In re Saugus General Hospital, Inc., Bankruptcy No. 78-1641-JG.
| Decision Date | 06 November 1980 |
| Docket Number | Bankruptcy No. 78-1641-JG. |
| Citation | 7 BR 347 |
| Parties | In re SAUGUS GENERAL HOSPITAL, INC., Debtor. Philip L. SISK, Receiver of Saugus General Hospital, Inc., Plaintiff, v. SAUGUS BANK AND TRUST COMPANY, Defendant. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
Anthony M. Feeherry, Goodwin, Procter & Hoar, Boston, Mass., for plaintiff.
Bernard A. Dwork, Barron & Stadfeld, Boston, Mass., George O. Gregson, Saugus, Mass., for defendant.
The instant complaint was filed by the Receiver of the Saugus General Hospital, Inc., a debtor under Chapter XI of the Bankruptcy Act. Plaintiff seeks to recover all, or in the alternative, a substantial portion of $83,655.92 of the Hospital's funds which were seized by the defendant, Saugus Bank and Trust Company from various of the Hospital's checking accounts at the Saugus Bank. The complaint has raised several legal issues relating to the defendant's right of set-off.
As of August, 1978, Saugus General Hospital, Inc., operated a hospital located at 81 Chestnut Street, Saugus, Massachusetts. The real property was acquired by the Hospital on or about June 4, 1951 and is entirely within an area of the Town of Saugus that is zoned as a single residence R-1 district. Subject to the issuance of a special permit cemeteries, hospitals, sanitariums, nursing homes, rest homes, private stables and philanthropic institutions are a permissible use.
On or about April, 1967 the Hospital executed a note, secured solely by a first mortgage on the real property at 81 Chestnut Street, to Saugus Bank in the principal amount of $200,000 for a term of fifteen years at six percent per annum, payable in equal monthly installments of $1,687.75. Said note included a tax escrow provision.
The last payment on the mortgage loan was made on September 6, 1977 and was applied to principal and interest due as of February, 1977, the balance having been applied to the tax escrow account. The mortgage note was in default from time to time prior to September 1977.
On July 20, 1978 a notice of intention to foreclose was given to the Hospital by Saugus Bank followed in August, 1978 by the filing of a Petition for Authority to Foreclose in the Superior Court of Essex County, Docket No. 12237.
The Board of Directors of the Hospital Corporation, after discussing the Hospital's financial problems throughout the summer of 1978, unanimously voted on August 19, 1978, "to close Saugus General Hospital as an acute medical surgical hospital facility and dissolve the corporation within a reasonable time and in such a manner as legal and accounting counsel may advise with the agreement of the Board of Directors and Stockholders." (Exhibit # 8 accompanying stipulation).
On August 23 and 24, 1978 the Massachusetts Department of Public Health conducted a survey of the Hospital which disclosed numerous deficiencies. Based on the survey's results, and after a hearing with Hospital officials, the Department of Public Health on August 30, 1978 imposed certain restrictions on the continued operation of the Hospital as follows:
The parties have stipulated that as of August 28, 1978, the status of the mortgage loan account was as follows: account was seventeen months in arrears, with a principal balance of $82,845.74 and accrued interest of $7,245.03; accrued real estate taxes, not including interest or penalties, totaled $44,685.00, resulting in an outstanding balance of $134,775.77.
Furthermore, this Court finds that as of August 28, 1978 the Bank was aware of the Hospital Board's resolution to close, the condition of deterioration of the Hospital's physical facilities and the Hospital's unsuccessful attempts during the previous year in finding a prospective purchaser for the business and real estate. The Court also finds that by August 1978, the Hospital's Board of Directors had substantially ceased communication with the Bank and that no stockholders came forward with any proposals to resolve the mortgage situation.
As of the opening of the business day on August 28, 1978, the Bank put a hold on all of the Hospital's funds, notifying all bank managers and the Hospital. This Court finds that at that time Saugus Hospital maintained various separate checking accounts at the Bank, designated as follows:
The Hospital's payroll account was used exclusively for the payment of payroll checks which bore specific designations "Payroll Account" and "Payroll Check" and were a different size and color than General Account checks. A separate corporate resolution was filed authorizing different individuals to sign payroll checks than general account checks. Additionally all monies deposited in the Payroll Account were drawn on checks from the General Account in an amount equal to the weekly payroll which normally was expected to result in a zero balance in the Payroll Account after employees cashed their checks. The statements for the payroll account were issued separately by the Bank at a rate twice as frequent as those issued for the general account.
