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FIDELITY BANK v. COMMONWEALTH MARINE & GEN. ASSUR.

August 7, 1984

The FIDELITY BANK
v.
COMMONWEALTH MARINE AND GENERAL ASSURANCE COMPANY, LTD, J.E. Mamiye & Sons, Inc., Maurice L. Jackson, Floyd Fountain and Farmers State Bank of Center, Texas, George K. Lynch, Horizon Medical Administrators, Inc., G. A. Brown, Pak-Mor Manufacturing Company, Delan Townson and First Alabama Bank of Conecuh County, Phillips & Son, Inc., Hutchinson Financial Corporation of Alabama, Neb, Ltd., Anne and Art Johnston d/b/a Treasure Harbor Sailing Yachts, and Reid, Inc.



The opinion of the court was delivered by: POLLACK

 The facts underlying this action, and certain preliminary legal analysis, appear in my earlier Opinion in this matter dated February 24, 1984. Fidelity Bank v. Commonwealth Marine and General Assurance Company, Ltd., 581 F. Supp. 999 (E.D.Pa.1984). This Memorandum and the accompanying Order dispose of certain legal issues left unresolved by that earlier Opinion. In order to provide background for the discussion here, I repeat in abbreviated form some of the pertinent facts related at length in 581 F. Supp. at 1002-1011, together with some more recent developments.

 Commonwealth Marine and General Assurance Company, Ltd. ("Commonwealth") sold insurance in the United States for some period preceding the inception of this action. Commonwealth, a Belize corporation, established a Trust Fund on deposit with The Fidelity Bank ("Fidelity") to provide security for Commonwealth's American policyholders. *fn1" Fidelity served as trustee. As of April 29, 1983, eight individuals and corporations had made claims against the fund which far exceeded the amount on deposit. *fn2" Fidelity, unsure which claimants to recognize, and in what order, commenced this action in interpleader on April 29, 1983, paying $440,891.61 into court. By February 24, 1984, fifteen individuals and corporations had asserted thirteen separate claims against the interpleaded fund. See 581 F. Supp. at 1005-1009 (describing thirteen claims).

 The February 24 Opinion disposed of most of the issues raised by the various claimants' cross-motions for summary judgment. In that Opinion I concluded that four claimants would receive distributions from the interpleaded funds. Specifically, I held that Mamiye had validly attached all assets of Commonwealth (1) in the hands of Fidelity on the date of Mamiye's service of the writ of execution, May 28, 1982, or (2) coming into Fidelity's hands thereafter. However, I held that this attachment did not reach assets impressed with Commonwealth's trust because Mamiye was not a creditor entitled to payment under the Trust Agreement. Because principal, but no income, became part of the Trust, I held that Mamiye could recover the full amount of the interpleaded sum not impressed with Commonwealth's trust. See Fidelity Bank, 581 F. Supp. at 1013-1016. I further held that Mamiye's entitlement depended on the outcome of pending proceedings in New York seeking to overturn Mamiye's judgment against Commonwealth. 581 F. Supp. at 1016-1017. *fn3"

 I next held that Horizon and Brown had validly attached the Trust's assets before any other claimants had perfected a claim under the Trust Agreement and before any other attaching creditors. I therefore held that they had priority in payment of the Trust's assets, at least as to the amounts of the judgments underlying their writs of execution. Horizon has a New York judgment in the amount of $83,080. Brown has a Texas judgment in the amount of $117,066.02. Horizon received $32,080 from the interpleaded fund on March 7, 1984, and $51,000 on March 14. Brown received $117,066.02 on March 14. On February 24, 1984, I further held that Pak-Mor would receive the remainder of the interpleaded fund after determination of all outstanding issues. This Opinion disposes of several of those issues.

