O'Donnell v. Bank of Vermont

• Decision Date: 31 January 1997
• Docket Number: No. 95-401,95-401
• Citation: 166 Vt. 221,692 A.2d 1212
• Court: Vermont Supreme Court
• Parties: Terrence M. O'DONNELL v. BANK OF VERMONT.

Page 1212

692 A.2d 1212

166 Vt. 221

Terrence M. O'DONNELL v. BANK OF VERMONT.

No. 95-401.

Supreme Court of Vermont.

Jan. 31, 1997.

Lisa Chalidze of Hull, Webber, Reis & Canney, Rutland, and Dustin F. Hecker and Andrea F. Nuciforo, Jr., of Posternak, Blankstein & Lund, Boston, MA, for plaintiff-appellant.

Arthur P. Anderson and Mary P. Kehoe of Saxer Anderson Wolinsky & Sunshine, P.C., Burlington, for defendant-appellee.

Before ALLEN, C.J., and GIBSON, DOOLEY, MORSE and JOHNSON, JJ.

JOHNSON, Justice.

Plaintiff appeals from a summary judgment decision of the Windham Superior Court. He represents a group of investors who claim that defendant Bank of Vermont (Bank) improperly seized four certificates of deposit (CDs) that the investors claim to own. The Bank responds that the seizure was proper because the CDs actually belonged to a debtor of the bank that had defaulted on a prior loan. The trial court found that the investors did not own the CDs and granted summary judgment in favor of the Bank. Without addressing the question of ownership, we hold that principles of banking law entitled the Bank to set off the funds. ¹

This dispute has a complicated factual history. It involves a real estate joint venture between the group of investors and Timber Creek Construction Company (TCC), a real estate developer, that was apparently formed in 1987, although the agreement was not reduced to writing and signed until January 1989. Under the agreement, the investors provided about $1.3 million dollars for the development of two tracts of land, one in Vermont and one in New Hampshire. The agreement named plaintiff as the escrow agent for the investors, and made him responsible for collecting the financial contributions of the investors and disbursing the funds to TCC. But according to the agreement plaintiff was "under no obligation or duty to inquire as to the nature of any disbursement by [TCC]." Moreover, once TCC received funds from the investors, there were "no restrictions on [TCC's] use or disbursement" of the money.

Despite the language giving TCC unfettered discretion in its use of the invested funds, the agreement also required TCC to establish, as security for the investment, a $500,000 CD with the Bank of Vermont. The funds would become the property of TCC after TCC fulfilled its contractual obligations. The agreement assigned plaintiff responsibility for setting up the CD, and stated that the account "shall require the signature of a[TCC] representative, [plaintiff] and a neutral third party before disbursement" to TCC.

Four separate CDs were established at the Bank between January and September of 1988 (before the joint venture agreement was actually signed), totalling slightly more than $500,000. Three of these CDs were designated as single-owner accounts in the name of TCC, and required for withdrawal the signatures of plaintiff, David Paul, the president of TCC, and a third party. A fourth CD was initially established in the name of these three signatories, but the name on the account was later changed to TCC. The account applications did not identify plaintiff as an escrow agent or explain that the three-signature requirement was for the protection of investors; indeed, on one of the applications, plaintiff signed as a representative of TCC. The funds for these CDs came from the investors, but plaintiff sent the checks to the Bank to deposit in the accounts. The letters accompanying these checks did not mention plaintiff's status as an escrow agent or refer to the investors or the joint venture agreement in any way. None of the correspondence gave any indication that plaintiff represented anyone other than TCC.

Meanwhile, David Paul's repeated representations to the Bank, which were made because TCC borrowed large sums from the Bank, indicated unambiguously that the CDs belonged to TCC. A letter sent by Paul to the Bank in June 1988 states that TCC would soon "have on deposit with the Bank of Vermont in Certificates of Deposit, $500,000.... [to] secure approximately half the loan [from the Bank to TCC]." In September, TCC's attorney sent the Bank a copy of a resolution adopted by TCC's board of directors; the resolution authorized the $500,000 deposit with the Bank to be held as collateral for TCC's debt to the Bank. Paul also delivered the passbooks for the CDs to the Bank. ² Finally, in October of 1988, Paul executed an "Assignment of Deposit," purportedly assigning the CDs to the Bank for its use in the event TCC defaulted on the loan. The document stated that TCC owned the deposits and had the right to assign them to the Bank.

