In re Drexel Burnham Lambert Group Inc.

Decision Date03 May 1990
Docket NumberBankruptcy No. 90B-10421 (HCB).
PartiesIn re the DREXEL BURNHAM LAMBERT GROUP INC., Debtor.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

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Shearman & Sterling by Susan P. Johnston, George F. Wade, Laura B. Bartell, New York City, for Various Banks.

Weil, Gotshal & Manges by Corinne Ball, Richard Krasnow, Richard Davis, Pamela Corrie, New York City, for debtor.

Jones, Day, Reavis & Pogue by Marc S. Kirschner, Cindy Tzerman, New York City, for creditors committee.

DECISION

HOWARD C. BUSCHMAN, III, Bankruptcy Judge.

Banque Worms and fifteen other banks1 (the "Banks") seek pursuant to 11 U.S.C. § 362(d) and § 105(a) (1986), an order modifying the automatic stay provided in 11 U.S.C. § 362(a)(3) to permit Bankers Trust Company ("Bankers Trust"), as Collateral Agent, to retain in trust collateral proceeds owed to the Debtor, The Drexel Burnham Lambert Group, Inc. ("Drexel"), to preserve their alleged right to set off Drexel's obligations to them as against Drexel's share of those proceeds if they are not paid in full. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(G) (1984).

I

Drexel filed a petition under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") on February 13, 1990. Prior to bankruptcy, it had entered into an Amended and Restated Credit Agreement (the "Credit Agreement") as of October 30, 1986 with some twenty-six (26) lenders (the "Lenders"), including the movants, providing for a credit commitment of $245,000,000 initially and $260,000,000 ultimately to First DBL Corporation ("First DBL"), a wholly owned subsidiary of the Debtor.

First DBL, on June 25, 1987, entered into a pledge agreement (the "Pledge Agreement") with Bankers Trust for the benefit of the parties to the Credit Agreement.2 Pursuant to the Pledge Agreement, each of the Lenders made advances to enable First DBL to obtain 20% of the common stock and 100% of the preferred stock of PT Corporation. The Lenders obtained, as collateral for the advances, the PT stock, Drexel's commitment to make certain additional equity investments, made or to be made by Drexel as required by the Credit Agreement, and the proceeds of both the PT stock and the additional investments. Pledge Agreement § 4.1. PT Corporation was apparently structured as an investment vehicle that could, inter alia, own or perhaps trade in securities. See Credit Agreement § 6.01(h), § 1.01 at 16-17 (definition of "Portfolio Securities"). Its assets currently consist primarily of junk bonds, the market for which is unstable. Duke Aff. ¶ 7.

Drexel, "as primary obligor and not merely as surety," unconditionally guaranteed all obligations of First DBL to the Lenders under the Credit Agreement and Pledge Agreement. Credit Agreement § 3.01. It further agreed to make additional equity investments in First DBL if the market value of its portfolio securities or the PT stock fell below 110% of the outstanding loans. Credit Agreement § 6.01(h). In such instances, Drexel was obligated to make additional investments in an amount not less than the difference between 117.5% of the amount of the outstanding loans and market value. Id.

The Lenders' loan commitments, although contained in a joint agreement, consisted of their agreement to lend individually designated amounts to First DBL. Credit Agreement §§ 2.01, 2.02, 1.01 (definition of "Advance" refers to an advance "by a Bank"). First DBL's obligation to repay principal and to pay interest ran directly to each Lender. Id. §§ 2.05, 2.06. The possibility that the Lenders might charge different interest rates, depending on eurodollar fluctuations, was contemplated. Id. §§ 2.02(b), 2.07, 2.08, 1.01 (definition of "Interest Rate"). First DBL's repayment obligation for the advance by each Lender was to be evidenced by a promissory note payable to that Lender rather than to the Lenders generally. Id. §§ 4.01(a), 1.01 (definition of "Note"). Thus, the Credit Agreement contemplates that each Lender be a direct creditor of First DBL and Drexel in the amount of its outstanding advance. See also id. § 2.13.

At some point in 1988, certain Lenders assigned to Drexel the promissory notes issued to them pursuant to the Credit Agreement. Parsons Aff. ¶ 9. Those assignments entitled Drexel to all the rights and benefits its assignors enjoyed under the Credit Agreement and the Pledge Agreement. Duke Aff. ¶ 6. Thus, Drexel is both obligor and, now, as a member of the group ("Group Members"), obligee. The Banks have claims against Drexel as obligor, to the extent that the collateral is insufficient to repay them; conversely, Drexel, as a Group Member, is owed $11,375,000 by First DBL, id., and has rights to its share of the collateral securing all of the advances made.

