Normand Josef Enterprises, Inc. v. Connecticut Nat. Bank, No. 14901

• Court: Supreme Court of Connecticut
• Writing for the Court: Before PETERS; PETERS
• Citation: 230 Conn. 486,646 A.2d 1289
• Parties: , 24 UCC Rep.Serv.2d 4 NORMAND JOSEF ENTERPRISES, INC. v. CONNECTICUT NATIONAL BANK.
• Docket Number: No. 14901
• Decision Date: 02 August 1994

Page 1289

646 A.2d 1289 230 Conn. 486, 24 UCC Rep.Serv.2d 4 NORMAND JOSEF ENTERPRISES, INC.
v.
CONNECTICUT NATIONAL BANK. No. 14901. Supreme Court of Connecticut. Argued May 3, 1994.
Decided Aug. 2, 1994.

[230 Conn. 487]

Page 1291

Gerald L. Garlick, for appellant-appellee (defendant).

Raymond J. Antonacci, with whom were Robert Hanahan and, on the brief, Robert Boynton, for appellee-appellant (plaintiff).

Robert M. Langer, Asst. Atty. Gen., with whom, on the brief, were Richard Blumenthal, Atty. Gen., and Neil G. Fishman and William M. [230 Conn. 488] Rubenstein, Asst. Attys. Gen., for the State as amicus curiae.

Mark V. Connolly and David J. Wiese filed a brief, for Conn. Bankers Ass'n as amicus curiae.

Before [230 Conn. 486] PETERS, C.J., and CALLAHAN, BORDEN, KATZ and PALMER, JJ.

[230 Conn. 488] PETERS, Chief Justice.

The principal issue in this case is the relationship between a bank's common law right of setoff and a judgment creditor's statutory right to enforce a court-issued execution. The plaintiff, Normand Josef Enterprises, Inc. (Josef), filed a four count complaint against the defendant, Connecticut National Bank (bank), alleging, in separate counts, that the bank had wrongfully dishonored two orders of execution on the bank account of Josef's judgment debtor, J.H. Hogan, Inc. (Hogan), that the bank's wrongful conduct violated the Connecticut Unfair Trade Practices Act (CUTPA), General Statutes § 42-110a et seq.; and that the bank had falsely, fraudulently, intentionally and recklessly misrepresented to Josef that no funds were in the account in question. The trial court, Pellegrino, J., rendered judgment in Josef's favor on the first three counts, ¹ and awarded it attorney's fees for the CUTPA violation. The bank appealed to the Appellate Court [230 Conn. 489] from the judgment and the supplemental judgment, and Josef cross appealed from the denial by the trial court, Pittman, J., of its postjudgment motion for attorney's fees to defend against the bank's appeal. We transferred the appeal and the cross appeal to this court pursuant to Practice Book § 4023 and General Statutes § 51-199(c).

The trial court, Pellegrino, J., made the following findings of fact. On September 24, 1991, Josef obtained a judgment against Hogan for $21,000. The validity of that judgment is not at issue. Because the judgment was not satisfied, Josef obtained an execution issued by the clerk of the court to recover unpaid damages in the amount of the judgment. Josef employed a deputy sheriff to serve the execution upon the bank in order to garnish the proceeds of Hogan's checking account. The deputy sheriff tried, unsuccessfully, on two occasions, to garnish this account.

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The deputy sheriff first served the execution upon the bank on Friday, October 25, 1991. On that date, Hogan had a checking account balance at the bank in the amount of $5326.97. A check drawn to a third party on Hogan's account in the amount of $380.15 was honored and cleared the following Monday, October 28. Thereafter, however, relying on a default on Hogan's commercial loan from the bank, the bank set off $4945.82, the remainder of Hogan's account, to itself. Although the bank's "proof ticket" was dated October 28, indicating that the setoff occurred on that date, no commercial loan payment was entered in Hogan's account until October 29. The bank notified the deputy sheriff who had served the execution that, as of the date of the execution, no funds were available.

[230 Conn. 490] Because of subsequent deposits, Hogan's bank account had a balance of $63,633.62, $54,620.06 and $51,673.23 on October 29, 30 and 31, respectively. The deputy sheriff served the execution for a second time on Wednesday, November 6, 1991, when Hogan's bank account had a balance of $31,304.86. Again relying on Hogan's defaulted bank loan, the bank repeated its exercise of its right of setoff, this time in the amount of $31,303.86. As had occurred previously, the bank manifested its exercise of that right by a "proof ticket" dated in timely fashion, on November 7, but did not credit the payment to Hogan's commercial loan account until the following day. The bank notified the deputy sheriff that no funds were available on the date of the second execution.