 First, Jackson has moved for reconsideration of my February 24 Opinion and the accompanying Order as applied to him. Disposition of this motion should precede disposition of other matters. Second, the February 24 Opinion specifically invited further submissions on the reserved question of whether this court could or must award interest to successful claimants out of the interpleaded fund. See Fidelity Bank, 581 F. Supp. at 1120-1121. Third, the Order accompanying the February 24 Opinion invited plaintiff to file further motions for summary judgment against those claimants not prevailing on their motions for summary judgment. That Order also invited plaintiff, Jackson, and Horizon to each move for summary judgment on Jackson and Horizon's counterclaims. Fidelity has petitioned for discharge as to all claimants. Fidelity has also moved for summary judgment on Horizon's counterclaim. Jackson has stipulated to dismissal of his counterclaim.

 1. Jackson's Motion for Reconsideration

 Each of the claimants to the interpleaded fund has obtained a judgment against Commonwealth in a court of a state other than Pennsylvania. The claimants attempted to induce Fidelity to satisfy these judgments out of Commonwealth's deposits in one of two ways. Mamiye, Horizon, Brown, and Pak-Mor entered their judgments in Pennsylvania courts of common pleas and then served Fidelity with writs of execution, thereby attaching the interpleaded funds. See Pa.R.Civ.P. 3101-3149 (Purdon's 1975 and Supp.1983). Other claimants attempted to follow the procedure delineated in the Trust Agreement.

 The second paragraph of article II of the Trust Agreement provides:

 
A claim against the Company under an American policy issued subsequent to the execution of this trust agreement shall be enforceable by the policy-holder against the Trust Fund when all of the following four conditions have been complied with and not otherwise.
 
(A) A judgment has been obtained by the policyholder against the Company in any Court of competent jurisdiction within the United States of America in respect of the Company's liability under an American policy;
 
(C) A certified copy of the said judgment has been filed with the Trustee, together with such proof as to its finality and its conformance with the other conditions specified in this Article II as the Trustee shall require;
 
(D) A period of thirty (30) days from the date of the filing with the Trustee of the said certified copy of the said judgment and all of said proofs has expired, without such judgment having been satisfied, provided, however, that the expiration of such thirty-day period shall not be required in the event the same extends beyond the termination date of the Trust;
 
WHEREUPON the said judgment shall be forthwith satisfied by the Trustee out of the Trust Fund then in its hands, without regard to the rights of any other policyholder or policyholders provided that the Company at its option may waive any or all of the foregoing conditions mentioned in Subdivisions (A), (B), (C), and (D) hereof and direct the Trustee in writing to pay from the Trust Fund the claim of any policyholder against the Company under an American policy without such claim having become enforceable as above defined, whereupon the said claim shall be forthwith satisfied by the Trustee out of the Trust Fund then in its hands without regard to the rights of any other policyholder or policyholders and provided further that the Trustee shall be absolutely protected in acting upon any such written direction from the Company without investigation and shall be under no obligation to see to the application of any such payment and shall not be concerned to ascertain or inquire as to the validity of such claim or the propriety of such direction.

 Fidelity Bank, 581 F. Supp. at 1024.

 Under this paragraph's procedure, a claimant had two routes to obtaining payment from the Trust Fund. The claimant could obtain an order from Commonwealth directing Fidelity to pay the claimant. Commonwealth issued no such order. Alternatively, the claimant had to comply with four steps: he had to obtain a judgment, survive all appeals or the pertinent appeal period, certify the judgment's finality to Fidelity's satisfaction, and wait thirty days. See Fidelity Bank, 581 F. Supp. 999 at 1004-1005.

 Relying on Austin-Nichols & Co., Inc. v. Union Trust Co., 289 Pa. 341, 137 A. 461 (1927), Smith v. Keener, 270 Pa. 578, 113 A. 912 (1921), Patten v. Wilson, 34 Pa. 299 (1859), and Cain v. Hockensmith Wheel & Car Co., 157 F. 992 (C.C.W.D.Pa.1907), on February 24 I held that "Pennsylvania law establishes a first-in-time, first-in-right priority rule as between an attaching creditor and a claimant with an equitable lien under the Trust Agreement. An attaching creditor cannot attach property which the garnishee must pay to one other than the creditor's debtor." Fidelity Bank, 581 F. Supp. at 1019. I applied this analysis to the facts of this case and held that a claimant did not obtain an equitable lien on the assets of Commonwealth's trust until that claimant had satisfied all four conditions of the second paragraph of article II; only then would "the said judgment . . . be forthwith satisfied by the Trustee out of the Trust Fund then in its hands, without regard to the rights of any other policyholder or policyholders. . . ." Trust Agreement, art. II, para. 2.

