Catalina Yachts v. Old Colony Bank & Trust Co.

• Citation: 497 F. Supp. 1227
• Decision Date: 18 September 1980
• Docket Number: Civ. A. No. 77-1157.
• Parties: CATALINA YACHTS, Plaintiff, v. OLD COLONY BANK AND TRUST CO. OF MIDDLESEX COUNTY and Warren D. Johnson, Defendants.
• Court: United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of Massachusetts

497 F. Supp. 1227

CATALINA YACHTS, Plaintiff, v. OLD COLONY BANK AND TRUST CO. OF MIDDLESEX COUNTY and Warren D. Johnson, Defendants.

Civ. A. No. 77-1157.

United States District Court, D. Massachusetts.

September 18, 1980.

COPYRIGHT MATERIAL OMITTED

John H. Henn, Thomas M. S. Hemnes, Foley, Hoag & Eliot, Boston, Mass., for plaintiff.

Hochberg & Schultz, P. C., Gordon N. Schultz, Boston, Mass., for defendants.

Carl K. King, Goldstein & Manello, Boston, Mass., for Warren D. Johnson.

OPINION

CAFFREY, Chief Judge.

This is a civil action in which plaintiff seeks damages for various claims arising out of the sale of marine property and the handling of certain checks delivered in connection therewith. Plaintiff Catalina Yachts (Catalina) is incorporated and maintains its principal place of business in California and is engaged in the business of manufacturing and selling sailing vessels. Defendant Old Colony Bank and Trust Company of Middlesex County (Bank) is a Massachusetts trust company and maintains its principal place of business in Massachusetts. Defendant Warren D. Johnson is a resident of Massachusetts and President, Treasurer and a principal shareholder of Eastern Yachts, Inc. (Eastern), a Massachusetts corporation. Until approximately August of 1976, Eastern was engaged in the business of selling yachts, boats and related merchandise at retail. On or about August 26, 1976, Eastern executed an assignment for the benefit of creditors. Jurisdiction is based upon 28 U.S.C. § 1332.

This matter is before the Court for hearing on defendant Bank's motion for summary judgment on Counts III, IV, V, VI, and VII¹ of plaintiff's amended complaint. Plaintiff Catalina has filed a cross-motion for summary judgment on Count IV.

The following facts are undisputed. Catalina shipped seven yachts to Eastern between June 3 and June 18, 1976. The yachts were shipped C.O.D. On June 15, 1976, Eastern accepted delivery of two of the yachts, and simultaneously paid for them with an uncertified corporate check, numbered 1675, in the amount of $22,764.65, drawn on its account with Bank. Delivery of the remaining five yachts was made on June 29, 1976. On that day Eastern wrote two more checks, numbered 1699 and 1706, for $21,158.88 and $25,418.67, respectively, also drawn on its account with Bank.

The yachts were sold by Eastern and the proceeds of their sale were deposited in Eastern's bank account pursuant to a security agreement between Eastern and Bank for the purchase of inventory. The proceeds from Eastern's sales of Catalina yachts, possibly together with proceeds from the sale of other inventory, were deposited in Eastern's bank account as a lump sum of $86,505.13. The statement of account reflects this deposit in the plus balance of account on July 12, 1976.

Checks 1675 and 1706 were deposited for collection by Catalina on July 8, 1976 in its account at the Independence Bank of Encino, California, and were received for collection by Federal Reserve Bank of Boston (Fed) on July 12, 1976.

An understanding of the claims of the parties to this dispute may be gained by briefly explaining the process, established by affidavits, for the collection of cash items presented to Bank for payment. Pursuant to an "Off-Premises Presentment Request" (Request) between Fed, First National Bank of Boston (First), and Bank, Bank employs the services of First, a member of the Federal Reserve System, to receive cash items of the Bank's customers which clear through Fed. Request is a collection agreement between Bank, Fed and the First, which establishes the method and time of presentment of cash items on Bank.

By that agreement, Fed upon completion of its processing functions delivers the respective cash items in a "Cash Letter" at its office to a messenger of the First who calls at Fed to receive the items. Fed obtains a signed receipt from the First' messenger, which receipt designates the several banking institutions whose cash items have been cleared through Fed and are to be processed by First, and the particular morning or afternoon cash letters received by the messenger.

Pursuant to an "Agreement for Gross Payment of Cash Letters by Non-Member Country Bank by Authority to Charge to Member Banks Reserve Account" (Settlement Agreement), Fed advises First and Bank that Fed has charged First's reserve account with Fed with the amount of the cash letter to be delivered to Bank. Upon Fed's notice to First and Bank, Bank automatically makes settlement on all cash items clearing through Fed by accepting a debit to Bank's account with First.

