Appeal, No. 286, Oct. T., 1962, from order of County Court of Philadelphia, June T., 1961, No. 8039-D, in case of Middle Atlantic Credit Corporation v. The First Pennsylvania Banking and Trust Company. Order reversed.
Louis J. DiGiacomo, with him Zoob, Cohan & Matz, for appellant.
Joseph Neff Ewing, Jr., with him William T. Windsor, Jr., and Saul, Ewing, Remick & Saul, for appellee.
Before Rhodes, P.j., Ervin, Wright, Woodside, Watkins, Montgomery, and Flood, JJ.
[ 199 Pa. Super. Page 457]
This is an appeal from the refusal of the court below to grant plaintiff's motion for judgment on the pleadings. The following are the undisputed facts under the pleadings:
On August 18, 1959, the plaintiff entered into a security agreement with M. Zucker Co., with respect to accounts receivable of Zucker purchased by the plaintiff. The agreement provided that Zucker was to receive the proceeds of the accounts in trust for the plaintiff and deliver them to plaintiff in their original form. This security interest was duly perfected by the plaintiff by filing financing statements in Philadelphia and Harrisburg. On January 4, 1961, pursuant to the security agreement, Zucker assigned to plaintiff the sum of $9111 from the proceeds of a Marple-Newtown Joint School Authority contract. On February 16, 1961, Zucker received a check from the school authority in the amount of $3798.45 as part payment and deposited it in its account in the defendant bank. On February 20, 1961, Zucker filed a petition for arrangement under Chapter XI of the Federal Bankruptcy Act. On February 21, 1961, the defendant bank appropriated the sum of $317.49, remaining in the Zucker account out of the $3798.45 deposit, against an outstanding loan in the sum of $50,000 made by the bank to Zucker on July 28, 1960.
Prior to the Uniform Commercial Code, the bank would have had no right to set-off the proceeds of this check, belonging to the plaintiff, against a debt due it
[ 199 Pa. Super. Page 458]
by Zucker, who improperly deposited the check in his account instead of turning it over to the plaintiff. The rule that a bank could not set-off funds of a third party in a debtor's account, theretofore enunciated only in cases where the bank had notice that the funds belonged or might belong to a third party, was held to apply also to funds of a third party in the debtor's account even in the absence of notice that they belonged to someone other than the debtor in Sherts v. Fulton National Bank, 342 Pa. 337, 21 A.2d 18 (1941). This is the situation here. Under the rule in the Sherts case the bank would have no right of set-off and no valid answer to the plaintiff's motion for judgment against it for the amount of the deposit.
The defendant argues that the rule in the Sherts case has been changed by Section 9-306(4)(d)(i) of the Uniform Commercial Code, as amended by the Act of October 2, 1959, P.L. 1023, § 9, 12A P S 9-306(4)(d)(i). Section 9-306, as amended, provides, in subsections (2) and (3) that a perfected security interest continues in any identifiable proceeds of the collateral "including collections received by the debtor". Section 9-306 provides that, in the event of insolvency proceedings, a secured party with a perfected security interest in proceeds has a perfected security interest
"(d) in all cash and bank accounts of the debtor, if other*fn1 cash proceeds have been commingled or deposited in a bank account, but the perfected ...