Opinion
CIVIL ACTION NO. 1:05-cv-1998-GET.
December 20, 2006
ORDER
The above-styled matter is presently before the court on:
(1) plaintiff's motion for partial summary judgment [docket no. 24];
(2) defendant's motion for summary judgment [docket no. 25].
On June 29, 2005, plaintiff filed this conversion action against defendant in the State Court of Fulton County, Georgia. On July 29, 2005, defendant removed the action to this court pursuant to 28 U.S.C. §§ 1332, 1441 1446. On December 29, 2005, the court issued an order denying defendant's motion to dismiss. On July 5, 2006, plaintiff filed a motion for partial summary judgment with regard to defendant's liability on the conversion claim. Defendant also filed a motion for summary judgment.
Standard
Courts should grant summary judgment when "there is no genuine issue as to any material fact . . . and the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party must "always bear the initial responsibility of informing the district court of the basis of its motion, and identifying those portions of `the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). That burden is `discharged by `showing' — that is, pointing out to the district court — that there is an absence of evidence to support the nonmoving party's case." Id. at 325; see also U.S. v. Four Parcels of Real Property, 941 F.2d 1428, 1437 (11th Cir. 1991).
Once the movant has met this burden, the opposing party must then present evidence establishing that there is a genuine issue of material fact. Celotex, 477 U.S. at 325. The nonmoving party must go beyond the pleadings and submit evidence such as affidavits, depositions and admissions that are sufficient to demonstrate that if allowed to proceed to trial, a jury might return a verdict in his favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 257 (1986). If he does so, there is a genuine issue of fact that requires a trial. In making a determination of whether there is a material issue of fact, the evidence of the non-movant is to be believed and all justifiable inferences are to be drawn in his favor. Id. at 255; Rollins v. TechSouth, Inc., 833 F.2d 1525, 1529 (11th Cir. 1987). However, an issue is not genuine if it is unsupported by evidence or if it is created by evidence that is "merely colorable" or is "not significantly probative." Anderson, 477 U.S. at 249-50. Similarly, a fact is not material unless it is identified by the controlling substantive law as an essential element of the nonmoving party's case. Id. at 248. Thus, to create a genuine issue of material fact for trial, the party opposing the summary judgment must come forward with specific evidence of every element essential to his case with respect to which (1) he has the burden of proof, and (2) the summary judgment movant has made a plausible showing of the absence of evidence of the necessary element. Celotex, 477 U.S. at 323.
Facts
In light of the foregoing standard, the court finds the following facts for the purpose of resolving these motions for summary judgment only. Plaintiff Eleison Composites, LLC is a Michigan limited liability company that was formed for the purpose of acquiring the assets of Eleison, Inc. in a transaction that was completed on April 11, 2005. Eleison, Inc. was formed in the Fall of 2002 in connection with the restructuring of another entity, Astechnologies, Inc., and operated as a manufacturer of raw materials, machinery and equipment for use in the automotive industry. F. Arthur Simmons was Eleison, Inc.'s president and sole officer.
Astechnologies, and later, Eleison, Inc., maintained a banking relationship with the asset based lending group of defendant's predecessor, SouthTrust Bank. Eleison, Inc. entered into a series of loan agreements wherein it became indebted to SouthTrust. As security for its loans, Eleison, Inc. granted SouthTrust a security interest in all of its assets, including its accounts receivable.
Eleison, Inc. subsequently opened three bank accounts with SouthTrust, including a payroll account, a cash collateral or lockbox account ("Deposit Account") and a controlled disbursement account ("the Disbursement Account"). The Deposit Account was used to receive accounts receivable payments and Eleison, Inc. was obligated to have its customers direct their payments into the Deposit Account. The Disbursement Account was funded by the Deposit Account as items were presented for payment. The bank required Eleison, Inc. to provide accounts receivable reports on a regular basis which the bank reviewed as it monitored Eleison, Inc.'s usage of the line of credit.
Simmons, as Eleison, Inc.'s president, opened these accounts by executing Business Signature Cards for all three accounts, each of which contained a deposit agreement, which provided, in pertinent part, as follows: "[t]he depositor named below hereby agrees to abide by and be bound by the Bank's Rules and Regulations Governing Deposit Accounts," including all amendments made to them from time to time on notice to the depositor. Eleison, Inc. was identified as the bank's customer and depositor on all of these accounts.
