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January 16, 1985

MELLON BANK, N.A., EQUIBANK and PEOPLES BANK OF WESTERN PENNSYLVANIA, Defendants, v. HERITAGE BANK, Third Party Defendant, Fourth Party Plaintiff, v. TIMOTHY J. O'MARA, VINCENT J. O'MARA and JAMES P. O'MARA, Fourth-Party Defendants

Mansmann, District Judge.

The opinion of the court was delivered by: MANSMANN

This matter comes before the Court on various Motions for Summary Judgment as well as Fourth-Party Defendants' Motion to Dismiss. For the reasons set forth below, Mellon, Equibank and Peoples' Motion against O'Mara is denied as is Heritage's Motion against O'Mara. Additionally, Equibank and Peoples' Motion against Mellon is granted as is Mellon's Motion against Heritage. Also for the reasons stated herein, Fourth-Party Defendants' Motion to Dismiss the Fourth Party Complaint is granted.


 Plaintiff, O'Mara Enterprises, Inc. ("O'Mara"), is a West Virginia corporation with its principal place of business in Steubenville, Ohio. Since 1972, O'Mara has operated fast food restaurants at various locations in Ohio, West Virginia and Pennsylvania.

 During the time at issue, the last quarter of 1979 and the first half of 1980, either W. Gail Smith or Timothy J. O'Mara was the president of O'Mara. The other O'Mara brothers, Vincent J. and James P., were also officers of O'Mara and Terry R. Thompson was its controller during this period.

 The Gail Smith Development Company ("GSD") had a contractual arrangement with O'Mara to manage its office, accounting and general finances. Among these services were the calculation, bookkeeping and check writing services regarding O'Mara's employees' weekly federal withholding taxes and social security payments. Terry R. Thompson was the controller of GSD.

 During the period at issue, O'Mara maintained some of its corporate checking accounts with Defendants, Mellon Bank, N.A. ("Mellon"), Equibank and Peoples Bank of Western Pennsylvania ("Peoples") at branches within close proximity to the various O'Mara restaurants.

 Additionally, during this period, O'Mara utilized an Internal Revenue Service Trust Account at Heritage Bank ("Heritage"). By agreement with O'Mara, GSD was to calculate O'Mara's employees' weekly federal withholding and social security taxes, to write the checks and to deposit the appropriate funds into this trust account. These checks were made payable to the order of Heritage Bank, signed by Timothy J. O'Mara *fn1" and drawn on the Mellon, Equibank and Peoples accounts referenced above.

 This system apparently worked without difficulty until the third quarter of 1979 when GSD began having financial problems and diverted the funds intended by O'Mara to pay its employees' federal taxes into a GSD account at Heritage. By August of 1980, over $400,000 had been so diverted, a small percentage of which is at issue instantly. Upon learning of this scheme, O'Mara obtained the resignations of Terry R. Thompson and W. Gail Smith, who later became the subject of bankruptcy proceedings. It is undisputed that this diversionary scheme was wholly unauthorized by O'Mara.

 As noted above, the checks at issue were made payable to the order of Heritage Bank. Further, at the time Heritage was given possession, the checks were stamped on the reverse side with the following:

Pay to the Order of First National Bank & Trust Co. *fn2" in Steubenville, Ohio

 Prior to placing the checks in the collection process, Heritage stamped each check with its indorsement:

Pay any Bank, P.E.G. HERITAGE BANK, Toronto, Ohio

 Each check was then sent to Mellon, which is Heritages' correspondent bank for this geographical area.

 With respect to the Equibank and Peoples checks, Mellon stamped the reverse side with the following indorsement:

Pay Any Bank
Pittsburgh, Pa.

 Mellon then forwarded to Equibank or Peoples their respective checks, while keeping its own.

 Each of these three banks then paid these checks by debiting O'Mara's respective checking accounts. The total amount of funds diverted from O'Mara and intended for deposit in the tax trust account which is at issue here is: $6,363.50 from the Mellon checking account; $7,211.75 from the Peoples checking account and $13,896.06 from the Equibank checking account, totalling $27,471.31.

 * * * *

 Thereafter, in August of 1982, Plaintiff O'Mara filed the instant Complaint against Mellon, Equibank and Peoples, requesting that each bank pay it the aforementioned sums, plus interest, and claiming that each bank breached its contractual and statutory duties by improperly debiting O'Mara's respective checking accounts and thereby converting these funds. Additionally, O'Mara alleges that the checks, which were drawn to the order of Heritage Bank, were not properly indorsed and that the banks failed to require the proper indorsement. O'Mara also claims that the Defendants failed to exercise due care and failed to act in a commercially reasonable manner.

 Mellon, in answering the Complaint, denied liability and pleaded various affirmative defenses.

 Equibank and Peoples answered separately; each denied liability and asserted various affirmative defenses and each interposed a Crossclaim against Mellon as the collecting bank based upon alleged breach of warranties, among other things.

 Mellon replied to the Crossclaim against it by Peoples denying the averments contained therein and asserting various affirmative defenses. Mellon simultaneously impleaded Heritage as a third-party defendant, seeking indemnity in the event it is found liable to O'Mara and/or to Equibank and Peoples. Count II of the Third-Party Complaint was later amended to assert that the checks at issue contained Heritage's indorsement.

 Similarly, Mellon interposed its Reply to Equibank's Crossclaim and included various affirmative defenses. Heritage answered the Amended Third-Party Complaint, denying liability and interposing various affirmative defenses.

 Heritage then moved to stay all proceedings in the instant action until such time as the adversary proceeding instituted by O'Mara and arising out of the Chapter 11 Bankruptcy proceedings regarding W. Gail Smith d/b/a Gail Smith Development Company pending in the Southern District of Ohio, as well as the action against Heritage, et al. instituted by O'Mara pending in the Ohio State court system reach a final determination. This motion was denied.

 Subsequently, O'Mara moved to strike Mellon's Third-Party Complaint against Heritage due to Mellon's failure to implead Heritage within the ten-day period set forth in FED.R.CIV.P. 14(a). Mellon responded with a motion to implead Heritage nunc pro tunc, noting that Heritage was impleaded within three days of FED.R.CIV.P. 14(c) requirements, which delay had not resulted in prejudice. O'Mara's motion was denied.

 The Fourth-Party Complaint alleges, inter alia, that the O'Mara brothers failed to exercise due care as officers of O'Mara. Prior to the service of an answer, the O'Mara brothers moved to dismiss the action against them, claiming, inter alia, a lack of ...

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