O'Donnell v. Bank of Vermont

O'Donnell v. Bank of Vermont  (95-401); 166 Vt. 221; 692 A.2d 1212

[Filed 31-Jan-1997]

       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.


                                 No. 95-401


Terrence M. O'Donnell                             Supreme Court

                                                  On Appeal from
    v.                                            Windham Superior Court

Bank of Vermont                                   April Term, 1996


Robert Grussing III, J.

       Lisa Chalidze of Hull, Webber, Reis & Canney, Rutland, and Dustin F.
  Hecker and Andrea F. Nuciforo, Jr., of Posternak, Blankstein & Lund,
  Boston, Massachusetts, for plaintiff-appellant

       Arthur P. Anderson and Mary P. Kehoe of Saxer Andersol Wolinsky &
  Sunshine, P.C., Burlington, for defendant-appellee


PRESENT:  Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.



       JOHNSON, J.   Plaintiff appeals from a summary judgment decision of
  the Windham Superior Court.  He represents a group of investors who claim
  that defendant Bank of Vermont (Bank) improperly seized four certificates
  of deposit (CDs) that the investors claim to own.  The Bank responds that
  the seizure was proper because the CDs actually belonged to a debtor of the
  bank that had defaulted on a prior loan.  The trial court found that the
  investors did not own the CDs and granted summary judgment in favor of the
  Bank.  Without addressing the question of ownership, we hold that
  principles of banking law entitled the Bank to set off the funds.(FN1)

       This dispute has a complicated factual history.  It involves a real
  estate joint venture between the group of investors and Timber Creek
  Construction Company (TCC), a real estate developer, that was apparently
  formed in 1987, although the agreement was not reduced to writing and
  signed until January 1989.  Under the agreement, the investors provided
  about $1.3

 

  million dollars for the development of two tracts of land, one in Vermont
  and one in New Hampshire.  The agreement named plaintiff as the escrow
  agent for the investors, and made him responsible for collecting the
  financial contributions of the investors and disbursing the funds to TCC. 
  But according to the agreement plaintiff was "under no obligation or duty
  to inquire as to the nature of any disbursement by [TCC]."  Moreover, once
  TCC received funds from the investors, there were "no restrictions on
  [TCC's] use or disbursement" of the money.

       Despite the language giving TCC unfettered discretion in its use of
  the invested funds, the agreement also required TCC to establish, as
  security for the investment, a $500,000 CD with the Bank of Vermont.  The
  funds would become the property of TCC after TCC fulfilled its contractual
  obligations.  The agreement assigned plaintiff responsibility for setting
  up the CD, and stated that the account "shall require the signature of a
  [TCC] representative, [plaintiff] and a neutral third party before
  disbursement" to TCC.

       Four separate CDs were established at the Bank between January and
  September of 1988 (before the joint venture agreement was actually signed),
  totalling slightly more than $500,000. Three of these CDs were designated
  as single-owner accounts in the name of TCC, and required for withdrawal
  the signatures of plaintiff, David Paul, the president of TCC, and a third
  party. A fourth CD was initially established in the name of these three
  signatories, but the name on the account was later changed to TCC.  The
  account applications did not identify plaintiff as an escrow agent or
  explain that the three-signature requirement was for the protection of
  investors; indeed, on one of the applications, plaintiff signed as a
  representative of TCC.  The funds for these CDs came from the investors but
  plaintiff sent the checks to the Bank to deposit in the accounts.  The
  letters accompanying these checks did not mention plaintiff's status as an
  escrow agent or refer to the investors or the joint venture agreement in
  any way.  None of the correspondence gave any indication that plaintiff
  represented anyone other than TCC.