Bankers Trust is not a Lender. It was appointed as "Collateral Agent" under the Credit Agreement. Proceeds of the collateral are to be paid to it. It has the duty to liquidate the collateral and apply the proceeds, after payment of taxes, commissions, its own expenses and certain expenses of the Group Members, to payment of interest and principal ratably to each Group Member. See Pledge Agreement §§ 5.1, 5.4, 2.1. Chase Manhattan Bank N.A. ("Chase") has the same duties as Paying Agent under the Credit Agreement with respect to funds remitted to it for repayment to the Group Members. Credit Agreement §§ 8.01, 2.10.

Section 5.1 of the Pledge Agreement provides that, in the event of an acceleration under the Credit Agreement (as the Banks allege has happened here), "the Collateral Agent, for the benefit of the Participating Banks, the Collateral Agent, the Paying Agent and the Reference Agent may . . . sell any or all of the Pledged Collateral . . . and shall apply the proceeds thereof to the repayment of the Outstanding Obligations of First DBL evidenced by notes held by Group Members." Section 5.4 of the Pledge Agreement, in turn, provides that "any amounts which the Collateral Agent is entitled to receive and retain on account of or as a result of its rights hereunder shall be applied by the Collateral Agent in the order of priority and in the proportions indicated in Section 2.1 hereof until all Outstanding Obligations shall have been extinguished" (emphasis added). Section 2.1, referred to in section 5.4, establishes the order of payment of the various liabilities of First DBL under the Credit Agreement and the Pledge Agreement. It states in pertinent part:

This Agreement is made to provide for and secure repayment of the following indebtedness and liabilities of the Borrower . . . in the order of priority indicated:
. . . .
Fourth, to the payment of interest at any time and from time to time owing by the Borrower . . . ratably according to the unpaid amounts thereof, without preference or priority of any kind among amounts of interest so due and payable;
Fifth, to the payment of principal at any time and from time to time owing by the Borrower, . . ., ratably according to the unpaid amounts thereof, without preference or priority of any kind among amounts of principal so due and payable; and
Sixth, except where otherwise provided herein, to the payment of all other indebtedness and liabilities, whether absolute, fixed or contingent, at any time and from time to time owing by the Borrower to the Participating Banks . . ., ratably according to the then unpaid amounts thereof, without preference or priority of any kind among such various Obligations.

Id. § 2.1 (emphasis added).

Section 7.2 of the Pledge Agreement enables a majority of the Group Members to direct Bankers Trust in certain areas, e.g., method and timing of the liquidation of collateral. In regard to these matters, the majority's instructions are binding. That section, nevertheless, keeps inviolate the right of each Group Member to ratable repayment by not requiring the Collateral Agent to follow any instruction contrary to the contract or applicable law. It states:

The Collateral Agent shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Participating Banks, and such instructions shall be binding upon all Participating Banks and all holders of Notes; provided, however, that the Collateral Agent shall not be required to take any action which the Collateral Agent reasonably believes exposes the Collateral Agent to personal liability or which is contrary to this Agreement or applicable law.

Id. § 7.2 (emphasis added). In acting upon the instructions, the Collateral Agent is protected from suit by any of the Group Members. Credit Agreement at § 9.03.3

In addition, section 3.06 of the Credit Agreement grants to each of the Group Members the right to set off as against Drexel's obligation any indebtedness of the particular Group Member to Drexel such as depository accounts maintained by Drexel. No provision is made for the Group Members to set off any collective obligations they may owe to Drexel or Drexel's ratable share of collateral proceeds to be realized and distributed by the Collateral Agent.

To preserve ratable recovery by each Group Member, however, section 2.13 of the Credit Agreement requires each Group Member to share with all other Group Members any payment obtained through setoff in excess of the ratable amount owing to it in light of payments received by all other Group Members. That section provides for such sharing by requiring the Group Member who has received an excess through setoff to purchase a participation from each of the other Group Members in proportional amounts equalling the amount of the excess.4 Section 2.13 contains certain exceptions to the sharing requirement which relate, inter alia, to incurred costs and taxes of a Group Member and payments made pursuant to a pledge agreement.

The Banks do not contend that this provision is inapplicable to the setoff they...

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  • Corporate v. BDC Fin., LLC
    • United States
    • New York Supreme Court
    • February 23, 2017
    ...agent's control. The agent's hands may have been tied as to certain actions under the two agreements (see Matter of Drexel Burnham Lambert Group Inc., 113 BR 830, 835 [Bankr SD NY 1990] [stating that certain pro rata sharing provisions were inviolate, that agent required to follow instructi......

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