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Ferer v. Chase Manhattan Bank

decided: March 14, 1984.

AARON FERER & SONS LIMITED, PLAINTIFF-APPELLANT,
v.
THE CHASE MANHATTAN BANK, NATIONAL ASSOCIATION, DEFENDANT-APPELLEE; WILLIAMS & GLYN'S BANK LIMITED, PLAINTIFF-APPELLANT, V. THE CHASE MANHATTAN BANK, NATIONAL ASSOCIATION, DEFENDANT-APPELLEE



Appeals from a judgment of the United States District Court for the Southern District of New York, (Griesa, Judge), dismissing plaintiffs' joint actions against defendant for money had and received, misrepresentation, breach of fiduciary duty, and negligence.

Feinberg, Chief Judge, Newman and Pratt, Circuit Judges.

Author: Pratt

PRATT, Circuit Judge:

Plaintiffs, Williams & Glyn's Bank, Ltd. (Williams & Glyn's) and Aaron Ferer & Sons, Ltd. (Ferer-London), appeal from a judgment of the United States District Court for the Southern District of New York, Honorable Thomas P. Griesa, Judge, entered after a jury trial, dismissing their joint actions against defendant, The Chase Manhattan Bank (Chase). Williams & Glyn's and Ferer-London sued Chase for money had and received, breach of fiduciary duty, negligence, misrepresentation, and for rescission of releases exchanged between Chase and Williams & Glyn's. Plaintiffs alleged that money lent by Williams & Glyn's to Ferer-London had been converted by Ferer-London's American parent corporation, Aaron Ferer & Sons Co. (Ferer-Omaha), which had used the money to repay loans owing to Chase, and that Chase knew the money actually belonged to plaintiffs. At the close of evidence the trial court directed a verdict in Chase's favor on the breach of fiduciary duty and negligence counts. Thereafter, the court set aside the jury's special verdicts, which found that Chase had misrepresented or concealed material facts connected with the release, and instead held that the release was not tainted with fraud, was valid, and barred Williams & Glyn's entire action. Finally, the trial court determined that Ferer-London failed to prove its count for money had and received, and it dismissed both complaints. We affirm.

I. BACKGROUND

Before addressing the legal issues, we must undertake a detailed review of the essential facts. Ferer-Omaha is a Nebraska corporation that bought and sold metal both in the United States and abroad. Defendant Chase Manhattan Bank is a national bank with offices in New York and London. Chase provided much of the financing for Ferer-Omaha's operations, and had a perfected security interest in all of Ferer-Omaha's property.

Plaintiff Ferer-London is an English corporation and a wholly owned subsidiary of Ferer-Omaha. Ferer-London was also engaged in the metal trading business. Ferer-London's purchases were financed in part by Chase, and in part by plaintiff Williams & Glyn's, an English bank with offices in London and New York.

A. Chase's Credit Arrangement with Ferer-Omaha

In April 1970 Ferer-Omaha entered into a credit and security agreement with Chase and the United States National Bank of Omaha (USNB), a local bank acting as agent for Chase. Chase perfected its security interest in Ferer-Omaha's property by filing financing statements in Nebraska, New York, and other jurisdictions where Ferer-Omaha did business. Chase and USNB provided Ferer-Omaha with a revolving line of credit which permitted Ferer-Omaha to borrow up to $5 million determined by a "borrowing base" formula. The borrowing base consisted of 90% of Ferer-Omaha's accounts receivable and an allowance of $1 million for inventory. In exchange, Ferer-Omaha agreed to assign its accounts receivable directly to Chase. Assignments and copies of the invoices representing the amounts due on the accounts were sent weekly to Chase.

Chase's control over the accounts receivable assigned to it was achieved through the use of a "lock box", which was really nothing more than a post office box in Chase's name. Ferer-Omaha's invoices bore a legend that requested its customers to remit payment directly to the lock box in New York City. Use of the lock box insured that Chase and USNB retained control over the receivables and also served to expedite receipt and recordation of payments. Chase collected checks from the lock box and deposited them into a cash collateral account maintained by it for Ferer-Omaha. While the funds in the cash collateral account belonged to Ferer-Omaha, transfers from that account were controlled by Chase pursuant to the borrowing base formula. If there was insufficient collateral to support the debt owed to Chase, it had the option of applying funds from the cash collateral account to reduce the loans in accordance with the credit and security agreement. The evidence showed, however, that the funds received in the cash collateral account were usually transferred immediately to Ferer-Omaha's operating account.

