In re McLean Industries, Inc.
| Decision Date | 22 December 1993 |
| Docket Number | No. 91 Civ. 7543 (KTD).,91 Civ. 7543 (KTD). |
| Citation | 162 BR 410 |
| Parties | In re McLEAN INDUSTRIES, INC., et al., Debtors. UNITED STATES LINES (S.A.), INC., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant. |
| Court | U.S. District Court — Southern District of New York |
COPYRIGHT MATERIAL OMITTED
COPYRIGHT MATERIAL OMITTED
Milbank, Tweed, Hadley & McCloy (Robert Drain, of counsel), New York City, for plaintiff-appellee USL Reorganization Trust.
Mary Jo White, U.S. Atty. (Edward A. Smith, Asst. U.S. Atty., of counsel), New York City, and J. Christopher Kohn, Tracy J. Whitaker and John T. Stemplewicz, Attys., Civ. Div., Dept. of Justice (Richard M. Lorr, Maritime Admin., of counsel), Washington, DC, for defendant-appellant U.S.
Appellant, The United States of America on behalf of the Maritime Administration ("Marad"), Department of Transportation, appeals to this court, pursuant to 28 U.S.C. § 158(a), from an Order of the United States Bankruptcy Court for the Southern District of New York, Cornelius Blackshear, J., granting the USL Reorganization Trust's ("Debtor"), successor in interest to United States Lines (S.A.), Inc., Motion for Summary Judgment and denying Marad's Motion for Summary Judgment. See United States Lines (S.A.), Inc. v. United States (In re McLean Indus., Inc.), 132 B.R. 247, 267 (Bankr.S.D.N.Y.1991) (hereinafter "McLean"). The decision of the Bankruptcy Court is hereby affirmed in its entirety.
The facts of this case are uncontroverted as they are based on an agreed Pre-trial Order, and they are generally set forth in McLean, 132 B.R. at 250-54. The following factual summary recites only those facts pertinent to this appeal.1
Moore-McCormack Liners, Inc. ("Moore-McCormack") owned three vessels: (1) S.S. AMERICAN ARGO; (2) S.S. AMERICAN RIGEL; and (3) S.S. AMERICAN VEGA (collectively the "Vessels"). Construction of these Vessels was largely financed by federal programs administered by Marad in 1964 and 1965. Marad paid $15 million to Moore-McCormack as a construction-differential subsidy in 1962 (the "1962 CDS"). Additionally, in 1967, Moore-McCormack issued bonds totaling $11,526,000 due April 1, 1987. These bonds were secured by a first preferred ship mortgage on each Vessel (the "1967 Mortgage"). More importantly, the 1967 Mortgage was insured by Marad pursuant to subchapter XI of Merchant Marine Act. 46 U.S.C.App. §§ 1271 et seq. Moore-McCormack also received an operating-differential subsidy ("ODS") for the Vessels as authorized by subchapter VI of the Merchant Marine Act. 46 U.S.C.App. §§ 1171 et seq.
In 1981, the Vessels underwent extensive modifications, costing approximately $54 million. Marad partly financed these modifications with another construction-differential subsidy (the "1981 CDS"). Marad also guaranteed another issue of bonds by Moore-McCormack, totaling $34,300,000 (collectively with the 1967 guarantee, the "Guarantees" or "Insured Bonds"). The second issue of Insured Bonds was secured by another preferred fleet mortgage in 1983 (the "1983 Mortgage").
In early 1983, McLean Securities, Inc., the parent of United States Lines, Inc., acquired Moore-McCormack and renamed it United States Lines (S.A.), Inc. ("USL"). In order to finance the acquisition, Chemical Bank ("Chemical") loaned $50 million to be partially secured by a preferred fleet mortgage on the Vessels. Chemical's fleet mortgage was subordinate to the 1967 Mortgage and the 1983 Mortgage.
In 1986, as part of a debt restructuring plan prompted by large operating losses, USL requested that Marad and the holders of the Insured Bonds defer the principal payment due June 30, 1986 on the 1983 Mortgage. Marad and the bondholders agreed to defer the payment until June 30, 1988. In return, however, USL agreed to amend the security agreement under the 1983 Mortgage to include certain additional security default covenants (the "Amended Security Agreement").
The Amended Security Agreement contained a covenant requiring USL to obtain Marad's consent prior to bareboat chartering the Vessels.2 This same restrictive covenant was included in the 1967 Mortgage, the 1981 CDS, USL's ODS, as well as the Reserve Fund and Financial Agreement entered into concurrently with the 1983 Mortgage. None of these agreements, however, restricted Marad's power to consent to a bareboat charter of the Vessels.
