Federal Deposit Ins. Corp. v. Pioneer State Bank

• Decision Date: 29 November 1977
• Citation: 155 N.J.Super. 381,382 A.2d 958
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, Liquidator of the Bank of Bloomfield, formerly organized and existing under the laws of the State of New Jersey, Plaintiff, v. PIONEER STATE BANK, a banking institution organized and existing under thelaws of the State of New Jersey, Defendant.
• Court: New Jersey Superior Court

Page 381

155 N.J.Super. 381

382 A.2d 958

FEDERAL DEPOSIT INSURANCE CORPORATION, Liquidator of the Bank of Bloomfield, formerly organized and existing under the laws of the State of New Jersey, Plaintiff, v. PIONEER STATE BANK, a banking institution organized and existing under thelaws of the State of New Jersey Defendant.

Superior Court of New Jersey, Law Division.

Nov. 29, 1977.

Parsons, Canzona, Blair & Warren, Red Bank, for plaintiff (John Warren, Jr., Red Bank, of counsel).

Giordano, Halleran & Crahay, Middletown, for defendant (John R. Orlovsky, Middletown, of counsel).

YANOFF, J. C. C., Temporarily Assigned.

The issues herein arise as the result of the insolvency of the Bank of Bloomfield (Bloomfield).

On January 10, 1976 the Commissioner of Banking of New Jersey, by reason of such insolvency, took possession of the business and property of Bloomfield. On the same day the Commissioner transferred certain of the assets of Bloomfield to First National State Bank of New Jersey (assuming bank), which assumed some of the liabilities of Bloomfield, primarily to depositors, and to Federal Deposit Insurance Corporation (FDIC), which agreed to indemnify assuming bank and hold it harmless from specified claims. Among the assets transferred by the Commissioner to FDIC were two certificates of deposit made by defendant Pioneer State Bank (Pioneer), each in the amount of $100,000, one due December 1, 1975, and the other December 30, 1975.

FDIC sues to recover upon these certificates.

Pioneer counterclaims for the sum of approximately $300,000, by reason of an agreement dated June 19, 1975 arising from the sale of machinery leasing agreements (also loans) by Bloomfield to Pioneer for the sum of $589,068.20. This sale was "with recourse" under an agreement in which Bloomfield undertook to repurchase any loan delinquent for 60 days and to indemnify Pioneer for losses resulting from such loans. The minutes of Bloomfield make no reference to the repurchase agreement. However, the minutes of May 27, 1975 reflect the considerations which motivated the board of that bank in authorizing its president to sell some of the bank's assets. The figure that Mr. Prodan, president of the bank, mentioned at that meeting as attributable to assets to be sold was $839,000. As to these he stated that Bloomfield had already taken the better part of the interest attributable thereto so that it would make a profit, presumably on a sale of $839,000 of assets, of $48,848.62. The second consideration was that the transaction would supply Bloomfield with cash for other loans. At the meeting Prodan pointed out that the large banks would not deal with Bloomfield, but indicated that Pioneer would enter into the transaction. The result was passage of a resolution "for the proposal of the sale of the portfolio, as outlined, and leave it to Mr. Prodan to work out."

Both parties move for summary judgment on the basis of affidavits which set forth the foregoing. Pioneer bases its claim upon breach of Bloomfield's repurchase agreement. It asserts, also, a "banker's lien" upon funds represented by the certificates of deposit. In response FDIC urges that the repurchase agreement is invalid. Both state and federal law are advanced in support of this contention.

The argument under New Jersey law has two aspects. One is that N.J.S.A. 17:9A-213.1 renders illegal all bank guaranties, citing New Jersey Bank v. Palladino, 146 N.J.Super. 6, 368 A.2d 943 (App.Div.1976), certif. den. 73 N.J. 64, 372 A.2d 329 (1977). Another is that Pioneer failed to honor the certificates of deposit, in violation of the "midnight deadline" rule (N.J.S.A. 12A:4-302). Pioneer, in turn, relies upon that aspect of Palladino which holds the guarantying bank liable on equitable principles for benefit obtained.

N.J.S.A. 17:9A-213.1 reads:

Except as in this act or otherwise by law provided, no bank or savings bank shall have power to guarantee the obligations of others; or to insure or indemnify against the acts, omissions, undertakings, liabilities or losses of others. (emphasis added)

The facts in Palladino were that Palladino was indebted to the First State Bank of Hudson County in the sum of $60,000. He borrowed $100,000 from the New Jersey Bank on the security of a guaranty executed by the First State Bank. He used the proceeds of the loan to reduce his indebtedness to the First State Bank. On default of his obligation to the New Jersey Bank that bank sought payment from the First State Bank. The trial judge entered judgment against both Palladino and the First State Bank. The Appellate Division reversed, holding that the guaranty was "an illegal act and void." (at p. 13, 368 A.2d 943.) It held also that the defendant bank was not estopped to assert the defense of illegality. Additionally, it ruled:

However, the application of equitable principles may prevent one party to such a transaction from retaining a benefit or unfair advantage over another received as a result thereof. Therefore, if defendant-bank received a benefit from the illegal transaction, it should be required to repay the sums so received. (at 14, 368 A.2d 947)

It is significant that in this transaction the guarantying bank incurred a liability which did not involve assets which it already had and which it was selling.

