In re Emergency Beacon Corp., Bankruptcy No. 76 B 356

• Court: U.S. District Court — Southern District of New York
• Writing for the Court: HOWARD SCHWARTZBERG
• Citation: In re Emergency Beacon Corp., 48 B.R. 341 (S.D. N.Y. 1985)
• Decision Date: 16 April 1985
• Docket Number: Bankruptcy No. 76 B 356,77 B 980.
• Parties: In re EMERGENCY BEACON CORP., Debtor.

48 B.R. 341 (1985)

In re EMERGENCY BEACON CORP., Debtor.

Bankruptcy Nos. 76 B 356, 77 B 980.

United States District Court, S.D. New York.

April 12, 1985.

As Amended April 16, 1985.

COPYRIGHT MATERIAL OMITTED

Harvey S. Barr, Spring Valley, N.Y., for trustee.

Kronish, Lieb, Shainswit, Weiner & Hellman, New York City, for Montmartco, Inc.; Laurence J. Kaiser, and Karen M. Klein, New York City, of counsel.

Stephen G. Glatzer, New Rochelle, N.Y., pro se.

DECISION ON OBJECTION TO CLAIM

HOWARD SCHWARTZBERG, Bankruptcy Judge.

The erstwhile trustee in possession of a confirmed Chapter XI debtor, Emergency Beacon Corp., has objected to the single largest unsubordinated unsecured claim filed against the estate by Montco, Inc. (now known as Montmartco and hereinafter referred to as Montco) in the amount of $217,363.75.¹ The trustee objects to the claim on the factual allegations that the debtor did not receive $80,000 of loan proceeds which form the basis of Montco's claim and that certain collateral was taken from Emergency Beacon without a proper credit being applied to the outstanding debt. Additionally, the trustee asserts that under Article 9 of the Uniform Commercial Code, Montco's claim was implicitly satisfied in whole or in part by the turnover of other collateral to this creditor. A further legal theory advanced by the trustee is that Montco's claim must be reduced to the extent that it is secured by stock of the debtor pledged by a third-party. Finally, the trustee seeks credit for a settlement payment received by Montco in connection with collateral litigation. Montco objects to the court's consideration of the settlement funds as excluded by the collateral source rule and moves for sanctions against the trustee for raising allegedly frivolous objections to Montco's claim.

FINDINGS OF FACT

1. Emergency Beacon Corp. originally filed a Chapter XI petition under the now repealed Bankruptcy Act of 1898, as amended, on February 18, 1976.

2. The Chapter XI case was aborted on March 11, 1977 with the result that Harvey S. Barr was appointed the trustee in bankruptcy.

3. Thereafter, new management of the corporate debtor reinstated the Chapter XI case with the court's consent. Harvey S. Barr continued as the trustee in possession in the reinstated Chapter XI case.

4. On March 30, 1984, an order was entered by the court confirming a Chapter XI plan proposing to pay unsecured creditors 10.5% of their allowed claims over a seven year period together with shares of stock of the debtor, entitling them to receive 5% of the debtor's annual gross income, until a 100% distribution is achieved.

5. Prior to the filing of the Chapter XI petition, Rocco Scappatura, who was then the president of Emergency Beacon Corp., approached George Horvath, president of Montco, Inc., for the purpose of obtaining a loan from Montco.

6. On March 13, 1975, the board of directors of the debtor adopted a resolution authorizing the debtor to borrow $145,000 from Montco for a period of approximately 90 days at a 20% interest rate and to pledge as security for the loan its accounts receivable, inventory, test equipment, real property and other assets of the company.

7. On March 26, 1975, the debtor entered into a written loan and security agreement whereby Montco agreed to advance the debtor $145,000 for 90 days at an interest rate of 20% for which Montco received a security interest in all of the debtor's present and future contract rights and their proceeds, the debtor's physical assets including its machinery, furniture, fixtures and equipment and the debtor's inventory including raw materials. The agreement also referred to a mortgage in the face amount of $70,000 given by the debtor on certain real estate as additional security for the loan.

8. The $145,000 advance to Emergency Beacon consisted of two components. One check made payable to Emergency Beacon Corp. in the amount of $65,000 was delivered directly to the debtor as part of the loan transaction. Pursuant to a written agreement,² the balance of the loan, $80,000,³ was advanced in the form of a check issued to Jack B. Polish who was the attorney representing Emergency Beacon at that time. Polish deposited this check into a special account at Merchants Bank of New York and subsequently drew a check in the same amount made payable to himself which he endorsed and delivered to the National Bank of Westchester ("NBW"). The purpose of the $80,000 payment to NBW was to satisfy Emergency Beacon's outstanding obligation to the bank, which was secured by a lien on the same assets that Emergency Beacon had pledged to Montco, and to receive a release of the collateral from NBW. Polish then obtained releases of the security interests held by NBW which he subsequently caused to be recorded.

