Kentucky Highlands Investment Corporation v. Bank of Corbin, Inc.

Kentucky Highlands Investment Corporation (Kentucky Highlands) (plaintiff) loaned over $5,000,000 to Tri-County Manufacturing and Assembly Incorporated (Tri-County Manufacturing) and its affiliates (the Tri-Companies), including Tritech Electronics, LLC (Tritech). As security, the Tri-Companies purportedly gave Kentucky Highlands a security interest in their personal property and assigned their accounts receivable to Kentucky Highlands. Tritech had a commercial deposit account with the Bank of Corbin, Inc. (the Bank) (defendant). In 2001, Tritech gave the Bank a security interest in its deposits. The Bank also held a setoff right against the account. Tritech’s customers generally paid Kentucky Highlands directly, and the deposit account mainly consisted of funds transferred from Tri-County Manufacturing’s account. Though Kentucky Highlands knew about Tritech’s deposit account, it never attempted to take control of the account. In March or April of 2002, Kentucky Highlands’s relationship with the Tri-Companies soured. In July 2002, Kentucky Highlands performed an audit showing that the Tri-Companies overstated their assets and suggesting illegal behavior. In 2004, Kentucky Highlands sued the Bank to recover approximately $400,000 in customer payments allegedly deposited by Tritech into the account in July and August of 2002. Kentucky Highlands alleged that the Bank colluded with the Tri-Companies and converted Kentucky Highlands’s proceeds. Relying primarily on a Kentucky Supreme Court case from 2000, Kentucky Highlands further alleged that the Bank impermissibly paid overdrafts on the account by applying the customer payments to the overdrafts while knowing of Kentucky Highlands’s interest. The Bank moved for summary judgment, arguing that its setoff right against the account had priority over Kentucky Highlands’s security interest and it had no duty to monitor Kentucky Highlands’s collateral. The trial court ruled for the Bank.