Preferred Surfacing, Inc. v. Gwinnett Bank & Trust Co.

• Decision Date: 25 September 1975
• Docket Number: No. B 75-1287 A.,B 75-1287 A.
• Citation: 400 F. Supp. 280
• Parties: PREFERRED SURFACING, INC., Debtor-Movant, v. GWINNETT BANK & TRUST COMPANY, Respondent.
• Court: U.S. District Court — Northern District of Georgia

400 F. Supp. 280

PREFERRED SURFACING, INC., Debtor-Movant, v. GWINNETT BANK & TRUST COMPANY, Respondent.

No. B 75-1287 A.

United States District Court, N. D. Georgia, Atlanta Division.

September 25, 1975.

C. Edward Dobbs, Huie, Brown & Ide, Atlanta, Ga., for debtor.

William J. Porter, Jr., Chamblee, Ga., for respondent.

ORDER

JAMES C. HILL, District Judge.

Gwinnett Bank & Trust Company, respondent in the above-captioned matter, appeals to this Court from an order of the Bankruptcy Court entered in this case on May 12, 1975, holding respondent in contempt of court. The issue presented is whether the bankruptcy judge abused his discretion in holding respondent bank in contempt of court for exercising the right of set-off under the facts and circumstances of this case.

The facts are not in dispute. On March 28, 1975, Preferred Surfacing, Inc. (the "Debtor") had one thousand, three hundred eighty-eight and 98/100 ($1,388.98) dollars on deposit in a general checking account with Gwinnett Bank & Trust Company (the "Bank"). On that same date the Debtor filed his petition in the Bankruptcy Court initiating this Chapter XI proceeding. On April 3, 1975, the Bank by means of set-off applied the aforementioned sum on deposit against the amount of the outstanding indebtedness allegedly owed by the Debtor to the Bank. On April 7, 1975, the Debtor informed the Bank that the set-off was in violation of the restraining order of the Bankruptcy Court entered March 28, 1975, and requested reinstatement of the same. The aforementioned order of the bankruptcy judge was entered in aid of the automatic stay provisions of the Bankruptcy Act upon a finding that it was "necessary to preserve the present status of said case with respect to all of the Debtor's creditors and as to the property and other assets of the Debtor until the First Meeting of Creditors is held." The order enjoined and restrained all persons from seizing or otherwise interfering with any property of the Debtor.

On April 10, 1975, the Bankruptcy Court issued a show cause order directing the Bank to show why it should not be adjudged in contempt by reason of its having seized funds of the Debtor after the filing of the Chapter XI petition and the issuance of the aforementioned order of the Bankruptcy Court. After hearing on this matter the bankruptcy judge found that the Bank

"did knowingly and wilfully act in contempt of court by interfering with property of the Debtor in the exclusive jurisdiction of this Court and by its refusal to comply with a lawful order of this Court enjoining and restraining any interference with property of the Debtor, . . ., it is herewith ADJUDGED that the said Gwinnett Bank & Trust Company is in contempt of court."

The Bank was ordered to establish and maintain a trust account in the name of the Debtor in order to purge itself of its contempt. Failure to do so would result in a two hundred ($200.00) dollar penalty. This appeal followed.

The Bank's alleged right to set-off in this case arises under a promissory note executed in favor of the Bank by the Debtor for the gross amount of one thousand seven hundred forty-five and 86/100 ($1,745.86) dollars. Said note matured on the same date as the order of the bankruptcy judge was entered enjoining any interference with the Debtor's property, to wit; April 3, 1975. However, the petition for an arrangement under Chapter XI was filed on March 28, 1975. The said note provided that collateral therefor included all balances, deposits and accounts the Debtor maintained with the Bank. The note further provided that upon certain contingencies, e. g. the filing of a bankruptcy petition, the Bank at its option could appropriate and apply toward payment any balances, deposits, and accounts of the Debtor with the Bank. Thus, the Bank set-off the $1,388.98 here in question. The next day the Bank was notified of the pending Chapter XI case.

