In re Standard Financial Management Corp.
Decision Date | 11 May 1988 |
Docket Number | Bankruptcy No. 87-10219-HL. |
Citation | 94 BR 231 |
Parties | In re STANDARD FINANCIAL MANAGEMENT CORP., d/b/a New England Rare Coin Galleries, Debtor. |
Court | U.S. Bankruptcy Court — District of Massachusetts |
COPYRIGHT MATERIAL OMITTED
Joseph F. Ryan, Brown, Rudnick Freed & Gesmer, Boston, Mass., for debtor.
Cyril Hochberg, Hochberg & Rossi, Boston, Mass., for Bank of New England.
MEMORANDUM RE: CREDIT CARD CHARGEBACKS
The debtor, Standard Financial Management Company, d/b/a New England Rare Coin Galleries (NERCG) sold rare coins through its store as well as over the telephone. Payments for the rare coins were made by cash, check, credit cards or wire transfers. On February 13, 1987, the Federal District Court of Massachusetts, at a hearing on the complaint of the Federal Trade Commission, appointed Joseph Ryan special counsel to take possession of NERCG's assets and authorized him to file a Chapter 11, which he did on the same day and at the same time, substantially, closed down the business operation.
The Bank of New England (BNE) processed the credit card, VISA and Master Charge, transactions of NERCG pursuant to two contracts, one pertaining to VISA and one pertaining to Master Charge. The contracts were signed by representatives of NERCG and BNE on June 27, 1983 and renewed on March 21, 1985.
The BNE provided other financial services to NERCG, including a revolving loan, lease equipment financing, depository and checking. At the commencement of the case, February 13, 1986, the NERCG maintained a balance of $179,948.47 including $109,894.32 in a segregated payroll account. BNE turned over the funds to NERCG on February 26, 1987 pursuant to a written stipulation that provided BNE did not prejudice it's right to later assert any lien, pledge, right or interest against the $179,948.47.
In 1985, customers charged back 24 times, for a total of $22,546.24. In 1986, customers charged back 25 times, for a total of $35,095.00. In the first quarter of 1987, during which, on February 13th, NERCG closed and the Chapter 11 was filed, customers charged back 9 times, for a total of $7,390.00. Over the next two quarters of 1987 post-filing in the Chapter 11, customers sought to charge back 62 times, for a total of $114,743.00. The total post-petition charge backs over the first three quarters of 1987 was $115,168.00 representing 63 transactions. BNE seeks to recover $115,168.00 in post-petition chargebacks and an additional $5,100.06 in bank service fees from the $179,948.47 that NERCG had on deposit with BNE on the date the case was commenced.
While the evidence was skimpy, BNE has introduced unrebutted evidence that NERCG solicited the credit card sales through telemarketing over the telephone, that were later charged back. In the absence of contrary evidence, the Court so finds.
The Court has held two hearings, reviewed eight memoranda of close to 200 pages, plus copious attachments, not counting a further unconsidered memorandum submitted by special counsel beyond the briefing schedule. It would appear that each side is literally trying to convince the Court by the sheer weight of their arguments.
BNE's claims rest on the provisions of the VISA and Master Charge standard form agreements which, in turn, refer to the terms and conditions set forth in other documents including the respective Operating Rules. The bank's position is that the express terms of the contracts gives it a secured position1 in the funds of the debtor if, in fact, they are really funds of the debtor and not merely provisional credits subject to being cancelled until the expiration of the charge back period.2
Special Counsel would have the Court resolve the entire dispute by finding that BNE's signed credit card agreements' security interest to be unenforceable. It is claimed that if BNE can be a secured creditor for claims of credit card holders who should be unsecured, it would allow unsecured credit card holders to recover 100 cents on the dollar while cash or check-paying customers may recover nothing. To allow BNE a security interest, if one follows this line of reasoning, would result in an early and inequitable distribution of assets to unsecured creditors, an anathema in bankruptcy. Official Committee of Equity Security Holders v. Mabey, 832 F.2d 299 (4th Cir.1987).
Although in some cases that may be the ultimate result, it cannot alter a valid security agreement on which the secured party, in good faith, relied. The bank is entitled to be secured for any liabilities it may incur as a result of the agreements if it obtained the security interest properly pre-petition and pre the preference period. From the express language of the contracts BNE was intended to have a secured position in any credits still held by the bank to cover any properly made chargeback claims unless some provision of the Uniform Commercial Code prevents the parties from so agreeing.
Special Counsel claims that BNE does not have a properly secured security interest. It is argued that since Article 9 of the Massachusetts U.C.C., does not apply to deposit accounts, BNE does not have a security interest. Mass.Gen.L. ch. 106 § 9-101 et. seq. BNE is properly secured. BNE correctly cites Article 4 of the Massachusetts U.C.C. as controlling the security interest of banks in deposit accounts. Mass.Gen.Laws ch. 106 § 4-101 et. seq. Credit card drafts are an item under Mass. Gen.Laws ch. 106 § 4-104(g):
Item means any instrument for the payment of money even though it is not negotiable but does not include money.
Item is to be broadly defined Houston Contracting Co. v. Chase Manhattan Bank, N.A., 539 F.Supp. 247, 33 U.C.C.Rep. 1730 (S.D.N.Y.1982). A credit slip is an instrument for payment.
A bank retains a security interest in an item once it has been deposited in an account even if the funds can be withdrawn:
Special Counsel seeks to have the Court find that the payments were not provisional because the BNE drafted contracts state that NERCG will receive payment the business day after NERCG submits a credit slip to BNE and do not explicitly provide that the credits are provisional and ambiguities should be construed against the drafting party. King v. Prudential Insurance Company of America, 359 Mass. 46, 267 N.E.2d 643 (1971). BNE claims that its right under the signed credit card agreements to automatically charge back from NERCG deposit accounts makes the settlements provisional. The Court finds both the language of the contracts and the conduct of the parties evidence an intent that the funds on deposit were property of the debtor subject to chargebacks. For the two years pre-petition, NERCG had use of the money the day after the credit slip was deposited and BNE charged back directly from the accounts. A bankruptcy court in Texas considered an identical situation and persuasively states:
In re United Sciences of America, 84 B.R. 79, 82 (Bankr.N.D.Texas 1988). The Court finds that NERCG had legal title to the deposit accounts, subject to defeasance by settlements.
Thus, since the bank has a right to recover any credits previously issued, it may be necessary to have a further hearing to trace credits from VISA and Master Charge in the non-payroll portion of money owed by the bank to the debtor if Special Counsel pursues his allegation that funds also came from other sources such as noncredit card sales; however, first the amount of any proper chargebacks must be determined.
BNE relies on provisions in...
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