William Gibson is president and sole stockholder of Gibson Electric Company, an electrical contracting firm, and president and majority stockholder (seventy-five percent) of Southern Electrical Supply Company, a dealer in electrical materials. (The other twenty-five percent of Southern Electrical stock is owned by its vice-president Alden Fitzpatrick.)
In 1980, Gibson Electric contracted with Willis and Paul to do electrical work, including furnishing labor and supplies, for building a coal preparation plant in Kentucky. The Raleigh County Bank made three ninety-day loans to Gibson Electric on February 2, February 25 and April 15, 1980 for $31,218.75 $5,206.25 and $5,160.11. By June, the first two notes were delinquent.
On June 17, 1980, the bank received a wire transfer that stated: "Raleigh Cnty Natl Bk Beckley W.VA/AC Southern Electric Supply (Gibson Electric) AC 005 826 0". It was from Willis and Paul for $27,568.78. The account number belonged to Southern Electrical, so the bank made up a deposit slip and mailed it to Southern.
Later that day, however, a bank officer ordered the deposit slip voided and deposited the money in Gibson Electric's account instead, and then used the newly deposited money to offset Gibson Electric's delinquent notes. The next day when Mr. Gibson was in the bank, a bank officer informed him about what was done.
Southern Electrical sued the bank for conversion of funds
Southern responded that the money was due it for supplies on the Kentucky job, but in any event, a bank cannot alter deposit slips or wire transfers made by depositors. Southern pled that the bank had not specifically pleaded fraud as required by our rules of civil procedure, and was barred from later raising the matter at trial to prove its alter ego theory. Finally, Southern insisted that the court had no legal reason to disregard its corporate structure.
The court concluded that William Gibson made a wrongful transfer of the funds belonging to Gibson Electric when he had that money deposited in the Southern Electrical account, and that that transfer was for the apparent purpose of frustrating the bank's exercise of its right of setoff from the Gibson Electric account.
Southern appealed because of the trial court's failure to grant it summary judgment as a matter of law. We agree, and reverse.
Summary judgment is appropriate when there are no genuine issues of material fact in dispute and the matter can be decided by application of rules of law. Clendenin Lumber and Supply Co. v. Carpenter, W.Va., 305 S.E.2d 332 (1983); Aetna Casualty & Surety Co. v. Federal Insurance Co., 148 W.Va. 160, 133 S.E.2d 770 (1963).
The relevant facts as recited above are undisputed.
TRANSFER OF FUNDS
Southern's primary argument is that a bank has a contractual obligation to follow its depositor's instruction and if it withdraws money from a customer's account without that customer's specific directions, it may be contractually or tortiously liable. Smith v. American Bank & Trust Co., 639 S.W.2d 169 (Mo.App.1982); Taylor v. Equitable Trust Co., 269 Md. 149, 304 A.2d 838 (1973); General Apparel Sales Corp. v. Chase Manhattan Bank, 321 F.Supp. 891 (S.D.N.Y.1970); Reliance Insurance Co. v. North Carolina National Bank, 39 N.C. App. 420,
We find the bank's cases distinguishable or representative of different rules. In Arnold v. San Ramon Valley Bank, supra, a man transferred his funds into an account in his wife's name to avoid his creditors. The bank was fully aware of the arrangement and honored the man's checks on his wife's account in the same manner as it had done when it had been in his name. This use of his wife's name was a matter of convenience and the account was really a general account between him and the bank. Therefore, the court had no trouble finding that the bank had a right to set off that man's indebtedness from his wife's account. Here, however, Southern's account was not created by closing another account and transferring funds from it to the new account to avoid creditors. There is no claim that the bank knowledgeably participated in some such arrangement. Southern and Gibson Electric had separate, legitimate accounts, and the bank had never treated Gibson Electric as the true depositor in Southern's account.
In Fory v. American National Bank, supra, plaintiff was president of a corporation that was indebted to defendant bank, and he and the bank had an agreement that $4,000 of certain insurance funds credited to his corporate account would be used to pay off past-due corporate debts. Without knowledge of the bank's president, with whom that agreement was made, plaintiff withdrew those corporate insurance proceeds and deposited them to his personal credit. The bank ultimately set the corporate debt off against his personal account. It was critical to the Fory decision that the specific funds in the corporate account had been pledged to payment of the debt to the bank by binding agreement. The bank and Fory knew the source of the funds already deposited in the corporate account. After making the deposit in accord with the agreement that $4,000 of it was to be paid to the bank, Fory fraudulently withdrew it. The bank was permitted to capture the funds from his personal account. Raleigh County National Bank cannot show that money was deposited in Southern's or Gibson Electric's accounts and then fraudulently withdrawn, or that it had a binding agreement with Gibson about that money.