TCC was consistently in default on its monthly loan payments, and there was no reduction of the principal after October 3, 1988. Moreover, only four property units (valued by the Bank at approximately $160,000 each) were available to secure a debt of over $900,000. In March 1989, Paul and the Bank agreed that the CDs would be used to reduce the loan principal. The Bank withdrew the money in the CDs, using withdrawal slips signed by a Bank officer and Paul, and applied the proceeds to TCC's debt. Plaintiff did not discover that the Bank had set off the CDs against TCC's loan until September 1989.

The parties filed cross-motions for summary judgment. The trial court held, as a matter of law, that TCC owned the CDs, and that the Bank therefore had the right to set off the CDs against TCC's indebtedness. This appeal followed.

This Court reviews a motion for summary judgment using the same standard as the trial court. Hodgdon v. Mt. Mansfield Co., 160 Vt. 150, 158, 624 A.2d 1122, 1127 (1992). Summary judgment is appropriate only when the moving party has demonstrated that there are no genuine issues of material fact and it is entitled to judgment as a matter of law. V.R.C.P. 56(c)(3); State v. G.S. Blodgett Co., 163 Vt. 175, 180, 656 A.2d 984, 988 (1995). In determining whether material facts exist for trial, we must resolve all reasonable doubts in favor of the party opposing summary judgment. Hodgdon, 160 Vt. at 158-59, 624 A.2d at 1127.

Plaintiff first maintains that the trial court improperly resolved material factual issues in ruling that TCC owned the CDs. Plaintiff relies on Beacon Milling Co. v. Larose, 138 Vt. 457, 418 A.2d 32 (1980), where we held that a bank account held jointly in the names of a husband and wife could not be charged to the husband's sole debts merely because his name was on the account. Id. at 460, 418 A.2d at 34. Instead, we remanded the case for the court to determine ownership of the account based on a number of evidentiary issues, including "the circumstances surrounding the creation of the account, the intention of the depositor or depositors, and the source or sources of the funds." Id. Emphasizing that the funds came from the investors, and that the accounts were created as security for his clients' investment, plaintiff argues that, at minimum, the question of ownership should have been resolved at trial.

Plaintiff may be correct that ownership of the CDs should not have been determined on summary judgment. The central issue in this case, however, is not who owned the CDs but whether the Bank had a right to set off the CDs against TCC's loan. We do not agree that the Bank's right to setoff turned on the question of ownership.

In general, a bank has the right to seize deposited funds to reduce or eliminate debts owed to it by the depositor. In Vermont the right to setoff derives from the contractual relationship between the depositor and the bank. See Hale v. Windsor Sav. Bank, 90 Vt. 487, 494, 98 A. 993, 996 (1916) (bank account is basis for contractual relationship between depositor and bank). By placing funds in an ordinary account, a depositor gives the bank legal title to them, and, absent a specific agreement to the contrary, becomes the bank's creditor up to the amount of the deposit. Caledonia Nat'l Bank v. McPherson, 116 Vt. 328, 330, 75 A.2d 685, 687 (1950). As titleholder, the bank has the right to apply the depositor's money to extinguish a matured preexisting debt. Goodwin v. Barre Sav. Bank & Trust Co., 91 Vt. 228, 235, 100 A. 34, 34 (1917). In Goodwin, this Court described the bank's position as that of a lienholder on the customer's deposit. By virtue of this lien, the banker "has the right to set off any matured debt against such funds without direction or authority from such customer." Id. at 235, 100 A. at 34-35.

The right to setoff is not absolute. We recognized in Hale that if a bank knows that a deposit is owned by a third party and not by the depositor, the...