Nat. Acceptance Co. of America v. Va. Capital Bank

• Citation: 498 F. Supp. 1078
• Decision Date: 07 October 1980
• Docket Number: Civ. A. No. 79-0630-R.
• Parties: NATIONAL ACCEPTANCE COMPANY OF AMERICA, a Delaware Corporation, and Mitsubishi International Corporation, a New York Corporation, Plaintiffs, v. VIRGINIA CAPITAL BANK, a Virginia banking corporation, Defendant.
• Court: U.S. District Court — Eastern District of Virginia

498 F. Supp. 1078

NATIONAL ACCEPTANCE COMPANY OF AMERICA, a Delaware Corporation, and Mitsubishi International Corporation, a New York Corporation, Plaintiffs, v. VIRGINIA CAPITAL BANK, a Virginia banking corporation, Defendant.

Civ. A. No. 79-0630-R.

United States District Court, E. D. Virginia, Richmond Division.

August 8, 1980.

On Motion to Amend Judgment October 7, 1980.

Charles F. Withoefft, Hirschler, Fleischer, Weinberg, Cox & Allen, Richmond, Va., for National Acceptance.

Robert A. Pustilnik, Samuel & Pustilnik, Richmond, Va., for Mitsubishi.

Alexander N. Simon, Wallerstein, Goode & Dobbins, Richmond, Va., for defendant.

OPINION AND ORDER

CLARKE, District Judge.

This diversity action was brought pursuant to 28 U.S.C. § 1332 by two creditors of Concrete Structures, Inc., a Virginia corporation recently the subject of bankruptcy proceedings under Chapter XI of the Bankruptcy Act. Claiming a prior, perfected security interest in certain funds deposited in several deposit accounts maintained by Concrete Structures in the Virginia Capital Bank, the plaintiffs allege that the Bank unlawfully appropriated these funds to setoff certain debts owed to the Bank by Structures. Evidence was submitted by the parties in support of their various positions at a hearing held before this Court on June 19, 1980, and the matter is ripe for a determination on the merits. The following opinion represents the Court's findings of fact and conclusions of law under Fed.R. Civ.P. 52(a).

Although certain facts relating to this controversy were recited by the Court in a previous Order denying the Bank's motion for summary judgment, 491 F.Supp. 1269 (1980), a more complete picture of the circumstances surrounding this case can now be drawn. Concrete Structures, Inc. was at all relevant times engaged in the business of manufacturing and distributing concrete blocks and prestressed concrete building materials. Beginning in 1964, National Acceptance Company of America (NAC), a Delaware corporation, lent Structures various amounts of money pursuant to certain loan and security agreements and other financing documents. A significant portion of these loans were made as part of an accounts receivable financing arrangement whereby NAC agreed to lend Structures a certain percentage of the face amount of Structures' accounts receivable. NAC reserved the right reasonably to reject unsound accounts which might be tendered by Structures for financing, and took a security interest in the financed accounts and in other collateral. For its part, Structures was obligated to submit all payments received from customers in payment of any account financed under this arrangement directly to NAC.

During the period January 1, 1978, to June 30, 1978, NAC continued to lend money pursuant to these financing arrangements. These transactions were governed by a Loan and Security Agreement dated January 5, 1973; an Extension Agreement dated October 1, 1976, which extended payments on certain outstanding loans; an Accounts Rider dated November 18, 1977; and an Inventory Rider dated November 18, 1977. Under the Loan and Security Agreement, Structures granted NAC a security interest in the following collateral to secure loans made under these agreements:

(a) existing and future accounts, chattel paper, contract rights and instruments (sometimes hereinafter individually and collectively referred to as "Accounts"), whether Accounts are acceptable or unacceptable to Lender and whether Accounts are scheduled to Lender on Schedules of Accounts or not, and all goods whose sale, lease or other disposition by Borrower has given rise to any Accounts and which goods have been returned to or repossessed or stopped in transit by Borrower (b) presently owned and hereafter acquired inventory ("Inventory");

(c) presently owned and hereafter acquired general intangibles, goods (other than Inventory), equipment, vehicles and fixtures, together with all accessions, parts and appurtenances thereto appertaining or attached or kept or used or intended for use in connection therewith and all substitutions, renewals, improvements and replacements of and additions thereto (sometimes hereinafter individually and collectively referred to as "Equipment") and all Equipment described in Equipment Rider attached hereto;

(d) presently owned and hereafter acquired Inventory evidenced by warehouse receipts (whether negotiable or non-negotiable) now or at any time or times hereafter issued by any bailee in Lender's name or negotiated to Lender evidencing such bailee's possession of any Inventory now or at any time or times hereafter deposited with such bailee;

and all proceeds and products of and accessions to all of the foregoing described properties and interests in properties. ...

