Morgan Guar. Trust Co. v. AMERICAN SAV. & LOAN
| Decision Date | 26 March 1985 |
| Docket Number | No. CV-83-6925-AHS.,CV-83-6925-AHS. |
| Citation | 605 F. Supp. 1086 |
| Parties | MORGAN GUARANTY TRUST COMPANY OF NEW YORK, a New York Corp., Plaintiff, v. AMERICAN SAVINGS AND LOAN ASSOCIATION, a California Corp., Defendant. AMERICAN SAVINGS AND LOAN ASSOCIATION, a California Corp., Third-Party Plaintiff, v. The CHASE MANHATTAN BANK, N.A., Third-Party Defendant. |
| Court | U.S. District Court — Central District of California |
Richard K. Simon, Randall S. Rothschild, Eric L. Dobberteen, Kadison, Pfaelzer, Woodard, Quinn & Rossi, Los Angeles, Cal., for plaintiff.
Richard H. Cooper, William H. Jennings, Freshman, Mulvaney, Marantz, Comsky, Kahan & Deutsch, Beverly Hills, Cal., for defendant and third party plaintiff.
Roger A. Ferree, McCutchen, Black, Verleger & Shea, Los Angeles, Cal., for third party defendant Chase Manhattan Bank, N.A.
This action involves two bearer notes issued by plaintiff Morgan Guaranty Trust Company of New York (hereinafter, Morgan), each in the sum of $5,000,000 and evidencing an indebtedness of the Manville Corporation (hereinafter, Manville). The notes were purchased by defendant American Savings and Loan Association (hereinafter, American) when the maturity date was less than two months away. Before maturity, however, Manville filed a petition for bankruptcy which invoked the stay provisions of the Bankruptcy Act. On the date of maturity, American, through its agent, third-party defendant Chase Manhattan Bank, N.A. (hereinafter, Chase), presented the two Manville notes to plaintiff for payment. Plaintiff paid the $10,000,000, notwithstanding special measures which had been instituted by it to monitor all Manville negotiable instruments.
Plaintiff filed suit to recover the $10,000,000, alleging counts of conversion, unjust enrichment, and money had and received. Defendant answered and later filed a third-party claim against Chase on the theory that Chase may have agreed, purportedly on American's behalf, to repay plaintiff, but was without authority to do so.
Morgan and American brought cross-motions for summary judgment, while Chase filed a motion to dismiss the complaint for failure to state a claim upon which relief can be granted. American then moved for partial summary judgment on the same issues raised by Chase.
The major question presented by these motions is whether, in a transaction governed by the Uniform Commercial Code, a bank which mistakenly pays on notes covered by insufficient funds has any right of restitution against a payee who presented the notes as a holder in due course.
The Court concludes that the Uniform Commercial Code compels a holding that the "final payment rule" embodied in U.C.C. § 3-418 bars recovery by a plaintiff on its claims for equitable relief.
Judgment in favor of defendant is granted.
The facts necessary to resolution of these motions are not in dispute.
On July 8, 1982, defendant American purchased from Goldman, Sachs & Co. (hereinafter, Goldman, Sachs) two promissory notes of the Manville Corporation, each with a face value of $5,000,000 and each made payable on September 2, 1982 at plaintiff Morgan. The notes were delivered by Goldman, Sachs to Chase, which debited American's account by the $9,760,833.33 purchase price of the notes, paid the sum to Goldman, Sachs, and held the notes for American until their maturity.
On August 26, 1982, Manville filed a Chapter 11 petition in bankruptcy.1 Morgan, which held several Manville accounts, immediately effected special procedures to process the notes it anticipated would be presented on those accounts. The procedures were designed to ensure proper disposition on each and every check presented in compliance with the applicable New York Clearing House rules, and to involve bankruptcy counsel in all payment decisions. In the days following the Chapter 11 filing, Morgan received into these channels hundreds of items drawn by Manville. Many were timely returned unpaid, many others were paid despite Manville's bankruptcy and despite the fact that payment caused an overdraft.
On September 2, 1982, without specific instruction from American, Chase presented the Manville notes to Morgan through the New York Clearing House 2:00 a.m. exchange. At that time, the aggregate of available funds in all of Manville's accounts was only $1,398,282.60.