Invoking federal law, FDIC cites 12 U.S.C.A. § 1819, which provides in part that "(a)ll suits of a civil nature at common law or in equity to which the (FDIC) shall be a party shall be deemed to arise under the laws of the United States * * *," and 12 U.S.C.A. § 1823(e), second paragraph, which reads:

No agreement which tends to diminish or defeat the right, title or interest of the Corporation in any asset acquired by it under this section, either as security for a loan or by purchase, shall be valid against the Corporation unless such agreement (1) shall be in writing, (2) shall have been executed by the bank and the person or persons claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the bank, (3) shall have been approved by the board of directors of the bank or its loan committee, which approval shall be reflected in the minutes of said board or committee, and (4) shall have been continuously, from the time of its execution, an official record of the bank.

Two issues can be disposed of readily. FDIC cannot be held liable for an affirmative recovery on the counterclaim by Pioneer. It had no dealings with Bloomfield. It acquired some, but by no means all, of Bloomfield's assets by transfer from the Commissioner. It is not the successor, receiver or liquidator of that bank. Nor is there a contractual provision by which it assumed any liability of Bloomfield; its undertakings run only to the First National State Bank.

Whether Pioneer violated the midnight deadline rule is not significant. If it did not pay the certificates of deposit, FDIC has a civil claim against it which is no stronger than its suit on the obligations created by the terms of the certificates. FDIC's argument that Pioneer's failure to observe the midnight deadline rule contemporaneously with the acquisition of the asset constituted a conversion, is not meaningful. The claim on the certificates of deposit is no more than a chose in action which Pioneer could satisfy out of its general assets. Pioneer had nothing specific of Bloomfield's which it could convert.

It is important to determine whether Pioneer has a right of set-off against the certificates of deposit. I conclude that it does. A bank has a right of set-off against all monies or funds in its possession belonging to a depositor to secure the payment of the depositor's indebtedness to the bank. Hudson United Bank v. House of Supreme, 149 N.J.Super. 153, 156, 373 A.2d 438 (Ch.Div.1977); Marmon Fanning Co. v. Peoples Nat'l Bank of Elizabeth,106 N.J.Eq. 170, 173, 150 A. 402 (E. & A. 1929); 5A Michie, Banks and Banking (rev. perm. ed. 1973), § 114 at 300. This is commonly referred to as a "banker's lien," although technically it is not a lien, but an application of payment. If regarded as a lien, it is a "possessory lien," only entitling the bank to retain possession of the deposit for application of a proper set-off. 5A Michie, supra at 304-305.

The right to set-off arises only when the deposit is general, i. e., in the usual course of business without restriction. In such case the deposit becomes the property of the bank and the depositor becomes a creditor of the bank for the amount deposited. Maurello v. Broadway Bank & Trust Co., 114 N.J.L. 167, 172-173, 176 A. 391 (E. & A. 1934); 10 Am.Jur.2d, Banks, § 360 at 320 (1963). ¹

To establish a right to set-off, three conditions must be satisfied: the fund to be set off must be the property of the debtor, the fund must be deposited without restrictions, and the existing indebtedness must be due and owing. 5A Michie, Banks and Banking, § 115a, at 306. In addition, there must be a mutuality of obligation between the debtor and his creditor, as well as between the debt and the fund on deposit. John Wills, Inc. v. Citizens Nat'l Bank of Netcong, 125 N.J.L. 546, 16 A.2d 804 (E. & A. 1940). As successor to Bloomfield's rights in the certificates of deposit, FDIC took, subject to any set-off against Bloomfield. Cf. Tumarkin v. First National State Bank of N.J., 142 N.J.Super. 304, 361 A.2d 550 (App.Div.1976), certif. granted 72 N.J. 459, 371 A.2d 63 (1976). A certificate of deposit is a written acknowledgement by a bank of the receipt of a sum of money on deposit with the bank which the bank promises to pay, creating a debtor and creditor relationship. 10 Am.Jur.2d, Banks, § 455 at 426 (1963). There are normally no extra conditions setting aside the depositor's specific funds, and there were no such contractual conditions in the present case. Although no New Jersey case speaks to this issue, since no special condition was attached to the...