Emergency Beacon Corp., Matter of
| Decision Date | 23 November 1981 |
| Docket Number | 80-5065 and 80-5064,Nos. 80-5063,s. 80-5063 |
| Citation | 665 F.2d 36 |
| Parties | 32 UCC Rep.Serv. 788 In the Matter of EMERGENCY BEACON CORPORATION, Debtor. MONTCO, INC., Plaintiff-Appellee, v. Stephen G. GLATZER, Defendant-Appellant. Stephen G. GLATZER, Third-Party Plaintiff-Appellant, v. George HORVATH, Rocco Scappatura, Jack Polish, Langer and Polish, Dana Jerry Horvath, Spencer Kellogg II, Cecil Citron, Sherman and Citron, Elliot Lubarsky, Ralph Barber, Roslyn Tabot, Montmartre Inc., Crafts Spun Yarn Inc., Mt. Clemens Corp., Balder Enterprises, DJH Corporation, Montmartco, Inc. et al., Third-Party Defendants-Appellees. |
| Court | U.S. Court of Appeals — Second Circuit |
Stephen G. Glatzer, New Rochelle, N. Y., defendant-third-party plaintiff-appellant pro se.
Sidney H. Reich, White Plains, N. Y., for plaintiff-appellee.
Robert Kolodney, New York City, for third-party defendants-appellees Cecil Citron and Sherman & Citron.
Brady & Tarpey, P.C., New York City (Daniel Gaven, New York City, on brief), for third-party defendants-appellees Rocco Scappatura, Jack Polish, Langer & Polish and Ralph Barber.
Before OAKES and KEARSE, Circuit Judges, and RE, Chief Judge. *
The principal foci of this appeal are two Buick automobiles, one vintage 1973, the other 1974. Appellant Stephen G. Glatzer appeals from an order of the United States District Court for the Southern District of New York, Lee P. Gagliardi, Judge, which, inter alia, affirmed an order of the bankruptcy court directing Glatzer to surrender or pay the book value of the two automobiles, previously owned by the debtor, Emergency Beacon Corporation ("EBC"), to appellee Montco, Inc. Although we affirm so much of the district court's order as affirmed dismissal of a third party complaint, 1 we reverse and remand the order requiring Glatzer to surrender the cars or pay their book value.
The controversy arises out of the financial difficulties of EBC, which was formed by Glatzer and Rocco Scappatura in 1968. Glatzer was EBC's president, Scappatura was vice-president, and after the firm went public each owned 28% of the issued and outstanding shares. Disputes arose, however, and by late 1974 there were discussions as to the possibility that either might buy the other's stock. Of greatest relevance here are the negotiations that took place at a meeting on November 3, 1974. In attendance were Glatzer, Scappatura, EBC's accountant Elliot Lubarsky, EBC's attorney Jack Polish, and an EBC director Spencer Kellogg II. At this meeting, as the bankruptcy court later found, Glatzer agreed to resign as an officer and director of EBC, EBC agreed to pay Glatzer $100,000 per year for two years, Glatzer agreed to serve as a consultant to EBC and agreed not to compete with EBC in the United States or Canada for three years, and Scappatura agreed to buy Glatzer's EBC shares for $200,000. EBC also agreed that Glatzer could keep any EBC equipment in his possession and that he was to pay EBC the book value of the company cars in his possession, i. e., the two Buicks.
Immediately after that meeting, Scappatura and Kellogg had second thoughts about the deal with Glatzer, although they held Glatzer to his resignation and refused to continue his salary. Despite renewed negotiations, EBC defaulted on its payments to Glatzer, who never received any part of the $200,000 he was to be paid by EBC, nor any payment from Scappatura.
On March 18, 1976, EBC filed a petition for an arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. §§ 701-99 (1976), and continued to manage its business and property as a debtor-in-possession. It then commenced an adversary proceeding before the bankruptcy court for an order directing Glatzer to turn over certain property. Glatzer answered that his possession of the property was lawful and he counterclaimed for $200,000 for EBC's breach of the November 3, 1974 contract. In a decision rendered on December 28, 1977, the bankruptcy court, Howard Schwartzberg, Judge, ruled against EBC. The court found that at the November 3, 1974, meeting the parties had made the agreements described above and intended to be bound by those agreements. It found that the minutes of the meeting satisfied the formal requirements of New York's Statute of Frauds as set forth in either N.Y.U.C.C. § 2-201 (McKinney 1964), governing sales of goods, or N.Y.Gen.Oblig.Law § 5-701 (McKinney 1978), governing contracts not to be performed within one year. The court ruled, therefore, that EBC was obligated to pay Glatzer $200,000.