It is agreed that this security interest was duly perfected and remained so throughout all relevant times. As of June 1978, when Structures instituted bankruptcy proceedings, Structures was indebted to NAC in an amount exceeding the funds in dispute in this action, under the various financing arrangements governed by the Loan and Security Agreement and related documents.

At the time it instituted bankruptcy proceedings, Structures also was indebted to the other plaintiff in this action, Mitsubishi International Corporation. For some period prior to April 1976, Mitsubishi had been selling steel products to Concrete Structures on open account. Concrete Structures fell behind in its payments on this account and in April 1976, it issued a note promising to pay Mitsubishi the sum of $210,415.20 by July 23, 1976, according to a schedule of payments established in the note. However, Concrete Structures soon failed to meet this schedule of payments and on June 1, 1976, Concrete Structures and Mitsubishi entered into a security agreement to secure "payment and performance of all liabilities and obligations of Concrete Structures to Mitsubishi of any kind and description, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising and howsoever evidenced or acquired and whether joint, several or joint and several...." Under this security agreement, which was duly perfected by the recording of a financing statement, Mitsubishi acquired a security interest in:

(a) Debtor's inventory including all goods and merchandise, raw materials, goods in process, finished goods, goods in transit now owned or hereafter acquired and the proceeds thereof.

(b) Debtor's accounts receivable and notes receivable and contract rights including all sais sic accounts sic receivable and notes receivable and contract rights outstanding as of this date and all future accounts receivable and notes receivable, and contract rights and proceeds thereof.¹

As of June 30, 1978, Structures remained indebted to Mitsubishi in the amount of $278,298.65, exclusive of interest.

In December 1977, Concrete Structures opened several deposit accounts with Virginia Capital Bank, including accounts XXX-XXX-X and XXX-XXX-X, the two accounts at issue in this litigation. Thereafter, on March 21, 1978, the Bank loaned Concrete Structures $40,249.92, payable in installments over a two-year period. The Bank took as security nineteen vehicles listed in an accompanying security agreement. On April 4, 1978, the Bank made a demand loan of $12,000 to Concrete Structures. This loan was unsecured. A third loan, in the amount of $50,000, was made by the Bank on or about April 27, 1978,² to refinance an outstanding loan previously made to Concrete Erectors, Inc., a subsidiary of Structures. The Bank concedes that, although this April 27 loan ostensibly was secured by an interest in the accounts receivable of Concrete Erectors, this security interest was never perfected.

Almost immediately Structures encountered difficulty in meetings its obligations to the Bank under the terms of these loans. Beginning on June 1, 1978, Structures' impending insolvency became apparent, and without notice to or the authorization of the plaintiffs, the Bank made the following debits to Structures' deposit accounts to satisfy that company's remaining indebtedness under the loans:

                          Account No. XXX-XXX-X
                   6/1/78              $10,000.00
                   6/5/78                5,000.00
                   6/6/78                5,000.00
                   6/7/78               22,829.94
                   6/16/78               6,151.67
                   6/19/78               5,505.53
                                       __________
                                       $54,487.14  $54,487.14
                          Account No. XXX-XXX-X
                   6/12/78             $ 6,000.00
                   6/19/78              18,840.62
                                       __________
                                       $24,840.62  $24,840.62
                                                   __________
                  Total                            $79,327.76
                

There is no dispute that the entire balance of these accounts at the time of these set-offs was attributable to funds derived from cash sales of inventory, collections of accounts receivable, or funds wired by NAC to Structures pursuant to their loan agreements.

Actuated in part by this drain of its operating funds, Structures filed a petition for an arrangement under Chapter XI of the Bankruptcy Act on or about June 29, 1978. The Bank received notice of these proceedings and was listed as a general creditor of Structures. In connection with these bankruptcy proceedings, the plaintiffs entered into an Inter-Creditor Agreement, approved by the Bankruptcy Court, in which the plaintiffs agreed upon a plan for sharing any proceeds of certain of Structures' pre-bankruptcy accounts which might be collected in this litigation.

On July 19, 1979, NAC brought the present action, contending that the funds in the accounts setoff by the Bank represented identifiable proceeds of collateral secured by its loan and security agreement with Structures, that its security interest expressly extended to these proceeds and was superior to any interest of the Bank, and that it was entitled to these funds by reason...