Citizens' Trust & Guaranty Co. v. Farmers' Bank, supra, is also inapposite because there was a specific writing between depositor-debtor and its bank that allocated to the bank for debt payment specific deposits in the debtor's account. There were deposits by a contractor into a subcontractor's account and the subcontractor owed the bank which took them for payment on the subcontractor's debt. It did not unilaterally transfer them to the subcontractor in order to exercise its setoff rights.
In Traders' National Bank v. Amsden, supra, the court determined the decedent-husband had fraudulently deposited money in his wife's name to avoid his indebtedness to the bank, and granted the bank a lien on the wife's account, finding that the account truly belonged to decedent-debtor. "In case of dispute, the bank must establish its lien, and that is what it seeks to do and has done in this case." Id., 195 N.Y.S. at 292. We emphasize that portion because it reiterates a point we make later, see infra, that in doubtful cases, a bank must go to court and prove its right to set off funds in another party's account.
Aidala v. Savoy Trust Co., supra, is also not analogous because a depositor represented himself to be another person and
We would be hardpressed to think of a situation in which we could condone a bank's decision to ignore the instructions of a depositor and unilaterally decide to alter a deposit. A depositor may contractually grant a bank the right to remove deposits from his account to pay off his matured indebtedness to the bank, see discussion infra on setoffs, but he may only contract to have his deposit account set off—not another's.
The bank said that the money was truly Gibson Electric's for work done on the Kentucky project, that its deposit in the Southern Electrical account was a sham intended to defraud the bank of its legitimate setoff rights, and that Southern and Gibson Electric were alter egos of Gibson, giving the bank implicit authority to make this otherwise unorthodox transfer.
Banks have a common law right to setoff.
A bank account creates a contractual debtor-creditor relationship between bank and depositor. Bank of Marin v. England, 385 U.S. 99, 101, 87 S.Ct. 274, 276, 17 L.Ed.2d 197 (1966); United States Fidelity and Guaranty Co. v. Home Bank for Savings, 77 W.Va. 665, 88 S.E. 109, 110 (1916). But see, Symons, Bank-Customer Relation, Pts. I and II, 100 Banking Law Journal 220-246; 325-353 (1983). A bank takes title to funds on deposit and becomes a debtor for that amount to the depositor, the customer, who becomes the bank's creditor. If a bank loans a customer money, then it becomes a creditor and the customer is a debtor.
The second requirement before setoff is appropriate, is that the deposit be in a general account. A special deposit is segregated for a specific purpose, and a bank may not set off a depositor's indebtedness against such an account. Lutz v. Williams, 79 W.Va. 609, 91 S.E. 460 (1917) and 84 W.Va. 216, 99 S.E. 440 (1919). Banks are obliged to keep special accounts separate. They may be payroll accounts, trust accounts, escrow deposits or the like. A general deposit, the more common type, serves any general banking purpose. 10 Am.Jur.2d Banks § 673 et seq.; 9 C.J.S.
Finally, there must be a mutuality of indebtedness. That means that the depositor must owe the bank a matured debt while the bank owes the depositor money based on his general deposit account. Mutuality requires the same parties with the same rights. A bank has no right by common law to set off funds in one account against an indebtedness on another account. Nor does it have the right to set off funds in a debtor's account that the bank has reason to believe belongs to someone else. See Annot., Bank's Right to Apply Third Person's Funds, Deposited in Debtor's Name, On Debtor's Obligation, 8 A.L. R.3d 235 (1966 and Supp.). Setoff relates to debts and deposits of the same person. Any question about whether a debtor and depositor of specific funds are the same should preclude setoff against those funds.
