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Tpo Inc. v. Federal Deposit Insurance Corp.

decided: June 28, 1973.



Weis, Circuit Judge and Newcomer, District Judge. On Rehearing: Gibbons and Weis, Circuit Judges and Newcomer, District Judge.

Author: Weis


WEIS, Circuit Judge.

Should summary judgment be entered against a bank for refusal to honor its cashier's checks which it claims were obtained by the payee-holder as part of a fraudulent scheme to misapply bank funds? We arrive at a negative answer but only after necessary analysis of the procedural problems involved and the intricacies of negotiable instruments law.

The dispute is one of many spawned by the misapplication of the funds of the Eatontown National Bank by its President, Douglas Schotte, in the period from April, 1967 to August 7, 1970.

While the details of his activities are not completely clear from the record of this case, it appears that Schotte bought securities valued at more than $200,000,000 during this time from various brokerage houses, including the defendant, a member of the New York and American Stock Exchanges. Ostensibly the stock was purchased for the account of the Bank, and payment was made from its funds by cashier's checks signed by Schotte.

It appears, however, that at least a portion of the stock purchases were for Schotte's personal speculation and that some of TPO's employees may have participated in the fraudulent scheme. TPO has denied any involvement, but, as the Court below indicated, the plaintiff's complicity is a matter of substantial dispute.

The ten cashier's checks on which the plaintiff filed this suit were issued on various dates between August 3, 1970 to August 5, 1970 to TPO and were delivered to it allegedly in exchange for securities ordered by Schotte. While TPO claims that the Bank received the stock certificates, the Liquidator appointed by the FDIC says that the securities were not among the assets in the Bank when it was closed on August 7, 1970. The record does not indicate to whom TPO delivered the certificates, although it is asserted that the transactions occurred in the plaintiff's New York office.

On August 7, 1970, the United States Comptroller of Currency declared the Bank to be insolvent, and the FDIC was appointed Receiver. When the ten cashier's checks, totaling $686,410.65, were presented to the Bank, the Receiver refused to pay them.

The plaintiff filed suit in the New York Supreme Court in accordance with a state procedure called "Motion for Summary Judgment in Lieu of Complaint" which is utilized where an action is based upon an instrument for payment of money. CPLR § 3213, McKinney's Consolidated Laws of New York. FDIC removed the case to the United States District Court for the Southern District of New York, and it was later transferred to the District of New Jersey.*fn1

No complaint or answer was filed by the parties in either district, although a number of affidavits were submitted in both the state and federal courts on behalf of the plaintiff and defendant. The Court below, feeling that the matters in dispute were sufficiently detailed in the sworn statements of record, proceeded to hear argument on plaintiff's Motion for Summary Judgment without repleading as was done in Istituto Per Lo Sviluppo Economico Dell' I.M. v. Sperti Prod., Inc., 47 F.R.D. 310 (S.D.N.Y. 1969).

The Court originally dismissed the motion because it felt "that it is absolutely essential to a determination of this case to establish whether in fact there was complicity by TPO in the Schotte scheme." However, after reargument, the Court entered judgment for the plaintiff on the theory that the delivery of the cashier's checks to TPO having completed the transactions between the Bank and the stockbroker, payment of the instruments was required. At the same time, however, the Court reserved to the defendant the right to litigate in another suit the issues of fraud and ultra vires actions claimed by the FDIC to have vitiated the stock transactions for which the cashier's checks had been issued.

In its opinion the District Court said:

". . . Having received adequate consideration for the issuance of the ten cashier's checks, the FDIC cannot now dishonor them. While it is alleged that losses sustained by ENB [the Bank] were due in part to the fraudulent acts of TPO, the ENB suffered no loss by issuing the cashier's checks for valuable securities. That transaction was valid and complete. Thus, it must be concluded as a matter of law that the FDIC is obligated to honor the ten cashier's checks. The alleged defense of a fraudulent conspiracy is more properly the subject of an independent suit.

"Thus, inextricably interwoven with this matter is the anticipated action to be instituted by the FDIC against TPO and several other brokerage houses for an alleged fraudulent scheme resulting in substantial losses to ENB. While ordinarily the compulsory counterclaim rule would come into play, an action under N.Y. CPLR § 3213 generally does not permit the filing of a counterclaim. . .

". . . Whatever possible cause of action the FDIC might have against TPO shall not be prejudiced by this decision . . ."

We conclude that in the circumstances of this case:

1. The compulsory counterclaim rule is applicable;

2. Though not designated as such and vaguely stated, a defense and counterclaim based on fraud had been asserted through the documents filed by the defendant;

3. Judgment should not be entered on the plaintiff's claim unless it is determined that the defense and ...

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