On August 15, 1986, USL applied for Marad's consent to a proposed bareboat charter of the Vessels to the Lykes Brothers Steamship Company ("Lykes"). For the previous nine months, USL had not used any of the Vessels for its own operations. In September 1986, USL and Lykes entered into a formal charter agreement ("Agreement to Charter") providing for a three-year bareboat charter of the Vessels. The Agreement to Charter was conditioned expressly upon Marad's consent to USL chartering the Vessels to Lykes.
On October 16, 1986, Marad agreed to consent to the Agreement to Charter subject to certain conditions. Primarily, Marad required an assignment of the charters as additional security for its mortgages on the Vessels. The facts indicate that Marad would not have consented without such an assignment. On November 4, 1986, the parties entered into four agreements: (1) three bareboat charter parties between USL and Lykes (the "Charters"); (2) a Charter Assignment and Agreement between USL, Lykes, and Marad (the "Assignment"); (3) a Depository Agreement between Marad and Chemical (the "Depository Agreement"); and (4) an Agreement between Marad and Lykes (Marad/Lykes Agreement"), which acknowledged Marad's mortgages and its interest in the Charters.
The Charters required that the charter hire be paid to Chemical "for credit to the account of" Marad pursuant to the Assignment. Under the Assignment, USL granted Marad a security interest in its Charters and the charter hire payments to be received from Lykes. It is this transfer from USL to Marad that the Debtor seeks to avoid as a preference under § 547(b) of the Bankruptcy Code. 11 U.S.C. § 547(b).
Pursuant to the Charter, Chemical agreed to receive the charter hire payments under the Depository Agreement. Chemical was to transfer to USL any charter hire paid by Lykes no later than one business day after the funds became available. If Marad notified Chemical of a demand upon the Guarantees, Chemical was to hold charter hire payments subject to Marad's instructions.
On November 24, 1986 ("Petition Date"), USL filed its voluntary petition under Chapter 11 of Title 11 of the Bankruptcy Code; however, it continued to operate its business as a debtor-in-possession in accordance with § 1107 of the Code. 11 U.S.C. § 1107. Debtor (formerly USL) made no payment on the Insured Bonds after the Petition Date. On February 26, 1987, Marad received the first demand upon the Guarantees. Pursuant to the Depository Agreement, Marad instructed Chemical to hold for Marad's account all charter hire deposited by Lykes. Chemical stopped transferring charter hire deposits to Debtor but refused to transfer the deposits directly to Marad without a court order.
After discussions between Debtor and Marad, Debtor acknowledged that Marad should receive all the charter hire that Lykes paid after Marad received the demand on its guarantees, including the charter hire paid prior to Marad's notification to Chemical of the demand upon the Guarantees. Marad and the Debtor signed a Stipulation and Order Providing for Repayment of charter hire (the "Stipulation") requiring Chemical to disburse all Lykes charter hire as Marad may direct. It also provided that the Debtor would pay Marad $126,000 for charter hire transferred to the Debtor after Marad received the demand upon the Guarantees but before Marad notified Chemical of that demand. The Stipulation was conditioned only upon court approval, and the parties set no time limit for obtaining the requisite court approval.
At a hearing to approve the Stipulation, Chemical, as a creditor, objected to the Stipulation. The hearing was adjourned pending further resolution of Chemical's objection. Marad and Chemical attempted to negotiate a settlement of Chemical's objection to the Stipulation, but they failed to do so. Chemical, nevertheless, did agree to pay interest on the depository account while the matter was pending.
On December 31, 1987, Marad filed a proof of claim for amounts due on the 1967 Mortgage and the 1983 Mortgage. The proof of claim included as a set off the charter hire that Chemical held in the depository account. The Debtor never contested the validity, priority, or amount of Marad's mortgages on the Vessels, and the 1967 and 1983 Mortgages were valid and perfected preferred mortgages under Ship Mortgage Act. 46 U.S.C. App. § 911 et seq. As a result of its debts and these mortgages, the Debtor had no equity in the Vessels.
On March 23, 1989, USL's Second Amended and Restated Disclosure Statement (the "Disclosure Statement") was approved by the Bankruptcy Court. On May 16, 1989, the Debtor's First Amended and Restated Joint Plan of Reorganization (the "Plan") was confirmed. In the Plan, the Debtor unqualifiedly assumed the Charters, which still required payment of the charter hire to Chemical. Marad did not object to the confirmation of the Plan or to the assumption of the Charters.
The Debtor then brought an adversary proceeding before the Bankruptcy Court claiming that the Marad must pay Debtor's bankruptcy estate approximately $10 million as an alleged avoidable preference and/or a fraudulent conveyance.3 The Debtor moved for summary judgement on its claims, and Marad cross-moved for summary judgment. The Bankruptcy Court granted the Debtor's motion and denied Marad's cross-motion. Marad appealed in a timely manner and obtained a stay pending this appeal. For the following reasons, the Bankruptcy Court's decision is affirmed in its entirety.
...
To continue reading
Request your trial