Fifth Third Bank v. United States Department of Agriculture-Rural Development et al

Filing 73

OPINION ; signed by Judge Robert Holmes Bell (Judge Robert Holmes Bell, kcb)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION

FIFTH THIRD BANK,
Plaintiff,
CASE NO. 1:12-CV-1123
v.
HON. ROBERT HOLMES BELL
UNITED STATES DEPARTMENT
OF AGRICULTURE-RURAL
DEVELOPMENT, et al.,
Defendants.
/
OPINION
This is an interpleader action brought by Plaintiff Fifth Third Bank to resolve
competing interests in the funds residing in Defendant Bentwaters Partners’ bank account
at Fifth Third. Previously, this Court denied Defendant Triangle’s motion for summary
judgment (Dkt. Nos. 34-35), and denied Triangle’s subsequent motion for reconsideration
(Dkt. Nos. 65-66). Presently before the Court is Bentwaters’ motion for summary judgment.
(Dkt. No. 60.) For the reasons that follow, this motion will be granted.
I.
On May 26, 2004, Bentwaters obtained a loan from Centennial Mortgage, Inc. for the
acquisition of apartment complexes in the City of Three Rivers, Michigan. This loan was
guaranteed by the United States of America through the Guaranteed Rural Rental Housing
Program, 7 C.F.R. § 3565. In connection with that loan, Bentwaters executed and delivered

to Centennial a promissory note, security agreement, and mortgage. (Dkt. No. 61, Exs. 1-3.)
Bentwaters subsequently defaulted, and Centennial submitted a loss claim to the United
States Department of Agriculture (“USDA”). After payment on the loss claim, the USDA
received an assignment of Bentwaters’ promissory note, security agreement, and mortgage
from Centennial in accordance with 7 C.F.R. § 3565.455. (Dkt. No. 62, Exs. 6-7.)
On August 22, 2011, Fifth Third, Bentwaters, and the USDA entered into a Deposit
Account Control Agreement (“DACA”) for the account in question. (Dkt. No. 62, Ex. 8,
DACA.) According to the DACA, Bentwaters owns the account, the USDA is a secured
creditor with exclusive control over the account, and Fifth Third is the depository bank. (Id.
¶ 3.)
Subsequently, on February 21, 2012, and June 13, 2012, writs of garnishment were
issued against Fifth Third and in favor of Mercantile. (Dkt. No, 62, Ex. 10.) On June 7,
2012, a writ of garnishment was issued against Fifth Third and in favor of Triangle. (Dkt.
No. 62, Ex. 9.) A default judgment was entered against Fifth Third in the Triangle
garnishment action.
Fifth Third filed the present interpleader action in state court on September 5, 2012.
The case was removed to this Court by the USDA on October 12, 2012. (Dkt. No. 1.)
II.
The Federal Rules of Civil Procedure require the Court to grant summary judgment
“if the movant shows that there is no genuine dispute as to any material fact and the movant

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is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). In evaluating a motion for
summary judgment the Court must look beyond the pleadings and assess the proof to
determine whether there is a genuine need for trial. Matsushita Elec. Indus. Co. v. Zenith
Radio Corp., 475 U.S. 574, 587 (1986).
In considering a motion for summary judgment, “the district court must construe the
evidence and draw all reasonable inferences in favor of the nonmoving party.” Martin v.
Cincinnati Gas & Elec. Co., 561 F.3d 439, 443 (6th Cir. 2009) (citing Jones v. Potter, 488
F.3d 397, 403 (6th Cir. 2007)). Nevertheless, the mere existence of a scintilla of evidence
in support of a non-movant’s position is not sufficient to create a genuine issue of material
fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). The proper inquiry is
whether the evidence is such that a reasonable jury could return a verdict for the non-moving
party. Id.; see generally Street v. J.C. Bradford & Co., 886 F.2d 1472, 1476-80 (6th Cir.
1989).
III.
Bentwaters argues that summary judgment should be entered in favor of the USDA,
and the account funds awarded to the USDA, because the USDA has a prior security interest
in the funds that is superior to the other claimants. Alternatively, Bentwaters requests that
the Court order Fifth Third to tender the account funds to the Court for disposition and
discharge Fifth Third from the action.
As for the other parties, the USDA concurs in Bentwaters’ motion in full. (Dkt. No.

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69.) Mercantile did not file a response to Bentwaters’ motion, but, according to Bentwaters,
did indicate its concurrence with Bentwaters’ request that Fifth Third deposit the funds with
the Court and be dismissed from the action. (Dkt. No. 60, ¶ 22.) Fifth Third is willing to pay
the funds into an escrow account with the Court. (Dkt. No. 68.) However, Fifth Third asks
that the Court discharge it of all liability to the other parties with respect to the account and
its funds.

(Id.)