The Rules and Regulations expressly allowed the bank to honor items presented for payment against Eleison, Inc.'s accounts even if those payments created an overdraft. Pursuant to Paragraph 4 of the Rules and Regulations, entitled "Authorization to Pay and Debit the Account," Eleison, Inc. authorized the bank to pay funds from the accounts on the order or request of Eleison, Inc. "without regard to the ownership or original source of the funds on deposit and without any requirement that [Wachovia] first notify any other depositor or authorized signer."
Pursuant to paragraph 6 of the Rules Regulations, entitled "Overdrafts; Items Drawn Against Insufficient Funds," Eleison, Inc. agreed that the bank "may return unpaid any item drawn against insufficient or unavailable funds, or in our discretion, we may (but are not obligated to) pay the item or permit withdrawal even though the payment or withdrawal causes an overdraft in the account."
Eleison, Inc. further agreed to allow the bank to setoff future deposits to cover overdrafts as follows: "[i]f we do pay an overdraft, we will collect the amount of the overdraft from future deposits to the account." Paragraph 6(d), entitled "Liability of Depositor," contains Eleison, Inc.'s agreement to "be personally liable for payment to [Wachovia] of all overdrafts on the account[s] and any interest and late charge thereon, regardless of which depositor or authorized signer created the overdraft and whether Eleison, Inc. knew of the overdraft, participated in activity on the account, or benefitted from the overdraft."
Pursuant to paragraph 15 of the Rules and Regulations, entitled "Set-Off; Security Interest," Eleison, Inc. granted the bank (i) the right of setoff, and (ii) a security interest in all funds deposited to the account at any time as collateral for the payment and performance of all obligations, then existing or thereafter arising. The only instances wherein the bank agreed not to exercise its right of setoff include situations where: (A) the account is an individual retirement account or other similar tax deferred retirement account; (b) the indebtedness arose from a consumer credit transaction under a credit card and Wachovia does not have a judgment, attachment or other court order against the funds; or (c) if Wachovia's claim is against the depositor individually, and the depositor holds the account "in a bona fide representative capacity only, and the account name indicates [the customer's] representative capacity."
Paragraph 28, entitled "Assignment of Account," provides, in pertinent part, that even if Eleison, Inc.'s accounts are assigned to another party, Eleison, Inc.'s accounts "will remain subject to [Wachovia]'s right of set-off with respect to obligations incurred and defaults occurring both before and after we receive notice of the assignment." In paragraph 35 of the Rules and Regulations, Eleison, Inc. agreed and acknowledged that "[t]hese Rules may not be amended orally, but only . . . in a writing signed by the depositor and [Wachovia]'s authorized representative."
Simmons read the Deposit Agreements "in a cursory way" and admits that the intent of the Deposit Agreements and Rules and Regulations was to set forth the applicable rules and regulations that would govern Eleison, Inc.'s accounts. Wachovia never entered into any written agreements with Eleison, Inc. that purported to amend or alter the terms of the Deposit Agreements and/or Rules Regulations, and there are no other documents or sets of rules which govern Eleison, Inc.'s bank accounts.
Eleison, Inc. struggled financially from "day one" because it started off "marginally capitalized and wasn't able to raise capital fast enough to really get its feet on the ground." On February 18, 2005, shortly after the January 1, 2005 effective date of the SouthTrust/Wachovia merger, Wachovia sent a demand letter to Eleison, Inc. and Simmons, putting Eleison, Inc. on notice that its loans were in default and accelerating its indebtedness and demanding payment in the amount of $5,048,052.45 to Wachovia.
James Green of Humphrey Capital Group advised the bank that it was proposing to purchase the assets of Eleison, Inc. for $1.3 million. The proposed transaction would be carried out in two stages. Gary Farris, counsel for the bank, replied, in part, that "the Bank will not be able to release its security interest in any Eleison assets until the bank receives the entire $1,300,000 payment."
Eleison, Inc. agreed to sell substantially all of its assets, including its machinery, equipment, inventory, patents, and accounts receivable to plaintiff ("the Asset Sale"). As part of the Asset Sale, Wachovia agreed to assign Eleison, Inc.'s loans and security agreements to plaintiff in exchange for receiving a substantially discounted payoff from plaintiff in the amount of $1,150,000.00.