 Pak-Mor filed its writ of execution April 19, 1983. Pak-Mor's claim exceeded the amount of the deposit then in Fidelity's hands. Thus, if Pak-Mor has priority over Jackson, Jackson cannot recover from the interpleaded fund.

 Jackson has moved for reconsideration. Jackson contends that he had perfected an equitable right to payment from the interpleaded fund as of the date that he had performed the last discretionary act prerequisite to his right to payment. Specifically, Jackson contends that he perfected his right to payment from the Trust Fund when he certified his judgment's finality to Fidelity's satisfaction. As of that date, Jackson contends, Fidelity had no further discretionary acts to perform and Jackson had no acts at all to perform. Both Jackson and Fidelity had only to await the expiration of thirty days, a period intended to permit Fidelity conveniently to liquidate the Trust's assets.

 Jackson does not quarrel with the reasoning of the February 24 Opinion other than that leading to the conclusion that a claimant under the Trust Agreement obtains no right to payment ahead of an attaching creditor until the Trust Agreement claimant has satisfied all four steps of paragraph Second of article II. Jackson advances several theories under which he believes that he received an equitable right to payment upon satisfaction of the first three conditions in paragraph Second. Jackson contends that no decisions of the Pennsylvania courts squarely decide this question in a context like the present one; therefore, so Jackson argues, this court should, as a matter of fairness, accord him priority over Pak-Mor. *fn4"

 It is not self-evident that resolution of a case like this one can turn on a finding of an optimally "fair" result. This case involves a dispute among innocent parties as to who shall receive some of the assets of an absent party which has not paid its debts. Fairness has little to do with this distribution; in a perfectly "fair" world, Commonwealth Marine would be able to pay all of the claimants here. What is called for in this case is the identification of rules which will impartially and efficiently allocate insufficient assets among claimants, all of whom are presumptively worthy. The rules rest upon considerations of certainty and swift resolution of disputes quite as much as they do on considerations of "fairness."

 In order properly to analyze Jackson's claim, it is essential to keep in mind that to prevail Jackson was not required to demonstrate some general equitable right to payment but rather an equitable right to payment ahead of Pak-Mor. Jackson had no such right.

 On the date that Pak-Mor served its writ of execution upon Fidelity, Pak-Mor acquired all of Commonwealth's rights in the Trust Fund's assets. Cf. Converse v. Hawse, 326 Pa. 1, 190 A. 899 (1937); Austin-Nichols & Co., Inc. v. Union Trust Co., 289 Pa. 341, 137 A. 461 (1927). On the date of Pak-Mor's attachment, Pak-Mor acquired Commonwealth's right "at its option [to] waive any or all of the conditions mentioned in Subdivisions (A), (B), (C), and (D) [of paragraph Second] and [to] direct the trustee in writing to pay from the Trust Fund the claim of any policyholder against the Company under an American policy without such claim having become enforceable as" defined in that paragraph. Trust Agreement art. II, para. 2. Upon receipt of the direction from Commonwealth, or Pak-Mor standing in Commonwealth's shoes, "the said claim shall be forthwith satisfied by the Trustee out of the Trust Fund then in its hands without regard to the rights of any other policyholder. . . ." Id. (emphasis added). Pak-Mor's attachment, then, permitted Pak-Mor to obtain immediate payment from Fidelity without regard to any other claimant's rights. The service of the writ of execution operated as a written direction to Fidelity from Pak-Mor to pay Pak-Mor.

