Spencer Companies v. Chase Manhattan Bank, NA
| Decision Date | 01 December 1987 |
| Docket Number | Civ. No. 87-0911-C. |
| Citation | 81 BR 194 |
| Parties | SPENCER COMPANIES, INC., Plaintiff, v. CHASE MANHATTAN BANK, N.A. and Chase National Corporate Services, Inc., Defendants. |
| Court | U.S. District Court — District of Massachusetts |
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Paul D. Moore, Toni G. Wolfman, Foley Hoag & Eliot, Boston, Mass., for plaintiff.
Robert M. Buchanan, Choate, Hall & Stewart, Boston, Mass., Andrew J. Connick, Barry G. Radick, Nader M. Tavakoli, Milbank, Tweed, Hadley and McCoy, New York City, for defendants.
This action is before the Court on the defendants' motion for dismissal of Counts II, III, IV, VI, VII and VIII of the plaintiff's complaint. In addition, the defendants have moved for dismissal of Count IX, or in the alternative, summary judgment.
Plaintiff, Spencer Companies, Inc. ("Spencer"), is a Massachusetts corporation involved primarily in the footwear business. The defendants are Chase Manhattan Bank, N.A., ("Chase Bank") a national banking association having its principal place of business in New York, and Chase National Corporate Services, Inc., ("Chase Services"), a New York corporation affiliated with Chase Bank which maintains a regional office in Boston, Massachusetts.1 In 1983, Chase Bank became the primary lender for Spencer. Pursuant to the credit relationship established, Spencer executed two promissory notes dated June 1, 1983 and January 22, 1985. Each note was expressly governed by New York law.2 Spencer also opened two checking accounts with Chase Bank, one of which was entitled "Expense Account" and was used for payment of Spencer's general operating expenses. The other account was used primarily for inventory and salary purposes and has been labeled the "General Account" by Spencer.
The lending arrangement between Spencer and Chase ran smoothly until the spring of 1986 when Chase informed Spencer that it wished to terminate their banking relationship. At that time, Spencer owed $3.2 million under the promissory notes. After receiving notice that Chase wished to withdraw as Spencer's primary lender, Spencer sought alternative financing with another lender. Throughout the summer of 1986, Spencer and Chase participated in discussions and negotiations with several lenders and a venture capital firm concerning the refinancing of Spencer's business. During this period, Chase took several actions to better protect itself in its position as Spencer's primary lender. In addition, at the end of October, 1986, Chase announced that it would no longer continue its previous policy of allowing Spencer to draw checks against uncollected funds. Chase informed Spencer that no deposits would be available until six days after deposit. As a result of this new policy, several checks issued by Spencer were dishonored.
On November 4, 1986, Chase set off the balance of Spencer's General Account against the $3.2 million debt owed Chase by Spencer. Either after the set off or immediately before, Chase sent a letter to Spencer's offices in Boston demanding payment of the promissory notes. Eight days later, Chase set off the funds held in Spencer's Expense Account against the amounts remaining to be paid under the notes. As a result of the loss of the funds in both the General and Expense Accounts, Spencer was forced to file for bankruptcy.
In Count II, Spencer's complaint alleges that Chase failed to make a demand or alternatively, failed to give Spencer an opportunity to respond to its demand for payment before it set off the General Account. In addition, Spencer alleges that Chase built up the balance in the account prior to the setoff by wrongfully dishonoring checks drawn thereon and by accepting deposits to the account with the intent to hold them solely for the benefit of Chase. Spencer asserts that these facts, which must be accepted as true for the purpose of this motion, establish that Chase wrongfully set off the General Account.
It is well settled that a bank may apply the balance in its depositor's account to satisfy a debt the depositor owes the bank. Forastiere v. Springfield Institution for Savings, 303 Mass. 101, 103, 20 N.E.2d 950 (1939). Three requirements must be met in order for a bank to validly exercise its right to setoff. First, the use of the funds deposited in the account must be unrestricted. Second, mutual obligations must exist between the bank and the depositor. Third, the debt which the bank seeks to setoff must be due and payable. Norton & Whitley, Banking Law Manual § 11.052 (1987). In the present case, there is no question but that use of the funds in the General Account was not subject to any restrictions and that mutual obligations existed between Chase and Spencer. Therefore, the question of whether or not Chase's setoff of Spencer's account was wrongful depends on whether the $3.2 million which Spencer owed Chase was properly due and payable at the time of the setoff.
