Smith v. Mark Twain Nat. Bank

Page 278

805 F.2d 278

15 Collier Bankr.Cas.2d 1160, 15 Bankr.Ct.Dec. 584,

Bankr. L. Rep. P 71,500, 2 UCC Rep.Serv.2d 1059

Robert H. SMITH, as Trustee of Reidy Marketing Company, Inc., a bankrupt, Appellee, v. MARK TWAIN NATIONAL BANK, Appellant.

Robert H. SMITH, as Trustee of Reidy Marketing Company, Inc., a debtor, Appellee, v. MARK TWAIN NATIONAL BANK, Appellant.

Robert H. SMITH, as Trustee of Marketing Company, Inc., a bankrupt, Appellant, v. MARK TWAIN NATIONAL BANK, Appellee.

Robert H. SMITH, as Trustee of Reidy Marketing Company, Inc., a debtor, Appellant, v. MARK TWAIN NATIONAL BANK, Appellee.

Nos. 86-1195, 86-1265.

United States Court of Appeals Eighth Circuit.

Submitted Sept. 8, 1986.

Decided Nov. 5, 1986.

Charles E. Merrill, St. Louis, Mo., for appellant.

Frank Susman, St. Louis, Mo., for appellee.

Before ROSS, WOLLMAN, and MAGILL, Circuit Judges.

MAGILL, Circuit Judge.

Plaintiff Robert H. Smith ("Trustee"), as Trustee in Bankruptcy of Reidy Marketing, Inc. ("Debtor"), brought two separate suits based on recovery provisions of the Bankruptcy Code against defendant Mark Twain National Bank ("Bank"). Trustee sought recovery of the proceeds of certain assets liquidated by Bank, Smith v. Mark Twain National Bank, No. 84-0031-C(4) (E.D.Mo. filed Jan. 6, 1984) (the "set-off case"), and turnover of a post-petition certificate of deposit, Smith v. Mark Twain National Bank, No. 83-2541-C(4) (E.D.Mo. filed Nov. 7, 1983) (the "turn-over case"). The district court subsequently consolidated these actions and tried them in a bench trial. Bank appeals the district court's entry of judgment based on 11 U.S.C. Sec. 553(b) for $616,154.03 and the award of prejudgment interest in favor of Trustee in the set-off case, and the granting of Trustee's motion for summary judgment based on 11 U.S.C. Sec. 542 in the turnover case. ¹ Trustee cross-appeals for recovery of Bank's assessment of early withdrawal penalties on certain certificates of deposit in the set-off case and for Bank's allegedly wrongfully-earned profits in both cases. For the reasons discussed below, we affirm in part and reverse in part.

I. BACKGROUND.

A. Financial Dealings.

Bank is a nationally chartered banking association with its principal place of business in St. Louis County, Missouri. From 1976 through mid-1981, Bank and Debtor maintained a business relationship in which Bank provided financing for Debtor's petroleum products brokerage business. The financing consisted of letters of credit and of loans to Debtor to fund petroleum purchases. In constructing the financing arrangements, Bank "relied on various certificates of deposit and repurchase agreements ² it issued to [D]ebtor as collateral for the credit and loans extended to [D]ebtor." Smith v. Mark Twain National Bank, 57 B.R. 373, 374 (E.D.Mo.1986).

Initially, Bank and Debtor orally agreed that all certificates of deposit and repurchase agreements issued by Bank and in Bank's possession would be collateral for any credit extended. On March 20, 1979, however, Debtor and Bank executed the first of a series of written security and pledge agreements. The front of this agreement listed as collateral a certificate of deposit in Bank's possession on that day. ³ The reverse side of the agreement contained a clause providing for a security interest in after-acquired collateral. ⁴ The reverse side also contained a paragraph 7, which provided that the occurrence of certain events would constitute default, including "if Bank deem[ed] itself insecure." Mark Twain, 57 B.R. at 375.

By early 1981, Debtor had been granted a $2,500,000 line of credit from Bank, evidenced by a note from Debtor to Bank in the same amount. The note provided that "[t]he [Debtor] and all endorsers, sureties, accommodation parties, guarantors and other parties hereto waive presentment for payment, demand for payment, protest and notice of every kind and nature." On June 1, 1981, Bank increased the line of credit to $4,000,000, which was evidenced by Debtor's promissory note to Bank executed on the same day. This note contained the same language as the previous note. On June 5, 1981, Bank advanced $972,144 to Debtor on the line of credit.

On June 1, 1981, Bank had in its possession three certificates of deposit with a total face value of $2,025,000. ⁵ Bank also had in its possession two repurchase agreements, together totalling $2,683,000, exclusive of interest.

