Bank can't take funds from one company to compensate for other's debt, appellate court rules

Kelly Holleran Oct. 19, 2011, 1:47am


The Fifth District Appellate Court ruled last week that a bank is not eligible to deduct extra money from a company's bank account to compensate for another company's debt.

Justices determined in a ruling filed Oct. 5 that St. Clair County Associate Judge Andrew Gleeson made the correct decision when he ruled in favor of the company that had more than $500,000 taken from its account by the Bank of Edwardsville.

In 1992, brothers Dennis Meyer, David Meyer and Douglas Meyer formed a company called Meyer Logistics. At the same time, one of the brothers also started a company named Meyer Container. The companies were involved in the transportation of cargo containers.

To run their company, the Meyers had to purchase trucks and other equipment. They took out a loan through the Bank of Edwardsville to pay for the equipment.

In addition, on July 25, 2002, the Bank of Edwardsville and the businesses entered into an agreement. In the partnership, the bank agreed to provide immediate cash to Meyer Logistics and Meyer Container for money they expected to receive for their work. In exchange for the immediate payment, the bank would pay a discounted price for the accounts receivable. The setup is typically referred to as factoring.

"In a factoring agreement, the factor earns a profit by buying the accounts receivable at a discount from their face value, and the other party benefits from immediate cash to finance continued business operations," the opinion says.

However, the bank claimed it discovered that Meyer Transportation and Meyer Container were not paying it all the money they were required to under the terms of the factoring agreement. In addition, in 2003, the companies defaulted on their truck and equipment loans, according to the opinion.

The bank began demanding the money from the companies. Soon, the Meyer brothers -- owners of the companies -- developed a plan in which their father, Gilbert Meyer, would form his own business, Meyer Logistics.

The bank was aware of the plan and submitted its own idea for repayment. In the bank's plan, it would foreclose on its lien against the trucks, then sell those trucks to Gilbert Meyer on a 48-month, seven percent note. Meyer Logistics would pay the bank $5,000, which could be applied toward Meyer Transportation's and Meyer Container's debt, and could continue to pay $10,000 per month for six months. The money could be put toward the outstanding bills owed by Meyer Transportation and Meyer Container, according to the opinion. However, Meyer Logistics never agreed to the plan.

Meanwhile, Meyer Logistics began business utilizing the trucks and equipment in question. It also entered into a factoring agreement with a different company. In turn, that company had to establish an intercreditor agreement with the Bank of Edwardsville in order to immediately pay Meyer Logistics the money it desired.

Although the bank had not yet reached an agreement with Meyer Logistics regarding the debt owed by Meyer Transportation and Meyer Container, it agreed to provide the funds for the factoring agreement, according to the opinion.

Eventually, Meyer Logistics agreed to allow the bank to withhold three percent of the money it made in the factoring agreement. In turn, the withholdings would be applied toward the debt owed by Meyer Transportation and Meyer Container, the opinion states.

Meanwhile, in 2003 and 2004, Meyer Transportation and Meyer Container attempted to enter into multiple forbearance agreements with the bank in which they attempted to make arrangements to pay off their debt. However, the bank continually wanted to make Meyer Logistics responsible for the debt incurred by Meyer Transportation and Meyer Container. In turn, Meyer Logistics refused to submit to the agreements.

In late 2004 or early 2005, the bank repossessed all of Meyer Logistics trucks and equipment. Still, it continued to retain the three percent portion it had begun withholding from Meyer Logistics's factoring agreement.

Meyer Logistics filed its complaint in an attempt to regain $591,000 it claims the bank wrongfully withheld from its accounts after repossessing the equipment.

On appeal, the bank argued that it was allowed to withhold the three percent, even though it had repossessed the property.

The appellate court, however, agreed with St. Clair County Circuit Court's analysis.

The factoring agreement between the bank, the third party and Meyer Logistics is vague, the Court ruled. As a result, it is necessary to examine all evidence leading up to the agreement.

"The evidence established that Meyer Transportation and Meyer Container were indebted to the Bank pursuant to various installment loans and pursuant to the terms of the Business Manager Agreement," Justice Bruce D. Stewart wrote for the Court. "Not only was Meyer Logistics not a party to any of these loans or the Business Manager Agreement, it did not even exist at the time those contracts
were formed. In addition, Meyer Logistics' owner, Gilbert Meyer, was not a party to any of these agreements and was not a shareholder or officer of Meyer Transportation or Meyer Container."

The bank was never granted the right to continue withdrawing three percent from Meyer Logistics, the Court found.

In the alternative, the bank argued that Meyer Logistics should not be reimbursed the money taken from its account because it voluntarily paid the funds.

However, the Court points out that Meyer Logistics requested the third party discontinue making the payments to the bank after the bank took the vehicles. The third party continued to make the payment to the bank over Meyer Logistics's protests, the Court determined. Therefore, Meyer Logistics was not voluntarily making the payments.

Finally, the bank argued that Meyer Logistics is merely an alter ego for Meyer Transportation and Meyer Container. As such, it should be held liable for their debts.

The Court again disagreed, saying the companies had different shareholders and did not commingle any of their funds.

The Fifth District Appellate Court affirmed St. Clair County Circuit Court's ruling that the bank pay Meyer Logistics the $591,000 it took from the company's account following the repossession of the vehicle.

Justices Stephen Spomer and James Wexstten concurred.

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Organizations in this Story

Bank of Edwardsville
330 West Vandalia Street
Edwardsville, IL 62025

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