Edwards v. Northwestern Bank

• Decision Date: 02 January 1979
• Docket Number: No. 7714SC851,7714SC851
• Citation: 250 S.E.2d 651,39 N.C.App. 261
• Court: North Carolina Court of Appeals
• Parties: , 26 UCC Rep.Serv. 548 Rudolph L. EDWARDS, Receiver of Durham Wholesale Catalog Co., Inc. v. The NORTHWESTERN BANK, Alpha Beta Corporation, Empire Properties, Inc., Valco, Inc., Presidential Apartments, Inc., Robert I. Lipton, Abe Greenberg, and C. Paul Roberts.

Page 651

250 S.E.2d 651

39 N.C.App. 261, 26 UCC Rep.Serv. 548

Rudolph L. EDWARDS, Receiver of Durham Wholesale Catalog Co., Inc. v. The NORTHWESTERN BANK, Alpha Beta Corporation, Empire Properties, Inc., Valco, Inc., Presidential Apartments, Inc., Robert I. Lipton, Abe Greenberg, and C. Paul Roberts.

No. 7714SC851.

Court of Appeals of North Carolina.

Jan. 2, 1979.

Randall, Yaeger & Woodson by John C. Randall, Durham, for receiver.

Jordan, Wright, Nichols, Caffrey & Hill by Edward L. Murrelle and Robert D. Albergotti, Greensboro, for The Northwestern Bank.

BROCK, Chief Judge.

In this appeal from the summary judgment in favor of The Northwestern Bank (Bank) the Receiver argues three propositions:

1. That the Bank failed to show that there was no genuine issue as to any material fact and that it was entitled to judgment as a matter of law with respect to the Receiver's assertion that the Bank permitted the fiduciary of Durham Wholesale to divert and misapply $250,000.00 of corporate funds with actual knowledge that the fiduciary was committing a breach of his obligation, or with knowledge of such facts that the Bank's action in paying the check amounted to bad faith. See G.S. 32-9.

2. That the Bank failed to show that there was no genuine issue as to any material fact and that the Bank was entitled to judgment as a matter of law with respect to the Receiver's assertion that the Bank's acceptance of an assignment of a note and deed of trust from Durham Wholesale and the transfer to the Bank of $50,813.00 by Durham Wholesale constituted either an unlawful preference, a fraudulent conveyance, or an assignment for the benefit of creditors.

3. That the Bank failed to show that there was no genuine issue as to any material fact and that the Bank was entitled to judgment as a matter of law with respect to the Receiver's assertion that the Bank became a joint venturer in the liquidation of the assets of Durham Wholesale and thereafter breached its fiduciary responsibility as such joint venturer, or alternatively that the Bank breached its fiduciary obligation arising from its control and domination of Durham Wholesale's affairs.

For the reasons hereinafter stated we affirm the trial court's grant of summary judgment with respect to the second and third propositions. We reverse the trial court's grant of summary judgment with respect to the first proposition and remand for trial upon the issues raised thereby.

1. Did the Bank show that there was no genuine issue as to any material fact and that it was entitled to judgment as a matter of law with respect to the Receiver's assertion that it permitted the fiduciary of Durham Wholesale to divert and misapply $250,813.00 of corporate funds with actual knowledge that the fiduciary was committing a breach of his obligation, or with knowledge of such facts that the Bank's action in paying the check amounted to bad faith? We answer in the negative and hold that the trial court committed error in granting summary judgment for the Bank upon this question.