Pursuant to Request, presentment to Bank is made at the premises of First. As part of the correspondent bank relationship between First and Bank, established by Request and the Settlement Agreement, Bank utilizes the computer services of First to begin processing all cash items cleared through Fed and presented upon Bank for payment. Bank furnishes First with records of Bank's customers' accounts which are assimilated into First's computer system in order to post cash items to customers' accounts in daily settlements. All transactions by Bank regarding cash items, except Notices of Dishonor and Return, bear the date upon which items are sorted and coded by First.

Thereafter all items comprising the cash letter are made ready for delivery to Bank. According to affidavits of Bank and First, the cash letter is customarily received by Bank on the banking day following the day on which the cash items are processed at First's computer center. Upon physical receipt Bank performs the inspection and other verification steps used in determining whether to pay an item or reverse an item previously entered by First's computer at the commencement of the posting process.

In the instant case, on the morning of July 12, 1976, Mr. Charles Blakeney, who was employed by the First as a messenger, called upon and received from the Fed cash items drawn upon and/or payable at Bank. He then delivered the morning cash letter to the Check Collection Department of the First for further processing. Fed advised First and Bank that Fed had charged First's reserve account with the amount of the July 12 cash letter to be delivered to Bank. Bank then made settlement for the cash letter in accordance with the Settlement Agreement. Following receipt of the July 12 cash letter at First's computer center for sorting and coding, the account of Eastern was debited for the amount of checks 1675 and 1706 and these items, together with all other items comprising the cash letter, were made ready for delivery to Bank on the next banking day.

The cash items contained in the July 12 cash letter were received by Bank on July 13, 1976. Bank reviewed the checks upon receipt but determined that Eastern's balance disclosed insufficient funds. On July 14, 1976, Bank effected reversal of the debit charged by computer to Eastern's account and returned checks 1675 and 1706 to Fed with Notice of Dishonor for insufficient funds.

Check 1699 was received for collection by Fed on July 15, 1976. The check was received at First's computer center for sorting and coding on Friday, July 16, 1976. Bank made settlement in accordance with the Settlement Agreement. The account of Eastern was provisionally debited for the amount of check 1699 and it, together with all other items comprising the cash letter, was made ready for delivery to Bank on Monday morning, July 19, 1976.

Bank received check 1699 from First on the morning of July 19, 1976. Bank's examination of check 1699 and of Eastern's account disclosed insufficient funds to pay the item. Bank returned check 1699 to Fed with Notice of Dishonor for insufficient funds on July 19, 1976.

The affidavit and deposition testimony of John P. DiIorio, President of Bank, disclose that Bank made a decision on July 12, 1976 to setoff funds in Eastern's account and to apply such funds to outstanding loans in accordance with the default provisions of several notes and security agreements. On the morning of July 12 notice of default and demand by 5:00 p. m. of that day was delivered in hand to Johnson at Eastern. At 5:00 p. m. on July 12, Bank defaulted Eastern, setoff the amount of the balance in Eastern's account and sent notice of those actions with Advice of Debit by certified mail. Since the setoff was made at 5:00 p. m., after Bank's three o'clock "cut-off" hour, the setoff was posted to Eastern's account during business hours on July 13, 1976.

Turning first to Count III, the gravamen of Catalina's complaint is that Bank made a decision to finally pay checks 1675, 1706, and 1699 and is therefore accountable for their amounts under section 4-213(1) of Mass.Gen.Laws ch. 106. Catalina opposes Bank's motion for summary judgment on Count III on the ground that genuine fact issues exist as to whether Bank finally paid checks 1675, 1706, and 1699 by completing the process of posting those items to Eastern's account.

Section 4-213(1) of Mass.Gen.Laws ch. 106, provides that a payor bank becomes accountable for the amount of an item when it has finally paid it. Final payment may occur when a payor bank completes the process of posting an item to the account of the drawer. Mass.Gen.Laws ch. 106, § 4-213(1)(c). Section 4-109 provides, in pertinent part, that "the process of posting means the usual procedure followed by a payor bank in determining to pay an item and in recording the payment ...."

The affidavit and deposition testimony of Ivy Percocco, Vice-President and Treasurer of Bank, which is uncontradicted, outline the process of posting employed by the Bank. The charging of accounts by computer at First is the first step of the usual procedure followed by Bank in the making of a determination to pay an item. Upon physical receipt of an item, Bank performs the remaining steps in making that determination. The Bank's usual posting procedure includes a decision whether to reverse a provisional debit.

Bank...