Court Finds Bank Breached Bailment Agreement Regarding Collateral of Rare Coins and Bullion; Awards Attorneys Fees Under Bad Faith Exception to the American Rule

Israel Discount Bank of New York v. First State Depository Company, LLC, C.A. No. 7237-VCP (Del. Ch. May 29, 2013). Several of the prior Chancery decisions in this case were highlighted on these pages here,  here and here.

Issue Addressed:  Did the defendant depository bank breach the agreement by releasing collateral and interfering with the plaintiff’s consent, inspection, and removal rights?

Short Answer: Yes.

Brief Discussion:  This is a post-trial decision regarding a dispute involving banks and the handling of loan collateral consisting of rare coins and bullion. The Court’s comment in footnote 2 of the opinion on the nature of the dispute sets the tone:

Because this case involves businesses that, by their nature, should keep accurate and up-to-date records, the recitation of facts should be simple. Unfortunately, that is not the case. A major reason is that the central figure in this dispute … is an unscrupulous businessman who used his businesses, [the defendants], to move around assets in the equivalent of a three-card monte scheme to serve Defendants’ ends and without regard to [plaintiff’s] rights.

Plaintiff, Israel Discount Bank of New York (“IDB”) lent money to Republic National Business Credit LLC (“Republic”) as part of a revolving credit agreement. Republic then issued loans to various entities and took an interest in collateral for those loans, IDB, in turn had an interest in the same collateral as a result of IDB’s security interest in Republic’s assets. In 2006, Republic asked IDB to have the collateral transferred to defendant First State Depository  (“FSD”) because FSB offered better pricing.  IDB, Republic and FSB entered into a bailment agreement requiring that, upon receiving written notice from IDB, FSB would refrain from releasing the collateral without the written authorization from IDB.  However, despite adequate notice, FSB, without consulting with IDB, released the collateral to the defendant Certified Assets Management, Inc. (“CAMI”) (CAMI has the same owner as FSB) and a large amount of the collateral was never returned to FSB.

IDB filed suit alleging that FSD breached the bailment agreement by releasing collateral without IDB‘s authorization and refusing to allow IDB to inspect and remove the collateral. IDB also alleged that CAMI converted the collateral by wrongfully exercising dominion and control over it without IDB’s authorization. Defendants counterclaimed and sought a declaratory judgment that, among other things, FSD never sold, traded, or offered to sell or trade its customers’ property.  In addition, the defendants raised a “legion of defenses” that included laches, and the doctrine of election of remedies.

The Court found that FSD breached the bailment agreement by releasing collateral and interfering with IDB’s consent, inspection, and removal rights. The Court found that CAMI improperly converted the collateral when it took possession of the collateral and did not return it.  The Court also found that defendants, among other things, misled the Court and IDB as to the whereabouts and value of the collateral, delayed the litigation and asserted frivolous motions, and advanced multiple theories that had “minimal grounding in fact and law,”  Accordingly, the Court awarded to IDB its attorneys’ fees and expenses under the bad faith exception to the American Rule.