Mellon Bank, N.A. v. Metro Communications, Inc.
| Citation | 945 F.2d 635 |
| Decision Date | 28 October 1991 |
| Docket Number | No. 91-3105,Nos. 91-3105 and 91-3160,No. 91-3160,91-3160,91-3105,s. 91-3105 and 91-3160 |
| Parties | , 25 Collier Bankr.Cas.2d 1064, 22 Bankr.Ct.Dec. 251, Bankr. L. Rep. P 74,288, 15 UCC Rep.Serv.2d 1119 MELLON BANK, N.A., Appellant in, v. METRO COMMUNICATIONS, INC. t/a Metrosports, debtor-in-possession, and The Pacific 10 Conference v. The COMMITTEE OF UNSECURED CREDITORS, Intervenor in District Court, Grant Street National Bank (in liquidation), Appellant in |
| Court | United States Courts of Appeals. United States Court of Appeals (3rd Circuit) |
George M. Cheever, (Argued), Kirkpatrick & Lockhart, Pittsburgh, Pa., for Grant Street Nat. Bank.
Denise K. Chamberlain (Argued), Mellon Bank, N.A., Pittsburgh, Pa., for Mellon Bank, N.A.
Phillip S. Simon (Argued), Kenneth P. Simon, Simon & Simon, Pittsburgh, Pa., for Committee of Unsecured Creditors.
Before STAPLETON, HUTCHINSON, and ROSENN, Circuit Judges.
This appeal, arising in the context of a failed leveraged buyout, had its roots in the congenial climate of mergers and acquisitions that beguiled corporate America during the decade of the nineteen-eighties. The appeal raises important questions regarding a bankruptcy trustee's avoidance powers under 11 U.S.C. §§ 547(b) and 548(a)(2) of the bankruptcy code. The debtor is Metro Communications (Metro), the corporation acquired in the leveraged buyout. Mellon Bank, N.A. (Mellon or Bank) financed the acquisition; Mellon lent the acquiror 1.85 million dollars to purchase all of the capital stock of the target corporation, Metro. Metro guaranteed and secured the acquisition loan with substantially all of its assets. Simultaneously with the leveraged buyout, Mellon extended a 2.3 million dollar credit line to Metro. At a later date, Mellon extended another 2.25 million dollars to Metro in the form of letters of credit. These loans were also collateralized by the security interest in substantially all of Metro's assets. Within a year of the leveraged buyout, Metro filed a bankruptcy petition under chapter 11.
The bankruptcy court held that Mellon's security interest in the three loans constituted a voidable preference under 11 U.S.C. § 547(b), finding that Mellon's security interest lapsed because it failed to re-file financing statements within four months of Metro's change in the location of its headquarters and that the refiling of the financing statements at the debtor's new location during the ninety day period preceding the filing of the bankruptcy petition constituted a voidable preference. Furthermore, the court held that Metro's guaranty of the acquisition loan and the execution of a security interest in connection therewith constituted a fraudulent conveyance under 11 U.S.C. § 548(a)(2). We reverse.
Metro Communications, also known as Metrosports, the debtor, had been in the business of television and radio sports syndication for about ten years prior to its bankruptcy. Metro, incorporated in Maryland in 1972, originally had its headquarters in Rockville, Maryland. Its business included acquiring the rights to broadcast sporting events, contracting with radio and television stations for such broadcasts, and selling rights to advertise during the broadcasts.
In April of 1984, Metro's stockholders sold all of their capital stock to Total Communications, Inc. (TCI), a wholly owned subsidiary of Total Communication Systems Co. (TCS). The principals of TCI created it solely for the purpose of acquiring the stock of Metro and becoming its sole shareholder. TCS, in turn, is the wholly owned subsidiary of Mass Communication and Management, Ltd. (MCM). These affiliated corporations were in the business of syndicating and producing television programs of college athletic events. TCS owned and operated mobile television production studios used in the broadcasting of athletic events nationally.
TCI acquired Metro for the purpose of creating a synergy of complementary services; Metro, as the buyer and seller of broadcasting rights, contracted regularly with companies, such as TCS, to produce and broadcast the athletic events. The two companies, TCS and Metro, developed a joint marketing concept known as TCS/Metro, and issued press releases and other promotional materials which stressed that the companies were working as a joint venture, joining their strengths and "working as a team."
To finance the purchase of the Metro stock, TCI borrowed $1,850,000 from Mellon on April 6, 1984. On the same day, Mellon loaned Metro $2,300,000 for use as working capital under a line of credit agreement. Pursuant to guaranty and suretyship agreements dated April 6, 1984, TCI guaranteed the repayment of the loan to Metro, Metro guaranteed the repayment of the loan to TCI, and TCS and MCM jointly guaranteed the repayment of both loans.