 The Trust Agreement not only defines the rights that Pak-Mor acquired as against Fidelity, but it also defines the rights that Pak-Mor acquired against Jackson. "When a creditor makes use of attachment process, he thereby treats the contract by which the garnishee acquired possession of the fund in his hands as valid. . . ." Austin Nichols & Co., 289 Pa. at 346, 137 A. at 463. In this regard, Vincent v. Watson, 18 Pa. 96 (1851), proves particularly instructive. See Fidelity Bank, 581 F. Supp. at 1019. In Vincent, the court held that an attaching creditor could not receive payments ahead of certain other creditors of the attaching creditor's debtor. The debtor had agreed with the garnishee that the garnishee could pay certain debts of the debtor's business. A general creditor could only attach the debtor's rights subject to the debtor's contract with the garnishee.

 The Trust Agreement grants a claimant under the procedure established by the second paragraph of article II an unconditional right to payment "when all of the following four conditions have been complied with and not otherwise." Trust Agreement art. II, para. 2. An attaching creditor would take subject to Fidelity's unconditional duty to pay the claim of a claimant who had satisfied all four of the conditions stated in paragraph Second. Cf. Smith v. Keener, 270 Pa. 578, 113 A. 912 (1921); Patten v. Wilson, 34 Pa. 299 (1859); Vincent v. Watson, 18 Pa. 96 (1851).

 Jackson had no such unconditional right to payment. Without such a right under the Trust Agreement, Jackson's equitable right to payment, if any, was insufficient to defeat the unconditional right to payment attached by Pak-Mor. Cf. Cain v. Hockensmith Wheel & Car Co., 157 F. 992 (C.C.W.D.Pa.1907). Accordingly, Pak-Mor has priority in payment from the interpleaded fund over Jackson. The accompanying Order therefore denies Jackson's petition for reconsideration.

 2. Interest

 As discussed above, four claimants may have a right to recover from the interpleaded fund. Mamiye may recover an as yet undetermined amount if it survives proceedings challenging its New York judgment. Horizon has received payment of $83,080. Brown has received payment of $117,066.02. Pak-Mor will recover any portion of the interpleaded fund not paid to another claimant.

 All four of these claimants seek to recover prejudgment interest from the interpleaded fund. This interest covers two periods. First, it covers the period from the time of the claimants' state court judgments until April 29, 1983, the date that Fidelity commenced this action. Second, it covers the period from April 29, 1983, until the date of payment from the interpleaded fund. In all four cases, any award of interest would have a dual quality. It would be post-state-judgment interest, but pre-federal-judgment interest.

 State law determines whether this court should award prejudgment interest in an interpleader action. See, e.g., Amoco Transport Co. v. Dietze, Inc., 582 F. Supp. 804, 807 n. 3 (S.D.N.Y.1984). Our Court of Appeals has considered the Pennsylvania law of prejudgment interest on two recent occasions. Black Gold Corp. v. Shawville Coal Co., 730 F.2d 941 (3d Cir.1984), addressed the award of prejudgment interest in contract actions. Ambromovage v. United Mine Workers of America, 726 F.2d 972 (3d Cir.1984), decided two months before Black Gold, considered the propriety of an award of prejudgment interest against a union which had breached its fiduciary duty. These cases bear careful scrutiny because they come to different, although not inconsistent, results, and because Black Gold does not refer to or distinguish Ambromovage.

 Ambromovage involved a claim that the union breached its duty to the anthracite Health and Welfare Fund by failing to collect certain royalties due the fund from certain coal operators. The district court found that the union had breached its duty, but declined to award prejudgment interest. See Nedd v. United Mine Workers of America, 488 F. Supp. 1208 (W.D.Pa.1980). Plaintiffs had brought both federal and state claims. The Court of Appeals held that Pennsylvania law governed the award of prejudgment interest on claims governed by Pennsylvania law, and that federal law governed the award of prejudgment interest on federal claims. 726 F.2d at 981 n. 25. However, the court "perceive[d] only one legal right under either Pennsylvania or federal law." 726 F.2d at 981. The court saw "no difference between the federal and state rules. . . ." 726 F.2d at 981 n. 25. Those rules, the Court of Appeals concluded, permit, but do not ...


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