In re Ocean Petroleum, Inc.

Business Alliance Capital Corp. (BACC) (defendant) provided revolving credit and asset-based lending to Ocean Petroleum, Inc. Ocean made payments to BACC by depositing collections into a blocked account at Fleet Bank, N.A. (plaintiff). BACC’s bank, First Union, then initiated Automated Clearing House (ACH) transfers and wire transfers from the blocked account to BACC’s own accounts. To request advances from BACC, Ocean prepared certificates listing alleged collections that Ocean was supposed to deposit into the blocked account. BACC relied on Ocean’s representations about the collections and regularly advanced money to Ocean even though BACC could not verify the deposits until the following business day. On November 20, 1998, BACC initiated a $5.8 million ACH transfer from the blocked account. However, the account contained insufficient funds, and BACC’s debit request was returned as uncollected. Although the transaction was reversed in Fleet’s system, it was not reversed with the Federal Reserve because of a computer glitch. As a result, the transaction was deemed final in Fleet’s Federal Reserve account and in the ACH system. Ocean filed for bankruptcy on November 23, 1998, and BACC initiated additional transfers from the blocked account. In total, BACC received over $7.3 million from Fleet, even though the blocked account only contained $5.9 million. The remaining $1.4 million came from Fleet’s Federal Reserve account. On December 14, 1998, Fleet contacted BACC and advised that the $5.8 million ACH debit should have been returned for insufficient funds because some of Ocean’s pre-bankruptcy deposits into the blocked account had not cleared. Fleet sought the return of its $1.4 million, but BACC only returned $741,000. Fleet sued BACC to recover the remaining funds. BACC asserted that Fleet’s claims were barred because Fleet had not returned the $5.8 million ACH debit entry within two business days, as required by National Automated Clearing House Association (NACHA) rules. Fleet argued that it could still seek return of the money under New York common law. In a pretrial deposition, a BACC officer testified that he knew by November 23, 1998, that over $500,000 in deposits made by Ocean on November 20, 1998, had not cleared. Both parties moved for summary judgment.