In re Castletons, Inc.
| Decision Date | 28 February 1992 |
| Docket Number | No. 91-C-0462-S.,91-C-0462-S. |
| Parties | In re CASTLETONS, INC., Debtor. Mary Ellen SLOAN, as Trustee for the Debtor, Castletons, Inc., Appellant, v. ZIONS FIRST NATIONAL BANK, N.A., Appellee. |
| Court | U.S. District Court — District of Utah |
Steven H. Gunn, Salt Lake City, UT, for appellant.
Jeffrey L. Shields, Callister, Duncan & Nebeker, Salt Lake City, UT, for appellee.
This matter is before the court on appellant Mary Ellen Sloan's ("Trustee") appeal from the bankruptcy court's ruling of summary judgment of April 5, 1990 in favor of appellee Zions First National Bank ("Zions"), and on the Trustee's appeal of the bankruptcy court's Order and Judgment entered at the conclusion of the trial.
Castletons, Inc. ("Castletons") was a clothing retailer operating stores in Davis, Salt Lake, and Utah Counties in the State of Utah. Castletons filed a petition under Chapter 11 in the United States Bankruptcy Court for the District of Utah on May 15, 1987.
Several years prior to filing under Chapter 11, Castletons had obtained a line of credit from Zions. A prior line of credit was renewed on January 30, 1986, by Castletons' signing a new note in the principal sum of $3,600,000. Zion's line of credit note of January 30, 1986 was secured by a security interest in all of Castletons' inventory and accounts receivable. On May 30, 1986, Castletons renewed the earlier note by signing a new line of credit note in the principal sum of $3,600,000 which was due "on demand or if no demand then April 30, 1987." As of February 25, 1987, the line of credit remained fully drawn, and as a result, Zions was not making any further advances. In addition to the line of credit note, on October 31, 1986, Castletons executed a note in the principal sum of $100,000 in renewal of an earlier note. It also executed a new note evidencing an additional loan of $500,000 on November 20, 1986. An outstanding balance of $250,000 owing on the November 20, 1986 note was renewed with a new note dated February 26, 1987. The notes were secured by a lien on Castletons' inventory, accounts receivable, contract rights and personal property "now or hereafter" in Zions' possession.
In early 1987, Castletons began closing three of its stores, and undertook the liquidation of a large portion of its inventory. Castletons made substantial payments against the three notes as a result of the liquidation. Prior to filing under Chapter 11, it paid $991,668.75 against the line of credit note and $253,014 against the $500,000 note. During this period of liquidation, Castletons continued to receive new inventory in its other stores and to generate new accounts receivable. During this period, Castletons generated new accounts receivable in the face amount of $911,868.20, and obtained new inventory having a retail value of $3,219,916 which became additional collateral for payment of Zions' loans.
In May, 1987, Zions froze, then offset against, Castletons' checking accounts held at Zions, and thereby obtained $352,494.73.
On April 30, 1987, Castletons drew a check in the sum of $214,303.64, payable to the Utah State Tax Commission, to pay Castletons' quarterly tax obligation. On May 5, 1987, the check was deposited in the Tax Commission's account at First Security Bank. When the check was presented to Zions the following day, it refused to honor it and returned the check to First Security on May 8, after the expiration of the midnight deadline imposed under § 70A-4-302 of Utah's version of the Uniform Commercial Code. The return was also untimely under the rules of the Salt Lake Clearinghouse of which Zions is a member.
As a result of Castletons' payments on Zions' notes and as a further result of the setoffs against Castletons' accounts, Zions was able to reduce Castletons' debt from $3,979,127 on February 14, 1987, to $3,054,234.64 on the date of the petition.
On July 2, 1987, Zions and Castletons entered into a Stipulation and Agreement Concerning Use of Cash Collateral (the "Stipulation"). Under the terms of the Stipulation, which was approved by the bankruptcy court, Castletons came under the control of a liquidator, Buxbaum, Ginsberg & Associates ("Buxbaum"). Under the Stipulation, all proceeds of sale of Castletons' inventory were to be deposited into a "control account" controlled by Zions. Zions agreed to authorize payment of taxes from that account for the period from June 28, 1987 to September 19, 1987.
In July, 1987, Castletons prepared a check for $101,399.07 drawn on the control account payable to the Utah State Tax Commission for the quarter beginning April 1, 1987. Zions refused to sign the check when presented for its co-signature.
