In re F & T Contractors, Inc.

• Decision Date: 03 March 1982
• Docket Number: Bankruptcy No. 75-30096.
• Citation: 17 BR 966
• Parties: In re F & T CONTRACTORS, INC., Debtor. FEDERAL DEPOSIT INSURANCE CORPORATION, A Corporation organized and existing under the laws of the United States of America, Plaintiff and Counter-Defendant, v. David CUVRELL, Receiver/Trustee of F & T Contractors, Inc., F & T Contractors, Inc., Bankrupt, and F & T Investment & Leasing Company, a Michigan Co-Partnership, Defendants and Counter-Plaintiffs, and Federal Deposit Insurance Corporation, in its capacity as Receiver of the Northern Ohio Bank, Counter-Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

17 B.R. 966 (1982)

In re F & T CONTRACTORS, INC., Debtor.

FEDERAL DEPOSIT INSURANCE CORPORATION, A Corporation organized and existing under the laws of the United States of America, Plaintiff and Counter-Defendant, v. David CUVRELL, Receiver/Trustee of F & T Contractors, Inc., F & T Contractors, Inc., Bankrupt, and F & T Investment & Leasing Company, a Michigan Co-Partnership, Defendants and Counter-Plaintiffs, and Federal Deposit Insurance Corporation, in its capacity as Receiver of the Northern Ohio Bank, Counter-Defendant.

Bankruptcy No. 75-30096.

United States Bankruptcy Court, E.D. Michigan, S.D.

March 3, 1982.

COPYRIGHT MATERIAL OMITTED

Larry E. Powe, Freeman, McKenzie, Matthews, Scherer & Stepek, P.C., Mount Clemens, Mich., for plaintiff and counter-defendant.

Dennis M. Haley, Winegarden, Booth, Ricker, Shedd, Haley & Lindholm, Flint, Mich., for defendants and counter-plaintiffs.

MEMORANDUM OPINION

HAROLD H. BOBIER, Bankruptcy Judge.

Introduction

The subject matter of this lawsuit concerns a complex contractual dispute between the Federal Deposit Insurance Corporation (hereinafter "FDIC") and the bankrupt, F & T Contractors, Inc. (hereinafter "F & T"). The FDIC, "acting in its corporate capacity," is the plaintiff, and the FDIC, "acting in its receivership capacity," and the FDIC, "acting in its corporate capacity," are the counter-defendants. F & T is the defendant and counter-plaintiff, in this law suit.

F & T was a Michigan corporation and exclusively involved in the construction business for approximately twenty years. According to the testimony of its president, Theodore Birnbaum, F & T was a substantial construction contractor with approximately six million dollars in gross sales and one hundred fifty employees in 1973. F & T performed not only as a general contractor for commercial and residential construction, but it had divisions with capabilities for excavation, electrical contracting, mechanical contracting, drywall contracting, painting, plumbing and heating and airconditioning. The corporation had constructed substantial multiple-unit residential developments in its history. Just prior to the commencement of the construction project which forms the subject matter of this law-suit, it had completed a 220-unit apartment/townhouse development project which utilized funds insured by the Department of Housing and Urban Development (hereinafter "HUD"). In addition, the testimony indicated that F & T had been involved extensively in the construction of single family residences built with HUD-insured mortgage funds.

Old Orchard by the Bay Associates (hereinafter "Old Orchard"), a Michigan limited partnership, was created by Theodore Birnbaum and others to build a 220-unit apartment complex to be known as Old Orchard by the Bay. Theodore Birnbaum testified that he was the general partner of Old Orchard and owned a 15% partnership interest in exchange for the services he was to perform for the partnership. Old Orchard had been formed for the sole and limited purpose of acquiring the ownership of the real estate upon which the Old Orchard by the Bay project was to be erected. F & T entered into a construction contract with Old Orchard on May 1, 1974, for the construction of the Old Orchard by the Bay project for a total contract price of $4,235,331. ('81 Ex. 3.)¹ An amendment to the construction contract, also dated May 1, 1974, was executed for the purpose of providing a profit to F & T in the amount of $164,805.12, or 4% of the contract price. ('81 Ex. 4.) The project was to be constructed with a HUD-insured mortgage extended by Advance Mortgage Corporation (hereinafter "Advance").

Prior to the execution of the construction contract with Old Orchard, Theodore Birnbaum and his brother, Fred Birnbaum, transferred F & T's motor vehicles, equipment and fixtures to F & T Investment and Leasing Company (hereinafter "Investment"), and in consideration therefore, took back a security agreement in the amount of $397,500 ('77 Ex. 9). Investment was a Michigan limited partnership which leased certain items of personal property to F & T. In fact, Theodore Birnbaum testified that most of the equipment used by F & T during the construction of the Old Orchard by the Bay project was owned by and leased from Investment.

