In re Lombard-Wall, Inc., Bankruptcy No. 82 B 11556 (EJR)
| Decision Date | 12 December 1984 |
| Docket Number | Adv. No. 83-6014A.,Bankruptcy No. 82 B 11556 (EJR) |
| Citation | 44 BR 928 |
| Parties | In re LOMBARD-WALL, INCORPORATED, Debtor. LOMBARD-WALL INCORPORATED, as Debtor-in-Possession, Plaintiff, v. NEW YORK CITY HOUSING DEVELOPMENT CORPORATION, Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Cadwalader, Wickersham & Taft, by Edwin David Robertson, New York City, for plaintiff Lombard-Wall, Inc.,
Skadden, Arps, Slate, Meagher & Flom, by Dennis J. Drebsky, New York City, for defendant New York City Housing Development Corp.
OPINION AND REPORT ON ORDER AND REFERENCE DATED JANUARY 20, 1984
By order of January 20, 1984 the undersigned Bankruptcy Judge was directed by Judge Gerard L. Goettel to hear and report upon the defendant's motion to withdraw the reference from the bankruptcy court and upon the demand for a jury trial in the district court.
The order defined the critical issues of this case as (1) whether the disputes presented by the complaint involve issues arising under the Bankruptcy Code and thereby properly within the jurisdiction of the bankruptcy court; and (2) whether prior actions taken by HDC amount to a consent of jurisdiction and preclude a demand for jury trial.
Argument was heard before me on July 18, 1984, at which time the parties were directed to submit memoranda of law on the possible effects on the issues raised in this matter of the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353, 98 Stat. 333 (July 10, 1984) (1984 Act).
My recommendation is that the defendant's motion to withdraw the reference from the bankruptcy court be denied and that the demand for a jury trial be stricken.
Defendant HDC is a corporate governmental agency constituting a public benefit corporation of the State of New York. HDC issues bonds and notes so as to provide mortgage financing for low-income residential construction and rehabilitation.
Plaintiff Lombard-Wall Incorporated (Lombard) is a Delaware corporation with its principal place of business in New York City. Lombard is in the business of arbitrating government obligations and other money market instruments.
On August 12, 1982, Lombard filed a petition for reorganization relief under Chapter 11 of the Bankruptcy Code. 11 U.S.C. § 1101 et seq. (Supp. III 1979). No trustee was appointed and Lombard remained in possession and continued to operate its business during the reorganization period. 11 U.S.C. §§ 1104, 1106-07.
In order for HDC to ensure sufficient funds to satisfy the holders of its debt securities and to maintain its credit and bond rating, HDC invested the proceeds of its financings until the day the funds were needed to issue mortgages. One method HDC used in making these investments was to enter into repurchase or "repo" agreements whereby it purchased debt securities from a seller who, at the time of sale, agreed to repurchase the securities on specified terms and conditions. The time for repurchase was fixed at a specific future date (fixed date) or on demand (flexible).
At the time Lombard filed the petition, HDC and Lombard were engaged in several fixed repurchase agreements (the Repurchase Agreements).
Lombard, HDC and J. Henry Schroder Bank & Trust Company (Schroder), as fiscal agent for HDC, entered into three investment agreements, dated February 3, 1981, March 24, 1981, and April 15, 1982 (the Investment Agreements). Under the terms of each Investment Agreement, (1) HDC deposited in an account with Schroder funds generated by the sale of public construction loan note issues; and (2) Lombard agreed to sell Schroder certain securities (the Securities), and Lombard agreed to repurchase the securities from Schroder in an amount equal to the purchase price, plus all earned and accrued interest on the purchase price at a specified interest rate. The fair market value of the Securities had to be at least 101% of its purchase price. Income produced by the collateral went to Lombard, and that income was greater than the repurchase interest payable to Schroder, as fiscal agent for HDC.
HDC was entitled under the Investment Agreements to require Lombard to repurchase investment obligations in an amount sufficient to enable HDC to fund its construction mortgage loans.
As a condition to entering into each Investment Agreement, Lombard was required to provide to Schroder, as fiscal agent for HDC, an irrevocable letter of credit in a defined amount, to guarantee Lombard's obligations under the investment Agreements (the letters of credit or LCs). Lombard had Chase Manhattan Bank N.A. (Chase) issue a letter of credit for each of the three Investment Agreements, dated January 27, 1981, March 23, 1981 and April 14, 1982, respectively. Each letter of credit by its terms pertained to a particular Investment Agreement. To effect a draw, HDC through its fiscal agent, had to represent that a certain sum was "due and owing" in accordance with the terms and conditions of the particular Investment Agreement.