We found no case anywhere, anytime wherein a bank ex parte transferred funds in order to exercise setoff rights such as this one did, but a few cases and concepts may be analogous. In Cherokee Carpet Mills v. Worthen Bank and Trust, 262 Ark. 776, 561 S.W.2d 310 (1978), Cherokee Carpet contracted with Turner-McCoy to build a plant. Turner-McCoy had an account with defendant bank and owed the bank $175,000. In addition to a mortgage, Turner-McCoy gave the bank a security interest in all its contract rights and account receivable. When Cherokee Carpet gave Turner-McCoy a partial payment for work done on the building project, Turner-McCoy deposited the money in its general account with the bank. The next day the bank applied all the money in Turner-McCoy's account (including the check from Cherokee Carpet) to Turner-McCoy's matured indebtedness. Turner-McCoy failed to pay many of its subcontractors and suppliers for work on the Cherokee Carpet project. Cherokee bought the subcontractor's rights and sued the bank to have the setoff set aside. The Chancery Court denied relief, and the Supreme Court affirmed. It is enlightening to review the court's rationale.
Cherokee Carpet's first argument was that the funds of a contractor are by law held in trust for subcontractors and materialmen. The relevance of the trust argument is that a bank may not set off funds in a depositor's account if those funds are held in trust for another party or belong to a third person. See generally, Annot., Bank's Right to Apply Third Person's Funds, Deposited in Debtor's Name, on Debtor's Obligation, 8 A.L.R.3d 235 (1966 and Supp.). If money in a contractor's account is held in trust for subcontractors, a bank might not have its usual setoff right.
The court rejected Cherokee's contention that a contractor holds funds in trust for subcontractors, but acknowledged that under certain circumstances, a resulting trust theory may apply. Even if a contractor were a resulting trustee of the funds, the Arkansas Supreme Court reasoned that the bank could not be deprived of its right to setoff unless it had knowledge or adequate notice of the trust, or at least has been put on inquiry that there was a beneficiary entitled to the funds.
Unlike Cherokee Carpet, where money was deposited in the account of the bank's debtor but allegedly belonged to materialmen, here the deposit was to a materialman's account (Southern Electrical) and the bank moved it to a contractor's (Gibson Electric's) account to enable it to set off the contractor's matured indebtedness. If Gibson Electric is a resulting trustee of the funds paid by Willis and Paul for the Kentucky project's use of Southern Electrical's materials, the bank's setoff rights would depend on the notice it had about the trust. Forgetting for the moment the bank's lack of authority to move the funds, it still would not have a right of set off under those circumstances because it had adequate notice that the funds may have belonged to a third party other than the debtor.
This same theme about notice of another party's right to a depositor's account depriving a bank of its setoff rights
The question of mutuality of demands underlying a bank setoff arose in Get It Kwik of America v. First Alabama Bank, Ala., 361 So.2d 568 (1978). Plaintiff bought two SSS stores. One of the store's inventory was subject to a filed security interest based on a loan between SSS and the defendant bank. After plaintiff purchased that store, it opened an account at defendant bank and wrote a check for over $4,500 that was returned "insufficient funds" because the bank took all the money in plaintiff's account and paid it on SSS's debt.
The Alabama Supreme Court found that the bank had no right to do that because there was no debtor-creditor relationship between it and plaintiff, and thus there was no mutuality of demand. The debt belonged to SSS, not plaintiff, and plaintiff had not assumed the debt nor become a debtor of the bank. The court did find that plaintiff might be liable to the bank for conversion of its security interest in the collateral, but that did not affect the illegitimacy of the bank's setoff and wrongful dishonor of plaintiff's check.
There is a clear analogy to this case. There was no debtor-creditor relationship with mutual demands between Southern Electrical and the bank; no loan between Southern Electrical and the bank; and the existence of a general deposit account made the bank a debtor to Southern Electrical, but it was not a creditor. There was no mutuality. Hence, the bank had no right to set off funds in Southern's account for Gibson Electric's debt. Westerly Community Credit Union v. Industrial National Bank, 103 R.I. 662, 240 A.2d 586 (1968), although involving a complicated and totally different situation, resulted in the court finding a bank to have wrongfully exercised setoff because there had been no mutuality between the debtor, depositor and bank.
This bank justified its actions by arguing that the Southern Electrical account and Gibson Electric account were in reality one (or should be viewed as one) because both corporations were the alter egos of William Gibson. He was sole or majority shareholder in both corporations, they had the same officers and same office address, and Gibson controlled both companies.
The alter ego doctrines, alternatively "instrumentality", "identity", "agency", "piercing the corporate veil", or "disregarding the corporate fiction",
We did not find facts in Southern States Co-Operative requiring us to ignore the corporate form. It is not easily proved and the burden of proof is on a party soliciting a court to disregard a corporate structure.
