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Metropolitan International Inc. v. Equibank

decided: February 22, 1980.



Before Gibbons and Higginbotham, Circuit Judges, and Weiner, District Judge.*fn*

Author: Weiner


In this bankruptcy case, Equibank, the appellant, seeks to overturn the order of the district court affirming the bankruptcy court's decision that the appellant waived its right of set-off, which right is provided for in Section 68 of the Bankruptcy Act, 11 U.S.C. § 108. In the alternative, the appellant seeks an order remanding the case to the bankruptcy court for a hearing on the question of whether the appellant waived its right of set-off. For the reasons to follow, we reverse the judgment of the district court.

The key date for point of reference is February 3, 1977. On that date, Metropolitan International, Inc., et al (hereinafter, MII) filed a petition for an arrangement under Chapter XI of the Bankruptcy Act. 11 U.S.C. § 701 et seq.

Prior to February 3, 1977, the following events occurred. Credit Alliance Corp. instituted an action against MII to collect approximately $364,000.00. Credit Alliance's claim against MII was reduced to judgment, and on February 1, 1977, a writ of execution was issued. At the time of these actions by Credit Alliance, MII had on deposit with Equibank approximately $52,000.00 in a checking account. On February 1, 1977, Credit Alliance garnished this account and served interrogatories upon Equibank.

Also prior to February 3, 1977, MII had borrowed funds from Equibank, which indebtedness was reduced to approximately $358,000.00 on or about February 3, 1977.

On February 9, 1977, Stanley J. Kann, II, attorney for Equibank wrote James L. Weisman, attorney for Credit Alliance, a letter stating that Equibank did not intend to attempt to exercise its rights to set-off as to the funds. Copies of this letter were forwarded to the receiver and all interested parties including officers of the bank.

On February 15, 1977, an agreement was entered into between the receiver and the appellant concerning the disposition of certain assets in which appellant had a security interest and for the assignment of certain accounts receivable of MII. The bankruptcy court approved the agreement, though no mention was made as to the $52,000.00 held in the checking account by Equibank.

On March 7, 1977, the receiver filed a complaint to secure funds. Credit Alliance and Equibank were the named defendants. The receiver sought the release of the $52,000.00 held by Equibank on the grounds that Equibank previously indicated it did not intend to exercise any set-off claim and that Credit Alliance's interest as garnisher was void because its preference was exercised within four months of the institution of the Chapter XI proceedings. On March 11, 1977, Credit Alliance filed an answer and counterclaim to the receiver's complaint. Equibank did not respond to the complaint. Subsequently, the receiver responded to Credit Alliance's counterclaim and then filed an amended complaint. Credit Alliance answered the amended complaint, but once again, Equibank failed to respond.

On April 7, 1977, a hearing on the complaint and amended complaint was held before Bankruptcy Judge Gerald K. Gibson. All parties were represented, including the appellant, which was represented by two attorneys and a loan officer. At the hearing, Mr. Kann, attorney for Equibank explained that the bank did not exercise any right that it might have had with respect to the funds, and that the bank froze the account on behalf of Credit Alliance and not on behalf of the bank's unexecuted right of set-off. Mr. Kann explained that the bank did not take the physical steps necessary to assert its right of set-off because the current status of the banking law does not permit the execution of that right after somebody else (Credit Alliance) has properly asserted its right to the funds. He further explained that the bank was a mere stakeholder and was participating at the hearing to assist the court in determining how the bank should disburse the funds in the checking account.

The April 7, 1977 hearing was continued at the request of the receiver in order to secure more financial data. On August 5, 1977, the receiver filed a petition to compromise its suit against Credit Alliance and Equibank; a hearing date was set for August 26, 1977. The agreement provided for a settlement between MII and Credit Alliance in the amount of $5,000.00, to be paid from the frozen checking account with the $47,000.00 balance paid over to the receiver.

On August 18, 1977, Equibank filed an answer to the receiver's petition to compromise, and for the first time raised its alleged right to set-off its claims against the fund. On August 26, 1977, the receiver filed a motion to strike the appellant's answer. The receiver contended that the bank waived its right of set-off, and that he relied upon that waiver when he assisted MII in fashioning a Plan of Arrangement.

Equibank's position with regard to the receiver's motion to strike was that it did not exercise its right to set-off because of erroneous legal advice, and that the receiver did not detrimentally rely on Equibank's nonaction in that the receiver did not file a Plan of Arrangement and did not request the use of the checking funds to effectuate a Plan of Arrangement. Equibank also ...

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