Jensen v. State Bank of Allison, 74-1696

• Decision Date: 06 June 1975
• Docket Number: No. 74-1696,74-1696
• Citation: 518 F.2d 1
• Parties: 17 UCC Rep.Serv. 286 Roger A. JENSEN, Trustee for the Estate of Jim Uhlenhopp a/k/a James K. Uhlenhopp, d/b/a Uhlenhopp Livestock Buying and Trucking, Appellant, v. STATE BANK OF ALLISON, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1

518 F.2d 1

17 UCC Rep.Serv. 286

Roger A. JENSEN, Trustee for the Estate of Jim Uhlenhopp a/k/a James K. Uhlenhopp, d/b/a Uhlenhopp Livestock Buying and Trucking, Appellant, v. STATE BANK OF ALLISON, Appellee.

No. 74-1696.

United States Court of Appeals Eighth Circuit.

Submitted Feb. 14, 1975.

Decided June 6, 1975.

John L. Butler, Eldora, Iowa, for appellant.

Raymond P. Drew, Hampton, Iowa, for appellee.

Before HEANEY and WEBSTER, Circuit Judges, and NANGLE, District Judge. ^*

WEBSTER, Circuit Judge.

The trustee of the bankruptcy estate of James K. Uhlenhopp appeals from the judgment of the District Court ¹ upholding a setoff by the State Bank of Allison against funds of the bankrupt on deposit with the bank in satisfaction of an existing debt to the bank.

Prior to 1970, James K. Uhlenhopp and his wife Judy maintained a checking account at the State Bank of Allison, primarily for their personal use. In May, 1970, Uhlenhopp, who was in the livestock and trucking business, began using the account for business purposes. Shortly thereafter, Uhlenhopp borrowed money from the State Bank of Allison. The loans were evidenced by promissory notes in the amounts of $8,890.62 and $11,217.60 payable October 1, 1970, and December 24, 1970, respectively, and were secured by agreements granting the bank a security interest in the cattle purchased. Each of the notes contained a clause stating that the due dates could be accelerated any time the bank felt insecure. The bank filed financing statements at the local recording office.

On August 19, 1970, the State Bank of Allison learned that the State Bank of Dumont had filed a financing statement which claimed a security interest in Uhlenhopp's property, including after-acquired property. This financing statement had been filed before that of the State Bank of Allison. Deeming itself insecure, the State Bank of Allison accelerated Uhlenhopp's notes to make them payable immediately. It then debited Uhlenhopp's checking account for the full amount of the loans plus interest. Uhlenhopp filed a petition for bankruptcy on September 16, 1970.

Roger A. Jensen, the trustee of Uhlenhopp's estate, brought this action in the District Court to recover the full amount set off from Uhlenhopp's account. The complaint charged that the setoff constituted a voidable preference under § 60 of the Bankruptcy Act, 11 U.S.C. § 96, and, alternatively, was a wrongful conversion under Iowa law.

Following trial of the case, the District Court held that the setoff did not constitute a preference because the trustee had not shown that the bank knew Uhlenhopp was insolvent at the time it debited his account or that he was in fact insolvent at that time. The District Court also found that since the bank had acted within its rights in accelerating the notes and performing the setoff, there was no common law conversion.

The trustee appeals from the dismissal of his complaint, contending that the setoff was a voidable preference and that the bank illegally converted Uhlenhopp's funds. We affirm the judgment of the District Court.

I.

Under the Bankruptcy Act, no voidable preference ² is ordinarily created when a bank sets off funds in an account of general deposit ³ with it against a debt owed to it by the depositor. Farmers Bank v. Julian, 383 F.2d 314, 324 (8th Cir.), cert. denied, 389 U.S. 1021, 88 S.Ct. 593, 19 L.Ed.2d 662 (1967), wherein we said:

Section 68(a) of the Bankruptcy Act, 11 U.S.C. § 108 applies and allows a setoff to (a) Bank unless the account has been accepted or built up for the real purpose of permitting the Bank to obtain a preference by way of setoff of the account. A bank account at the time of filing the petition in bankruptcy is a debt due to the bankrupt from the bank, and in the absence of fraud or collusion between the bank and the bankrupt, the bank may set the account off against any indebtedness owed it by the bankrupt. * * * Section 68(a) of the Bankruptcy Act did not create the right of setoff but it 'recognizes this right, and it cannot be taken away by construction because of the possibility that it may be abused.' (sic ) as it 'would precipitate bankruptcy and so interfere with the course of business as to produce evils of various and far-reaching consequence'. * * *

The bank has the right to set off deposits against indebtedness even though the bankrupt is insolvent at the time of setoff and before the petition in bankruptcy is filed. (citations omitted) ⁴

See generally 4 J. Moore, Collier on Bankruptcy P 68.15-.19 (1971). ⁵

There was no evidence that Uhlenhopp's account had been accepted or built up in order to permit the bank to obtain a preference. The account was one of long-standing. Uhlenhopp began using the account for his livestock business when he began to borrow money from the bank to purchase cattle. ⁶ The cattle loans were secured by the cattle themselves, and there is nothing in the record to show any kind of build-up in the bank account in order for Uhlenhopp to make a preferential payment to the bank during a period of insolvency. In fact, there is evidence that the bank, without Uhlenhopp's knowledge, deferred posting of some checks drawn against the account in order that there be sufficient funds in the account to cover the setoff. There was "absolutely no evidence of any collusive or prearranged plan of action between (Uhlenhopp) and the Bank to build up this account." See Farmers Bank v. Julian, supra, 383 F.2d at 325.

