Frierson v. United Farm Agency, Inc.
| Decision Date | 23 February 1989 |
| Citation | 868 F.2d 302,8 U.C.C. Rep. Serv.2d 260 |
| Parties | 8 UCC Rep.Serv.2d 260 Retha D. FRIERSON, Appellee, v. UNITED FARM AGENCY, INC., Appellant. The Merchants Bank, Intervenor Below. Retha D. FRIERSON, Appellee, v. UNITED FARM AGENCY, INC., The Merchants Bank, Appellant. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Steven Mustoe and Richard Ralston, Kansas City, Mo., for appellant.
Cal Hoover, Reno, Nev., for appellee.
Before BOWMAN and MAGILL, Circuit Judges, and BATTEY, * District Judge.
In this case, we address a dispute between a judgment creditor and a bank over a judgment debtor's funds. The case came before the district court on motion by the judgment debtor, United Farm Agency, Inc. (UFA), to quash the judgment creditor's, Retha G. Frierson's (Frierson), garnishment of funds held in UFA's bank accounts at three banks. Merchants Bank (Merchants) intervened, asserting a possessory interest in the funds pursuant to its right of setoff or, in the alternative, under its prior perfected security interests. The district court denied the motions to quash and ordered the funds in all three accounts paid over to Frierson. See Frierson v. United Farm Agency, Inc., 672 F.Supp. 1272 (W.D.Mo.1987). Both Merchants and UFA now appeal. After careful consideration of the issues raised by the various parties, we reverse with respect to the funds in Merchants Bank based on the bank's right of setoff, and let stand the district court's order with respect to the other two accounts.
Frierson obtained a $513,525 judgment against UFA in the United States District Court for the Eastern District of California on June 3, 1985. While awaiting the result of an appeal to the Ninth Circuit, 1 Frierson filed an independent action in federal court in Missouri seeking recognition of the California judgment. The district court granted summary judgment on Frierson's behalf, and her judgment against UFA was registered in the Western District of Missouri on January 9, 1987.
On May 20, 1987, Frierson had summonses of garnishment served on three Missouri banks. Interrogatories directed to the banks revealed that UFA had the following amounts on deposit: Merchants Bank--$74,219.07; Centerre Bank--$965.00; and Country Club Bank--$1,000.00. Merchants claimed that it had a valid perfected security interest in all of UFA's money on deposit and therefore denied that the funds on deposit were owed to or belonged to UFA. Merchants also alleged that contract and common law rights of setoff entitled it to the money in the account. UFA filed two motions to quash the garnishment, claiming that the various accounts were subject to Merchants' prior security interest. Merchants intervened and filed a separate motion to quash when a question arose regarding UFA's standing to quash the garnishments. 2
The district court determined unequivocally that Merchants had a prior perfected security interest in the three deposit accounts. The court found that, because Merchants did not declare the loan in default or follow procedures required by the loan agreement to enforce its U.C.C. and contract rights, Merchants had neither a present right to the funds nor a right to have the garnishment quashed. In addition, the district court found that Merchants could not exercise its common law or contractual setoff rights because the debt had not yet matured when the garnishment summons was served. The court therefore denied the motions to quash the garnishments and awarded the funds in the various accounts to Frierson.
Merchants and UFA now appeal. Merchants argues that the district court should have quashed or dissolved the garnishment of the $74,000 account at Merchants, focusing on Merchants' setoff rights under Missouri law and its rights as a secured creditor. UFA also argues that Frierson should not be able to garnish the accounts because Merchants has a prior security interest in the funds and because allowing Frierson to garnish the accounts would effectively destroy Merchants' security interest.
Under Missouri law, a bank has the right to set off a borrower's deposit accounts against debts owed by that borrower. Smith v. American Bank & Trust, 639 S.W.2d 169, 173 (Mo.App.1982). Before a bank can exercise its setoff rights, however, the borrower's debt must be due and owing. In the case of garnishment, the borrower's debt must be due on the date the garnishment is served. "[A] bank cannot * * * defeat a garnishment on the ground that the depositor owes the bank money on a note not yet due." Prince v. West End Installation Service, 575 S.W.2d 831, 832 (Mo.App.1978).
Merely recognizing that the debt must be due, however, does not help us decide this case. The more important issue is when, exactly, is a debt "due" for purposes of quashing a garnishment? For setoff purposes, Missouri law considers a debt due when the bank has the power to deem the debt due, not when the bank actually exercises that power. Herd v. Ingle, 713 S.W.2d 887, 890 (Mo.App.1986). Under Missouri law, a bank need not take steps to effect a setoff prior to garnishment, but only must show that a default existed. As the Missouri court stated in Herd, "[i]f the note was due, then the bank had the right to a set-off even if at the time of the garnishment they did not know that conditions existed making it due." Id.
The district court reasoned that UFA's debt was not mature or otherwise due and owing when the bank received the garnishment summons because Merchants never declared the loan in default. Therefore, the district court concluded, Merchants could not rely on setoff to quash the garnishment. This conclusion is clearly incorrect. Under Herd, the bank did not have to declare default for the debt to be considered "due" at the time of the garnishment.
Merchants' right of setoff accrued no later than thirty days after registration of the California judgment in Missouri on January 9, 1987. The loan agreement between Merchants and UFA clearly provides for default on UFA's failure to...
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