In order to finance the construction of the Old Orchard by the Bay project, the owner of the real property, Old Orchard, was required by the construction lender, Advance, as a condition imposed by HUD, the mortgage insurer, to procure three different irrevocable letters of credit. The letters of credit were obtained from the Northern Ohio Bank (hereinafter "NOB")² on July 2, 1974, as follows:

1. Letter of Credit No. 1129, in the amount of $95,098, for the purpose of meeting any initial operating deficits caused by a failure to timely complete the project and generate sufficient rental income to meet the end mortgage amortization schedule and other operating expenses (\'77 Ex. 2),

2. Letter of Credit No. 1130, in the amount of $172,365.62, for the purpose of guaranteeing the payment of the end mortgage commitment fee (\'77 Ex. 1), and

3. Letter of Credit No. 1131, in the amount of $7,650, for the purpose of providing an escrow deposit for the construction of certain off-site improvements and roads (\'77 Ex. 3).

The letters of credit were issued for the benefit of Advance, as the construction lender, and for the account of Old Orchard. They were secured by mortgage notes signed by Old Orchard as maker and by F & T and Investment as comakers. Mortgages were also give to NOB by Investment, on land it owned, to secure the letters of credit. ('77 Exs. 4-6.)

On July 3, 1974, Advance executed a mortgagee's certificate which allowed for advances to be made to F & T pursuant to the construction mortgage ('81 Ex. 5). Shortly thereafter, construction of the Old Orchard by the Bay project was commenced, and it continued without delay until early February of 1975.

Failure of the NOB and the Bankruptcy of F & T

On February 14, 1975, the superintendent of banks for the state of Ohio appointed the Federal Deposit Insurance Corporation as the receiver for the Northern Ohio Bank in a liquidation proceeding commenced that day in the Cuyahoga County Court of Common Pleas. Four days later, the Court of Common Pleas entered an order approving the sale of certain assets of NOB and transfering all of its liabilities. The sale of assets and transfer of liabilities which was approved by the Court was the "typical" method used by the FDIC in liquidating an insolvent national bank.³ Basically, the liquidation process was accomplished by the FDIC, acting in its receivership capacity, executing four written agreements on February 16 and 17, 1975. These agreements can be briefly summarized as follows:⁴

1. An agreement executed between the FDIC as the receiver of NOB and the FDIC, acting in its corporate capacity, whereby the corporation purchased from the receiver all of NOB\'s "unacceptable assets and liabilities" for an "initial cash purchase price" of $90,250,000.

2. An agreement executed between the FDIC as the receiver of NOB and the National City Bank of Cleveland, Ohio (hereinafter "NCB" or "Assuming Bank") whereby NCB assumed all of the deposit liabilities of NOB and its acceptable assets.

3. An indemnity undertaking signed by the FDIC in its corporate capacity for the purpose of holding NCB harmless from any liabilities which were not specifically assumed by NCB in the agreement referred to above.

4. An agreement executed by the FDIC, as the receiver of NOB, and NCB, whereby NCB assumed $100,000,000 in deposit liabilities owing by NOB, and received in exchange therefore approximately $3,000,000 in cash, $3,000,000 worth of U.S. government securities and $90,250,000 in cash from the FDIC in its corporate capacity.

The role of the FDIC as the receiver for NOB was narrow and short lived. Within four days of its appointment, the FDIC as receiver completely liquidated the Northern Ohio Bank. It did so by entering into a tripartite arrangement with the National City Bank and itself in its corporate capacity. It sold all of NOB's "acceptable assets" to NCB which consisted of cash on hand, certain receivables due from other banks, government securities, and certain funds provided by the FDIC itself. In return NCB agreed to assume all of NOB's deposit liabilities which were insured by the FDIC. The FDIC, as receiver, agreed to pay NCB a sum of cash equal to the difference between the value of the "acceptable assets" and the amount of the deposit liabilities assumed by NCB.

To raise those funds, the FDIC as receiver, sold the remainder of the NOB assets (i.e., the "unacceptable assets") to itself, in its general corporate capacity, and the FDIC, in its corporate capacity, paid itself, as receiver, the cash needed to consummate the transaction with NCB. In essence, the FDIC as the receiver was nothing more than a "straw man" used to transfer part of the assets and liabilities to NCB and the remaining assets and liabilities to the FDIC in its corporate capacity. By entering into such an arrangement, the FDIC-receiver was left with nothing but a promise from the FDIC in its corporate capacity to turn over any assets the corporation realized upon liquidation in excess of what the corporation paid for those assets. In other words, if the FDIC in its corporate capacity was able to liquidate the assets it purchased in excess of the $90,250,000 it had paid for those assets, then such "excess recoveries" would be returned to the FDIC in its receivership capacity of NOB. In fact, the liquidator of NOB's assets, Mr. William Bryant, testified in a trial deposition that at the conclusion of the sale, the FDIC-receiver retained no assets nor liabilities of NOB. ('81 Ex. II.)

Included in the assets transfered to the FDIC in its corporate capacity, by the FDIC-receiver, was a promissory note executed by Investment in favor...