Royal Bank of Pennsylvania v. Selig

• Citation: 644 A.2d 741,434 Pa.Super. 537
• Parties: , 24 UCC Rep.Serv.2d 621 ROYAL BANK OF PENNSYLVANIA, Appellant, v. Joseph B. SELIG and Tremayne Selig and Continental Bank, Appellees. ROYAL BANK OF PENNSYLVANIA v. Joseph B. SELIG and Tremayne Selig and Continental Bank. Appeal of CONTINENTAL BANK.
• Decision Date: 03 August 1994
• Court: Pennsylvania Superior Court

Page 741

644 A.2d 741

434 Pa.Super. 537, 24 UCC Rep.Serv.2d 621

ROYAL BANK OF PENNSYLVANIA, Appellant, v. Joseph B. SELIG and Tremayne Selig and Continental Bank, Appellees.

ROYAL BANK OF PENNSYLVANIA v. Joseph B. SELIG and Tremayne Selig and Continental Bank.

Appeal of CONTINENTAL BANK.

Superior Court of Pennsylvania.

Argued Jan. 20, 1994.

Filed June 10, 1994.

Reargument Denied Aug. 3, 1994.

Stuart H. Savett, Ardmore, for Royal Bank.

James W. Hennessey, West Conshohocken, for Continental Bank.

Before WIEAND, HUDOCK and SAYLOR, JJ.

WIEAND, Judge:

Royal Bank of Pennsylvania, the appellant, holds a judgment against Joseph and Tremayne Selig in an amount exceeding six million ($6,000,000.00) dollars. The Seligs are also indebted to Continental Bank for approximately fourteen million, eight hundred thousand ($14,800,000.00) dollars. On or about August 10, 1990, Royal Bank caused a writ of attachment to be issued on its judgment, and this was served on Continental Bank as garnishee. The object of the writ was a custodial account being maintained by the trust department of Continental Bank in which the Seligs, pursuant to agreement, had placed stocks, bonds and securities having a value of ten million, four hundred twenty thousand ($10,420,000.00) dollars. When the trial court subsequently dismissed Royal Bank's writ of attachment, the bank appealed.

The facts were stipulated. They reveal that the present custodial account was created on or about January 17, 1990. ¹ Pursuant to the terms thereof, Continental Bank was to provide safekeeping for securities deposited by the Seligs. The bank was also to buy and sell securities as directed by the Seligs, collect the income therefrom and distribute the same as the owner and the custodian should agree from time to time. The owner, with the bank's approval, could withdraw any security deposited under the agreement, and either party could terminate the agreement upon written notice to the other. The agreement contained no provision that securities deposited in the account were intended to be collateral for monies advanced by the Bank to the Seligs. Following execution of the custodial agreement, however, the Seligs agreed that the income from the stocks, bonds and other investments forming the res thereof was to be paid to Continental Bank to reduce the Seligs' liability to said bank. These liabilities had arisen by direct loans to the Seligs and also as a result of surety agreements executed prior to 1990 in connection with loans made to corporate borrowers.

Pursuant to Pa.R.C.P. 3111(c), the writ of execution served upon Continental Bank contained language restraining it from delivering any property of the Seligs and from paying any debt to or for the Seligs. Despite this language, Continental Bank sold securities which were a part of the custodial account and applied the proceeds on account of the Seligs' indebtedness to it. Thereafter, the trial court granted a petition by Continental Bank to dismiss the writ of execution and refused to enforce the same. The court also dismissed a petition to hold Continental Bank in contempt for violating the restraining order contained in the writ of execution. Royal Bank appealed.

The first issue is whether Royal Bank's attachment was invalid because the sheriff failed to take physical possession of the stocks, bonds and other securities forming a part of the custodial account. This argument by appellee is based on 13 Pa.C.S. § 8317 (1979), which, at the commencement of the proceedings in this case, ² provided as follows:

§ 8317. Attachment or levy upon security

(a) Seizure required.--No attachment or levy upon a security or any share or other interest evidenced thereby which is outstanding shall be valid until the security is actually seized by the officer making the attachment or levy but a security which has been surrendered to the issuer may be attached or levied upon at the source.

(b) Remedies available.--A creditor whose debtor is the owner of a security shall be entitled to such aid from courts of appropriate jurisdiction, by injunction or otherwise, in reaching such security or in satisfying the claim by means thereof as is allowed at law or in equity in regard to property which cannot readily be attached or levied upon by ordinary legal process.

In the instant case, the stocks, bonds and securities were not in the possession of the debtors but in the possession of Continental Bank, an intermediary. Therefore, Royal Bank proceeded by attachment under Pa.R.C.P. 3111. Subsections (b), (c) and (d) of this Rule are as follows:

(b) Service of the writ upon the garnishee shall attach all property of the defendant which may be attached under these rules which is in the possession of the garnishee. It shall also attach all property of the defendant which may be attached under these rules and which comes into the garnishee's possession thereafter until judgment against him even though no such property of the defendant was in his possession at the time of service. Note:

For limitations on the power to attach tangible personal property see Rule 3108(a).

