In re Wellington Const. Corp., Bankruptcy No. S82-10052
| Citation | 80 BR 813 |
| Decision Date | 10 August 1987 |
| Docket Number | Adv. No. 84-1051.,Bankruptcy No. S82-10052 |
| Parties | In re the WELLINGTON CONSTRUCTION CORPORATION, Debtor. Jacob C. PONGETTI, Trustee for the Estate of the Wellington Construction Corporation, Plaintiff, v. NATIONAL BANK OF COMMERCE OF MISSISSIPPI, Defendant. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Mississippi |
Jacob C. Pongetti, Columbus, Ohio, trustee.
Stephen C. Edds, Heidelberg, Woodliff & Franks, Towers, Jackson, Miss., for Nat. Bank of Commerce.
On consideration of the complaint filed by the Plaintiff, Jacob C. Pongetti, Trustee for the Estate of The Wellington Construction Corporation, hereinafter referred to as Plaintiff or Trustee; answer and affirmative defenses having been filed by the Defendant, National Bank of Commerce of Mississippi, hereinafter referred to as Defendant or NBC; all parties being represented before the Court by their respective attorneys of record; and the Court having received testimony, heard oral argument, and having received memoranda of law submitted by both the Plaintiff and the Defendant, hereby finds as follows, to-wit:
I.
The Court has jurisdiction of the parties to and the subject matter of this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(E) and (F).
II.
The Wellington Construction Corporation, hereinafter referred to as Wellington or Debtor, established a line of credit with the Defendant NBC initially in August, 1979, in the sum of $200,000.00. This line of credit was secured by the personal guaranties of Wellington's principals, as well as, a certificate of deposit in the principal amount of $50,000.00, issued to The Wellington Construction Corporation. This certificate of deposit was renewed on several occasions, but at all times, the certificate was retained in the possession of the Defendant. To evidence this possession, the Defendant issued a custody receipt, dated September 4, 1979, which was delivered to Wellington and which contained the following language: (emphasis added) (See Exhibits D-4 and D-15.)
On June 17, 1981, Wellington executed a promissory note in favor of the Defendant which was payable on demand or within 90 days from the date of execution. The note recited that it was a renewal of a prior promissory note, and that the collateral securing the indebtedness was "personal guaranties". In addition, on the face of the note was the following provision:
(emphasis added)
The certificate of deposit was renewed on August 28, 1980, as evidenced by certificate no. 9162, issued in the principal amount of $52,404.64, bearing interest at the rate of 10.5% per annum, and maturing on February 26, 1981. (See Exhibit D-5.) The principal amount of this certificate apparently included interest that had accrued on an earlier certificate of deposit.
Wellington also maintained two checking accounts with NBC under numbers XX-XXXX-X and XX-XXXX-X. The deposit agreements, applicable to these accounts, contained the following language:
"Bank is given the right, without notice, to charge against such account any indebtedness of us or any of us to the Bank, regardless of form or source of such debt."
The note, dated June 17, 1981, matured on September 14, 1981, 90 days from the date of its execution. Wellington defaulted in making the payment due under the note, so NBC mailed to Wellington a renewal promissory note, dated September 22, 1981, for execution in the identical principal sum of $200,000.00. This note was held by Wellington and not returned to NBC until October 30, 1981.
On October 15, 1981, because of Wellington's continued default in the payment of the June 17, 1981 note, as well as, the apparent refusal to return the September 22, 1981 note, NBC setoff the principal amount of the certificate of deposit plus all accrued interest, as well as, the balances in the two bank accounts. NBC calculated the setoff as follows:
Certificate of deposit
Principal amount $52,404.64
Accrued interest from 8/28/80
through 10/15/81 6,555.28
__________
Value attributed to certificate of deposit $58,959.92
__________
Of the aforesaid amount, $46,138.00 was applied against the principal of the promissory note and the balance of $12,821.92 was applied against accrued interest. Following the application of the value of the certificate of deposit to the indebtedness, the principal balance remaining was the sum of $153,862.00.
Thereafter, the balances of the two checking accounts, in the total sum of $2,200.36, were setoff against the remaining principal amount, leaving a final balance owing of $151,661.64.
A recap of the setoff calculations is set forth as follows:
Balance of 6/17/81 indebtedness
as of 10/15/81 $212,821.92
Less
Value of certificate of deposit
assigned to interest $12,821.92
Value of certificate of deposit
assigned to principal 46,138.00
__________
58,959.92
___________
$153,862.00
Less
Account no. XX-XXXX-X $ 748.09
Account no. XX-XXXX-X 1,452.27
__________
2,200.36
___________
Principal balance remaining $151,661.64
___________
Approximately two weeks later, Wellington returned the September 22, 1981 promissory note to NBC, executed in the principal sum of $200,000.00, as noted hereinabove. Since NBC had previously setoff the certificate of deposit and the two bank accounts, this promissory note was carried on the NBC bank records in the amount of $151,661.64. The maturity date of this promissory note was considered as December 21, 1981, 90 days from its date of execution.
At an unspecified time, NBC advised Wellington of the setoff, as well as, the remaining balance of the indebtedness. According to the testimony of Bobby Harper, the President of NBC's office in Columbus, Mississippi, the setoff transactions were accepted and ratified by the Wellington officials. There was no proof to the contrary.
A third promissory note was executed by Wellington in favor of NBC on December 21, 1981 in the principal sum of $151,661.21, also payable on demand or within 90 days of the date of execution. (The nominal difference in this amount and the amount of the principal balance of the indebtedness was unexplained.) Evidencing Wellington's acquiescence of the setoff, this note was executed by the president of the corporation and returned to NBC on December 30, 1981, with the recitation that it renewed the earlier promissory note of September 22, 1981.
On February 4, 1982, 112 days after NBC had applied the proceeds of the certificate of deposit and the balances of the two checking accounts to the Wellington indebtedness, an involuntary petition in bankruptcy was filed against Wellington.
Thereafter, the Plaintiff Trustee filed his complaint against the Defendant seeking to recover the value of the certificate of deposit, as well as, the two checking accounts as voidable preferences pursuant to 11 U.S.C. § 547(b), or, in the alternative, demanding the turnover of the value of these properties pursuant to 11 U.S.C. § 542. At the conclusion of the trial, the Court advised the parties that that part of the Trustee's complaint alleging preferential transfers was not well taken in that the setoffs occurred more than 90 days prior to the filing of the involuntary bankruptcy petition, coupled with the total absence of proof that the Defendant was an insider to the Debtor as that term is defined in 11 U.S.C. § 101(25)(B). (This Code section, which was in effect at the time this case was filed, was the predecessor to 11 U.S.C. § 101(30)(B).)
The only issue that remains in dispute is whether NBC should be compelled to turnover the value of the certificate of deposit and the two bank accounts, setoff against the Wellington indebtedness, to the Trustee as properties of the bankruptcy estate. Several underlying questions must be answered in the resolution of this turnover issue, and each will be addressed hereinbelow.
III.
The focal point of this case centers on whether NBC had the right to set off the value of the certificate of deposit and the two bank accounts against the Wellington indebtedness. In the Bankruptcy Code, setoff is addressed in 11 U.S.C. § 553(a) which provides as follows:
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