In re Spears Carpet Mills, Inc.
| Decision Date | 22 May 1987 |
| Docket Number | Bankruptcy No. 81-36. |
| Citation | 86 BR 985 |
| Parties | In re SPEARS CARPET MILLS, INC. SPEARS CARPET MILLS, INC., Plaintiff, v. CENTURY NATIONAL BANK OF NEW ORLEANS, Robert Masson, G & A Carpet Mills, Inc., Dale Black and Gilbert Federbush, Defendants. |
| Court | U.S. Bankruptcy Court — Western District of Arkansas |
The instant adversary proceeding was commenced by Complaint filed September 29, 1982, and later amended December 22, 1983, whereby the plaintiff, Spears Carpet Mills, Inc. (SCM), through its Chapter 7 trustee seeks both compensatory as well as punitive damages from the defendants in consequence of certain events surrounding the purchase of SCM by G & A Carpet Mills, Inc. (G & A), and the involvement of Century National Bank of New Orleans (Century), with that transaction and others that followed. Service on defendants Robert Masson and Gilbert Federbush was not accomplished hence the only defendants involved in the present action are Century and its then president, Dale Black (Black). Although service was made on G & A, it has failed to answer. On February 13, 1987, this court dismissed four of the plaintiff's six claims for relief leaving for trial claims two and three. The second claim for relief alleges that Century and Black were negligent in the preparation and processing of various checks, drafts, and wire transfers. This lack of diligence in the preparation and processing also forms the basis for the third claim whereby the bank is alleged to have breached its contract with SCM. SCM seeks $229,535.52 from Century on counts two and three and $162,000.00 from Century and Black jointly and severally on count two. Punitive damages in the sum of $898,598.09 are also requested from Century. Century and Black generally deny liability under either claims two or three.
The case came on for trial before the undersigned sitting by special designation on March 10, 1987.
From the evidence produced at trial the facts as material may be summarized as follows:
1.
SCM was a carpet manufacturing mill situated in Hope, Arkansas. It began experiencing financial difficulties in the summer of 1979. Several workout efforts were attempted but in November, 1981, an involuntary Chapter 7 petition was filed against it which was later converted to a Chapter 11 in February, 1982. Upon motion of the trustee the Chapter 11 was converted to a Chapter 7 effective January 1, 1984.
A 1980 loan from FHA failed to stem SCM's downward slide and by 1981 the company was experiencing losses of $50,000.00 to $100,000.00 every month. With SCM in financial extremis, efforts were undertaken to find a purchaser for the company. Answering a Wall Street Journal sale ad, Gilbert Federbush, the chief officer of G & A, offered to purchase all of SCM's stock through G & A for the total price of $669,273.00. Little was or is known of Federbush's background and no investigation of him was undertaken in advance of SCM reaching an agreement with him. The sale was evidently one whereby SCM's stock would be transferred to G & A who, as a part of the purchase price, was to make a payment of $200,000.00 to SCM's preferred shareholders. By the terms of the purchase agreement, signed on April 14, 1981, the closing was to take place on April 15, 1981, with G & A accorded a 45 day right of recision. For the 45 day recision period following April 15th and until its expiration, James Lester, SCM's then president, was to remain as a member of the board of directors and G & A was to arrange for all company bank accounts to reflect that all withdrawals had to have the signature of at least two persons, one of them being that of Lester.
The $200,000.00 was to have been placed in an escrow subject only to the 45 day right of recision. G & A never put the money in escrow and the deal was not finally consummated until June 17, 1981, when Federbush presented three checks totaling $200,000.00 to a representative of the preferred stockholders. It is with this purchase transaction that the involvement of Century begins.
Century is a fairly small bank ($28,000,000.00 in deposits) chartered under the laws of the State of Louisiana with its principal place of business in New Orleans. During the period in question, Black was its president. He was introduced to Federbush by an individual named John Cerise, an existing bank customer. Federbush and Cerise were also looking at other New Orleans property at the time.