The trial court ruled in Josef's favor on the first two counts of its complaint, concluding that the bank had failed to act within the midnight deadline, the time constraint defined in General Statutes § 42a-4-104, ² that is expressly made applicable to the garnishment of corporate bank accounts by the terms of General Statutes § 52-367a. ³ That time constraint would have required [230 Conn. 491] the bank to exercise any right of setoff, in the first instance by midnight of October 28, and in the second instance by midnight of November 7. The court specifically found that the proof tickets were unreliable and that the bank had not exercised its setoff rights until October 29 and November 8.

With respect to these counts, the trial court also concluded that, regardless of its timing, the bank had no right of setoff in the circumstances of this case. The court determined that, in the absence of an express right of setoff in the Hogan loan agreement, the bank could only invoke a common law

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right of setoff. No common law right of setoff was available in this case, according to the trial court, because Hogan was not insolvent and because underlying equitable considerations did not support its recognition.

Finally, the trial court ruled in Josef's favor on its CUTPA claim. The court held that CUTPA applies to banks and that the bank's exercise of its right of setoff was, in both cases, a flagrant violation of § 52-367a and of the court orders of execution. The court found that the bank had engaged in deceptive conduct in returning[230 Conn. 492] the orders of execution on the ground of "no available funds" without mentioning the setoffs. Accordingly, the court held that Josef was entitled not only to its money judgment and interest, but also to a reasonable attorney's fee. Thereafter, the court awarded attorney's fees calculated on an hourly basis.

On appeal, the bank challenges one of the trial court's findings of fact and all of its conclusions of law. As a matter of fact, the bank claims that its setoff was timely because it complied with the applicable midnight deadline. As a matter of law, the bank claims that: (1) Josef failed to state an actionable claim, because it alleged only that the bank did not act upon the execution according to General Statutes § 42a-4-303, ⁴ which does not apply to the circumstances of this case despite the cross-reference contained in § 52-367a; (2) the bank is entitled to a common law right of setoff in the circumstances of this case; (3) CUTPA does not apply to banks; (4) the bank did not violate CUTPA; and (5) the trial court miscalculated recoverable attorney's fees. The cross appeal filed by Josef challenges the trial court's ruling that, as a matter of law, CUTPA does not authorize[230 Conn. 493] recovery of anticipatory appellate attorney's fees. Although we affirm the judgment of the trial court concerning the § 52-367a violation and agree with its conclusion that CUTPA applies to banks, we disagree with the trial court's determination that the bank's actions, under the circumstances of this case, violated CUTPA.

I

The bank first claims that Josef has failed to state an actionable claim and, therefore, cannot recover on the basis of its pleadings. The bank specifically contends that Josef only alleged a failure by the bank to act upon Josef's court-issued postjudgment execution, served pursuant to § 52-367a, in accordance with § 42a-4-303 before its midnight deadline as defined in § 42a-4-104. The bank argues that § 42a-4-303 provides rules for determining the priority between, inter alia, a setoff or judicial execution and an item, and not between an execution and a bank setoff. Because § 42a-4-303 does not apply to the circumstances of this case, which involve a priority dispute between Josef's judicial execution and the bank's setoff, the bank contends that the plaintiff cannot prevail on its cause of action.

A

The first issue before us is whether § 42a-4-303, which is identical to § 4-303 of the Uniform Commercial Code, resolves a priority dispute between a judicial execution and a bank's setoff. The priority disputes that § 42a-4-303 addresses are those between an "item," on the one hand, and legal process such as a judicial execution or garnishment, a setoff by the payor bank, a bankruptcy

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petition or a stop payment order, on the other hand. ⁵ A.L.I., Uniform Commercial Code (12th [230 Conn. 494] Ed.1990) § 4-303 and comments 1 and 2. The term "item" is defined by § 42a-4-104(a)(9) as "an instrument or a promise or order to pay money handled by a bank for collection or payment." ⁶ In order to come within § 42a-4-303, either the bank's setoff or Josef's postjudgment judicial execution would, therefore, have to be an "item." We agree with the bank that neither the setoff nor the execution order is an "item."

The right of setoff, although it may arise out of a written instrument, is a common law equitable right that is not itself a written instrument. A setoff involves "[t]he equitable right to cancel or offset mutual debts or cross demands, commonly used by a bank in reducing a customer's checking or other deposit account in satisfaction of a debt the customer owes the bank." Black's Law Dictionary (6th Ed.1990) p. 1372; see Sullivan v. Merchants National Bank, 108 Conn. 497, 499-500, 144 A. 34 (1928). A setoff is, therefore, not an "item."

[230 Conn. 495] A postjudgment judicial execution or garnishment involves an order issued under authority of the court allowing a judgment creditor to obtain satisfaction of a judgment by reaching debts due from a third party, such as a banking institution, to the judgment debtor. General...