In re Edelsberg, Bankruptcy No. 87-02188-BKC-AJC
| Decision Date | 07 June 1989 |
| Docket Number | Bankruptcy No. 87-02188-BKC-AJC,Adv. No. 88-0444-BKC-AJC-A. |
| Citation | 101 BR 386 |
| Parties | In re Sam and Esther EDELSBERG Debtors. Sam and Esther EDELSBERG Plaintiffs, v. THOMPSON MCKINNON SECURITIES INC., & Paine, Webber, Jackson & Curtis, Inc., Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of Florida |
Law Office of D. Jean Ryan, Miami, Fla., for debtors.
N. James Turner, Buso & Turner, P.A., Orlando, Fla., for Paine Webber.
Scott W. Cichon, Thompson, McKinnon Securities, Inc., Daytona Beach, Fla., for Thompson, McKinnon Securities, Inc.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This matter came before the court on November 23, 1988, for a pre-trial conference. The matter is a core proceeding under 28 U.S.C. §§ 1334 & 157, and was brought before the court by adversary proceeding under part VII of the Bankruptcy rules. Pursuant to the court's order of November 30, 1988 the cause was not set for trial, but was decided on the documents, affidavits, and memoranda submitted. Having reviewed the data and arguments submitted by counsel, the court makes the following Findings of Fact and Conclusions of Law.
1. Sam S. Edelsberg maintained an open account, number SP-05065-18, with Paine, Webber, Jackson & Curtis (hereafter PaineWebber) in which he traded heavily from March, 1985 until December, 1985.
2. On November 25, 1985 PaineWebber credited a check to Mr. Edelsberg's account in the amount of $8,391.00.
3. There was no prior transaction on the November statement that exactly corresponded to this amount. On November 22 Mr. Edelsberg had purchased 20 puts due 12/85 on the American Exchange Major Market Index, strike price $275. The quote was 4 3/8, and he was charged $8,966.88.
4. Mr. Edelsberg's account statement with PaineWebber for November showed an opening balance in his favor of $275.49, and a closing balance in his favor of $410.82.
5. Mr. Edelsberg's December statement showed a debit for a returned check in the amount of $8,391.00 on December 12, 1985. No purchases or payments are shown in December. After PaineWebber set off his positive balance, charged his account for a returned check, and made other minor adjustments, his closing balance for December was $8,004.06 in favor of PaineWebber.
6. Mr. Edelsberg's January statement shows the transfer of this receivable of $8,004.06 to the Legal Ledger of the National Collection Department of PaineWebber.
7. On March 16, 1987, PaineWebber obtained a judgment for damages in the amount of $8,391.00, the amount of the returned check. Also included in the judgment were prejudgment interest from November 20, 1985, costs of $315.20, and attorney's fees of $4,000, for a total of $14,048.76.
8. PaineWebber garnished Thompson Mckinnon Securities, Inc. (TMSI) on March 27, 1987. The garnishment was served on March 30, 1987.
9. TMSI answered that the only asset of the defendant, Sam Edelsberg, that they held was a CAT (Certificate of Accrual, Treasury) bond in his individual retirement account. TMSI further answered that such accounts were exempt from claims of creditors by virtue of 29 U.S.C. § 1056(a), and that defendant was indebted to TMSI in the amount of $6,700 and TMSI was "entitled to offset the funds it is holding against the debt of the defendant to TMSI." This answer was filed May 11, 1987.
10. TMSI did not deliver possession of the CAT bond to PaineWebber.
11. In a strikingly similar series of events involving Mr. Edelsberg and TMSI, on October 7, 1986, Mr. Edelsberg purchased 10 options from TMSI and paid with a $6,700 check. On November 5, 1986, the check was returned. December 2nd TMSI asked for payment, and Mr. Edelsberg wrote a series of smaller checks totalling $6,700 which also bounced.
12. TMSI has strong setoff and hypothecation language in their contract with Mr. Edelsberg, but this record shows no positive steps to hypothecate, sell, or set off against Mr. Edelsberg's CAT bond, nor has TMSI petitioned this court for relief from stay to do so.
13. On June 23, 1987, Mr. Edelsberg and his wife Esther filed for Chapter 13.
14. The Edelsbergs listed an undisputed obligation to PaineWebber in the amount of $14,048.76 on their 12(c) unsecured debt schedule. They also listed an undisputed obligation to TMSI for $6,900.
15. PaineWebber filed a Proof of Claim on a Final Summary Judgment dated March 16, 1987, for $14,048.76. No expansion of facts or explanation of the suit underlying the judgment appears on the Proof of Claim.