James Green is a founding member and manager of plaintiff and was the primary negotiator representing plaintiff in connection with the Asset Sale. Although Simmons was the primary negotiator and decisionmaker representing Eleison, Inc. in connection with the Asset Sale, Simmons also became a founding member and manager of plaintiff and began acting as plaintiff's president immediately after the Asset Sale closed.
Prior to the closing of the Asset Sale on April 8, the attorney for plaintiff informed Farris that "we want to make sure that the bank allows outstanding checks to clear. . . ." Before the Asset Sale closed, Eleison, Inc. wrote checks payable to several of its creditors which were expected to clear Eleison, Inc.'s accounts after the Asset Sale closed. The bank understood that after closing, Eleison, Inc. would not be writing any more checks on the Disbursement Account.
To facilitate a fluid business transition from Eleison, Inc. to plaintiff, Eleison, Inc. and Wachovia agreed that Eleison, Inc.'s bank accounts would remain open for a period of time after the Asset Sale closed in order to allow outstanding checks and other presentments to clear and to allow certain incoming deposits to be received. Plaintiff did not take over Eleison, Inc.'s accounts or become Wachovia's customer with respect to those accounts after the Asset Sale closed, or at any time. Plaintiff has never maintained any accounts with or otherwise been a customer of SouthTrust or Wachovia.
Darlene Fochler was the employee of Eleison, Inc. (and later the plaintiff) who was primarily responsible for monitoring the daily activity in Eleison, Inc.'s accounts at Wachovia. Prior to closing, Simmons directed Fochler to make a list of outstanding checks that were payable to Eleison, Inc.'s "critical vendors" (the "Outstanding Check List") to ensure that there would be enough money remaining in Eleison, Inc.'s accounts after the Asset Sale to cover these "critical payables."
Upon Simmons' approval, Eleison, Inc. forwarded the Outstanding Check List to plaintiff with the understanding that plaintiff would provide the same to Wachovia. Neither Simmons, Fochler nor anyone representing Eleison, Inc. ever provided the Outstanding Check List to anyone at Wachovia. Travis Buys, comptroller for plaintiff, however, provided the Outstanding Check List to Gary Farris.
Ann Anthony was the Wachovia representative with whom Fochler had the most contact regarding Eleison, Inc.'s accounts. Anthony asked Fochler to confirm that there were adequate funds in Eleison, Inc.'s accounts to cover all outstanding items expected to clear the accounts after the Asset Sale closed, and Fochler so confirmed.
Plaintiff's counsel, Stephen Waterbury, also claims that he transmitted the Outstanding Check List to Gary Farris on or around the time of closing to inform the bank of the outstanding presentments that were expected to clear Eleison, Inc.'s accounts post-closing. Although Farris does not recall receiving the Outstanding Check List, Farris did have conversations with Waterbury on or before closing wherein Waterbury asked Farris to confirm with Wachovia that there were sufficient funds in Eleison, Inc.'s accounts to cover the outstanding checks and to confirm that Wachovia would not continue to "sweep" Eleison, Inc.'s accounts for purposes of applying funds to Eleison, Inc.'s loan payments after the Asset Sale closed.
Farris inquired with Wachovia and confirmed to Waterbury that Wachovia would not "sweep" the accounts except when loan payments were due, which in this case would not be until several weeks post-closing. Farris also passed along Wachovia's confirmation that there were sufficient funds in Eleison, Inc.'s accounts to cover the outstanding checks that Wachovia knew about. Neither Farris nor anyone else at Wachovia ever agreed, in writing or otherwise, that Wachovia would only honor the specific items appearing on the Outstanding Check List.
On April 12, plaintiff's attorney sent Farris an e-mail stating in part "[t]he documents were signed yesterday and Eleison, Inc. employees were moved to Eleison Composites, LLC payroll beginning yesterday at the opening of business . . . Please note that Eleison, Inc. accounts receivable are now owned by Eleison Composites, LLC effective at the opening of business on Monday. . . . "
After closing, both Ann Anthony for the bank and Darlene Fochler monitored activity in the Eleison, Inc. accounts. In an e-mail of April 12 to other bank employees, Ms. Anthony noted that "I have asked for wiring instructions so that funds received after pay off can be forwarded on a collected basis." Ms. Fochler provided the wiring instructions in an e-mail to the bank sent April 18. Ms. Anthony also inquired if $13,000 would cover the outstanding checks and Ms. Fochler indicated that it would.
