S.E.C. v. Safety Finance Service, Inc., 80-3954

• Citation: 674 F.2d 368
• Decision Date: 26 April 1982
• Docket Number: No. 80-3954,80-3954
• Parties: SECURITIES & EXCHANGE COMMISSION, Plaintiff, v. SAFETY FINANCE SERVICE, INC., et al., Defendants. GENERAL MOTORS ACCEPTANCE CORPORATION, Defendant-Appellee, v. Ben D. SISSON, Receiver for Safety Finance Service, Inc., Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 368

674 F.2d 368

SECURITIES & EXCHANGE COMMISSION, Plaintiff, v. SAFETY FINANCE SERVICE, INC., et al., Defendants.

GENERAL MOTORS ACCEPTANCE CORPORATION, Defendant-Appellee, v. Ben D. SISSON, Receiver for Safety Finance Service, Inc.,

Defendant-Appellant.

No. 80-3954.

United States Court of Appeals Fifth Circuit.

April 26, 1982.

John J. Gillon, Jr., Robert J. Landry, Michael H. Ellis, New Orleans, La., for defendant-appellant.

Steven B. Witman, Gary M. Zwain, New Orleans, La., for defendant-appellee.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before WISDOM, SAM D. JOHNSON and WILLIAMS, Circuit Judges.

JERRE S. WILLIAMS, Circuit Judge:

This controversy emerges from a larger dispute between the Securities and Exchange Commission and Safety Finance Service, Inc. (SFSI). Appellant, the court-appointed receiver of SFSI (Receiver), contests the supervisory court's decision awarding $10,110.88 from the liquidation of a receivership asset to appellee General Motors Acceptance Corp. (GMAC) in satisfaction of a chattel mortgage. Deferring to the broad discretionary powers inherent in a court of equity, we affirm the court's order.

I. The Facts

As the district court notes, the underlying facts are not seriously in dispute. On October 25, 1979, the district court issued a temporary restraining order and preliminary injunction enjoining SFSI, Jack Porobil, Jr., and others from committing any further violations of various federal securities laws. The court also appointed a receiver to assume control over SFSI's assets and to administer its affairs. On November 5, SFSI agreed to a consent judgment that permanently enjoined the corporation from engaging in any activities in violation of the federal securities laws, placed its assets in trust, and appointed appellant Ben Sisson as receiver. Two days later, codefendant Jack Porobil consented to a similar judgment placing virtually all of his personal and commercial assets into the receivership.

Several months prior to the onset of his troubles, Porobil had purchased a 1979 Chevrolet Corvette, making the down payment with a check for $4,769.83 drawn on one of his corporate affiliates later named in the trust. He had borrowed the balance of the purchase price from GMAC by executing a chattel mortgage on the car. The mortgage contained the customary proviso authorizing GMAC to initiate executory proceedings for seizure and sale of the Corvette if Porobil should default on his $11,165.40 promissory note. With GMAC thus secured, title to the car was given over to Porobil and Jack A. Porobil Enterprises, Inc., a bogus entity that never filed any articles of incorporation with the Secretary of State for Louisiana.

By January of 1980, Porobil had defaulted on his payments to GMAC. GMAC promptly began executory proceedings in the civil district court for the Parish of Orleans, naming Porobil and "Porobil Enterprises" as defendants. The Civil Sheriff of Orleans Parish seized the Corvette.

Meanwhile, Melvin J. Hoerner, a friend of Porobil, ordered a cashier's check for $10,110.88 from the Century National Bank on February 4, 1980, and tendered it to GMAC in satisfaction of the mortgage as the full amount then owed. Precisely why Hoerner produced this sum for Porobil is not clear from the record. According to the Receiver, Porobil had persuaded Hoerner to pay off GMAC, obtain the car from the sheriff, sell it to a buyer that Porobil would procure, and give Porobil a commission on the sale. Hoerner quickly learned, however, that the Receiver had asserted a claim to the Corvette as an asset of the Porobil trust. So Hoerner then ordered Century National Bank to stop payment on the certified check, and the bank, surprisingly, complied. To complete the strange saga of this forlorn check, GMAC, on receiving the dishonored instrument from the bank, simply returned it to Hoerner at his request.

The following August, GMAC again attempted to obtain a sheriff's sale of the Corvette. On August 13, however, the Receiver obtained a temporary restraining order enjoining the sale. Eventually, GMAC and the Receiver agreed that the Receiver should sell the car to the highest bidder and pay the proceeds into the court's registry pending resolution of their dispute. Although the car finally sold for $10,700, it is the amount covered by GMAC's lien, $10,110.88, that still forms the object of the quarrel between the Receiver and GMAC.