B. Course of Dealing Between Ferer-Omaha and Ferer-London

In late 1970 Ferer-Omaha's president, Harvey Ferer, formed an English subsidiary, Ferer-London, to assist Ferer-Omaha in the metal trading business. Harvey Ferer also planned to use Ferer-London to trade in metal futures contracts on the London Metal Exchange (LME). Chase extended a small line of credit to Ferer-London, and financed specific copper purchases by Ferer-London on a transaction-by-transaction basis.

The usual operating arrangement between Ferer-Omaha and Ferer-London was that the copper purchased by Ferer-London would be transferred to Ferer-Omaha for refining and sale to end users. Ferer-Omaha paid for the shipping and refining, and determined the selling price of the copper. After receipt of the sales proceeds, Ferer-Omaha would be reimbursed for its expenses, Ferer-London would be repaid the original purchase price, and any profit would then be divided between parent and subsidiary. The arrangement between the companies was never set out in writing.

Ferer-Omaha usually invoiced its sales of Ferer-London's copper on Ferer-London invoices. Although Ferer-London's invoices did not bear the legend directing payment to the Chase lock box, most of the purchasers of the Ferer-London copper through Ferer-Omaha followed their customary practice and sent payments there anyway. The funds would pass through the collateral account, into the operating account, and Ferer-Omaha would then repay Ferer-London from that account.

C. The Codelco Copper

In 1973 Harvey Ferer, acting for Ferer-Omaha, contracted with Corporacion del Cobre (Codelco) in Chile for the monthly purchase of partially refined copper. Ferer-Omaha did not have sufficient credit at Chase to purchase all of the copper it contracted for, so at Harvey Ferer's request, Ferer-London purchased some of the monthly shipments. Two Ferer-London purchases from Codelco were financed by Chase.

In August 1973 Williams & Glyn's began financing Ferer-London's purchases of copper from Codelco. The terms of the loans from Williams & Glyn's to Ferer-London were not reduced to writing anywhere other than in the credit applications Ferer-London filed to procure letters of credit from Williams & Glyn's. With respect to the Codelco copper Williams & Glyn's never filed a financing statement, security agreement, or any other document to perfect a lien in England or in any jurisdiction in the United States until after most of the Codelco copper had been sold.

At first Codelco did not realize that it was dealing with both Ferer-Omaha and Ferer-London as buyers. Consequently, some of the earlier contracts mistakenly named Ferer-Omaha as buyer, when in fact, Ferer-London was the buyer. Ferer-Omaha returned the contracts, and Codelco changed most of them to show Ferer-London as buyer. Codelco's invoices listed the buyer's name, address, Codelco contract number, and a letter of credit number. The invoices also showed the name of the vessel the copper was to be shipped on, the date and place of shipping, and the destination.

Both Ferer-Omaha's and Ferer-London's purchases of Codelco copper were invoiced on a provisional basis, based on an estimated copper content. Following assay, a final invoice was issued. If the final invoice was lower than the provisional invoice, then Codelco owed a refund for overpayment; conversely, if the final invoice was higher than the provisional invoice, then a balance was due from the buyer.

When the ships bearing Codelco copper reached the United States, Ferer-Omaha performed its usual services by arranging for further refining and sale. However, instead of invoicing the sales of Ferer-London's refined Codelco copper on Ferer-London's invoices, as had been its prior practice, Ferer-Omaha invoiced the Codelco copper sales on its own forms and assigned the invoices to Chase. Notwithstanding those assignments, however, until March 1974 Ferer-Omaha was diligent in sending Ferer-London sufficient funds to enable Ferer-London to repay the loans it owed to Williams & Glyn's.

D. The Crisis

Serious delays in payments from Ferer-Omaha to Ferer-London on Codelco copper sales began in March 1974. On April 20, 1974, two Ferer-London directors flew to Omaha and met with Harvey Ferer seeking to accelerate payments. During the course of the meeting Harvey Ferer revealed that he had diverted $12 million of Ferer-London's Codelco proceeds to pay LME margin calls. The Ferer-London directors returned to London and informed Williams & Glyn's of Ferer-Omaha's problems. They also told Williams & Glyn's that Chase had a security interest or "charge" over all of Ferer-Omaha's receivables.