16. TMSI filed a Proof of Claim on an open account for $6,700 plus ten percent annual interest as a general unsecured claim.
17. Mr. Edelsberg listed his IRA in the amount of $3,982.00 on schedule 14(b) as an asset.
18. The Edelsbergs filed a Chapter 13 plan which took into account this bond as an asset. The plan was confirmed without objection on August 26, 1987.
19. PaineWebber claims to have a perfected security interest in the CAT bond by virtue of the garnishment served on the custodian, TMSI.
20. TMSI is retaining the bond, apparently on a theory of set off.
The claim of PaineWebber must fail for several reasons. It appears that the security interest in the Edelsberg's CAT bond was never properly perfected under Florida law, which governs the garnishment. Assuming, arguendo, that TMSI held other assets against which the Writ of Garnishment did perfect a security interest, the perfection falls within the preference period and is voidable as a § 547(b) preference. Since PaineWebber reduced their claim to judgment, and in fact filed a claim based only on the judgment, PaineWebber is precluded by the merger doctrine from arguing a differing underlying transaction to avoid § 547(b).
1. The court takes judicial notice of Florida Statutes § 222.21 (1987), and Florida Statutes Ch. 678. Florida's Uniform Commercial Code was extensively amended effective October 1, 1987. The amendment most pertinent here is one that allows creditors to reach securities in the possession of financial intermediaries, Florida Statutes § 678.317(4). The following analysis is based on the state of the law regarding perfection of security interests as it existed on the date of service of the Writ of Garnishment by PaineWebber on TMSI, March 30, 1987. A different result would obtain as to this issue under present law. However, considering only Florida law, the ultimate result would remain the same, for as the Florida legislature gave creditors the right to reach securities in the hands of financial intermediaries, it took away their rights to reach retirement plans with the passage of Florida Statutes § 222.21. This court does not reach, and does not opine, on the issue of Federal preemption of this field.
2. A CAT bond is a security as that term is contemplated by § 2(1) of the Securities Act of 1933 and Florida Statutes § 678.102.
3. On March 30, 1987, Florida Statutes § 678.317 provided that no attachment or levy was valid on a security until the security was actually seized by the officer making the attachment. Whether or not TMSI's defenses to the garnishment were sound, PaineWebber never actually gained possession of the CAT bond, and hence did not have a valid levy as to it.
4. The garnishment was served on TMSI approximately 84 days prior to the Edelsberg's filing for Chapter 13 relief. This court has held that a Writ of Garnishment becomes perfected on the date that it is served. Ryder v. Landmark First National Bank of Fort Lauderdale 59 B.R. 868 (Bankr.S.D.Fla.1986). If there are assets (other than the CAT bond) against which this garnishment action perfected a security interest, that interest is avoidable as a preference under § 547(b). PaineWebber argues that they are entitled to the exception in § 546(e) for "settlement payments." There are two considerations. First, there was no "settlement payment" by the debtor; there was an attempt by a creditor to execute on a judgment. Second, although the complaint in the state court case was not placed before the court, it appears likely that the underlying suit was not on the debt, but on the returned check. The transaction for which this was supposed to be a settlement was for $8,966.88. The outstanding balance after PaineWebber applied setoffs against the account was $8,004.06, and this was the amount that PaineWebber transferred to their legal ledger. But PaineWebber sued for $8,391.00, the amount of the returned check. It appears that the garnishment of TMSI was at least two steps removed from a "settlement payment" as that term is defined in 11 U.S.C. § 741(8). That is too remote to allow PaineWebber to claim the exemption in § 546(e).
TMSI alleges that they set off Edelsberg's obligation to them against his IRA at an unspecified time subsequent to December 2, 1986. Several considerations mitigate against this bare assertion. First, TMSI has submitted absolutely no proof of the fact or time of set off. Second, in answer to the Writ of Garnishment served on them within the preference period, TMSI asserted that the IRA was not subject to creditor's claims and that they were entitled to set off against it. Even though these assertions are inconsistent, they indicate that TMSI had not exercised its right of set off at that time. After the petition for relief, TMSI filed an unsecured claim for the entire amount plus interest, indicating that set off had not occurred even at that late date. TMSI has never petitioned this court for relief from stay to exercise its right of set off.
5. TMSI argues that "the set off occurred by operation of the agreement when the reciprocal obligations occurred." At a later point in their Trial Memorandum, TMSI asserts that this automatic set off occurred in December, 1986.1 The law is well settled that such set offs are not automatic or self executing. Cumberland Glass Manufacturing Co. v. DeWitt and Co., 237 U.S....
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