In addition, Fifth Third requests that the Court address Triangle’s

counterclaim against it in any final ruling involving Fifth Third. (Id.) Last, Triangle states
that it does not have a claim to the account because its claim is satisfied by the entry of
default judgment against Fifth Third in the garnishment action, which it contends was a
personal judgment. Consequently, Triangle argues that this entire case should be dismissed,
incorrectly asserting that Mercantile has abandoned its claim to the account funds.1 (Dkt. No.
71.) Additionally, Triangle argues that this Court lacks the ability to discharge Fifth Third
from liability in excess of the funds deposited.
A. Is USDA entitled to the account funds as a matter of law?
A security interest in a deposit account may be perfected by control. Mich. Comp.
Laws § 440.9314(1). According to Michigan’s Uniform Commercial Code:
A secured party has control of a deposit account if . . . [t]he debtor, secured
party and bank have agreed in an authenticated record that the bank will
comply with instructions originated by the secured party directing disposition
of the funds in the deposit account without further consent by the debtor.
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Neither Mercantile’s decision not to file a response to Bentwaters’ motion for summary
judgment nor Mercantile’s concurrence in part of the relief requested by Bentwaters is an
abandonment of Mercantile’s claim to the account funds.
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Mich. Comp. Laws § 440.9104(1)(b). Here, the USDA, Fifth Third, and Bentwaters entered
into the DACA, which by its plain terms grants the USDA a secured interest in the account.
(DACA ¶ 2.)2 Further, the DACA expressly perfected that interest, pursuant to § 440.9104,
by granting the USDA exclusive control over the account:
Control. In order to provide the Secured Party with control over the Deposit
Account(s), Company agrees that Depository Bank shall comply with any and
all orders, notices, requests and other instructions originated by Secured Party
directing disposition of the funds in the Deposit Account(s) without any
further consent from Company, even if such instructions are contrary to any
of Company’s instructions or demands or result in Depository Bank
dishonoring items which may be presented for payment.
(Id. ¶ 3.)
As a secured creditor with control, the USDA has priority in the account funds over
Triangle and Mercantile. “[A] security agreement is effective according to its terms between
the parties against purchasers of the collateral and against creditors.” Mich. Comp. Laws
§ 440.9201. “The effect of this provision is to give priority to a [] secured party over
‘anyone, anywhere, anyhow’ except as provided in the Code.” Se. Fin. Corp. v. Nat’l Bank
of Detroit, 377 N.W.2d 900, 901 (Mich. Ct. App. 1985). “The Code” – Michigan’s Uniform
Commercial Code – explicitly provides that the USDA, as a secured party with a perfected
security interest, has priority over other parties, even those with conflicting security interests.
“A security interest held by a secured party having control of the deposit account under
section 9104 has priority over a conflicting security interest held by a secured party that does
2

Technically, the DACA is governed in accordance with Ohio law. However, Ohio law
on the matter is virtually identical. See Ohio Rev. Code § 1309.104.
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not have control.” Mich. Comp. Laws § 440.9327(a).3
Consequently, the Court will grant the motion for summary judgment and enter an
order recognizing the superiority of the USDA’s interest in the account funds.
B. Fifth Third’s liability
Fifth Third asks the Court to “[d]ischarge the Bank of all liability to all other parties
with respect to the Account and its funds.” (Dkt. No. 1, Ex. A, Compl. ¶ 14(D).) Triangle,
ignoring this plain language, argues that Fifth Third is requesting that this Court discharge
Fifth Third’s liability “in excess of the funds deposited.” (Dkt. No. 71, at PageID# 1447.)
Ultimately, Triangle believes that the default judgment it secured against Fifth Third on its
writ of garnishment is a personal judgment that Fifth Third must pay out of its own funds,
and it fears that this Court will improperly discharge Fifth Third from liability on that
judgment. As discussed at length in this Court’s opinions denying Triangle’s motions for
summary judgment and reconsideration, the Court does not believe that Fifth Third is
personally liable on the default judgment. (Dkt. Nos. 34, 65.) Nevertheless, rehashing that
argument is unnecessary because Fifth Third does not seek a discharge of liability with
respect to anything but the account funds, and this Court’s judgment will not affect Fifth
Third’s liability outside those funds.

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The USDA also has a perfected security interest, and thus priority, over all rent and lease
payments held in the deposit account by virtue of the “assignment of rents” contained in the
mortgage.
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C. Triangle’s counterclaims/cross-claims
Last, the Court must address the issue of Triangle’s counterclaims/cross-claims. (Dkt.
No. 42.) Triangle alleges that Bentwaters and the USDA violated Mich. Comp. Laws
§ 566.31 et seq. when Bentwaters fraudulently transferred a security interest in the account
to the USDA after Triangle became a judgment creditor. Triangle further alleges that Fifth
Third violated Mich. Comp. Laws § 600.4051 by knowingly and willfully answering falsely
in a disclosure filed in response to a writ of garnishment.
Triangle now argues that this case should be dismissed in its entirety. (Dkt. No. 71,
at PageID# 1447.) Triangle “maintains its cross/counter-claims only to the extent Triangle’s
judgment against Fifth Third is interpreted as anything other than a valid final personal
judgment, which in turn requires Triangle to raise these compulsory claims, and only to the
extent this issue must be litigated in this case rather than the Michigan courts.” (Id.) While
this Court has interpreted Triangle’s judgment as non-personal in denying Triangle’s motion
for summary judgment, this interpretation does not affect the Court’s ultimate disposition of
this interpleader action; the USDA is entitled to the account funds whether or not Triangle’s
judgment against Fifth Third is personal in nature. Thus, the Court’s judgment in this case
only affects the default judgment to the extent that default judgment provided Triangle with
an interest in the account funds. Because this Court is not discharging Fifth Third from any
personal liability on the default judgment (if there is any), it will dismiss Triangle’s
counterclaims/cross-claims without prejudice, in accordance with Triangle’s request.
An order consistent with this opinion will be entered.
Dated: April 26, 2013

/s/ Robert Holmes Bell
ROBERT HOLMES BELL
UNITED STATES DISTRICT JUDGE

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