A corporate shield may, of course, be "pierced" to subject a sole shareholder to liability for corporate acts or to make a corporation liable for behavior of another corporation within its total control.
Decisions to "pierce" involve multifarious considerations, including inadequacy of capital structures, whether personal and corporate funds have been commingled without regard to corporate form by a sole shareholder, whether two corporations have commingled their funds so that their accounts are interchangeable; whether they have failed to follow corporate formalities, siphoning funds from one corporation to another without regard to harm caused either entity, or failed to keep separate records. Other reasons to disregard the structure are: total control and dominance of one corporation by another or a shareholder; existence of a dummy corporation with no business activity or purpose; violation of law or public policy; a unity of interest and ownership that cuases one party or entity to be indistinguishable from another; common shareholders, common officers and employees, and common facilities. 1 Fletcher, Cyclopedia of Corporations (Perm.Ed.1983 Rev.) § 41.30 et seq.; H. Henn Law of Corporations (2d ed.1970) § 148; Powell Parent and Subsidiary Corporations 9 (1931); 18 Am.Jur.2d Corporations § 14; 18 C.J.S. Corporations §§ 6, 7 (1939 and Supp.); Annot., Stockholder's Personal Conduct of Operations or Management of Assets as Factor Justifying Disregard of Corporate Entity, 46 A.L. R.3d 428 (1972 and Supp.); Annot., Liability of Corporation For Torts of Subsidiary, 7 A.L.R.3d 1343, 1355 (1961).
This evidence must be analyzed in conjunction with evidence that a corporation attempted to use its corporate structure to perpetrate a fraud or do grave injustice on an innocent third party seeking to "pierce the veil." Brunswick Corp. v. Waxman, 459 F.Supp. 1222, 1234 (E.D.N.Y.1978); Saphir v. Neustadt, 177 Conn. 191, 210, 413 A.2d 843, 853 (1979); Lowendahl v. Baltimore & Ohio Railroad, 247 A.D. 144, 157, 287 N.Y.S. 62, 75, aff'd., 272 N.Y. 360, 6 N.E.2d 56 (1936); Old Southern Life Ins. Co. v. Bank of North Carolina, 36 N.C. App. 18, 244 S.E.2d 264 (1978); Mortgage & Trust, Inc. v. Bonner & Co., 572 S.W.2d 344, 350 (Tex.Civ.App.1978), reh. denied.
The law presumes that two separately incorporated businesses are separate entities and that corporations are separate from their shareholders.
Raleigh County National Bank did not submit sufficient evidence to overcome this
Each of Gibson's corporations served a separate purpose although their businesses were related. That relationship does not justify disregarding their separateness.
The court was shown no evidence that either corporation was undercapitalized, none that funds were commingled, nor that one corporation controlled the other, but only that Gibson owned all the stock in one and three-fourths of the other's. See
Having moved for summary judgment on this point, the bank has precluded itself from introducing more evidence to support its position. We find as a matter of law that the evidence introduced was insufficient to allow a court to treat both corporations as one entity.
Banks, unlike other creditors, are given a self-help remedy of setoff to collect matured indebtedness from a customer's general bank account. A self-help remedy, while constitutionally permissible,
A bank always has traditional collection remedies as provided by the Code and courts, and if a Raleigh County National Bank officer believed it was entitled to Southern Electrical's deposit, it should have sued Gibson Electric, Gibson and Southern Electrical, and presented its alter ego theory. Whether a corporate structure should be disregarded is peculiarly a question for courts to determine from evidence. Vann v. Shilleh, 54 Cal.App.3d 192, 126 Cal.Rptr. 401 (1976); 1 Fletcher Cyclopedia of Corporations, supra § 41.95, fn. 6; 18 C.J.S. Corporations § 6, 1983 Supp. at 108.
This bank had no explicit or implicit authority to transfer funds from one corporation's account to another's and then setoff those funds against the second corporation's indebtedness.
We reverse the summary judgment entered in favor of the bank. Southern Electrical is entitled to partial summary judgment declaring the bank did not have authority to transfer its funds and set them off against Gibson Electric's indebtedness. We remand the case for further proceedings on other claims and matters raised, consistent with this opinion.
Reversed and remanded.