On May 15, 1981, Federbush opened an account for G & A at Century by first taking a $250,000.00 loan in the form of a certificate of deposit and pledging it as collateral. Corporate borrowing and check signature resolutions were prepared for G & A on bank forms. The G & A borrowing resolution, signed by Federbush and Masson authorized either Federbush, its president, or Masson, its secretary, to borrow and the G & A signature resolution allowed checks to be drawn by either acting alone. Neither forms were completely filled out in that the borrowing resolution was undated and the signature resolution was both undated and unsigned. Black testified that it is typical bank practice to require such resolutions for the opening accounts and they would normally be fully completed. He did not, however, handle the form completion himself and agreed that the omitted dates and signatures were an oversight.
On June 10, 1981, Federbush and Masson opened an account at Century for SCM by making a deposit of $15,000.00. SCM had previously conducted all of its banking with banks in Hope, Arkansas. As with G & A, two corporate resolutions were prepared for SCM on bank forms. The SCM borrowing resolution dated June 18, 1981, was signed by James W. Lester, as SCM's president, and Federbush as secretary. Either one, acting alone, was authorized to borrow. The SCM check signature resolution was undated and was signed by Federbush as secretary. The check signature resolution form at the top, however, bears the name of Robert Masson, secretary, as the certifying officer. The two SCM resolution forms were typed up by someone in the bank's customer service department. The check signature resolution provides for checks and withdrawals to be made by the, "secretary with president or vice-president two of three".
In opening checking accounts Century, consistent with normal banking practice, requires signature cards. Black acknowledged that different types of cards are used for individuals, corporations, partners and trade names. Although Black knew SCM was a corporation and knew what its business was, Century, in opening SCM's checking account on June 9, 1981, had SCM, through its officers, complete a signature card used for individual, joint & trade name accounts. Black did not personally prepare the card and, while acknowledging the use of an individual card for a corporation was unusual, said that so long as the corporate name and required signatures appeared, the individual card would suffice. The SCM signature card bore the full corporate name of SCM and was signed by Federbush, Lester and Masson. Consistent with the SCM corporate check signature resolution, the signature card allowed for checks to be written by any two of these individuals. In opening the account, Black spoke to Lester in order to confirm Federbush's identity. According to Black, Lester never advised him that Lester would have to authorize withdrawals nor was there any suggestion to that effect. Nothing in evidence suggests that Black or anyone at Century was aware of the G & A-SCM purchase contract requirement mandating Lester's signature on all withdrawals during the 45 day recision period.
2.
G & A's purchase of SCM's preferred stock for $200,000.00 was, in part, paid for by two cashier's checks in the sum of $23,000.00 and $165,000.00 issued by the bank on June 17, 1981, and payable to G & A Carpet Mills. Both were signed by Black and bear the endorsements of Federbush and Masson. The $23,000.00 check denoted John Cerise as the remitter whereas no remitter on the $165,000.00 check was disclosed. The agent for the preferred shareholders did not know who Cerise was and made no inquiry as to who the remitter of the $165,000.00 check was. According to the testimony of Black and an officer of a competing bank, there is no requirement that the name of a remitter appear on cashier's checks.
The $162,000.00 cashier's check was drawn against the checking account of SCM rather than an account of G & A and resulted in an overdraft and issuance of a notice of insufficient funds. A debit advice for the $162,000.00 check was issued on June 17, 1981, and was signed by Federbush and Masson. The check itself, while issued on June 17, was not actually posted until June 18th because at the time of issuance the bank had closed for the day and in such situations it would be normal banking practice to debit the account on the next business day. According to the testimony of an officer of a competing bank, the normal practice is to immediately post a cashier's check against the depositor's account, but if the check is issued after banking hours, then it would not be out of the ordinary to debit the account the next day.
How the unusual event of the overdraft occurred was explained by Black as resulting from the cashing of eight items as checks which were actually drafts and should not have been run through the checking account. Between June 10th and June 15, 1981, SCM issued eight drafts totaling $88,127.31. These drafts were very similar in appearance to a check and differed only in small but readable type stating "draft payable on approval". Black testified that drafts are not written against checking accounts and are not prepared by the bank and would not normally bear (as these did) checking account encoding. Because of the size of the type, the checking account encoding, and the general appearance of the eight...
To continue reading
Request your trial