Under Buxbaum's direction the liquidation proceeded with all but $177,115.91 of the loans from Zions being paid off as of August 9, 1990.
Castletons' bankruptcy case was converted to a Chapter 7 liquidation by an order of the bankruptcy court dated September 7, 1988. The Trustee commenced this adversary proceeding on October 5, 1989.
On January 29, 1990, the Trustee sought summary judgment against Zions based upon Zions' late return of the Tax Commission check. The late return claim arises under Utah Code Ann. § 70A-4-302,1 which provides that a payor bank is liable to pay a check which it retains beyond its midnight deadline.
The bankruptcy court concluded that the liability imposed under § 70A-4-302 was a penalty within the meaning of § 78-12-29(2)2 and that, as a result, the late return claim was time-barred. The issue the Trustee raises is whether the bankruptcy court's application of the one year statute of limitations (§ 78-12-29(2)) was in error. The court reviews this issue de novo Morgan v. Mobil Oil Corp., 726 F.2d 1474 (10th Cir.1984).
The Trustee contends the bankruptcy court erred in applying the one year statute of limitation to her late return claim. She urges that the lower court's conclusion, that the tardy return claim was governed by the one year statute of limitations, was based on the view that the claim arose under a penal statute, whereas in reality the claim arises under a statute which redresses a private injury, and, therefore, falls under the three year statute of limitations found in Utah Code Ann. § 78-12-26(4).
Zions responds that the bankruptcy court correctly dismissed the Trustee's late return claim because it was filed after the expiration of the applicable statute of limitations. Zions urges that Utah Code Ann. § 70A-4-302 imposes strict liability on a payor bank that fails to return a check by the midnight deadline and that the strict liability imposed is a penalty within the meaning of Utah Code Ann. § 78-12-29(2).
The threshold issue is whether the liability imposed by § 70A-4-302 imposes a "penalty" for purposes of § 78-12-29(2). "A penalty is a sum of money which the law exacts the payment of by way of punishment for doing some act which is prohibited, or omitting to do some act which is required to be done." State v. Franklin, 63 Utah 442, 226 P. 674, 676 (1924). Section 70A-4-302 clearly imposes liability on the payor bank for a late check "whether properly payable or not." Accordingly, the court is not persuaded by the Trustee's argument that § 70A-4-302 does not impose a fine but is simply intended to indemnify a payee who has been damaged by the payor bank's tardy return of a check. The court is of the opinion that Utah Code Ann. § 70A-4-302 imposes a penalty or forfeiture and is, therefore, governed by the statute of limitations. Citibanc of Alabama/Fultondale, v. Tricor Energies, Inc., 493 So.2d 1344; 1 U.C.C.Rep.2d 1571, 1580 (Alabama 1986) (". . . the rule of strict liability of U.C.C. § 4-302 is all the more reason to hold that a suit for violation of the midnight deadline, as such, comes under the statute of limitations for a statutory penalty, not that for conversion.") (emphasis original). See also Carlson v. McCoy, 566 P.2d 1073, 1075 (Colo.1977) (). Moreover, the one year limitation period of Utah Code Ann. § 78-12-29(2) is consistent with the public policy of Utah Code Ann. § 70A-4-302 to encourage the prompt settlement of checks. Therefore, the court concludes that the bankruptcy court correctly applied the one-year statute of limitations to the Trustee's late return claim.
Pursuant to 11 U.S.C. § 547, the Trustee sought to set aside, as preferential transfers, payments made to Zions and attachments of Zions' liens occurring within ninety days of Castletons' bankruptcy petition. At the conclusion of the Trustee's case, the court granted Zions' motion to dismiss as to the cash payments which the debtor made to Zions, but denied the motion as to inventory and accounts receivable to which Zions' security interest attached during the preference period. However, at the close of trial, the court ruled that Zions had proved the elements of its affirmative defense under 11 U.S.C. § 547(c)(5) relating to the new collateral. The bankruptcy court, therefore, dismissed the remainder of the Trustee's preference claim.
The Trustee first asserts that the bankruptcy court contradicted itself on the issue of whether she met her initial burden under 11 U.S.C. § 547(b)(1) through (4)(A). On October 12, 1990, the bankruptcy court ruled on Zions' motion to dismiss, finding that the trustee had proven all elements of § 547(b)(1), (2), (3), and (4)(A). Referring to cash payments, the court stated ...
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