National Accept. Co. of America v. Virginia

• Decision Date: 17 June 1980
• Docket Number: Civ. A. No. 79-0630-R.
• Citation: 491 F. Supp. 1269
• 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

491 F. Supp. 1269

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.

June 17, 1980.

Charles F. Witthoefft, Hirschler, Fleischer, Weinberg, Cox & Allen, Richmond, Va., for Nat. 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.

The plaintiffs in this diversity action are creditors of Concrete Structures, Inc., a Virginia corporation currently the subject of bankruptcy proceedings under Chapter XI of the Bankruptcy Act. Claiming a prior, perfected security interest in certain funds deposited in various deposit accounts maintained by Concrete Structures in the Virginia Capital Bank, they allege that the Bank wrongfully appropriated these funds to set off certain debts owed to the Bank by Concrete Structures. The matter comes before the Court on the Bank's motion for summary judgment against one of the plaintiffs, Mitsubishi International Corporation, on the ground that by its conduct prior to these setoffs, Mitsubishi waived whatever security interest it may have had in these funds.

The following facts are undisputed. 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 agreement, 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

Other pertinent provisions of this Agreement were as follows:

The Debtor will keep the Collateral free from any adverse lien, security interest or encumbrance (except as mentioned or provided for herein), and in good order and will not waste or destroy the Collateral or any part thereof.

Until default, the Debtor may have possession of the Collateral and use it in any lawful manner not inconsistent with this Agreement and not inconsistent with any policy of insurance thereon.

Upon default by the Debtor in the performance of any covenant or agreement herein or in the discharge of any liability to the Secured Party, or if any warranty should prove untrue, the Secured Party shall have all of the rights and remedies of a secured party under the Uniform Commercial Code or other applicable law and all rights provided herein or in any other applicable law and all rights provided herein or in any other applicable security agreement or instrument, all of which rights and remedies shall, to the full extent permitted by the law, be cumulative. The waiver of any default hereunder shall not be a waiver of any subsequent default hereunder shall not be a waiver of any subsequent default. sic

Debtor shall be in default under this agreement and all Liabilities of Debtor to Secured Party shall, without demand or notice of any kind and notwithstanding the maturity date or dates expressed in any evidence of any Liabilities, become immediately due and payable upon the happening of any of the following events or conditions:

(a) Default in the punctual payment or performance of any Liability referred to herein, or any part thereof;

(b) Default in the punctual performance of any covenant or agreement contained in or referred to herein;

(c) Any warranty, representation or statement made or furnished to Secured Party by or on behalf of the Debtor proves to have been false in any material respect when made or furnished;

(d) Loss, theft, substantial damage, destruction, encumbrance, to or of any of the Collateral;

(e) Insolvency of Debtor;

(f) Such a change in the management or change in ownership of capital stock of Debtor or change in any other of Debtor's affairs, financial or otherwise, as in the opinion of Secured Party impairs Secured Party's security or increases its risk.

In the early part of 1978, Concrete Structures opened three deposit accounts with Virginia Capital Bank, including 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. While the plaintiffs urge that this loan was made not to Concrete Structures, but to a sister corporation, Concrete Erectors, this issue need not be reached on the present motion. For purposes of ruling on this motion, the Court may assume that this last loan was attributable to Concrete Structures. The Bank concedes that, while this April 27 loan ostensibly was secured by an interest in Concrete Erector's accounts receivable, this security interest was never perfected.

Beginning on or about May 30 or June 1, 1978, the Bank set off various amounts of money against Concrete Structures' deposit accounts to satisfy that company's obligations to the Bank under the loans described above. The last such setoff was accomplished on June 19, 1978. Concrete Structures filed a petition for bankruptcy on June 28, 1978. These setoffs were accomplished without notice to either of the plaintiffs. In this action, the plaintiffs' claim that that these accounts contained proceeds from the sale of inventory and other collateral.

Throughout the period, June 1976 to June 1978, despite Concrete Structures' delinquent payment of its accounts, Mitsubishi continued to supply Concrete Structures with steel products and made no attempt to enforce its security interest under the June 1, 1976, agreement. On June 23, 1978, however, Mitsubishi dispatched a telegram to Concrete Structures' president stating:

Virtue of your default in payments of a promisory sic note dated April 1976 and a security agreement dated June 1976 demand is hereby made for payment of the balance due on the aforesaid note and all subsequent obligations, infull sic, by June 28, 1978, it being the intention of Mitsubishi International Corporation to institute a suit to foreclose on the collateral set forth in the above mentioned security agreement.

The gist of the Bank's argument in support of its motion for summary judgment is that by the terms of the June 1976 security agreement between Mitsubishi and Concrete Structures, and through Mitsubishi's conduct, Mitsubishi waived any prior security interest it might otherwise have had in the funds in the deposit accounts set off by the Bank. Specifically, the Bank notes that under the terms of the security agreement, Concrete Structures retained the right, until default, to retain possession of all collateral and to "use it in any lawful manner not inconsistent with" the agreement. From this language the Bank concludes that "Mitsubishi had no right to any of Concrete Structures' property or proceeds thereof until default. . . ." Though technically default may have occurred as early as June 1976, the Bank argues that by not enforcing its rights against the collateral and by continuing to supply Concrete Structures with steel products until June 1978, Mitsubishi waived any default which may have occurred prior to June 23, 1978, when Mitsubishi dispatched its telegram to Concrete Structures formally declaring default. Thus, the Bank concludes, Mitsubishi had no enforceable interest in the proceeds deposited in Concrete Structures' accounts at the time of the setoffs prior to June 23, 1978.

The logic of this argument is fatally flawed, and fails to appreciate the nature of Mitsubishi's interest in the collateral. Under Virginia law, to which we must turn for guidance in this diversity action, Mitsubishi's interest in the proceeds deposited in Concrete Structures' accounts at the time of the challenged set-offs is determined by reference to Article 9 of the Uniform Commercial Code, as adopted at Code of Virginia 1950, as amended, § 8.9-101 et seq. Under the UCC, a secured creditor clearly may not enforce his interest in collateral until such time as the debtor defaults. See UCC § 9-501(1) & (2); Code of Virginia 1950, as amended, § 8.9-501(1) & (2).² However, this is not to say that, until the debtor defaults, a secured party has no rights in the collateral sufficient to defeat the claims of other creditors to the collateral. The secured party's rights against conflicting claims to the collateral are determined not by the default of his debtor or his recognition thereof, but by the extent of his compliance with the various provisions of Article 9 governing the attachment and perfection of security interests and the priority of...