The creditor and the bank entered into a Deposit Account Control Agreement (“DACA”) to “govern the parties’ control” over the debtor’s accounts in the event of default and “create an enforcement mechanism… to perfect the parties’ agreement.” Later, to satisfy the debtor’s obligations, the creditor foreclosed and retained money that was in the debtor’s account and sent the bank a Notice of Exclusive Control. Subsequently, the bank made credit withdrawals from the debtor’s account despite the creditor’s protests. The parties disputed the legal implications of the foreclosure on the parties’ obligation to abide by the DACA. The bank claimed that the credit withdrawals from the debtor’s account were legal because the foreclosure of the account “discharged [the bank’s] secured status and the DACA.” The creditor refuted this argument by claiming that the DACA was still binding among the parties and the agreement prohibited the bank from materially breaching the DACA. The creditor filed five claims against the bank and the bank’s holding company, including a breach of contract claim, two claims of conversion, and two claims for declaratory judgment claims.
In Studio Enter. LLC v. SSB Bancorp, Inc., No. 2:23-CV-02095, 2024 WL 5263590, 2024 U.S. Dist. LEXIS 234517 (W.D. Pa. Dec. 31, 2024) (opinion not yet released for publication), the court considered cross motions for summary judgment on the creditor’s breach of contract and conversion claims. First, the court found that the creditor had retained secured status and the DACA controls “because ‘foreclosure does not discharge a security interest for the purpose of enforcing that interest.’” Bayer CropScience v. Stearns Bank Nat’l Ass’n, 837 F.3d 911, 915 (8th Cir. 2016). Second, the court noted that the bank’s statutory discharge argument was inconsistent with the Pennsylvania UCC’s promotion of enforcement agreements. The court found that “[t]he record indisputably establishes” that the bank understood that the DACA governed the parties’ control over the debtor’s account when it requested permission to make withdrawals after the foreclosure. Therefore, the court determined the credit withdrawals were a material breach of the DACA and granted the creditor’s motion for summary judgment on its breach of contract claim. Third, the court addressed the creditor’s conversion claims and found that the creditor “attempts to have its cake and eat it too.” The creditor argued that the conversion claims were independent of the DACA. The court disagreed and stated that because the creditor’s ownership interest in the debtor’s accounts relied on the DACA, the conversion claims also “fall within the purview of the DACA,” and no independent tort claim was available. Therefore, the court granted summary judgment regarding the conversion claims in favor of the bank and its holding company. Finally, the court dismissed the breach of contract and conversion claims against the bank’s holding company because it was not an “actual part[y]” to the DACA.
By Ian Wallace: [email protected]
Edited By Jace Brown: [email protected]
Edited By Ashley Boyce: [email protected]
Edited By Hayden Mariott: [email protected]