       Meanwhile, David Paul's repeated representations to the Bank, which
  were made because TCC borrowed large sums from the Bank, indicated
  unambiguously that the CDs belonged to TCC.  A letter sent by Paul to the
  Bank in June 1988 states that TCC would soon "have on

 

  deposit with the Bank of Vermont in Certificates of Deposit, $500,000. . .
  . [to] secure approximately half the loan [from the Bank to TCC]."  In
  September, TCC's attorney sent the Bank a copy of a resolution adopted by
  TCC's Board of Directors; the resolution authorized the $500,000 deposit
  with the Bank to be held as collateral for TCC's debt to the Bank.  Paul
  also delivered the passbooks for the CDs to the Bank.(FN2)  Finally, in
  October of 1988, Paul executed an "Assignment of Deposit," purportedly
  assigning the CDs to the Bank for its use in the event TCC defaulted on the
  loan.  The document stated that TCC owned the deposits and had the right to
  assign them to the Bank.

       TCC was consistently in default on its monthly loan payments and there
  was no reduction of the principal after October 3, 1988.  Moreover, only
  four property units (valued by the Bank at approximately $160,000 each)
  were available to secure a debt of over $900,000.  In March 1989, Paul and
  the Bank agreed that the CDs would be used to reduce the loan principal. 
  The Bank withdrew the money in the CDs, using withdrawal slips signed by a
  Bank officer and Paul, and applied the proceeds to TCC's debt.  Plaintiff
  did not discover that the Bank had set off the CDs against TCC's loan until
  September 1989.

       The parties filed cross-motions for summary judgment.  The trial court
  held, as a matter of law, that TCC owned the CDs, and that the Bank
  therefore had the right to set off the CDs against TCC's indebtedness. 
  This appeal followed.

       This Court reviews a motion for summary judgment using the same
  standard as the trial court.  Hodgdon v. Mt. Mansfield Co., 160 Vt. 150,
  158, 624 A.2d 1122, 1127 (1992). Summary judgment is appropriate only when
  the moving party has demonstrated that there are no genuine issues of
  material fact and it is entitled to judgment as a matter of law.  V.R.C.P.
  56(c)(3); State v. G.S. Blodgett Co., 163 Vt. 175, 180, 656 A.2d 984, 988
  (1995).  In determining whether material facts exist for trial, we must
  resolve all reasonable doubts in favor of the party opposing summary
  judgment.  Hodgdon, 160 Vt. at 158-59, 624 A.2d  at 1127.

 

       Plaintiff first maintains that the trial court improperly resolved
  material factual issues in ruling that TCC owned the CDs.  Plaintiff relies
  on Beacon Milling Co. v. Larose, 138 Vt. 457, 418 A.2d 32 (1980), where we
  held that a bank account held jointly in the names of a husband and wife
  could not be charged to the husband's sole debts merely because his name
  was on the account.  Id. at 460, 418 A.2d  at 34.  Instead, we remanded the
  case for the court to determine ownership of the account based on a number
  of evidentiary issues, including "the circumstances surrounding the
  creation of the account, the intention of the depositor or depositors, and
  the source or sources of the funds."  Id.  Emphasizing that the funds came
  from the investors, and that the accounts were created as security for his
  clients' investment, plaintiff argues that, at minimum, the question of
  ownership should have been resolved at trial.

       Plaintiff may be correct that ownership of the CDs should not have
  been determined on summary judgment.  The central issue in this case,
  however, is not who owned the CDs but whether the Bank had a right to set
  off the CDs against TCC's loan.  We do not agree that the Bank's right to
  setoff turned on the question of ownership.

