UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
SIM/LAKE CUMBERLAND, INC.
d/b/a SYCAMORE ISLAND MARINE
DEBTOR CASE NO. 92-60774
SIM/LAKE CUMBERLAND, INC.
d/b/a SYCAMORE ISLAND MARINE PLAINTIFF
VS. ADV. NO. 92-6038
THE CITIZENS NATIONAL BANK
OF SOMERSET DEFENDANT
This matter is before the Court for decision on the issues of whether the defendant wrongfully withheld the general operating account of the plaintiff, and whether the guaranty of Richard B. Stewart, the plaintiff's president, is enforceable pursuant to KRS 371.065. This matter had previously been set for trial on August 17, 1993, but at a show cause hearing conducted on August 16, 1993, the Court determined that the matter could be decided upon the record. This Court has jurisdiction of this matter pursuant to 28 U.S.C.'1334(b); it is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(E).
This matter was initiated by the filing of the plaintiff's Complaint on October 15, 1992, in the Western District of Kentucky. Richard B. Stewart ("Stewart") filed his Motion to Intervene as Plaintiff on October 16, 1992. This matter was transferred to the Eastern District of Kentucky on November 3, 1992. At a hearing conducted on February 24, 1993, the Court sustained Stewart's Motion to Intervene. Stewart's Intervening Complaint was filed on March 1, 1993. The defendant filed its Answer to the plaintiff's Complaint and its Answer to the Intervening Complaint on March 9, 1993.
Soon after the filing of its Complaint the plaintiff had, on October 23, 1992, filed a Motion for Turnover of Funds. The defendant filed its Response to Motion for Turnover of Funds on March 9, 1993. On June 3, 1993, the Court entered an Agreed Order continuing the trial to August 17, 1993. The Court issued a Show Cause Order on August 10, 1993. After a show cause hearing, as referred to hereinabove, the Court subsequently entered an order submitting this matter for decision.
The parties have entered into a Stipulation of Facts, including the following:
1. SIM is a corporation duly organized and existing under the laws of the Commonwealth of Kentucky. SIM is engaged in the business of selling boats and other assorted marine products.
2. Citizens Union National Bank of Somerset ("Citizens") is a nationally chartered bank doing business in Somerset, Kentucky. Citizens maintains a branch, among others, in Burnside, Kentucky.
3. On or about December 1, 1989, SIM entered into a Master Dealer Agreement ("the Agreement") with Citizens. On the same date, Stewart executed a document entitled "Guaranty Agreement" with Citizens.
4. On or about November 13, 1989, SIM executed and delivered a Security Agreement and Financing Statement to Tracker Marine Corporation ("Tracker"). On the same date, Tracker filed its Uniform Commercial Code Financing Statement (UCC-1) with the Pulaski County Court Clerk's office. The Financing Statement covered inventory, equipment, fixtures, accounts, contract rights, chattel paper, instruments, documents of title, deposit accounts and general intangibles, whether now owned or hereafter acquired, and all attachments, accessions, substitutions and replacements thereto and all proceeds thereof.
5. On December 26, 1989, Citizens filed its UCC-1 in the Pulaski County Court Clerk's office. It covered all existing and hereafter acquired inventory and new and used boats, motors, trailers of all makes and models, together with all existing and hereafter acquired accessories, parts, equipment, furnishings and the like attached or related thereto, and all accounts, contract rights, chattel paper and general intangibles arising out of the retail sale or other disposition of any of the foregoing. This Financing Statement also covered all inventory, furniture, fixtures, equipment, cash and accounts receivable then owned or thereafter acquired.
6. Tracker had the first filed blanket security interest in SIM's assets, and Citizens had the second filed blanket security interest in SIM's assets.
7. Tracker has not subordinated its interest to Citizens or refiled its UCC-1.
8. From December 1989 to and including September 27, 1992, Tracker and Citizens financed the purchase of boats and marine accessories purchased by SIM.
9. On March 31, 1990, Stewart signed a statement authorizing Citizens to debit the SIM account #75-060-251 to pay off floor-plan units that had been sold.
10. In June 1992 Citizens conducted a floor-plan check to determine whether certain boats financed by Citizens were at SIM's showroom. Employees of Citizens discovered that one or more boats had been sold, the boats had been titled in the purchasers' names, and Citizens had not received payment for them.