On the date of the petition, HDC had invested approximately $130,000,000 with Lombard under Repurchase and Investment Agreements.
At the time Lombard's petition was filed, Lombard was allegedly in default of its obligation to repurchase $600,000 of securities pursuant to the terms of the Investment Agreements, and $5,000,000 of securities as required by the terms of the Repurchase Agreements. Therefore, on August 16, 1982, HDC commenced an adversary proceeding in this court seeking declaratory relief from the statutory stay in effect under 11 U.S.C. § 362(a) and for an order under 11 U.S.C. § 365 compelling Lombard to assume or reject the Investment Agreements to the extent that they were deemed executory contracts. HDC also filed an emergency application for an order under 11 U.S.C. § 363(f) vacating the automatic stay to permit HDC to sell the Securities held by Schroder, its fiscal agent, pursuant to the Investment Agreements so as to enable HDC to meet certain immediate financial obligations.
On August 18, 1982, HDC and Lombard entered into a stipulation of settlement, allowing HDC to sell the Securities it held through its fiscal agent (the Stipulation). The Stipulation was authorized by order of this court dated August 18, 1982, following a hearing. The August 18, 1982 order expressly referred to the matters developed at the hearing. The Stipulation was described as "an interim procedure to minimize any further liability of the Lombard estate of HDC," in which the parties preserved all their legal rights and did not admit or deny the assertions made in the adversary proceeding. Paragraph five further stated that the Stipulation would be without prejudice to the parties' respective rights, contentions and assertions. In paragraph eight, the parties expressly agreed that the bankruptcy court would have jurisdiction to enforce the terms of and to resolve any dispute arising from the Stipulation.
On August 19, 1982, the day after the Stipulation was entered into, HDC caused draws to be made on the March 23, 1981 letter of credit and the April 14, 1982 letter of credit in the amounts of $225,978 and $1,300,798, respectively, representing that the amounts were "due and owing" under the Investment Agreements. Lombard alleges that HDC caused Chase to cancel the January 27, 1981 letter of credit on or about August 19, 1982.
After the sale of the Securities pursuant to the Stipulation, excess funds amounted to $7,389,980 after deducting principal and accrued interest due to HDC at the date of sale. Lombard claims that $7,000,000 was remitted to it two to five days after the sale, $119,522 was remitted on October 29, 1982, and the remaining $270,452 of excess funds was remitted on July 10, 1983, after Lombard obtained an order from this court dated June 30, 1983, directing that HDC deliver to Lombard $270,452 plus interest from August 23, 1982.
On March 15, 1983, HDC filed a proof of claim with the bankruptcy court, stating that Lombard was indebted to HDC in an undetermined and unliquidated amount, arising from Lombard's retention of a portion of the sale proceeds of the securities that HDC purchased from Lombard pursuant to the Investment Agreements.
On July 14, 1983, an order was entered confirming Lombard's plan of reorganization.
On October 14, 1983, Lombard commenced the present action in the bankruptcy court by filing a complaint against HDC (the Complaint) containing sixteen claims for relief.
The first eight claims for relief arise from HDC's draws on the March 23, 1981 and April 15, 1982 letters of credit (LCs) in the total amount of $1,526,776. Lombard alleges that HDC falsely represented the amounts drawn were "due and owing" under the Investment Agreements; that the draws on the LCs violated § 502(b)(2) of the Code as an unallowable claim for unmatured interest; conversion; and breach of warranty.
The ninth, tenth, and thirteenth claims for relief arise from HDC's alleged withholding of the excess proceeds from the sale of Securities in August 1982 for periods of time ranging from two to five days to over nine months following sale, and claiming interest of approximately $33,000.
The eleventh and twelfth claims for relief are for coupon interest payments on the Jumbo C.D.'s allegedly due to Lombard pursuant to the terms of the Investment Agreements and the Stipulation, in the amount of $151,000. Lombard alleges breach of contract and conversion against HDC in these two claims, respectively.
The fourteenth claim for relief is for interest on Jumbo C.D. coupon payments that were allegedly withheld from Lombard for five months, in the amount of $7,000.
The fifteenth claim for relief alleges HDC withheld coupon payments on U.S. Treasury and Agency Securities for four months, and asks for interest of $6,000.
The sixteenth claim for relief alleges that HDC refused to pay Lombard the full amount of interest due on a Bank of Tokyo...
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