In re SMB Holdings, Inc., Bankruptcy No. 84-1381.
| Citation | 77 BR 29 |
| Decision Date | 21 August 1987 |
| Docket Number | Bankruptcy No. 84-1381. |
| Parties | In re SMB HOLDINGS, INC., d/b/a Bride & Boutique, Debtor. PITTSBURGH NATIONAL BANK, Movant, v. SMB HOLDINGS, INC., d/b/a Bride & Boutique, Respondent. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Western District of Pennsylvania |
Matthew E. Jackson, Jr., Pittsburgh, Pa., for debtor.
Gary P. Hunt, Tucker Arensberg, P.C., Pittsburgh, Pa., for movant.
Sidney R. Finkel, Baskin, Flaherty, Elliott & Mannino, P.C., Pittsburgh, Pa., trustee.
Robert L. Federline, Pittsburgh, Pa., for party-in-interest.
Presently before the Court is a claim by Pittsburgh National Bank (hereinafter "PNB") for administrative expense priority pursuant to 11 U.S.C. § 503. Specifically, PNB seeks a Finding by this Court that it provided a benefit to the Chapter 11 estate, by honoring a $250,000.00 check drawn on $300,000.00 of provisionally settled funds. When the originally deposited $300,000.00 item and three (3) similar items were all dishonored, PNB exercised its right of charge-back and overdrafted SMB's account in the amount of $214,823.69; it is for this sum that PNB seeks administrative priority, alleging that this "loan" was used to reduce other obligations of the estate.
SMB and an additional party-in-interest/objector challenge PNB's claimed status, asserting that PNB provided no benefit to the estate, as the funds causing the overdraft were not utilized to reduce SMB's obligations; and that PNB was negligent in allowing payment of the $250,000.00 check prior to final settlement of the item.
Having heard substantial testimony hereon, this Court finds that while PNB's practice of paying on provisional credits is quite liberal, it is not a breach of its duty of care, and thus is not negligent. However, we find no basis upon which to grant PNB's claim of administrative priority and will therefore deny said request.
On June 29, 1984 SMB Holdings, Inc., d/b/a Bride & Boutique (hereinafter "SMB") filed a voluntary petition for reorganization under the Bankruptcy Code. At that time, SMB maintained a corporate checking account with PNB and an additional checking account at the National State Bank of New Jersey (hereinafter "Jersey Bank"). The PNB account was used to pay SMB's day-to-day expenses; The Jersey Bank account was used by Alexander L. Bajusz (hereinafter "Bajusz"), president of SMB, as a personal checking account and as a payroll account. Additionally, SMB borrowed $25,000.00 in working capital from the Jersey Bank in 1983, for which Bajusz executed a security agreement on accounts receivable, inventory and equipment; and a personal guarantee. SMB also borrowed $40,000.00 from PNB, and obtained a $15,000.00 line of credit, for which Bajusz executed guarantees.
Bajusz had personal dealings with Dr. Nelson Harrison, a financial broker, who maintained a money market type of account at First Interstate Bank of California (hereinafter "First Interstate"). The exact nature of their association is unclear; however at some point, Bajusz paid Harrison $30,000.00 to assist in finding financing for Bajusz and SMB.
Before presenting the factual chronology leading up to the substantial overdraft in question, it is necessary to explain the manner in which PNB handled the processing of these out-of-state checks. PNB received the check and noted SMB's account as having uncollected funds, which cannot be withdrawn. That same evening, the check, along with many others, would be delivered to the Federal Reserve Bank in Pittsburgh. Once the Federal Reserve took the checks for collection, it gave a bulk provisional credit to PNB. PNB would redistribute that provisional credit among its customers; once an account was so provisionally credited (usually within 24 hours) PNB permitted the funds to be available for withdrawal. At the same time, the Federal Reserve Bank sent the Harrison check to the Federal Reserve Bank in Los Angeles; the check would then be transferred to First Interstate for payment. When First Interstate dishonored the check, it is not clear whether notice went directly to PNB or returned through the Federal Reserve system. In either case, the entire process took at least several days to complete, and in this case, more, since the California checks were drawn on a money market fund and not a standard checking account. As a result of this procedure, PNB allowed withdrawals against these provisional funds far before it could possibly have received notice of dishonor.
In the case at bar, Harrison presented Bajusz with a check for $300,000.00, drawn on his account at First Interstate. Bajusz testified, and the checks in large part verified, that the $300,000.00 was for his personal use. The check was made out to SMB because Bajusz had no personal account in Pittsburgh. On May 14, 1985, Bajusz deposited the $300,000.00 California check to his SMB account at PNB. Shortly thereafter, Bajusz drew a check in the amount of $250,000.00 to the order of the Jersey Bank, in order to cover overdrafts in that account, caused by Bajusz in his personal capacity. This SMB check was paid by PNB to Jersey Bank on May 17, 1985, within three (3) days of the original deposit. The originally deposited $300,000.00 check was subsequently dishonored and PNB charged-back SMB's account on May 23, 1985. However, prior thereto, on May 20, 1985, Bajusz deposited an additional $300,000.00 check from Harrison, drawn on the same California bank, into the PNB account, which PNB provisionally credited on May 21, 1985; therefore, when the first check was dishonored and the first provisional credit charged-back, no overdraft occurred. This second $300,000.00 check was similarly dishonored, and PNB charged-back SMB's account on May 30, 1985. However, on May 28, 1985, Bajusz had deposited a third $300,000.00 check from Harrison, drawn on his California bank, which PNB had provisionally credited on May 29, 1985; therefore, when the second charge-back occurred, SMB's account still showed a positive balance. On May 31, 1985, Bajusz made an additional deposit of $285,000.00, to create a positive balance when Harrison's third check was dishonored. By June 17, 1985, all of the Harrison drafts had been dishonored, PNB had charged-back against SMB's account for all provisional credits, and SMB was left with an overdraft of $214,823.69.
Of the $250,000.00 previously paid to the Jersey Bank, $197,000.00 was used to cure Bajusz's overdrafts, $20,000.00 was used to pay off a loan personally guaranteed by Bajusz, and $18,000.00 was taken back by Bajusz for other personal obligations. The remaining $15,000.00 is not explained; however, Bajusz testified that none of this money was used for payroll or obligations solely belonging to SMB; PNB offered no testimony to discredit or contradict this claim.
Article 4 of the Uniform Commercial Code (hereinafter "U.C.C.") sets forth the practices involving Bank Deposits and Collections, making banking practice and procedure substantially consistent throughout this country. By creating said uniformity, the...
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