The Receiver argued to the court below, and argues now, that the Corvette was a Porobil asset covered by the trust; therefore, the proceeds from its sale should go to the receivership. While conceding that GMAC once had a valid security interest in the car, the Receiver insists that the chattel mortgage was extinguished when Hoerner tendered a cashier's check to GMAC in satisfaction of the debt. In support of his position, the Receiver cites La.Civ.Code Ann. art. 3411(4) (West 1952), which provides that mortgages are extinguished "(b)y the extinction of the debt, for which the mortgage was given." Reminding us that GMAC accepted Hoerner's check and authorized him to pick up the Corvette at the auto pound, the Receiver also points out "that consent of a mortgagee to the release or removal of mortgaged property destroys the validity of the securities as to third parties." Glass v. McLendon, 66 So.2d 369, 370 (La.App.1953).

GMAC responds with the allegation, the truth of which is not discernible from the record, that all of its troubles stem from its reliance upon the Receiver's assurances that he would not interfere with GMAC's executory proceedings against the Corvette. It also disputes the Receiver's interpretation of Louisiana law, submitting that the bank's disavowal of Hoerner's check, whether legally valid or not, precluded the immediate satisfaction of Porobil's debt. This, in conjunction with the Receiver blocking Hoerner's effort to pick up the car, produced a failure of consideration on both sides. Consequently, according to GMAC, the chattel mortgage remains intact.

The court below concluded that the bank acted improperly in stopping payment on the cashier's check. The court determined further that GMAC had committed a serious blunder in returning the check to Hoerner, thereby forfeiting its rights on that instrument, and choosing instead to attempt another forced sale of the car. While admitting that the Receiver's position on the extinction of GMAC's mortgage was arguable, the court chose to rely on what it described as the "practicalities" of the situation: acceptance of the Receiver's view would leave GMAC without any remedy. On weighing the equities, the court held that such a resolution would penalize GMAC too harshly. Accordingly, it ordered the Receiver to pay GMAC the $10,110.88 covered by the mortgage, with the $589.12 remainder from the sale falling into the receivership.

II. The Law

Some understanding of the exalted position occupied by cashier's checks in our commercial law is necessary to a full appreciation of this peculiar cycle of events. The Receiver has maintained throughout this litigation-and GMAC does not seriously contend otherwise-that a cashier's check is as good as cash, and that a customer's order to a bank to stop payment on such a check is legally invalid. The district court agreed, quoting the following excerpt from R. Hersbergen, The Bank-Customer Relationship Under the Louisiana Commercial Laws, 36 La.L.Rev. 29, 41 (1975) (footnote omitted):

A cashier's check is a draft drawn by a bank on itself. Neither the bank nor the customer can stop payment since the bank is not its own "customer" and the check is not "an item payable for (the customer's) account" under (La.Rev.Stat.Ann. § 10:) 4-403 (West Supp.1979). Furthermore, courts may view cashier's checks as accepted in advance upon issuance, and therefore not subject to a stop order by virtue of (La.Rev.Stat.Ann. § 10:) 4-303(1)(a) (West Supp.1979).

The statutes mentioned above ¹ convince us that this interpretation of Louisiana law is well-founded. Moreover, the Receiver's position on cashier's checks comports with basic hornbook commentary on the Uniform Commercial Code, from which Louisiana's commercial statutes were drawn. See La.Rev.Stat.Ann. § 10:1-101 Comment (West Supp.1981). In J. White & R. Summers, Handbook of the Law Under the Uniform Commercial Code, 681-82 & n.110 (2d ed. 1980), the authors note that "(T)he public treats cashier's checks as the equivalent of cash." Moreover, "(i)f the bank voluntarily chooses to dishonor the certified or cashier's check or to order its bank to stop payment on the bank check, the holder will have a cause of action against the bank." ²

As all who have ventured into the channels of commerce must quickly perceive, Hoerner's feat in getting the bank to stop payment on its check, which it had no right to do, and then getting GMAC to give back the instrument, on which it could have sued the bank, was barely short of heroic. Having thus escaped this financial Scylla and Charybdis miraculously unscathed, Hoerner disappears from our story with his $10,110.88 in hand.

GMAC, by contrast, still confronts the Receiver's insistence that its mortgage evaporated with its acceptance of the now-vanished check in satisfaction of Porobil's debt. After reviewing the sparse authorities offered in support of the Receiver's position, we must agree with the district court that the Receiver's interpretation of Louisiana law on this issue is arguable, but only that. ³ The threshold question that both parties have sought to resolve is whether a third party's tender of a cashier's check on behalf of a mortgagor automatically extinguishes a chattel mortgage, even though the drawer/acceptor bank subsequently illegally dishonors the check at presentment. In other words, faced with the unexpected necessity of suing the third party's bank on the instrument offered in satisfaction of the debt, does the...