a debtor's checking account against a demand note indebtedness. Speaking for the Court of Appeals, Judge Goodrich thus discussed the broad issue of what law to apply:

We are, . . . dealing with federal law in all matters concerning the conduct of reorganization proceedings, although, of course, a reorganization court, like a bankruptcy court, takes the property situation as it finds it, and property rights will have been determined by state law prior to bankruptcy or reorganization proceedings. Id. 174 F.2d at 785 Footnotes omitted. See also In Re Universal Medical Services, Inc., 460 F.2d 524, 526 (3 Cir. 1972).

Susquehanna involved

a contest between the trustees in reorganization for the Susquehanna Chemical Corporation and the bank with which the corporation had, on July 30, 1948, checking accounts. The debtor owed the bank an amount greater than its checking accounts upon a demand note containing the usual Pennsylvania confession of judgment clause. Id. 174 F.2d at 784.

The reorganization petition was filed and the trustees were appointed on July 30, 1948.

The bank thereafter refused to honor checks drawn on the checking accounts of the debtor corporation and claimed that under Pennsylvania law it was entitled to apply these accounts to the payment of its own debt. Id. 174 F. 2d at 785.

The trustees sued the bank in the reorganization court for "a judgment that the bank be directed to pay the amount of the deposits to the trustees." Upon the district court rendering judgment against the bank, the bank appealed.

The Court of Appeals was faced with the argument of the appellant bank that under the Pennsylvania Defalcation Act³ "a bank depositor who owes his bank money has only a claim against the bank for the difference between his `deposit' and the bank's claim against him." Pursuing this point the Court stated:

The customer's lack of claim against the bank is conditioned by the circumstance that `the right of defalcation is claimed.' But when one talks about claiming such a right, we get the equivalent of set-off or counter-claim called by another name. And then we get to the place of considering set-off, counter-claim, etc. and we are, as already indicated, away from the state law and governed by the federal law upon the subject. We pass, then, from the consideration of state statute to federal statute upon the subject-matter involved. Id. 174 F.2d at 786. Footnote omitted.

Thereafter the Court of Appeals recognized that Lowden v. Northwestern National Bank, 298 U.S. 160, 56 S.Ct. 696, 80 L.Ed. 1114 (1936) and other cited authorities "show beyond doubt that the reorganization court is not bound to apply, willy-nilly, the set-off rule of Section 68 of the Bankruptcy Act."

Susquehanna's affirmance of the District Court's denial of the bank's right to set off a debtor's checking account against the debtor's demand note indebtedness is helpful but not dispositive of the issues facing this court. Factually Susquehanna differs from the instant case since in Susquehanna the bank's attempted set-off occurred after the reorganization petition was filed. Further, the District Court in Susquehanna sat as a reorganization court under Chapter XI of the Bankruptcy Act with jurisdiction to conduct a summary proceeding.

The instant action is a plenary proceeding with the district court's jurisdiction derived from section 23 of the Bankruptcy Act, 11 U.S.C. § 46. Under section 23a this court's jurisdiction is expressly "distinguished from proceedings under this title" Title 11, The Bankruptcy Act. In the present controversy "between . . . trustees as such and adverse claimants, concerning the property acquired or claimed by the . . . trustees" the jurisdiction of this district court must be exercised

in the same manner and to the

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