9. The debtor's Statement of Affairs attached to its original Chapter 11 petition reflects that a loan for $80,000 made by NBW was repaid. NBW has never asserted a secured claim in this Chapter 11 case based on this loan and security agreement.

10. Mr. Polish testified that he was named as the payee on the check which he subsequently endorsed over to NBW because he was unsure as to whether the transaction would be completed and that the secured assets would be released. Under the written agreement between Montco and Emergency Beacon, the $80,000 portion of the loan would revert to Montco if NBW were not paid its indebtedness.

11. On May 29, 1975, Emergency Beacon's board of directors adopted a second resolution authorizing the debtor to borrow an additional $105,000 from Montco and to pledge the same security.

12. On May 30, 1975, the parties amended the preexisting security agreement to reflect the additional advance of $105,000, making the total indebtedness $250,000, and to raise the interest rate to 24%. This interest rate was demanded by George Horvath, the president of Montco, because in order to make the loan, he had to withdraw Montco funds from the Chase Manhattan Bank where it was earning 18% interest.

13. On August 13, 1975, the debtor borrowed an additional $25,000 from Montco, with interest at the rate of 24% per annum, as evidenced by a promissory demand note dated that same day. The debtor sought this advance because its corporate account at Westchester Savings Bank had been seized by the bank and unless an obligation owed to the bank was satisfied, Emergency Beacon's outstanding checks issued from this account would not clear. Once the loan proceeds were obtained, they were deposited at Westchester Savings Bank.

14. As collateral for the loan made on August 13, 1975, Scappatura offered to grant Montco a security interest in an airplane and four automobiles owned by Emergency Beacon. Horvath indicated that these assets were insufficient security and Scappatura added his personal guarantee of the loan to his offer of collateral. Horvath requested further security for Scappatura's personal guarantee because he felt that Scappatura "was not good for it." At this point, Scappatura offered 43,659 shares of his stock in Emergency Beacon Corporation as collateral for his guarantee. Horvath accepted this pledge of Scappatura's stock along with Scappatura's personal guarantee and the security interest in the debtor's airplane and vehicles.

15. In August, 1977, after the reinstatement of the Chapter XI case, on the heels of the qualification of a trustee in bankruptcy, Montco commenced an action in state court to foreclose upon its security. Thereafter, pursuant to an order of this court, the trustee in possession turned over to Montco all of the debtor's inventory, furniture, fixtures and equipment for sale at a public auction conducted on behalf of the secured creditor. After a deficiency claim of approximately $200,000 resulted from the sale, Montco asserted a further interest in the debtor's patent rights, tradename, customer lists, books and records and the right to manufacture or sell emergency beacons, the debtor's product. Montco urged that its security interest covered these assets of the debtor.

16. Pursuant to an opinion and order dated December 28, 1977, this court ruled that the debtor's patent rights, tradename, customer lists, books and records and right to manufacture and sell its products were general intangibles within the meaning of § 9-106 of the Uniform Commercial Code and that they did not fall within the category of "goods" or "things" as those terms were used in Montco's security agreement. Montco's asserted security interest in these items was thereby rejected. In re Emergency Beacon Corp., 23 U.C.C.Rep.Serv. (Callaghan) 766, 772 (Bkrtcy.S.D.N.Y.1977), aff'd, 78 Civ. 795, (S.D.N.Y. September 22, 1978) (mem.).

17. In June of 1978, Emergency Beacon turned over to Montco that portion of Montco's collateral consisting of accounts receivable. These accounts were produced almost exclusively by sales of HAM and CB radios manufactured by Emergency Beacon which did not perform to the level of expectation of the dealers who purchased the radios. Prior to turning over the accounts receivable to Montco, Emergency Beacon's trustee attempted without success to collect from the account debtors, many of whom had discontinued their business relationships with Emergency Beacon. The trustee's collection efforts were met by a raft of letters complaining either that the radios were defective or that they were never actually purchased, but merely consigned.

18. The trustee testified that despite his initial difficulties in collecting the accounts receivable, he could have turned them over for collection and could have received $14,000 to $16,000 in net gain for the estate. Following the turnover, Montco's collection effort produced $650 in payments received at an expense of over $1000, resulting in approximately $350 of losses to the secured creditor.

19. There was no evidence presented that Montco expressed an intention, either orally or in writing, to accept the accounts...