Accordingly, appellant's contention that the State Bank of Allison's setoff of Uhlenhopp's checking account was a voidable preference must fail.

II.

The claim of conversion presents a closer issue. Iowa law defines a conversion as "any distinct act of dominion or control, wrongfully exerted over the chattels of another in denial of his right thereto." E. g., Goeman v. Live Stock National Bank, 238 Iowa 1088, 29 N.W.2d 528, 531 (1947).

The relationship between a bank and its depositor is that of debtor-creditor. E. g., Andrew v. Union Savings Bank & Trust Co., 220 Iowa 712, 263 N.W. 495 (1935); 10 Am.Jur.2d Banks § 339 (1963); 9 C.J.S. Banks & Banking § 267(c) (1938). As a general rule there can be no conversion of an ordinary debt. See W. Prosser, Handbook of the Law of Torts § 15, at 82-83 (4th ed. 1971); Restatement (Second) of Torts § 242, comment f (1965). Before applying this principle of law, however, we are bound in this case to consider whether the unseemly conduct of the bank transformed the routine process of setoff into the tortious act of conversion.

The bank gave no notice of its intention to accelerate its notes and to apply the bank account to discharge the debt, which was already secured by purchase money security interests. Instead, stampeded by the thought that it might become embroiled in a dispute with one of its friendly correspondents, the Bank of Allison decided to deem itself insecure and satisfy the notes through Uhlenhopp's bank funds rather than the chattel security. There is no way for us to know to what extent such harsh and unilateral action may have contributed to Uhlenhopp's bankruptcy, which followed in its wake, and that question is not before us.

It is, however, well settled that a bank has a right to set off funds deposited with it in an account of general deposit against a debt owed it by the depositor if the debt is mature or, if the debt is not mature, if the depositor is insolvent. E. g., Olsen v. Harlan National Bank, 162 N.W.2d 755, 759 (Iowa 1968); 9 C.J.S. Banks and Banking § 296 (1938); 10 Am.Jur.2d Banks §§ 666-70 (1963). ⁷ Here the debt was mature at the time of the setoff if the bank had properly accelerated the due date of Uhlenhopp's loans.

The Iowa statute applicable to acceleration clauses, I.C.A. § 554.1208 (1967), provides:

A term providing that one party or his successor in interest may accelerate payment or performance or require collateral or additional collateral 'at will' or 'when he deems himself insecure' or in words of similar import shall be construed to mean that he shall have power to do so only if he in good faith believes that the prospect of payment or performance is impaired. The burden of establishing lack of good faith is on the party against whom the power has been exercised.

Good faith is presumed when a creditor accelerates a debt. Sheppard Federal Credit Union v. Palmer, 408 F.2d 1369 (5th Cir. 1969) (applying Texas law). While the bank's judgment in deeming itself insecure upon discovering a prior filed financing statement is clearly open to question, and its heavy-handed treatment of its customer without prior notification is cause for dismay, we cannot say that the District Court's finding of good faith is clearly erroneous. See Fed.R.Civ.P. 52(a). ⁸

While notice to the debtor is generally not required before a debt can be accelerated, the holder of an instrument who seeks to accelerate its maturity date must take some positive action to exercise his option to declare payments due under an acceleration clause in the instrument, to avoid waiving his rights to do so. E. g., Weinrich v. Hawley, 236 Iowa 652, 19 N.W.2d 665, 667-68 (1945), citing Swearingen v. Lahner, 93 Iowa 147, 61 N.W. 431 (1894); Moore v. Crandall, 146 Iowa 25, 124 N.W. 812, 814 (1910). Here the setoff constituted sufficient affirmative action. See Wentland v. Stewart, 236 Iowa 661, 19 N.W.2d 661 (1945) (affirmative action required, declaration of intention insufficient); Weinrich v. Hawley, supra, (commencement of suit sufficient affirmative action); Barnett v. Hitching Post Lodge, Inc., 101 Ariz. 488, 421 P.2d 507 (1966) (foreclosure of deed of trust and application of proceeds to note along with filing of claim sufficient affirmative action to accelerate debt); Santini v. Fritkin, 240 Md. 542, 214 A.2d 578 (1965) (foreclosure on collateral sufficient); Smith v. Davis, 453 S.W.2d 340 (Tex.Civ.App.1970) (filing of suit constitutes sufficient affirmative action to...