With regard to the two Buicks, the court found that "it was agreed that Glatzer was to keep whatever equipment in his possession that he wanted to keep and that he would pay for company cars at book value." The court ordered that the $200,000 owed by EBC to Glatzer "be reduced by the book value of the automobiles now in Glatzer's possession." The court's conclusions of law stated as follows:
4. The debtor, EBC, breached its agreement with Stephen Glatzer, whose proof of claim in the sum of $200,000 is sustained, less the book value as of March 18, 1976, of the debtor's automobiles now in his possession.
5. The parties agreed that Glatzer may retain these items of the debtor's equipment in his possession on November 3, 1974, and therefore, his retention of these items is not unlawful, nor may they be recovered, as prayed for in the debtor's complaint.
In accordance with his opinion, Judge Schwartzberg entered an order, also on December 28, 1977, dismissing EBC's complaint, stating that EBC had "failed to sustain its action against Stephen Glatzer for a turnover of the debtor's equipment in his possession as of November 3, 1974," and upholding Glatzer's counterclaim, providing in part as follows:
ORDERED, that Stephen Glatzer's proof of claim filed in this Chapter XI proceeding is hereby allowed in the sum of $200,000, less the book value, as of March 18, 1976, of the debtor's automobiles now in his possession.
This order was not appealed.
In March 1979, Harvey S. Barr, EBC's trustee in possession 2 sought permission from the bankruptcy court to give Glatzer a bill of sale and/or certificate of title for the two vehicles, free and clear of all liens. The trustee's application was opposed by Montco which, in 1975, had loaned EBC a total of $275,000, receiving a security interest in various EBC property that Montco contended included the two Buicks held by Glatzer. Montco had made appropriate U.C.C. filings with respect to these cars. Since in March 1979 more than $200,000 remained unpaid on its loan to EBC, Montco urged the denial of the trustee's application and requested the issuance of an order directing Glatzer either to deliver the cars to Montco or to pay Montco their book value. Montco's submission was treated as an adversary proceeding against Glatzer and Barr, and Glatzer filed an answer disputing Montco's security interest in the cars on the ground that title to the cars belonged to Glatzer.
On November 21, Judge Schwartzberg issued a decision denying the application of the trustee and granting that of Montco. Recalling that its December 28, 1977, order had found that EBC had agreed to sell the cars to Glatzer in November 1974, the court described its 1977 order as follows:
(T)he court upheld Glatzer's proof of claim filed in this Chapter XI proceeding, less the book value, as of March 18, 1976, of the debtor's automobiles in his possession.
The court's decision did not thereby confer upon Glatzer title to the automobiles. It recognized that he could acquire whatever interest or claim the debtor had in the vehicles by deducting for their book value from his claim. This would have legitimized Glatzer's possession vis a vis the debtor. Such acquisition of an interest in the vehicles by Glatzer was, of course, subject to any prior interest of others.
The court also stated, "There is nothing in writing before this court which would satisfy the Statute of Frauds to support Glatzer's title claim prior to this court's decision on December 28, 1977." Following a succession of additional hearings, the bankruptcy court ruled on January 17, 1980, that Montco had a valid security interest in the Buicks. The December and January rulings were eventually embodied in an order dated February 1, 1980, which directed Glatzer either to turn over the cars to Montco or to pay Montco their book value.
Glatzer appealed to the district court, which affirmed, and he now appeals the district court's decision under 11 U.S.C. § 47 (1976) and 28 U.S.C. § 1291 (1976). Since we conclude that Montco did not acquire a security interest in the two Buicks, we reverse this portion of the district court's order.
The validity of the security interest claimed by Montco in the two Buicks depends on the effect of the November 3, 1974, agreement between Glatzer and EBC. Under the pertinent provision of the Uniform Commercial Code in effect in 1975, "(a) security interest cannot attach until there is agreement ... that it attach and value is given and the debtor has rights in the collateral." N.Y.U.C.C. § 9-204(1) (McKinney 1964) (citation omitted.) 3 Notwithstanding any agreement between the debtor and the creditor, if the debtor has no rights in the collateral, no security interest in that collateral comes into existence. See J. White & R. Summers, Uniform Commercial Code § 23-4, at 916 (2d ed. 1980). The question is, therefore, whether EBC had rights in the two Buicks in 1975 when it agreed to give Montco a security interest.
In determining what rights EBC had, we look to the bankruptcy court's 1977 decision in the adversary proceeding brought by EBC against Glatzer to regain possession of the Buicks. 4 In that 1977 decision the bankruptcy court found that on November 3, 1974, EBC and Glatzer had "agreed that Glatzer was to keep whatever...
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