BANK ONE, TX, NA v. Prudential Ins. Co. of Amer.
Decision Date | 16 March 1995 |
Docket Number | Civ. A. No. 3:92-CV-0535-D. |
Citation | 878 F. Supp. 943 |
Parties | BANK ONE, TEXAS, N.A., Plaintiff-Counterdefendant, v. The PRUDENTIAL INSURANCE COMPANY OF AMERICA and Texas Commerce Bank, N.A., Defendants-Counterplaintiffs-Third-Party Plaintiffs-Third-Party Counterdefendants, and Federal Deposit Insurance Corporation and Capital Associates International, Inc., Third-Party Defendants-Third-Party Counterplaintiffs. |
Court | U.S. District Court — Northern District of Texas |
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Michael P. Lynn and Steven H. Stodghill of Lynn, Stodghill & Melsheimer, L.L.P., Dallas, TX, for Bank One, Texas, N.A.
Fletcher L. Yarbrough, Corbet F. Bryant, Jr., Michael Prince (argued), George M. Kryder, III, and Barbara J. Elias-Perciful of Carrington, Coleman, Sloman & Blumenthal, L.L.P., Dallas, TX, for The Prudential Co. of America.
Craig L. Weinstock (argued), Mark C. Taylor, and Roger B. Cowie of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., Dallas, TX, for Texas Commerce Bank, N.A.
Dennis S. Klein (argued), Robert B. Funkhouser, Christopher J. Austin, and M. Kathleen O'Connor of Hughes Hubbard & Reed, Washington, D.C. and Roy G. Morris, Steven A. DeMonbreum, Richard E. Anderson, Joseph W. Spence, and Thomas J. Fisher of F.D.I.C.-Legal Div., Dallas, TX, for F.D.I.C.
Jay M. Vogelson (argued) and David A. Klingler of Stutzman & Bromberg, P.C., Dallas, TX, for Capital Associates Intern., Inc. FITZWATER, District Judge:
This pre-FIRREA1 litigation presents questions concerning the rights of secured creditors of a failed national bank, and of the Federal Deposit Insurance Corporation ("FDIC"), with respect to a sale-leaseback transaction entered into by the creditors and the bank prior to its insolvency. The creditors seek to recover against the pledged collateral on the basis of contractual rights and obligations that took effect by operation of an ipso facto clause upon the failed bank's insolvency. Among the questions the court must decide are whether the creditors have a provable claim, as required by 12 U.S.C. § 194; whether the transaction is a preference rendered invalid by 12 U.S.C. § 91; whether the ipso facto clause is enforceable; and whether public policy considerations, and the FDIC's powers to disaffirm burdensome leases and marshal the assets of failed institutions, are sufficient to permit it to abrogate the creditors' rights in the transaction. Today's decision may lend credence to Congress' wisdom in enacting FIRREA. On the basis of the applicable pre-FIRREA law, the court holds in favor of the creditors.
In December 1987 MBank-Dallas, N.A. ("MBank") and third-party-defendant Capital Associates International, Inc. ("Capital")2 entered into a sale-leaseback transaction. MBank sold to Capital for the sum of approximately $29.5 million certain furniture, fixtures, and equipment ("FF & E") that MBank and its parent company, MCorp, intended to use in their new headquarters building. The FF & E includes such property as the bank vault door, escalators, furniture, and computer equipment needed to operate MBank. In turn, Capital simultaneously leased the FF & E back to MBank and MCorp3 pursuant to a collateralized equipment lease ("Original Lease"). The parties secured MBank's performance of the payment of rent and other obligations by means of a Security, Collateral Maintenance and Pledge Agreement ("Original Pledge Agreement"). This agreement obligated MBank to pledge certain Class A Senior/Subordinated Automobile Loan Pass-Through Certificates Series 1987-1 and other automobile loan certificates (the "MCar Certificates") and their proceeds (the "MCar Proceeds") (collectively the "MCar Assets"). The MCar Certificates were large groups of packaged automobile loans. By collateralizing the Original Lease, MBank was able to lower its rent payments.
Pursuant to the Original Pledge Agreement, MBank granted Capital a first priority security interest in the MCar Assets to secure MBank's performance under the Original Lease, Original Pledge Agreement, and other specified transactional documents. The Original Pledge Agreement permitted Capital to assign its rights to any lender who financed Capital's acquisition of the FF & E Capital made a down payment to MBank of approximately $4.5 million of the total purchase price. Capital lacked the financial capability to pay the entire cost. It therefore financed part of the balance of the purchase price through a non-recourse loan in the sum of approximately $25.8 million from defendant The Prudential Insurance Company of America ("Prudential").4 Capital executed promissory notes ("Notes") in favor of Prudential. Pursuant to a participation agreement among Capital, MBank, Prudential, and defendant Texas Commerce Bank, N.A. ("TCB"),5 Prudential agreed to pay MBank $25,455,000, representing the balance of the purchase price for the FF & E, and accrued interest.