Two days later, on April 22, 1974, Harvey Ferer told Chase officials about the potential loss of $25 million because of his speculation on the LME. He also told Chase representatives that Ferer-London owed $12 million to Williams & Glyn's that could not be repaid because the funds had been diverted to pay margin calls on the LME. That same day, Chase made a formal demand on Ferer-Omaha for repayment of its loans. On April 24 Ferer-Omaha filed a Chapter XI petition in the bankruptcy court in Omaha. A few months later Ferer-London went into liquidation in England.

As part of the effort to collect its outstanding loans, Williams & Glyn's had Ferer-London assign its interest in those Codelco copper shipments that corresponded to unpaid letters of credit. Using the assignments, Williams & Glyn's was able to take possession of several shipments and thereby reduce its losses to approximately $7.7 million. Williams & Glyn's and Ferer-London then proceeded to the bankruptcy court in Nebraska to determine what would be available for them from Ferer-Omaha.

E. The Omaha Bankruptcy Proceedings

As part of the bankruptcy proceedings in Omaha, and with the approval of the bankruptcy court, Chase continued to finance Ferer-Omaha at vastly reduced levels. This enabled Ferer-Omaha to continue operating its metals trading business under the supervision of the bankruptcy court. While the court specifically approved use of the "lock box" system, it maintained summary jurisdiction over the funds being transferred into and out of the collateral account.

From 1974 until early 1977 Williams & Glyn's was represented in the Ferer-Omaha bankruptcy proceedings by Carter, Ledyard & Milburn (Carter Ledyard), a New York law firm. Carter Ledyard reported to Williams & Glyn's London solicitors, and in turn retained Kennedy, Holland, DeLacey & Svoboda (Kennedy Holland) as local counsel in Omaha. In late 1975 Ferer-London also retained Carter Ledyard and Kennedy Holland.

In May 1974 Williams & Glyn's and Ferer-London brought reclamation actions against Ferer-Omaha in the bankruptcy court. Williams & Glyn's claimed that Ferer-Omaha had converted approximately $9 million that should have been turned over to Ferer-London for repayment to Williams & Glyn's. Ferer-London's original claim was for approximately $10 million, but because $9 million of that claim was represented by amounts assigned to Williams & Glyn's, Ferer-London voluntarily reduced its claim to approximately $1 million. Ferer-London joined Williams & Glyn's in seeking to enjoin Ferer-Omaha from disposing of Ferer-London's Codelco copper or proceeds. Chase moved to intervene, claiming that it had a perfected security interest in all of Ferer-Omaha's property.

The bankruptcy court entered a temporary restraining order directing Ferer-Omaha to furnish a summary of all transactions relating to the disposition of the Codelco copper. Ferer-Omaha's summary stated that all of the accounts receivable had been paid, but did not show that the funds had passed through the collateral account at Chase. Williams & Glyn's then sought to withdraw its reclamation action without prejudice. Chase did not oppose the withdrawal motion, but sought to have attorneys' fees assessed against Williams & Glyn's if the withdrawal motion was granted.

During the course of oral argument on the withdrawal motion, counsel for Williams & Glyn's attempted to characterize his client as the innocent party in all of the bankruptcy proceedings and argued that attorneys' fees should not be awarded. Counsel for Williams & Glyn's argued that a good deal of Ferer-London proceeds owed to Williams & Glyn's "directly or indirectly, went to Chase Manhattan Bank * * *". Thus, both Williams & Glyn's and Ferer-London knew, or at least suspected, as early as July 1974, that Chase was the recipient of the money which Williams & Glyn's claimed. The bankruptcy court granted Williams & Glyn's motion to withdraw and denied Chase's motion for attorneys' fees.

1. The Codelco Refunds

Because the final assay of copper content in the Codelco shipments proved to be lower than the provisional assays, Ferer-Omaha and Ferer-London were due refunds for overage payments on most of the copper purchased from Codelco (hereinafter "Codelco refunds"). On May 7, 1975, Harvey Ferer furnished Chase with a handwritten schedule of Codelco contracts, stating whether the ...


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