       In general, a bank has the right to seize deposited funds to reduce or
  eliminate debts owed to it by the depositor.  In Vermont the right to
  setoff derives from the contractual relationship between the depositor and
  the bank.  See Hale v. Windsor Sav. Bank, 90 Vt. 487, 494, 98 A. 993, 996
  (1916) (bank account is basis for contractual relationship between
  depositor and bank).  By placing funds in an ordinary account, a depositor
  gives the bank legal title to them, and, absent a specific agreement to the
  contrary, becomes the bank's creditor up to the amount of the deposit. 
  Caledonia Nat'l Bank v. McPherson, 116 Vt. 328, 330, 75 A.2d 685, 687
  (1950).  As titleholder, the bank has the right to apply the depositor's
  money to extinguish a matured preexisting debt.  Goodwin v. Barre Sav. Bank
  & Trust Co., 91 Vt. 228, 235, 100 A. 34, 34 (1917).  In Goodwin, this Court
  described the bank's position as that of a lienholder on the customer's
  deposit.  By virtue of this lien, the banker "has the right to set off any
  matured debt against such funds without direction or authority from such
  customer."  Id. at 235, 100 A.  at 34-35.

 

       The right to setoff is not absolute.  We recognized in Hale that if a
  bank knows that a deposit is owned by a third party and not by the
  depositor, the bank may not apply the funds as payment for the depositor's
  debts.  Hale, 90 Vt. at 501, 98 A.  at 998; see also 5A Michie on Banks and
  Banking §§ 132, 141, at 542, 560 (M. Divine & G. Legner, eds., 1994) (where
  bank has notice that deposit is held by one for use of or as security for
  another person, bank has only such right of setoff as is not inconsistent
  with right of such person).  The same is true if the bank knows of
  circumstances that give it a duty to inquire about ownership.  See Union
  Stock Yards Bank v. Gillespee, 137 U.S. 411, 416 (1890) (circumstances that
  distinguish deposit bar bank from treating it as property of depositor); 5A
  Michie on Banks and Banking, supra § 141, at 571 (bank that has notice of
  such facts as put it on inquiry is bound by every fact that such inquiry
  would have disclosed).  The majority rule, however, is that a bank that has
  neither actual nor constructive knowledge of a third party's interest in a
  deposit is entitled to set off the funds against a debt owed it by the
  depositor.  In re Triple A Coal Co., 55 B.R. 806, 812 (Bankr. S.D. Ohio
  1985); see also Cooper v. Nevada Bank of Commerce, 403 P.2d 198, 199-200
  (Nev. 1965) (bank with neither actual knowledge nor knowledge of facts
  sufficient to put it upon inquiry concerning third person's interest in
  deposited funds may apply deposit to individual debt of depositor);
  Westerly Community Credit Union v. Industrial Nat'l Bank, 240 A.2d 586, 591
  (R.I. 1968) (absent actual or constructive notice on part of bank that
  deposited funds belonged to third person, bank had right to set off debts
  owed to it by depositor); J. TeSelle, Banker's Right of Setoff -- Banker
  Beware, 34 Okla. L. Rev. 40, 44 (1981) (recognizing majority rule).(FN3)
  Applying this rule, we conclude that the Bank was entitled to set off the
  money invested in the CDs against TCC's indebtedness.

 

       In this case, all of the information known to the Bank pointed to TCC
  as the owner of the CDs.  Although plaintiff makes much of the
  three-signature requirement on the accounts, such a provision by itself did
  not indicate to the Bank that the accounts were jointly-owned or owned by a
  third party.  Businesses commonly protect their funds by requiring multiple
  signatures for disbursement.  The Bank had no way of knowing, based on the
  paperwork for the accounts and the correspondence from plaintiff and David
  Paul, that plaintiff represented anyone other than TCC.(FN4)  See Cooper, 403 P.2d  at 200 (bank had no duty to inquire whether third party had interest
  in crop proceeds deposited in bank because depositor treated them as his
  own, and third party never notified bank of interest).

       The closest plaintiff comes to presenting evidence that the Bank knew
  of the investors is the following statement from his own deposition, where
  he refers to statements made by Paul at a meeting between plaintiff, Paul,
  and an officer of the Bank:  "[T]his is where I'm not exactly certain, but
  I believe the reference was made that we were there to establish the
  certificates of deposit for the investors in the joint venture."  The Bank
  disputes this, but for purposes of the Bank's motion for summary judgment
  we accept the statement as true.  It does not, however, affect our
  conclusion.  Although this vague reference may have informed an alert bank
  employee that the funds for the CDs came from a group of investors, the
  statement does not contain the critical piece of information: that the
  investors intended to retain an ownership interest in the funds, superior
  to that of TCC, the account holder.  Indeed, plaintiff admitted in the same
  deposition that no reference was ever made to the investors having a
  security interest in the CDs.

