In re General American Communications Corp.

• Citation: 63 BR 534
• Decision Date: 30 July 1986
• Docket Number: Bankruptcy No. 83 B 11495 PA.
• Parties: In re GENERAL AMERICAN COMMUNICATIONS CORPORATION, Debtor.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

63 B.R. 534 (1986)

In re GENERAL AMERICAN COMMUNICATIONS CORPORATION, Debtor.

Bankruptcy No. 83 B 11495 PA.

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

July 30, 1986.

COPYRIGHT MATERIAL OMITTED

Law Offices of Stuart A. Jackson, Certilman, Haft, Lebow, Balin, Buckley & Kremer, New York City, for debtor; Stuart A. Jackson, Ronald L. Mayers and Martin F. Brecker, of counsel.

Robson, Miller & Osserman, Cooper, Cohen, Singer, Ecker & Shainswit, New York City, for claimants; Morton S. Robson, Kenneth N. Miller, and Davis J. Howard, of counsel.

MEMORANDUM DECISION AND ORDER

PRUDENCE B. ABRAM, Bankruptcy Judge:

On October 14, 1983, General American Communications Corporation ("GACC" or "Debtor") filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. GACC thereby invoked the automatic stay of Bankruptcy Code § 362 and frustrated the efforts of Robson & Miller (the "Robson Firm") and WLW Funding Corp. ("WLWFC") to enforce an order of attachment obtained as a provisional remedy in an on-going and highly contentious state court suit they had commenced in June 1983 against GACC and Stuart R. Ross ("Ross"). In addition, GACC sought and obtained from the bankruptcy court a stay of an examination of Ross scheduled¹ for three days after the Chapter 11 filing on the grounds that his services were essential to a successful reorganization of GACC and that it would be prejudicial to GACC's reorganization attempt for Ross to take time away from the operation of GACC to defend the state court action.

On November 4, 1983, proofs of claim were filed by the Robson Firm² and WLWFC.³ The bankruptcy court became the site for the litigation when on December 15, 1983, GACC filed objections to both proofs of claim.⁴ By notice of motion dated August 13, 1984, the Robson Firm and WLWFC (collectively the "Claimants") sought summary judgment in their favor on the enforceability of the loans.

For the reasons which follow, this court denies the Claimants' motion for summary judgment. In addition, and notwithstanding the Claimants' early success in the state court and the absence of a cross-motion for summary judgment, this court finds that the claims of the Robson Firm and WLWFC must be disallowed.

THE FACTS

At the times relative to the material events, GACC was in the business of promoting "tax-advantaged investments" in the form of limited partnership interests in ventures involving the production of television programming intended for the children's market. For several years and at the time the transactions set forth below were entered into, the Robson Firm provided legal services to Ross, GACC and several other corporations and partnerships controlled by Ross. Morton S. Robson ("Robson"), a member of the Robson Firm, was also a partner with Wake L. Warthen ("Warthen") in Wake L. Warthen & Co. ("WLW"), an investment banking firm. Kenneth Miller ("Miller"), Robson's partner in the Robson Firm, although not a partner in WLW, had a 50% interest in Robson's interest in WLW. Warthen, who has no interest in the Robson Firm, is the sole stockholder of WLWFC.

Ross, as he had with other similar notes, sought financing using as collateral the promissory notes (the "Notes") given by the investor limited partners. When he was unable to obtain the desired financing Ross sought assistance from Robson and Warthen.⁵ Warthen contacted several banks but was unable to obtain financing secured by the Notes for Ross due to the unwillingness on the part of those contacted to make loans to tax shelter syndicators secured by investors' notes.

The Robson Firm and Warthen both maintained accounts and had long-standing credit relationships with Chemical Bank ("Chemical"). They determined to finance the Notes for Ross and to borrow the necessary funds for that purpose from Chemical (the "Chemical Loans"). They had previously entered into several similar transactions with Ross. As a result of Chemical's willingness to lend funds to the Claimants, the Claimants entered into a series of four, virtually identical loan agreements (the "Loan Agreements") with GACC (the "GACC Loans").

The first three loans Chemical made to Robson & Miller were evidenced by unsecured notes personally guaranteed by Robson, Miller and Warthen. However, with respect to the last loan, the two pertinent Chemical notes (one for $100,000 and one for $120,000) were signed by WLWFC. The smaller note was guaranteed by Robson, the Robson Firm and Warthen; the large one, by Robson, Miller and Warthen. The Chemical Loans make no reference to GACC or Ross. Although the investor notes were delivered to Chemical by the Claimants, the notes evidencing the Chemical Loans make no reference to them. With regard to the first three transactions, the interest on the Chemical Loans was set at prime plus 2%, while on the fourth, the interest was set at prime plus 3%.

