In re Computer Input Services, Inc., Bankruptcy No. 83-01361K
| Citation | 33 BR 292 |
| Decision Date | 20 September 1983 |
| Docket Number | Adv. No. 83-1511K.,Bankruptcy No. 83-01361K |
| Parties | In re COMPUTER INPUT SERVICES, INC., Debtor. FIRST NATIONAL BANK OF BOSTON, Plaintiff, v. COMPUTER INPUT SERVICES, INC., Defendant. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Neal D. Colton, Karen L. Senser, Philadelphia, Pa., for defendant/debtor.
Jack B. Justice, Philadelphia, Pa., for Official Unsecured Creditors' Committee.
Marjorie O. Rendell, Philadelphia, Pa., for plaintiff.
Theodore J. Krulwich, New York City, for National Shoes, Inc.
Jerry S. Cohen, Washington, D.C., for Service Station Dealers Association of Am.
Computer Input Services, Inc. ("CISI") is a data processing company which filed a voluntary Chapter 11 petition on March 31, 1983.
Prior to April 13, 1983, CISI operated a data processing service center for retail merchants who contracted with CISI to handle their VISA and Mastercard credit transactions. The operations of the so-called "credit card division" ceased on April 13, 1983, when the instant controversy arose.
At issue is the debtor's Application for Authority to Settle an Adversary Proceeding with the First National Bank of Boston ("FNBB"). FNBB is a national banking association with its principal office in Boston, Massachusetts. CISI maintains two (2) bank accounts with FNBB. One of these is the account from which FNBB made disbursements to retail merchants who had submitted charge slips to CISI for collection processing ("The charge processing account").
On April 13 and 14, 1983, FNBB made electronic disbursements from this account of $294,000.00 to various retail merchants pursuant to instructions on magnetic tapes sent by CISI to FNBB. These disbursements created an overdraft on CISI's account of $292,196.00, which FNBB now seeks to collect by means of the above-captioned adversary proceeding.
CISI applied to this Court for its approval to settle the adversary proceeding with FNBB and three (3) parties objected.
The objecting parties are: (1) National Shoes, Inc.; (2) the Service Station Dealers Association of America; and (3) the Official Unsecured Creditors' Committee.
National Shoes, Inc. and the Service Station Dealers Association of America filed official objections to CISI's Application prior to the July 7, 1983 hearing. National Shoes, Inc. is a retail merchant serviced by CISI's credit card division and holder of an unsecured post-petition claim against CISI. The Service Station Dealers Association represents seventy-seven (77) service station merchants who were serviced by CISI's credit card division and hold unsecured post-petition claims against CISI.
At the July 7, 1983 hearing on the Application, counsel for both National Shoes, Inc. and the Service Station Dealers Association of America were present. Extensive testimony was given by the debtor concerning its operations. At the conclusion of the hearing, the debtor and the two (2) objecting parties of record were ordered to submit proposed findings of fact, conclusions of law, and memoranda of law.
CISI and National Shoes, Inc. filed the above-ordered pleadings, but the Service Station Dealers Association did not; instead, the Association adopted by reference those pleadings filed by National Shoes, Inc.
The third objecting party, the Official Unsecured Creditors' Committee, voiced an objection on July 18, 1983, eleven (11) days after completion of the hearing. Counsel for the Committee sent the Court a letter stating that notice of the hearing had never been received by the Committee and attaching an unsigned copy of the Committee's objection.
The adversary docket shows that this objection was never filed by Counsel for the Committee. Hence, the objection of the Committee is not part of the official record in this adversary proceeding.
After review of the memoranda filed by the debtor and the two (2) objecting parties, the Court will grant debtor's Application and permit the above-captioned adversary proceeding between FNBB and the debtor to be settled according to the proposed terms. Before discussing the proposed settlement agreement between CISI and FNBB, however, this Court will describe the business operations of the debtor in detail to show how the $292,196.00 overdraft in CISI's account occurred.
All of the retail merchants utilizing CISI's services have charge slip processing contracts with CISI. These contracts are known as "Retail Merchant Agreements." National Shoes, Inc. has such an "Agreement" with CISI, as do the various service station dealers represented by the Service Station Dealers Association of America.
Also on the same day, CISI sent FNBB a copy of the magnetic tape with instructions that, after three (3) days, FNBB should disburse the funds from CISI's account to those retail merchants involved in the recorded transactions.7
Testimony from the July 7th hearing showed that funds wired to FNBB from Louisville were traceable to each individual transaction recorded on the magnetic tape.8
FNBB used the New England Automated Clearing House Association ("NEACH") to disburse money to the retail merchants. The disbursement process through NEACH took three (3) days. On the first day, NEACH credited money received from CISI's account at Louisville to CISI's account at FNBB. On the second day, NEACH received, by electronic transmission, the credit information which it needed for the following day's disbursements. On the third day, NEACH disbursed money to the appropriate retail merchants and then electronically debited CISI's FNBB account for the same amount.9
CISI's decision to discontinue the operations of its credit card division, and the ensuing events which occurred on April 13, 1983, came about as a result of recommendations made by an outside consultant. The consultant reported to CISI that the division was suffering losses and that its operations should be discontinued as soon as possible.10 He also informed CISI that there were insufficient funds to cover the credit card charge slips which had been submitted to CISI for processing.11 Based on this information, CISI discontinued the credit card division's operations on April 13, 1983.
CISI immediately sent mailgrams to all retail merchants with whom it had processing contracts stating that the credit card division was discontinued, effective as of the close of business on April 12, 1983, and that VISA and Mastercard charge slips would no longer be processed.12
Also on April 13, 1983, CISI gave FNBB instructions to transfer $278,000.00 from CISI's account to the Hamilton Bank. CISI did so because it feared FNBB's seizure of these funds, if they were still in the FNBB account once FNBB learned of the closing down of CISI's credit card operations. After the $278,000.00 withdrawal, CISI's balance in its FNBB charge processing account was less than $2,000.00.13 The $278,000.00 was placed in an interest bearing account at Hamilton Bank and has remained there, pending this Court's determination of the proper disbursement of these funds.
At the same time that the funds were being withdrawn from FNBB, FNBB was making electronic disbursements to retail merchants through NEACH. Approximately $294,000.00 was paid out by FNBB in this manner on April 13 and 14, 1983, pursuant to instructions on the magnetic tapes sent to FNBB by CISI on April 8 and 11, 1983. These disbursements resulted in an overdraft on CISI's account of $292,196.00.14
FNBB learned of the overdraft in CISI's account on April 19, 1983. FNBB was able to intercept some of the payments to retail merchants. FNBB seized $90,525.92 of the $294,000.00 in the process of being transmitted to the merchants.15 This sum is still being held by FNBB.
FNBB also demanded that CISI return the $278,000.00 which had been transferred to Hamilton Bank the day before. CISI, however, refused to return any of this money to FNBB without Court approval.
On June 8, 1983, FNBB filed the instant adversary proceeding against CISI to recover the $278,000.00 and any balance due FNBB which was not covered by the $278,000.00. FNBB also seeks punitive damages and attorney's fees from CISI on account of CISI's actions.
After negotiations, CISI and FNBB agreed to settle the adversary proceeding according to the following terms:
Essentially the Court has before it two (2) objections....
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