The questions presented on this appeal are (1) whether the Bank was authorized to exercise its alleged right to set-off against the Debtor's checking account under the facts and circumstances at the time this was done, and (2) whether the bankruptcy judge abused his discretion in holding the Bank in contempt for exercising this alleged right to set-off under the facts of this case. The Court is of the opinion that the Bank had no right to set-off and that it was not error to hold the Bank in contempt for doing so under the circumstances.

Section 68(a) of the Bankruptcy Act, 11 U.S.C. § 108, provides:

"In all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid."

In ordinary bankruptcy, a bank may set off a deposit against an unmatured indebtedness even though done after the petition is filed, absent fraud or collusion for purposes of effecting a preference. See generally 4 Collier on Bankruptcy ¶ 68.02. Basically, the Bank is a creditor to the amount of the note and a debtor to the amount of the deposit. Insofar as not inconsistent with or in conflict with the provisions of Chapter XI, this section is applicable to proceedings under Chapter XI. 11 U.S.C. § 702.

There is some authority in this Circuit, albeit perhaps dictum, that a bank is entitled to a set-off in a Chapter XI proceeding under the circumstances of this case. First National Bank in Fort Lauderdale v. Davis, 317 F.2d 770 (5th Cir. 1963); see also, Tyler v. Marine Midland Trust Co. of New York, 128 F. 2d 927 (2nd Cir. 1942). However, after an extensive review of numerous court decisions and in light of the promulgation of Rule 11-44, the Court is of the opinion that there was no unilateral right to set-off under the facts of this case.

The general tone of thought on this question was set by Mr. Justice Cardozo in Lowden v. Northwestern National Bank and Trust Co., 298 U.S. 160, 56 S. Ct. 696, 80 L.Ed. 1114 (1936).

"A proceeding to reorganize is not a bankruptcy, though an amendment to the bankruptcy act creates and regulates the remedy. From the fact without more that such a proceeding has been initiated, one cannot know that it will be necessary to have recourse to section 68, 11 U.S.C.A. § 8, which was meant in its enactment to prescribe the rule of set-off upon a distribution of the assets. That stage of administration, or the analogous stage of a revision of the debts, may never be obtained in a proceeding to reorganize, though a petition has been approved and trustees have been appointed. If a plan of reorganization is not proposed or accepted, or, being proposed and accepted, is not confirmed by the court within a reasonable time, the whole proceeding may be dismissed (section 77(c)(7), 47 Stat. 1476); the title to the estate reverting to the debtor. By that time there may even be ability to pay demands as they mature. What is done at the beginning amounts to little more than a provisional sequestration to give protection for the future.

The right of set-off must fit itself to these procedural conditions. It is not susceptible of definition in the abstract without reference to the time or occasion of the controversy or the relation of the suit to the primary proceeding. Irrespective of the acceptance or confirmation of a plan, the trustees must have the power to gather in the assets and keep the business going. . . . The rule to be accepted for the purpose of such a suit is that enforced by courts of equity, which differs from the rule in bankruptcy chiefly in its greater flexibility, the rule in bankruptcy being framed in adaptation to standardized conditions, and that in equity varying with the needs of the occasion, though remaining constant, like the statute, in the absence of deflecting forces." 298 U.S. at 163-165, 56 S.Ct. at 698.

See also, Continental Illinois National Bank v. Chicago, R. I. & Pacific Ry., 294 U.S. 648, 55 S.Ct. 595, 79 L.Ed. 1110 (1935); Susquehanna Chemical Corp. v. Producers Bank & Trust Co., 174 F.2d 783 (3rd Cir. 1949); In re Cuyahoga Finance Co., 136 F.2d 18 (6th Cir. 1943). As all of these cases recognize, set-offs sanctioned in ordinary bankruptcy are not necessarily controlling in corporate reorganizations. See In Matter of Penn Central Transportation Company, 453 F.2d 520 (3rd Cir. 1971); In re Yale Express System, Inc., 362 F. 2d 111 (2nd Cir. 1966). Thus, in railroad reorganizations it would seem to now be well settled that banks are not privileged to elect to satisfy their own claims against the railroad by self help through the remedial device of set-off. In ...