       Plaintiff also argues that the Bank breached its contract with the
  depositors by permitting withdrawal of the funds without the required three
  signatures.  A bank, however, is free to

 

  exercise its right of setoff without seeking the permission of the
  depositor.  See Goodwin, 91 Vt. at 235, 100 A.  at 34-35.  Neither Paul's
  signature on the withdrawal slips nor Paul's assignment of the CDs to the
  Bank was necessary.  Although the Bank chose to confer with Paul, it was
  not required to do so, nor was it required to obtain the permission of the
  other signatories on the account.

       Plaintiff complains vociferously about the Bank's alleged failure to
  follow proper procedures.  Ironically, however, the undisputed facts in
  this matter suggest that plaintiff bears substantial responsibility for the
  loss suffered by the investors.  Plaintiff has not produced a scrap of
  correspondence or other written evidence directed to the Bank that explains
  his role as an escrow agent or the investors' interest in the CDs.  Had
  plaintiff used his presumed expertise as both a certified public accountant
  and an attorney, and taken a few minutes to draft such a letter to the Bank
  before establishing the first of these accounts, the Bank would have been
  required to view Paul's claims with greater skepticism.  Or, had plaintiff
  advised the investors of the riskiness of establishing the CDs in TCC's
  name at the bank to which TCC owed substantial sums of money, this entire
  incident might have been averted.

       In essence, our decision in this case assigns the loss caused by David
  Paul, who is not a party, to plaintiff and the investors he represents
  rather than to the Bank.  Plaintiff considers this result unfair.  We do
  not agree.  Although plaintiff, the investors, and the Bank may be equally
  "innocent" victims of Paul's conduct, plaintiff and the investors were in a
  far better position than the Bank to avert this loss.  Plaintiff was not an
  unsophisticated novice but a well-credentialed professional advising a
  group of investors who had substantial resources. Nonetheless, plaintiff
  and the investors devised or at least agreed to an ill-advised plan for
  securing the investment and then failed to take obvious steps to protect
  the funds.  The only criticism that can be leveled at the Bank is that it
  did not aggressively inquire as to the ownership of funds invested with it. 
  Yet, as we have already discussed, based on the facts known to the Bank,
  such an inquiry was not required.  Under these circumstances we see no

 

  unfairness in allowing the Bank to keep the funds.

       Affirmed.

                              FOR THE COURT:


                              _______________________________________
                              Associate Justice


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                                  Footnotes



FN1.    As we affirm the court's decision granting summary judgment in
  favor of the Bank, we do not address the Bank's argument that plaintiff
  lacks standing to bring this action.

FN2.   Plaintiff knew that the Bank held the passbooks, but apparently
  believed that Paul had given the passbooks to a bank employee for "safe
  keeping."

FN3.   A minority of jurisdictions follow an "equitable" rule, which
  "prohibits setoff where a third party has an interest in funds deposited in
  the account of a debtor-depositor, even though the bank has no actual or
  implied knowledge, where lack of such knowledge has not resulted in any
  change in the bank's position and no superior equities have been raised in
  the bank's favor." J. TeSelle, Banker's Right of Setoff -- Banker Beware,
  34 Okla. L. Rev. 40, 44-45 (1981).

FN4.    By statute, joint accounts must be made "in the names of two
  or more persons, payable to any one of them," 8 V.S.A. § 908, and trust
  accounts must disclose the name and residence of the beneficiary and be
  credited to the depositor as trustee.  8 V.S.A. § 907.  Plaintiff does not
  claim to have satisfied the statutory requirements for multiparty accounts.