Decision Date05 January 1978
Docket NumberCiv. A. No. J76-305(C).
Citation463 F. Supp. 169
PartiesA. Spencer GILBERT, III, Trustee in Bankruptcy for Char-Mac Enterprises, Inc., Trustee in Bankruptcy for Charles E. Duran, and Trustee in Bankruptcy for Rachel R. Duran, Plaintiff, v. FIRST NATIONAL BANK OF JACKSON, MISSISSIPPI, Defendant.
CourtU.S. District Court — Southern District of Mississippi

A. Spencer Gilbert, III, David H. Nutt, Jackson, Miss., for plaintiff.

W. F. Goodman, Jr., Thomas C. Gerity, Watkins & Eager, Jackson, Miss., for defendant.


This controversy involves the propriety and legality of the action of the First National Bank in applying certain fund as a set off against a secured debt of the bankrupts to the bank. Charles E. Duran was the owner of several different corporations, including Char-Mac Enterprises, Inc., and was engaged in a practice of kiting checks between Citizens National Bank (CNB) and First National Bank (FNB), both in Jackson, Mississippi. The plaintiff contends that the course adopted by First National Bank in satisfying its indebtedness was done with the actual intent to hinder, delay or defraud the creditors of the bankrupts in violation of 11 U.S.C. § 107d(2)(d).1

The defendant denies any intent to hinder, delay, or defraud creditors but insists that its actions at all times were in keeping with its legal rights. Charles E. Duran, acting for his several corporations and engaged in a vast dollar amount of transactions, in the case at bar would draw checks on CNB and deposit them in FNB for collection without any kind of authority or approval from CNB and in such manner build a fictitious balance on deposit in the bankrupts' account at FNB until such fraud was discontinued and stopped. On April 2, 1974, FNB became suspicious of Duran's kiting activities. Thus for approximately two days, or through April 4, 1974, it continued to accept deposits through CNB while discontinuing paying out any withdrawals from FNB. On April 4, 1974, FNB discontinued accepting any deposits drawn by the bankrupts through CNB. On April 9, 1974, FNB utilized a provision in its secured notes of the bankrupts to accelerate and mature its indebtedness and to use the accumulated balance of bankrupts' accounts with the bankrupts to pay their indebtedness in the amount of $496,241.40.2

First National Bank exercised its option under the conditions of said notes to accelerate and declare due and payable all of the obligations of said bankrupts. Under the circumstances and conditions existing between FNB and with such notes as FNB had which CNB sought to have considered as knowledge of such check kiting practices of the bankrupts, CNB sued FNB for stopping payment on those checks drawn on FNB after FNB stopped payment thereon while continuing to receive deposits into said account for approximately two days. Citizens National Bank contended that FNB owed it the courtesy, if not the duty, to advise it as to what Duran was suspected of doing in connection with such kiting option. The Chancery Court of Hinds County sustained a demurrer to said bill of complaint shown in this record, and the Supreme Court of Mississippi affirmed said decision which in effect held that these two banks were acting in competition with each other and dealt at arm's length with each other, and that FNB had no duty or obligation of any kind to treat CNB as a fiduciary.3

That position of these two banks has not been altered or changed in any respect by anything subsequently done. Thus, this Court is confronted with a situation where the question before the Court involving the rights of the Trustee in Bankruptcy of these bankrupts to have set off the deposits in FNB against the established obligations of these bankrupts is presented. The question of set off was not involved in the proceeding but could have been involved between the parties and their privies to that state litigation.4

This case involves the same funds which were involved in that state case, and these bankrupts and their trustee are certainly privies thereto. The question of set off between the parties to the instant case was not before the Court in the bill of complaint and judgment of the trial court on the demurrer and in the Supreme Court of Mississippi on its affirmance of that final decree in the Chancery Court of Hinds County, Mississippi.

The principle of set off in a case of this kind has been before the Court on many occasions and equity has always recognized and applied the doctrine in wholesome instances. There is simply nothing to be found as an ultimate fact which will support any contention of fraud or unfairness just because FNB suspected Duran of kiting checks and thus ballooning his deposits with FNB even though it continued to allow Duran to make deposits into said account, stopped all cashing of checks on said account. First National Bank simply had no fiduciary relationship with CNB and was not obliged to reveal to it what it knew and what it suspected since CNB was a competitor in active competition with it at all times during every phase of its activities involving these checks of Duran drawn on CNB and deposited in his accounts with FNB. The plaintiff charged and must prove by the greater weight of the more convincing evidence that defendant acted as it did with intent to hinder, delay, or defraud the creditors of the bankrupts. That it has not done in this case.5

The Trustee in Bankruptcy as plaintiff has presented to this Court a question of fact for its resolution. The Trustee contends and must prove to prevail that the defendant under these circumstances before the Court acted with actual intent as distinguished from intent presumed in law to hinder, delay, or defraud either existing or future creditors of these bankrupts. That it has not done.6

The plaintiff, as the duly appointed, qualified and acting Trustee of these three bankrupts, has instituted a five count complaint in this Court on October 15, 1976 and seeks to recover from FNB a large sum of money. This Court has heard and considered this case extensively, together with excellent briefs of counsel, and is of the opinion and so holds that the plaintiff has not established his claim by the greater weight of the more convincing evidence, but the evidence and testimony in this case has demonstrated to this Court that the complaint in its entirety is without merit and should be dismissed. The complaint of the plaintiff in this case is without merit and will be dismissed at his cost.

A judgment accordingly may be prepared and presented to the Court for entry within five days under the rules of this Court.

1 11 U.S.C.A. § 107d(2)(d) provides: "Every transfer made and every obligation incurred by a debtor within one year prior to the filing of a petition initiating a proceeding under this title by or against him is fraudulent (a) as to creditors existing at the time of such transfer or obligation, if made or incurred without fair consideration by a debtor who is or will be thereby rendered insolvent, without regard to his actual intent; or (b) as to then existing creditors and as to other persons who become creditors during the continuance of a business or transaction, if made or incurred without fair consideration by a debtor who is engaged or is about to engage in such business or transaction, for which the property remaining in his hands is an unreasonably small capital, without regard to his actual intent; or (c) as to then existing and future creditors, if made or incurred without fair consideration by a debtor who intends to incur or believes that he will incur debts beyond his ability to pay as they mature; or (d) as to then existing and future creditors, if made or incurred with actual intent as distinguished from intent presumed in law, to hinder, delay, or defraud either existing or future creditors."

2 On the face of each collateral note signed by the bankrupts to FNB is the following provision: ". . . Upon the happening of any of the following events, each of which will constitute a default hereunder, all liabilities of Maker to Bank shall become immediately due and payable at the option of Bank; . . . (5) determination by any officer of Bank that a material adverse change has occurred in the financial condition of Maker or any party hereto. Upon occurrence of any such event or at any time thereafter, Bank shall have the remedies of a secured party under the Uniform Commercial Code of Mississippi . . .

"Bank shall have a security interest in the moneys or property at any time in possession of Bank belonging to Maker or any other party liable hereon and any deposit due by Bank to Maker or any other such par...

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