On June 8, 1981, Debtor executed a second security and pledge agreement in favor of Bank, the front side of which provided:

Pledgor does hereby give and grant unto Bank as security for [p]ledgor's liability and obligations hereunder, a lien, with full right of setoff, upon any deposit or other account of pledgor with Bank and all securities and property of any kind and of whatsoever nature belonging to pledgor or in which pledgor has any right, title or interest and which, for any purpose have come into the possession, custody or control of Bank.

Mark Twain, 57 B.R. at 376. Debtor also executed an assignment to Bank on June 8, 1981.

On June 29, 1981, Debtor executed a third security and pledge agreement granting Bank a security interest in the three aforementioned certificates of deposit. The reverse side of the agreement contained language identical to the two previous agreements. All of the security and pledge agreements also contained a paragraph 9, which permitted Bank to "demand, sue for, collect and/or receive money, securities or other property at any time due, payable or receivable on account of or in exchange for any such part of the collateral." On June 29, Debtor also executed an assignment of the $1,500,000 certificate of deposit to Bank.

On June 30, 1981, Bank advanced Debtor $3,008,917 on Debtor's line of credit. Bank made this advance to enable Debtor to pay one of its creditors. This transaction was evidenced by Debtor's promissory note to Bank executed on June 30 for the same amount. The June 30 note contained the same language as the two previous notes. The June 29 security and pledge agreement was executed by Debtor in conjunction with the June 30 advance.

In early July of 1981, Bank and Debtor entered into two repurchase agreements in the amounts of $300,000 and $700,000. On July 13, 1981, they were rolled over into one agreement in the amount of $1,000,000. On July 27, 1981, Bank and Debtor entered into another repurchase agreement in the amount of $1,000,000, which was in Bank's possession on July 31, 1981.

In late July of 1981, Debtor orally requested the withdrawal of $1,350,000 of its funds held by Bank. Bank "informed [D]ebtor that if he made written demand for withdrawal of funds, his collateral would be liquidated." Mark Twain, 57 B.R. at 378. Nevertheless, on July 30, 1981, Debtor, by telegram, requested Bank to wire transfer $1,350,000 to Debtor's account at a Mobile, Alabama bank. Also on that date, Bank issued a $200,000 ⁶ certificate of deposit to Debtor, and Debtor executed an assignment of the certificate to Bank.

B. Bank's Actions on July 31, 1981.

On July 31, 1981, Bank sent Debtor a telex and a letter informing Debtor that its request of July 30, 1981, "was not within the terms of its agreement," and that Bank "deemed itself insecure" and "had applied all funds of [D]ebtor's deposit accounts and repurchase agreement proceeds to reduce [D]ebtor's loan balance." Mark Twain, 57 B.R. at 377. Further, in the telex and letter, Bank demanded full payment of the balance still due and owing after its collection action. As of this date, none of the security and pledge agreements had been cancelled or released.

In reducing Debtor's loan balance on July 31, 1981, Bank used a series of bookkeeping transactions. ⁷ Bank credited certain amounts, corresponding to Debtor's various accounts and assets held by Bank, to Debtor's outstanding indebtedness. ⁸

On August 7 and 10, 1981, two checks totalling $225,130, which had been deposited for the same amount in Debtor's demand deposit account to produce the July 31 balance of $445,176, were returned marked "Stop Payment." These checks were charged back to Debtor's account, and the amount actually credited to Debtor's outstanding indebtedness on July 31, 1981 was adjusted to $228,158.

C. Debtor's Bankruptcy and Post-Bankruptcy Dealings.

On August 31, 1981, an involuntary petition for relief under Chapter 7 of the Bankruptcy Code was filed in the Bankruptcy Court for the Southern District of Alabama against Debtor. The court entered an order for relief on November 11, 1981, and Smith was appointed as Trustee on January 19, 1982.

On November 6, 1981, post-bankruptcy petition and pre-order for relief, Debtor wire-transferred $250,000 to Bank which, on the same day, issued a certificate of deposit in Debtor's name. On or after November 6, Bank received from Debtor a security and pledge agreement, which listed the postpetition certificate of deposit as collateral, and an assignment of the certificate. The certificate was assigned to Bank "as security and collateral for a loan of even date herewith ⁹ and for any other indebtedness or liabilities, present or future, absolute or contingent, direct or indirect * * *." Trustee, in a memorandum to Bank dated February 10, 1982, requested Bank to turn over the certificate of deposit. In a letter to Debtor dated February 12, 1982, Bank acknowledged receipt of Debtor's memorandum. Although Bank also indicated in its letter that turnover of the certificate would be forthcoming at some point in the future, Bank never gave the certificate to Trustee.

D. Trustee's Suits and the District Court's Decisions.

1. The Set-Off Case.

On January 6, 1984, Trustee filed a complaint against Bank in the set-off case. Trustee sought, under three different theories, to recover all or part of the approximately $3,600,000 allegedly transferred from Debtor to Bank on July 31, 1981. Count I of Trustee's complaint sought to avoid the transfer under Section 547 of...