When the Manville notes passed through the New York Clearing House check exchange2 they became subject to the Clearing House rules. Under these rules, notes presented through the 2:00 a.m. exchange are subject to provisional settlement at 10:00 a.m. that same day. Once made, the provisional settlement can be revoked in one of only two ways: first, the settling bank may physically return the notes to the presenter before 3:00 p.m. that day; second, the settling bank may inform the presenter before 3:00 p.m. that the notes will be dishonored and return the notes through the 11:00 p.m. exchange. Rule 6b, Rules Governing the Return of Items Received through the Exchange of the New York Clearing House. The Morgan employees who usually handled such notes were wellversed in the Clearing House rules and deadlines. However, the special channels established by Morgan to handle the Manville accounts bypassed these employees and instead put the Manville notes in the hands of employees unfamiliar with these rules.
At 10:00 a.m. in the morning of September 2, Morgan effected a provisional settlement of $10,000,000 in Chase's favor. In accordance with Morgan's procedures, the Manville notes were forwarded to Cathleen O'Daniel, who, as head of Morgan's Deposit Accounting Department, was responsible for monitoring the Manville accounts. O'Daniel tried twice between 10:00 and 12:00 that morning to contact David Deming, a Morgan official, for instruction in dealing with the notes. Deming, in turn, attempted contact with special counsel handling the Manville bankruptcy procedures for Morgan. Deming ultimately received instructions not to honor the Manville notes. Unfortunately, O'Daniel did not receive her reply until 4:00 p.m.—well past the 3:00 p.m. deadline for dishonoring such notes—when Deming told her to "bounce" the notes. O'Daniel immediately undertook to do so, but it was then too late.
On September 3, Chase transferred the $10,000,000 credit to American's account and notified American of the transaction. On the same day, Morgan demanded repayment of the $10,000,000, first from Chase as agent for American, and then from American itself. American refused to return the payment.
On October 26, 1983, Morgan filed a complaint against American, asserting causes of action for (1) conversion, (2) unjustment enrichment, and (3) money had and received. American answered, and, on May 4, 1984, filed a third-party complaint against Chase seeking indemnity in the event that American would be found liable on any promise, made by Chase as its agent, to return the money to Morgan.
American and Morgan subsequently filed cross-motions for summary judgment. Chase filed a motion to dismiss the complaint under Fed.R.Civ.P. 12(b)(6). American further moved for partial summary judgment on the complaint in support of the very issues raised in Chase's motion. All motions were presented and heard contemporaneously, but only the cross-motions for summary judgment are considered in this opinion.
American has moved for summary judgment as to all three claims of Morgan's complaint. Summary judgment is properly granted where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed. R.Civ.P. 56; Aydin Corp. v. Loral Corp., 718 F.2d 897, 902 (9th Cir.1983).
American posits four alternative theories why Morgan has no equitable right to recover its money paid and, thus, why Claims 2 and 3—for unjust enrichment and money had and received—must be dismissed: first, that Morgan's payment on the Manville notes was not the result of a "mistake," but was instead voluntary4; second, that by signing the notes as agent at the date of their issuance, Morgan accepted the notes and assumed an independent obligation to pay as guarantor5; third, that even if the payment was the result of Morgan's mistake of fact, New York common law has never allowed equitable recovery of such payments6; and, fourth, even if such recovery were permitted at common law in New York, that the New York Uniform Commercial Code bars all equitable recovery of such payments. Because the Court finds the fourth argument dispositive, resolution of the merits of the other arguments is unnecessary.
American's argument centers on Section 3-418 of the New York U.C.C., which provides:
Except for recovery of bank payments as provided in the Article on Bank Deposits and Collections (Article 4) and except for liability for breach of warranty on presentment under the preceding section, payment or acceptance of any instrument is final in favor of a holder in due course, or a person who has in good faith changed his position in reliance on the payment.
The parties dispute the effect of the section and the circumstances under which that effect is brought to bear on a commercial transaction. Morgan contends that the preconditions to application of Section 3-418 have not been met in this case. Morgan further argues that, if the section does apply to this case, that the N.Y.U.C.C. preserves common law restitutionary rights for a bank that has mistakenly paid on an NSF note. American responds that this transaction falls within the ambit of Section 3-418, and that the section acts to bar restitutionary recovery of a final payment by Morgan.
By its terms, Section 3-418 requires that two conditions be met before the "final payment" rule takes effect. First, there must be a "payment or acceptance." Second, the payment must be in...
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