On or about May 6, 1982 the first Loan Agreement (the "Initial Loan") was entered into between GACC, as borrower, and the Robson Firm and Warthen, as, collectively, lenders. Pursuant to the terms of the Initial Loan, GACC borrowed the sum of $110,000. Of this amount GACC received $93,000; the sum of $12,000 was paid to Warthen "in order to discharge certain obligations of the Borrower to that entity"; and $5,000 was paid to the Robson Firm "in order to discharge a portion of the obligations of the Borrower to that entity." The funds were disbursed to GACC on or about May 18, 1982. The loan was due approximately one year later and on April 30, 1983 when GACC was required to repay the loan principal of $110,000 plus "the actual interest and other costs to the Lender of its Borrowing." The term "Borrowing" is nowhere defined in the Initial Loan. As used, and in light of the modifying "its", it is clear that the term refers to the loans the Claimants obtained from Chemical. As security for the Initial Loan, GACC pledged 18 investor notes due April 1, 1983, each in the amount of $10,000 (a total of $180,000).

Thereafter, and on or about May 10, 1982, another Loan Agreement (the "Supplemental Loan") was entered into again between GACC, as borrower, and the Robson Firm and Warthen, as, collectively, lenders, for the sum of $20,000. GACC received $18,000 of the principal amount of this loan, which was disbursed to it on or about May 21, 1982; the remaining $2,000 was paid to WLW "in order to discharge certain obligations of the Borrower to that entity." As security for the Supplemental Loan, GACC pledged one promissory note due April 1, 1983 in the amount of $10,000. The provisions for repayment of principal and interest on the Supplemental Loan are identical to those in the Initial Loan.

The third loan transaction, entitled "TexCat Loan Agreement" (the "TexCat I Loan"), was entered into again with GACC, as borrower, and the Robson Firm and Warthen, as, collectively, lenders, on or about June 2, 1982. The principal amount of the TexCat I Loan was $175,000. Of this sum, $17,500 was paid to WLW "in order to discharge certain obligations of the Borrower to that entity", and $157,500 was disbursed to GACC on or about June 9, 1982. As security for the TexCat I Loan, GACC pledged 22 promissory notes representing 26 units in the amount of $9,000 each (a total of $234,000) each due April 5, 1983. Repayment of principal and interest was due less than a year later and on April 30, 1983. The repayment terms of the TexCat I Loan are identical to those in the Initial Loan.

The final agreement at issue, the "1982 GAC Video Production Services — TexCat II Associates Loan Agreement" (the "TexCat II Loan"), was executed on or about October 21, 1982 this time between GACC, as borrower, and WLWFC, as lender. Of the $220,000 stated principal, $22,000 was paid to WLW "in order to discharge certain obligations of the Borrower to that entity," $100,000 was disbursed to GACC, and the balance of $98,000 was to be paid to the borrower upon full repayment of the "Equidyne Loan."⁶ The funds, including the $98,000, were disbursed in three installments during October and November of 1982. The TexCat II Loan was secured by 13 promissory notes payable on June 1, 1983, representing 26 units in the amount of $11,250 each (a total of $292,500). Payment of principal, interest and other charges was due on June 1, 1983.

GACC has made no payments on any of the Loans. Each of these four loan agreements provided that the lender would collect the pledged notes at maturity and apply the proceeds in payment of the loan. Any surplus was to be paid to the borrower, GACC. Prior to any collection of the Notes by the lender, Ross requested that Robson allow him to collect the Notes directly because he and GACC were then engaged in litigation with the general partners of TexCat Associates and TexCat Associates II Partnerships, in which the notemakers were limited partners. Ross had expressed concern that GACC's litigation posture would be prejudiced if the Notes were collected by the Robson Firm. The Robson Firm agreed to allow Ross to collect the monies due on the Notes with the understanding that the proceeds would be immediately turned over to Chemical in order to satisfy the Claimants' obligations to Chemical.

In April of 1983, the Robson Firm received a quantity of checks from several of the makers of the Notes payable to the Robson Firm for a total amount of approximately $250,000, accompanied by letters requesting that the funds be held in escrow pending resolution of the disputes with GACC. Ross requested that the checks be returned to the notemakers because, in his view, retention of the funds in escrow would be injurious to his bargaining position with the partnerships. Although the Robson Firm was apparently reluctant to return the checks, an oral agreement was reached whereby they would return the checks and GACC or Ross would provide additional collateral. After returning the checks, the Robson Firm sent a letter to Ross setting forth the terms of the...