On April 15 $33,840.66 was deposited into Eleison, Inc.'s lockbox account which represented payment of an Eleison, Inc. account receivable owed by M-Tek. On April 18, the bank in turn transferred that payment to plaintiff's bank. Also on April 18, $39,977.00 was deposited into Eleison, Inc.'s lockbox account, which represented payment on an account receivable owed by Lear Corporation. On April 26, the bank transferred $39,977.00 to plaintiff's bank. By the end of April, all of the checks Eleison, Inc. had written before closing had cleared and the disbursement account had a zero balance.
While it was still in business, Eleison, Inc. had an arrangement with one of its suppliers, Vetrotex, that allowed Vetrotex to submit invoices for payment by ACH (Automated Clearing House) debits. Vetrotex was the only vendor paid by ACH debit. On two occasions in either 2004 or 2005, the bank rejected ACH debits against Eleison, Inc.'s account presented by Vetrotex because there were insufficient funds to honor the debits.
Simmons informed Vetrotex that there were two outstanding invoices that would not be paid by Eleison, Inc. but that "we wanted to continue doing business with them, that the new company would be well financed and would continue to pay the bills; and that we would sit down post-closing to work out a — an acceptable arrangement for continuing to supply product." According to Simmons, Vetrotex accepted this arrangement on the basis that the new company would pay cash in advance. The agreement with Vetrotex was not memorialized in writing. Furthermore, no one at Wachovia was informed of the agreement with Vetrotex.
After the Asset Sale closed, Vetrotex submitted the two invoices for payment by presenting ACH debit items against Eleison, Inc.'s accounts in the amounts of $29,116.48 and $30,090.62. These amounts were owed by Eleison, Inc. and were due and payable to Vetrotex at the time these items were presented for payment.
Wachovia paid these two Vetrotex invoices on May 4 and 5, 2005 which resulted in an overdraft in Eleison, Inc.'s Disbursement Account in the amount of $59,207.10. Upon learning that the ACH debits had been presented, Ms. Fochler requested that they not be paid. The bank, however, had no ability to reject the ACH debits at the time of Ms. Fochler's request.
On or about May 4, 2005, while Eleison, Inc. still had a negative account balance due to the overdraft, EAC Technologies deposited $170,708.51 into Eleison, Inc.'s Deposit Account. Wachovia set off $59,207.10 from Eleison, Inc.'s Deposit Account to cover the overdraft in the Disbursement Account created by the payment of the Vetrotex invoices, and forwarded the remaining $110,501.41 of the EAC Technologies payment to plaintiff's account at Fifth Third Bank.
Simmons states that he called Vetrotex to ask for a return of the money within a week of discovering that the invoices had been submitted and paid, but that Vetrotex refused to refund the money because it was rightfully owed. Neither plaintiff nor Eleison, Inc. has made any additional efforts to get the money back from Vetrotex and plaintiff continues to do business with Vetrotex.
On May 11, the attorney for plaintiff demanded that the bank remit the full amount of the EAC payment. On May 18, the bank, through its attorney, refused to return the funds, claiming, among other things, "the bank has already incurred a substantial loss with respect to Eleison, Inc. and is not willing to incur additional losses unless there is a clear and compelling legal reason to do so." By letter of June 9, 2005, plaintiff's counsel demanded that the bank return the $59,207.10 withheld on May 10. The bank refused the demand.
Discussion
Plaintiff contends that the defendant improperly converted $59,207.10 of plaintiff's money when the bank retained this amount to cover the overdraft created by the Vetrotex ACH debit. According to plaintiff, it owned the funds deposited by EAC Technologies because plaintiff had acquired the accounts receivable of Eleison, Inc.
"Conversion consists of an `unauthorized assumption and exercise of the right of ownership over personal property belonging to another, in hostility to his rights;. . . .'"Maryland Cas. Ins. Co. v. Welchel, 257 Ga. 259, 261 (1987). Conversion requires proof that (1) plaintiff had lawfully acquired possession of the property and held title and right of possession, (2) a demand for the return of the property, and (3) a refusal by the defendant to return the property. See College Park v. Sheraton Savannah Corp., 235 Ga. App. 561, 564 (1998). Money can be the subject of a conversion claim as long as the allegedly converted money is specific and identifiable. Unified Services, Inc. v. Home Ins. Co., 218 Ga. App. 85, 89 (1995).