(c) Service of the writ upon the garnishee shall also subject him to the mandate and injunctive orders of the writ restraining him from paying any debt to or for the account of the defendant and from delivering any property of the defendant which may be attached under these rules to anyone except the sheriff or otherwise disposing thereof until further order of the court or discontinuance or termination of the attachment.

(d) Violation of the mandate and injunctive orders of the writ may be punished as a contempt.

Under these provisions, even if Royal Bank's execution had not been perfected because of Continental Bank's continued possession of the Seligs' stocks, bonds and securities, it is clear that Continental Bank could no longer deal with the Seligs' investments as it had prior to the attachment. Indeed, the terms of the writ served upon Continental Bank expressly enjoined the garnishee-intermediary "from paying any debt to or for the account of the defendant[s] and from delivering any property of the defendant[s] or otherwise disposing thereof." When the garnishee-intermediary nevertheless sold securities and applied the proceeds on account of debts owed by the Seligs to said bank, it acted at its peril.

The Supreme Court, speaking on the effect of a writ of execution, has said:

"The service of an attachment execution has the effect of an equitable assignment of the thing attached. It puts the garnishee in the relation to the attaching creditor which he had sustained to his former creditor. He may make the same defense to the attachment by evidence of set-off or of other equities that he might have made if sued by his original creditor."

Aarons v. Public Serv. Bldg. & Loan Ass'n, 318 Pa. 113, 117, 178 A. 141, 142 (1935), quoting Roig v. Tim, 103 Pa. 115, 117 (1883). A creditor's right to attach a general bank account of its debtor is subject to the garnishee-bank's right to set-off any matured obligation owed to it by its depositor. Aarons v. Public Serv. Bldg. & Loan Ass'n, supra. See also: Gluth Bros. Const., Inc. v. Union Nat'l Bank, 166 Ill.App.3d 18, 116 Ill.Dec. 365, 369, 518 N.E.2d 1345, 1349 (1988); United States v. First Nat'l Bank & Trust Co., 695 F.Supp. 194, 196 (W.D.Pa.1988); General Elec. Credit Corp. v. Tarr, 457 F.Supp. 935, 937 (W.D.Pa.1978); Allied Sheet Metal Fabricators v. Peoples Nat'l Bank of Washington, 10 Wash.App. 530, 518 P.2d 734, 739 (1974). It is generally established that "a bank has a general lien upon or right of set off against all moneys or funds in its possession belonging to a depositor to secure the payment of the depositor's indebtedness to it ..." 5A Michie on Banks and Banking § 114. The Uniform Commercial Code does not modify or suspend this aspect of the common law. Pittsburgh Nat'l Bank v. United States, 657 F.2d 36, 39 (3rd Cir.1981). Immediately upon the maturity of a debt owed by a depositor, the bank's right to set-off, by operation of law, extinguishes the depositor's rights to the account. Pittsburgh Nat'l Bank v. United States, supra at 38. Set-off is not overridden by the filing or service of attachment execution or garnishment. General Elec. Credit Corp. v. Tarr, supra at 937. In effect, the garnishee-bank's common law right to set-off gives it a right to self-help that takes priority over other creditors claiming a right to the funds on deposit. Walter v. Nat'l City Bank of Cleveland, 42 Ohio St.2d 524, 330 N.E.2d 425, 427-428 (1975).

Set-off, however, is appropriate only where certain conditions are met. There must be mutuality of obligation between the bank and the depositor; the funds against which set-off is exercised must belong to the depositor; the funds must be deposited with the bank into a general account; and, the debt owed by the depositor to the bank must be mature. See: Firstar Eagan Bank v. Marquette Bank Minneapolis, 466 N.W.2d 8, 12 (Minn.App.1991); Federal Dep. Ins. Corp. v. Pioneer State Bank, 155 N.J.Super. 381, 382 A.2d 958, 962 (1977). The dispute in this case is whether the custodial account was a general account. Did Continental Bank have a right to set-off the Seligs' debt against stocks, bonds and securities in possession of the bank's trust department pursuant to a written agreement which, by its terms, established no right of set-off in the custodian?

Generally, funds which have been deposited into a "special" account cannot be set-off against a debt owed from the depositor to a garnishee-bank. See: R.M. Bourne & Co. v. Peoples Union Bank & Trust Co., 404 Pa. 519, 526, 172 A.2d 814, 818 (1961); In Re Gordon, 319 Pa. 367, 371, 179 A. 592, 593 (1935). See also: Cotton States Mut. Ins. Co. v. Citizens & Southern Nat'l Bank, 168 Ga.App. 83, 308 S.E.2d 199, 203 (1983). "A bank cannot knowingly accept a deposit for a particular purpose and then act to defeat the purpose...