In addition to the guarantees, Metro entered into an agreement dated April 6, 1984, with Mellon Bank wherein Metro conveyed to the Bank a security interest in substantially all of Metro's property, including its general intangibles and accounts receivable. The security agreement provided that the collateral secured "all ... indebtedness, obligations and liabilities of [Metro] to the Bank, now or hereafter existing, including but not limited to those arising under the Guaranty, and those arising under the Metrosports Loan Agreement."
On September 7, 1984, Metro and Mellon entered into a Letter of Credit Agreement to finance Metro's purchase of broadcast rights for the PAC-10 Conference football season. The Letter of Credit Agreement provided that Mellon's reimbursement rights were secured under the April 6, 1984 security agreement between Mellon and Metro and guaranteed by TCI, TCS, and MCM. Between December 18, 1984 and January 2, 1985, Mellon disbursed the full $2,250,000 face amount of the letters of credit in response to the PAC-10's drawing requests. The following chart summarizes the loans received and guaranties made by Metro:
TRANSACTION DATE AMOUNT
Guaranty of Acquisition Loan 4/6/84 $1,850,000
Working Capital Line of Credit 4/6/84 $2,300,000
PAC"10 Letter of Credit 12/18/84 $2,250,000
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The Bank perfected its security interests in the collateral pledged by Metro by filing UCC-1 financing statements in the Maryland State Department of Assessment and Taxation on April 9, 1984 and the Clerk's Office of the Circuit Court of Montgomery County, Maryland, on April 17, 1984. The Bank filed additional UCC-1 financing statements in the appropriate offices in Pennsylvania on February 1 to and including February 5, 1985.
On March 12, 1985, PAC-10 filed a complaint against Metro, TCS, and various related entities in the United States District Court for the Northern District of California, alleging breaches of various agreements covering the broadcasting of PAC-10 basketball and football games. Simultaneously with the filing of the complaint, PAC-10 obtained an ex parte order which permitted pre-judgment attachment of Metro's assets. Pursuant to the order, PAC-10 attached certain outstanding accounts receivable of Metro. Three days later, on March 15, 1985, Metro filed a petition for reorganization under Chapter 11 of the Bankruptcy Code.
On January 30, 1986, the Bank filed an adversary proceeding against Metro and PAC-10 to determine the validity, priority, and extent of the Bank's security interest and to ascertain the parties' respective rights in an escrow account which PAC-10 had attempted to attach. The Official Unsecured Creditor's Committee ("the Committee") intervened, claiming that the Bank had received preferential transfers pursuant to 11 U.S.C. § 547(b) and that a fraudulent conveyance had occurred pursuant to 11 U.S.C. § 548(a)(2).
PAC-10, Metro and the Bank have agreed to a settlement of their disputes over the escrow account and have presented their settlement to the bankruptcy court for approval. The bankruptcy court has stated that it will defer ruling on the proposed settlement until this appeal is resolved.
After a two-day bench trial, the bankruptcy court on February 10, 1989, filed an opinion and order holding that the Bank's security interest in Metro's assets was voidable under 11 U.S.C. § 547(b) and that Metro's guaranty of the acquisition loan and the grant of the security interest was a fraudulent conveyance under 11 U.S.C. § 548(a)(2). In re Metro Communications, Inc., 95 B.R. 921 (Bankr.W.D.Pa.1989). The court ordered the Bank and Metro to file an accounting, showing all amounts subject to disgorgement. In October of 1988, after the bench trial but before the bankruptcy court filed its decision, Mellon assigned all its claims against Metro to Grant Street National Bank (GSNB), which is now in liquidation. On February 17, 1989, counsel for Mellon and GSNB (together the Banks) filed a motion to amend the February 10, 1989 order under Rule 59(e) of the Federal Rules of Civil Procedure. That motion, filed on behalf of GSNB as successor in interest to Mellon, sought to exclude from the scope of the bankruptcy court's order payments made by Metro to Mellon with respect to loans made directly to Metro from Mellon more than 90 days prior to Metro's bankruptcy filing.
On February 27, 1989, GSNB filed its Notice of Unconditional Assignment of Claim to it by Mellon Bank. The bankruptcy court issued a second order on April 4, 1989, permitting GSNB to intervene in the adversary proceeding as an additional plaintiff and amending its February 10, 1989 order in accordance with the relief requested. On April 10, 1989, the Banks filed their notice of appeal in the district court.
In a third order, dated May 15, 1989, the bankruptcy court expressly directed the entry of a final judgment on its prior order of February 10, 1989, as amended April 4, 1989, and certified it under Fed.R.Civ.P. 54(b) for appeal to the...
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