11. On August 6, 1992, Stewart met with Citizens at the request of its executive vice-president, Charles Farris, to discuss the units that had been sold, titled, and for which Citizens had not received payment, and possible resolutions of this problem.
12. On September 28, 1992, Renee Gregory, a SIM employee, took two deposits to the Burnside branch of Citizens. The first deposit consisted of a $700.00 personal check and a $13,000.00 cashiers check. The second deposit was in the amount of $13,500.00 for the downpayment on a Tracker boat. Paperwork for the sale of another boat was also taken to Citizens for financing. Ms. Gregory was directed to the office of Thomas Benneke at Citizens' downtown location. Ms. Gregory met there with Mr. Benneke, as well as Mr. Farris, and explained the purpose of the deposits.
13. The deposits were retained by Citizens and Ms. Gregory wrote checks on the deposits to pay off the two boats and procure the certificates of origin. Ms. Gregory wrote check #4819 in the amount of $26,065.69 to pay off the boats and a check to register the boats. Citizens paid both the checks according to their face tenor.
14. On September 28, 1992, the business operation checking account of SIM had a balance of $41,760.45.
15. On or about September 29, 1992, Citizens informed Stewart by telephone and by follow-up letter that:
a. Floor-plan items "sold out of trust", certain past due interest on the floor-planning agreement, and the ten percent (10%) reductions due on old items on the floor-plan had to be paid by October 2, 1992. These items represented a total of $137,563.81. If these problems were not resolved by October 2, 1992, Citizens would ask the manufacturers to honor their repurchase agreements and repurchase the items currently floor-planned.
b. Citizens had placed a hold on SIM's checking account # 75-060-251 which then had a balance of $18,230.47 to apply against the units which were sold out of trust.
c. Citizens would no longer floor-plan any items with any manufacturer doing business with SIM until further notice.
16. On September 29, 1992, SIM's regular operating account had a balance of $44,296.16. On October 1, 1992, $33,458.26 was deposited into the account, and Citizens paid $26,065.69, resulting in a balance of $51,688.73. On October 2, 1992, the balance of the account was reduced by Citizens to $33,458.26. On October 9, 1992, the account was reduced to $0.08 by Citizens' removal of $33,458.18.
17. Citizens did not honor any checks written by SIM employees after September 28, 1992, except for checks #4819 for $26.069.69 and #4818 for $57.65. Checks drawn on account # 750-602-51 representing a total of $18,463.57 were dishonored by Citizens prior to October 9, 1992.
18. The balance due and owing Citizens by SIM is $779,446.44.
As stated above, the first issue before the Court is whether the Bank wrongfully withheld the general operating account of the plaintiff. The plaintiff uses several arguments to support this contention, one being that the deposits made on September 28, 1992, were "special deposits" and so were not subject to setoff by the Bank. The plaintiff contends that the deposits were "special" because Renee Gregory informed bank officers that the plaintiff intended the deposits to pay off certain items. Interestingly, both the plaintiff and the Bank cite First-Mercer Nat. Bank of Harrodsburg v. Tewmey's Assignee, 54 S.W.2d 672, Ky. (1932), in support of their respective positions on this point.
In the Tewmey case, bonds were deposited with the bank for safekeeping. The court held that this constituted a "special deposit" as the bank was a mere bailee. The court explained that a "special deposit" contemplates that the identical deposit will be returned to the depositor. In Brashear v. Perry Bank & Trust Co.'s Liquidating Agent, 67 S.W.2d 28, Ky. (1934), the court stated:
A special deposit becomes such by specific directions, or agreement, or through circumstances such as to create a trust, and, in the absence of such agreement, or circumstances, a deposit will be deemed a general deposit, in which event the bank merely becomes a debtor of the depositor. In the absence of evidence to the contrary, a deposit of money in a bank in the ordinary course of business is presumed to be a general deposit, and the burden is on the depositor to prove that it is a special deposit.
At page 29.