Generally, demand notes are considered due and payable immediately upon their execution with or without a prior demand. See M.G.L. c. 106, § 3-122(1)(b); N.Y. Uniform Commercial Code § 3-122(1)(b) (McKinney 1964). See also Federal Deposit Insurance Corp. v. First Mortgage Investors, 485 F.Supp. 445, 455 (E.D.Wisc. 1980); Allied Sheet Metal Fabricators v. Peoples National Bank of Washington, 10 Wash.App. 530, 518 P.2d 734, 738 (1974); Bielanski v. Westfield Savings Bank, 313 Mass. 577, 580, 48 N.E.2d 627 (1943); In re Dimon's Estate, 32 N.Y.S.2d 239, 243 (Surrogate's Court 1941). Because a demand note is considered a mature obligation, a bank's setoff of its depositor's account to satisfy a demand note has been held proper even where the lender failed to make a formal demand for payment. FDIC v. First Mortgage Investors, 485 F.Supp. at 455, Allied Sheet Metal Fabricators v. Peoples National Bank of Washington, 518 P.2d at 739.
Although a formal demand is not required to mature an obligation evidenced by a demand note, the parties to a lending arrangement can agree that a note will become due and payable only after a formal demand is made. Moreover, the mere fact that the parties choose to label the instruments which evidence their obligations as demand notes does not automatically mean that no prior demand is required. Where the terms and conditions of a so-called demand note indicate that the parties intended the obligation to become due and payable upon the happening of a future event, the debt is not mature upon execution of the note. The obligation matures only when the agreed-upon event occurs. Kersten v. Continental Bank, 129 Ariz. 44, 628 P.2d 592, 598 (1981); Peterson v. Valley National Bank of Phoenix, 102 Ariz. 434, 432 P.2d 446 (1967). Until then, a bank may not set off its depositor's account to satisfy the debt. Kersten v. Continental Bank, 628 P.2d at 598.
In the present case, the promissory notes at issue are denominated demand notes. However, closer inspection of the terms and conditions indicate that the parties did not intend the debts to become due and payable immediately upon execution. The note dated June 1983 provides that one interest rate shall apply from the date of execution until the date the principal amount becomes due. The note also provides that a higher interest rate shall apply to any amount of principal which is not paid when due. These provisions indicate that Spencer and Chase did not intend the debts to mature until some point after the execution of the note. While the June 1983 note does not specify when the principal would become due, it is a compelling conclusion, and I so find, that a demand for payment was required.3
With respect to the January 1985 note, the terms of the agreement indicate that the parties also intended this debt to mature upon the happening of a future event, rather than at the execution of the note. The January 1985 note lists various events which would render the note due and payable. Like the 1983 note, the 1985 note contains no specific term stating that a demand is required prior to maturity. However, the listing of the various contingencies which would render the note due and payable would be illogical and unnecessary if the parties intended that the note would be due and payable from its execution. See Reid v. Key Bank of Southern Maine, Inc., 821 F.2d 9, 14 (1st Cir.1987). I find that the logical construction of this note is that, in the absence of the occurrence of one of the contingencies listed, demand for its payment was required before it became due and payable.
Spencer has alleged that Chase failed to demand payment prior to setting off Spencer's General Account. For the purposes of a motion to dismiss, this allegation must be accepted as true. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed. 2d 90 (1979). If proved, the failure to make a prior demand would mean that Chase set off Spencer's General Account against an unmatured indebtedness, a fact sufficient to make the setoff wrongful. Harding v. Broadway National Bank, 294 Mass. 13, 18, 200 N.E. 386 (1936).
Although I agree with Spencer that a demand for payment was a prerequisite to a proper setoff in this case, I disagree with Spencer's contention that the good faith obligations imposed by the U.C.C. prohibited Chase from acting in an arbitrary and capricious manner in requiring payment of the notes. The holder of a demand note does not need a good faith reason or any reason at all to demand payment. Demand instruments are specifically exempted from the good faith obligation applicable to acceleration clauses under U.C.C. § 1-208. As the Comment to that section states:
Obviously, this section has no application to demand instruments or obligations whose very nature permit call at any time with or without reason.
The cases cited by Spencer do not persuade me that Chase's right to demand repayment was limited by a good faith...
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