"[U]nless funds deposited with a lending bank are in an account governed by an agreement which designates the funds as trust funds, or unless the lending bank by other means has actual knowledge that the funds deposited in a general account are intended to discharge a specific obligation or otherwise partake of the character of trust funds, then the funds are treated as any other general deposit funds, are commingled with other funds on deposit with the bank, and are subject to set-off against any mature indebtedness for which the bank is creditor to the principal." Barnett Bank of Atlanta v. Thurman, 213 Ga. App. 820, 821 (1994).
It is undisputed that the banking agreements between Wachovia and Eleison, Inc. provided that the bank could pay a presentment such as the Vetrotex ACH debits even if such payment created an overdraft in the account. There is absolutely no evidence that either plaintiff or Eleison, Inc. instructed Wachovia to reject the ACH debits prior to their presentment or informed Wachovia of the agreement with Vetrotex that the two invoices would not be paid. Therefore, the court finds nothing improper about the creation of the overdraft in the Eleison, Inc. Disbursement Account. Furthermore, under the terms of the Rules and Regulations, this overdraft created a security interest on behalf of the bank in the Eleison, Inc. Deposit Account in the amount of the overdraft.
In Georgia, "a bank has the right of setoff against the amount of a general deposit account belonging to a customer of a matured debt due by the customer to it." Citizen Southern Nat'l Bank v. Weyerhaeuser Co., 152 Ga. App. 176, 179 (1979); Bank of Lawrenceville v. Rockmore Co., 129 Ga. 582, 586 (1907). Therefore, absent an exception to this general rule, Wachovia was entitled to the funds to satisfy the overdraft and there could be no conversion. Design Spectrum, Inc. v. First Nat'l Bank of Atlanta, 182 Ga. App. 418, 418 (1987) (citing Aiken v. Bank of Ga., 101 Ga. App. 200 (1960) (holding that a "bank may use a depositor's funds on deposit with the bank to satisfy a matured debt the depositor owes the bank")).
Plaintiff, citing Thurman, 213 Ga. App. 820, contends that the deposited funds belonged to plaintiff, a third party to the banking relationship, and therefore were not subject to the bank's right of set-off. According to plaintiff, as the purchaser of Eleison, Inc.'s accounts receivable, it was the owner of the deposited funds and its ownership followed the funds into the bank.
A purchaser of accounts receivable obtains a "security interest" in those accounts. See O.C.G.A. 11-1-201(37). Furthermore, a debtor's funds deposited into a bank account that are otherwise subject to a secured party's lien are made subject to the bank's right of setoff. See O.C.G.A. § 11-9-340(a) (b). The exercise by a bank of a set-off against a deposit account is only ineffective against a secured party that holds a security interest in the deposit account which is perfected by control. O.C.G.A. § 11-9-340(c). Absent control,
unless the bank otherwise agrees in an authenticated record, a bank's rights and duties with respect to a deposit account maintained with the bank are not terminated, suspended, or modified by:
(1) The creation, attachment, or perfection of a security interest in the deposit account;
(2) The bank's knowledge of the security interest; or
(3) The bank's receipt of instructions from the secured party.Id.
The plaintiff points the court to no evidence that the deposited funds had the character of a trust such that an exception to the bank's general rights of set-off exists. Furthermore, there is no evidence that plaintiff purchased, was assigned, or otherwise took control of Eleison, Inc.'s Deposit Account. Therefore, the bank's right of set off is superior to plaintiff's security interest in the deposited funds pursuant O.C.G.A. § 11-9-340. While plaintiff argues that Bank of Spalding County v. Pound, 213 Ga. App. 324 (1994), supports a finding that a bank can not exercise its right of set off against an account receivable deposited into a customer's account when its customer has transferred its assets, the court finds Pound distinguishable from the instant action. In Pound, the funds represented insurance premiums which, by statute, are considered trust funds. Id. at 325. More importantly, the party in Pound had received an assignment of the bank account itself, not merely the accounts receivable. Id.
Therefore, for all the foregoing reasons, the court finds that plaintiff fails to establish a question of fact as to its conversion claim. Accordingly, plaintiff's motion for partial summary judgment [docket no. 24] is DENIED and defendant's motion for summary judgment [docket no. 25] is GRANTED.
Summary
(1) Plaintiff's motion for partial summary judgment [docket no. 24] is DENIED;
(2) Defendant's motion for summary judgment [docket no. 25] is GRANTED.