On August 28, 1978 the Bank debited each account and credited its Treasurer's checking account as follows-General Account No. 13-846-0, $63,261.40; Payroll Account No. 13-823-1, $20,006.68; Tax Account No. 13-831-2, $388.84, issuing three treasurers checks each in the above noted amounts payable to Saugus Bank and Trust.
This court specifically finds that the check dated August 23, 1978 in the amount of $31,458.31, drawn on the Saugus Hospital General Account payable to the Saugus Hospital Payroll Account, was received by the Bank on the banking day of August 28, 1978. Although conditionally posted on August 28, 1978, the check was dishonored on August 29, 1978.
At all times from August 28, 1978 to November 22, 1978, the Treasurer's checks were in the control of the Bank's President and/or Treasurer and the funds were used for the general purposes of the Bank continually from August 28, 1978. Although computer notices of loan statements were sent out in September and October, 1978 indicating no reduction in the outstanding balance of the Hospital's loan, no interest charge was made from the period between August 28 and November 28, 1978. Finally, on November 28, 1978, the Bank credited the $83,656.92 to the Hospital's mortgage loan account and debited its own account in that amount. Thus, the mortgage loan account showed a principal balance of $6,433.85 with interest paid through August 28, 1978.
On September 1, 1978, an involuntary petition in bankruptcy was filed against Saugus General Hospital. Operations at the Hospital terminated on September 6, 1978 at which time the Department of Public Health considered the license to operate as abandoned.
The defendant Bank's position is that it exercised its common law right to set-off the funds from all deposit accounts of the Saugus General Hospital and applied the proceeds to the defaulted loan obligation. The Bank contends such set-off was in fact accomplished as of August 28, 1978.
The plaintiff has argued that Massachusetts law requires the Bank to show that it is insecure before setting-off deposit funds on a secured obligation. Plaintiff further argues, inter alia, that even if the Bank were insecure its right to set-off only extends to the deficiency balance beyond the value of the collateral and in no event would such right extend to the funds in the payroll account. Finally, plaintiff alleges the set-off was not completed until November 1978, when the Bank credited the Hospital's mortgage loan account.
The parties have agreed that the Bank's claim to the legal right of set-off in this case is based entirely upon its common law right. There are no contractual rights to set-off in the loan documents.
Set-off, as generally understood, is "that right which exists between two parties, each of whom under an independent contract owes an ascertained amount to the other, to set-off his respective debt by way of mutual deduction." John Wills, Inc. v. Citizen's National Bank of Netcong, 125 N.J.L. 546, 16 A.2d 804 at 806.
The Saugus Hospital, as of August 28, 1978, was a debtor to the Bank for the outstanding balance of the mortgage indebtedness. Likewise, the relationship between the Bank and Saugus Hospital was that of debtor and creditor, the Bank being a debtor as to funds on general deposit. Forastiere v. Springfield Institution for Savings, 303 Mass. 101, 20 N.E.2d 950; Furber v. Dane, 203 Mass. 108, 89 N.E. 227; National Mahaiwe Bank v. Peck, 127 Mass. 298. These general deposit funds are held to be the absolute property of the Bank. Krinsky v. Pilgrim Trust Co., 337 Mass. 401, 149 N.E.2d 665 at 668 (citing Laighton v. Brookline Trust Co., 225 Mass. 458, 11 N.E. 671). See also: National Mahaiwe Bank v. Peck, 127 Mass. 298. Therefore, mutual outstanding debts are established as of August 28, 1978.
The Bank contends that a secured creditor should be permitted to pursue all his remedies until he receives satisfaction, citing Broadway National Bank of Chelsea v. Hayward, 285 Mass. 459, 464, 189 N.E. 199 at 202. However, in the Hayward case the plaintiff, the holder of a second mortgage, had sought the court to require the defendant, holder of a first mortgage and personal guarantee, to postpone one of his remedies until the other had been exhausted. The Court denied the request for marshalling in that case and allowed the first mortgagee to foreclose, not restricting him to obtain satisfaction from the personal guarantee in the first...
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