In February 1988, as part of the Prudential financing transaction, MBank and Capital entered into a First Amendment to the Lease ("Lease").6 They also executed an Amended and Restated Security Collateral Maintenance and Pledge Agreement (the "Pledge Agreement"). TCB acted as Indenture Trustee under an Indenture of Assignment of Lease, Rents and Security Agreement (the "Indenture") between Capital and TCB. The Indenture secured the Prudential loan to Capital by granting TCB as Trustee a security interest, for the benefit of Prudential, in the MCar Certificates and MCar Proceeds, FF & E, the Lease, and the Pledge Agreement.
Section 17 of the Lease specified several acts, omissions, or events that constituted events of default. Section 17(h) provided that an act or declaration of insolvency was such an event. Section 18 of the Lease afforded Capital various remedies upon the occurrence of an event of default. Section 18(e)7 contained a clause (the "Ipso Facto Clause") that provided an exclusive remedy upon the occurrence of an event of default specified in § 17(h) of the Lease, that is, upon an act or declaration of insolvency. According to § 18(e), upon an act or declaration of insolvency (1) the Lease automatically terminated; (2) MBank immediately and unconditionally became obligated to pay all unpaid rent due and payable for all periods up to and including the rent payment due following the event of default; and (3) MBank immediately and unconditionally became obligated to pay a sum as liquidated damages (the Casualty Value of the Leased Equipment ("Casualty Value")), determined according to a formula prescribed by § 18(e) and attachments to the Lease.8 This remedy automatically took effect without option, notice, or any other action required by Capital. It replaced MBank's obligation to return the FF & E and hold MBank liable for damages. Section 18(e) also obligated Capital to convey the FF & E to MBank by bill of sale, upon receiving payment of the Casualty Value. Section 7(b) of the Pledge Agreement9 provided for a substantially similar remedy.
The effect of the transaction was to give Prudential and Capital security interests in the FF & E, MCar Certificates, MCar Proceeds, Lease, and Pledge Agreement, and to provide similar interests to TCB in trust for the benefit of Prudential.
During 1988 MBank periodically pledged other MCar Certificates to secure the Lease. As individual borrowers reduced their indebtedness on their automobile notes, the market value of the MCar Certificates decreased. Because the Lease obligated MBank to preserve the collateral value of the MCar Certificates, MBank pledged additional MCar Certificates in June, October, and December 1988.
On or about March 27, 1989 a number of MCorp-owned banks sought repayment from MBank of overnight loans they had made to the institution. On March 27 and 28, 1989 MBank defaulted on the loans. On March 28, 1989 the Federal Reserve Bank of Dallas cut off MBank's line of credit and demanded payment of in excess of $1 billion in overnight loans that it had made to MBank. MBank was unable to pay these loans and thereby defaulted. On March 29, 1989 the Office of the Comptroller of the Currency ("OCC") declared 20 MBanks, including MBank, insolvent.10 The OCC placed MBank in receivership, and appointed third-party-defendant FDIC as its receiver.11 Rental due under the Lease had already been paid through June 1989 at the time of these events.
TCB notified the parties that the insolvency of MBank had triggered an event of default under the Indenture. It directed the master servicer of the MCar Certificates to forward all future proceeds directly to TCB. Prudential and TCB asserted that the declaration of insolvency triggered the Ipso Facto Clause of the Lease, thereby automatically terminating the Lease, and making the amounts owed under the Lease immediately due and payable. Based on MBank's insolvency, Prudential accelerated Capital's non-recourse Notes.
Upon its appointment as receiver, FDIC-Receiver immediately implemented a Purchase and Assumption Agreement ("P & A Agreement") by which it transferred all deposits and certain liabilities and assets from the MBank receivership estate to the newly-created Deposit Insurance Bridge Bank ("DIBB"). The P & A Agreement did not transfer the Lease to DIBB, but afforded DIBB a 120-day period in which to assume the Lease. The MBank receivership and bridge bank transaction were effected without any cessation or interruption of daily banking activities.
DIBB and FDIC-Receiver notified Prudential and TCB of their position that the Lease's default, acceleration, termination, and penalty provisions were unenforceable. DIBB continued to provide the collateral reports required under the Lease. On July 1, 1989 FDIC-Receiver and DIBB paid what they contended was the semi-annual rental payment to keep the Lease current through December 1989. Prudential applied this sum of approximately $2.8 million to liquidated damages that it contended were due under the Lease, and...
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