Finally, in Keyes v. Paducah & I.R. Co., 61 F.2d 611 (6th Cir. 1932), the court discussed the distinction between general and special deposits:
A special deposit consists in the placing of specific kinds of money or property in the possession of the bank, with an obligation of the bank to return the identical thing deposited; the depositor retaining title. ... On the other hand, a deposit is general where a sum of money is left with the bank for safe-keeping, subject to order, and payable, not in the specific money deposited, but in an equal sum, whether it bears interest or not. ... Whether a deposit in a bank is general or special depends upon the mutual understanding and intention of the parties at the time such deposit is made, and a deposit made in the ordinary course of business is presumed to be general, and the burden of proof is upon the depositor to overcome such presumption by proving that the deposit was made upon such terms and conditions as constituted a special deposit, or a deposit for a specific purpose, as distinguished from a general deposit. (Cites omitted).
At pages 612-613. It appears to this Court that the subject deposit made by the plaintiff does not meet the criteria set out in these cases in several respects. There was no mutual understanding and intent, there was no obligation on the part of the Bank to "return the identical thing deposited", there was nothing done to alter the basic debtor-creditor relationship of the Bank and the plaintiff. In short, this deposit was made in the ordinary course of business.
Having determined that the subject deposit was not "special", the Court further concludes that the Bank could properly exercise its right of set-off. As stated in Tewmey, supra:
The right of set-off obtains only between persons occupying the relation of debtor and creditor, which is the relation existing between a bank and its general depositors. The bank's right of set-off is sometimes called a lien, but strictly speaking it is not such, since general deposits are the property of the bank and it cannot have a lien on its own property. When a general deposit is made in the bank, the money or property deposited becomes the property of the bank and the bank becomes the debtor of the depositor.
At page 673. The plaintiff argues further, however, that before the Bank ever applied any funds to the debt owed to it by the plaintiff, it had improperly placed a hold on the plaintiff's general operating account, dishonoring checks written on the account while there were funds available to pay them. The plaintiff contends that until the Bank actually removed funds from the account, it had not exercised its right of set-off.
In the Sixth Circuit the standard for determining when set-off occurs has been set out in Baker v. National City Bank of Cleveland, 511 F.2d 1016 (1975). Therein the court stated that a bank's act of nonjudicial set-off of a depositor's account against its debt is not complete until three steps have been taken: "(1) the decision to exercise the right, (2) some action which accomplishes the setoff and (3) some record which evidences that the right of setoff has been exercised." At page 1018. This Court believes that the argument may be made that the Bank had embarked on steps (1) and (2) at the time it placed the hold or administrative freeze on the plaintiff's account.
A question that has not been addressed is that of "improvement of position" pursuant to 11 U.S.C.'553(b)(1). The Court must assume that no claim is made regarding this setoff pursuant to that section.
The second issue before the Court for decision is whether
Stewart is liable upon the guaranty executed on December 1, 1989. The plaintiff contends that he is not because the guaranty does not meet the requirements of KRS 371.065 which states in part:
No guaranty of an indebtedness which either is not written on, or does not expressly refer to, the instrument or instruments being guaranteed shall be valid or enforceable unless it is in writing signed by the guarantor and contains provisions specifying the amount of the maximum aggregate liability of the guarantor thereunder, and the date on which the guaranty terminates ...
The plaintiff contends that the guaranty does not contain a termination date, but instead states that the guarantor is liable for debts of SIM "...now existing or hereafter incurred on or before 12/1/94".
The pertinent statute, KRS 371.065, went into effect in 1990. To date, there have been no cases interpreting it. However, Kentucky courts have expressed themselves on the construction of guaranties. In Logan v. Amos Exec'r, 110 S.W.2d 1107, Ky. (1937), the court held that
[a]ll guaranties or instruments partaking of the nature of a guaranty are to be construed and determined in the light of the declared or inferred purpose and intent of the parties as ascertained from the writings themselves.
At page 1108. While the guaranty agreement at issue here does not contain a specific "termination date", it is not an open-ended guaranty that may last into eternity. The writing appears to express the intent of the parties that the guarantor's obligation will be concluded upon the payment of any and all debts incurred by SIM on or before December 1, 1994. The Court believes that whatever concerns were expressed by the enactment of KRS 371.065 have been addressed in the subject guaranty agreement.
In accordance with the above, the Bank properly exercised its right of setoff in this matter. It is further the opinion of this Court that Richard B. Stewart is liable upon the December 1, 1989 Guaranty Agreement. An order in conformity with this opinion will be entered separately.
By the Court -
Bruce D. Atherton, Esq.
Benny E. Ham, Esq.