According to the record on appeal before us the following was shown by the Receiver: On 9 October 1973 the organizational meeting of Durham Wholesale was held, at which time A. Greenberg was elected President and Chairman of the Board, and C. Paul Roberts was elected Vice-President. On that day 500 shares of stock were issued at $1.00 per share: 250 shares to A. Greenberg and 250 shares to C. Paul Roberts. A Pro-Forma Balance Sheet statement dated 31 October 1973 signed by Greenberg and Roberts, showing accounts payable for inventory in the sum of $615,000.00, was submitted to defendant Bank by Greenberg and Roberts. On 1 November 1973 a Certified Inventory Control Agreement was entered into between Durham Wholesale, defendant Bank, and Lawrence Systems, Inc. On 2 November 1973 the Board of Durham Wholesale authorized Greenberg to borrow $500,000.00 from defendant Bank and execute a security agreement. Both Greenberg and Roberts were active in negotiating the loan through Atkinson, City Executive of defendant Bank's Durham Branch. On 5 November 1973 Greenberg and Roberts agreed to maintain a compensating balance of $100,000.00 in either individual or corporate balances. Greenberg was known by Atkinson, of defendant Bank, to be the principal of Valco, Inc., which maintained an account with defendant Bank, and Roberts was known by Atkinson, of defendant Bank, to be the principal of Empire Properties, Inc., which maintained an account with defendant Bank. Greenberg, Roberts, and their families were known by Atkinson, of defendant Bank, to be involved in multifarious corporate operations in Durham County. By letter dated 6 November 1973 the Certified Public Accountant for Durham Wholesale wrote a letter stating that the value of inventory in the warehouse was in excess of $600,000.00; this letter was delivered to defendant Bank. On or about 6 November 1973 a Security Agreement-Floating Lien on Inventory-Variable Interest Rate agreement for a $500,000.00 line of credit to finance inventory was executed by Durham Wholesale and delivered to defendant Bank; Greenberg and Roberts signed as personal guarantors. On 6 November 1973 a Financing Statement was filed showing Durham Wholesale as the debtor and defendant Bank as creditor covering "all inventory and all inventory hereafter acquired and all additions and accessions thereto, and all proceeds of its sale or disposition." On 6 November 1973, $400,000.00 was advanced by defendant Bank to Durham Wholesale upon its note for $400,000.00 issued on the $500,000.00 line of credit. On 6 November 1973 Greenberg executed a Durham Wholesale check to Empire Properties in the sum of $250,000.00. On 7 November 1973, upon instructions from Atkinson, of defendant Bank, the commercial loan teller of defendant Bank issued four Cashier's Checks made payable to Empire Properties in exchange for the Durham Wholesale check made payable to Empire Properties. The four cashiers checks were dated 7 November 1973 and were made payable in the following sums: $50,000.00, $60,000.00, $40,000.00, and $100,000.00. The $50,000.00 check was endorsed Empire Properties, by Roberts, and negotiated to one James W. Tyndall who in turn negotiated it to defendant Bank. The $60,000.00 check was endorsed Empire Properties, by Roberts and negotiated to defendant Bank. The $40,000.00 check was endorsed Empire Properties, by Roberts and negotiated to Liberty Bank & Trust Co., Durham, by Roberts for cash. The $100,000.00 check was endorsed Empire Properties, by Roberts, negotiated to Valco, Inc., endorsed Valco, Inc., by Greenberg, and negotiated to defendant Bank. From the present record it appears that $250,000.00 of the $400,000.00 loan to finance inventory may have been immediately applied to uses other than that for which it was intended, and the general creditors of Durham Wholesale were faced with a $400,000.00 lien on Durham Wholesale's inventory without corresponding assets in Durham Wholesale with which to pay general creditors. It also appears from the present record that Empire Properties was a corporation dealing in real estate and not in inventory supplies.

In its motion for summary judgment defendant Bank stated it was relying upon "the deposition of the plaintiff heretofore taken on October 15, 1976, and upon the affidavit of Fenton S. Cunningham submitted herewith." The deposition of the plaintiff taken on October 15, 1976, is not included in the record on appeal. We, therefore, conclude that it was of no value in establishing defendant Bank's claim to summary judgment. The affidavit of Cunningham, a Vice-President of defendant Bank, constitutes no more than a general denial of knowledge on the part of defendant Bank of any improper use of the proceeds of the $400,000.00 loan which was made to Durham Wholesale for the purpose of financing its inventory.

Although the issues discussed under this first proposition presented on appeal are not clearly alleged in the complaint, it appears that the parties addressed it both on the motion for summary judgment and on this appeal without objection. We will therefore assume for purposes of this appeal that the complaint has been amended by consent to allege the issues discussed hereunder.

North Carolina General Statutes, Section 32-9 provides:

"If a check is drawn upon the account of his principal in a bank by a fiduciary who is empowered to draw checks upon his principal's account, the bank is authorized to pay such check without being liable to the principal, Unless the bank pays the check with actual knowledge that the fiduciary is committing a breach of his obligation as fiduciary in drawing such check, or with knowledge of such facts that its action in paying the check amounts to bad faith. If, however, such a check is payable to the drawee bank and is delivered to it in payment of or as security for a personal debt of the fiduciary to it, the bank is liable to the principal if the fiduciary in fact commits a breach of his obligation as fiduciary in drawing or delivering the check." (Emphasis added.)

Under the provisions of this statute the defendant Bank would be liable to the principal (Durham Wholesale) if the defendant Bank paid the 6 November 1973 check for $250,000.00 drawn on the principal's account by Greenberg, the fiduciary, with actual knowledge that the fiduciary was committing a breach of his obligation as fiduciary in drawing such check for a purpose other than to finance the principal's inventory, or if defendant Bank paid said check with knowledge of such facts about the payee or the purpose of the check that its action in paying the check amounted to bad faith. Under the provisions of G.S. 32-9 the existence of actual knowledge, or the existence of knowledge of such facts that its action in paying the check amount to bad faith, or both, would render defendant Bank liable to the principal (Durham Wholesale). The plaintiff Receiver...