In re Monetary Group
| Decision Date | 03 January 1989 |
| Docket Number | Bankruptcy No. 84-428-BKC-3P1,84-431-BKC-3P1 and 84-433-BKC-3P1.,84-430-BKC-3P1 |
| Citation | 95 BR 803 |
| Parties | In re The MONETARY GROUP, Debtor. In re The SECURITIES GROUPS, Debtor. In re The SECURITIES GROUP 1980, Debtor. In re The SECURITIES GROUP, Debtor. |
| Court | U.S. Bankruptcy Court — Middle District of Florida |
Ira Rubin, Dayton, Ohio, for Robert L. Young, Orlando, Fla., for objectors.
Karen E. Wagner, New York City, for Morgan Banks.
George Ridge, Jacksonville, Fla., for Post-Confirmation Administrator.
This contested matter is before the Court upon objections to the proofs of claims filed by Morgan Guaranty Trust Company of New York ("Morgan Guaranty") and Morgan Bank (Delaware) ("Morgan Delaware"). The claimants are hereinafter collectively referred to as the "Morgan Banks." The objecting parties are former limited partners of The Monetary Group ("TMG"), The Securities Group ("TSG"), and The Securities Group 1980 ("TSG80"), who were authorized to file objections to these claims by Order entered August 11, 1986.
A trial of the objections was held August 25, 1988, and upon the evidence offered, including the evidence submitted during the trial of Lowin v. Dayton Securities Associates, Adv. No. 85-214, on July 28 and 29, 1988, the Court enters the following Memorandum Opinion:
THE FACTS
The debtors, TMG, TSG and TSG80, are New York limited partnerships involved in Chapter 11 reorganization proceedings before this Court. At all times pertinent to this action, the partnerships conducted business out of offices in New York City. The Securities Groups ("Groups") is a New York partnership whose general partners consisted of TMG, TSG and TSG80. Charles Agee Atkins ("Atkins") was the founder and managing general partner of TSG, TSG80, TMG and Groups.
Groups was formed in 1978 as a securities trading partnership which sought to maximize the total return to investors by taking advantage of certain tax shelter benefits. The business of Groups was described in its 1980 annual report as "among the nation's best capitalized investment firms" with "established expertise." Groups served in "market making, asset management and financial advisory services which are provided by highly trained professionals with strong backgrounds in economics and finance." Pl.Ex. 95.
As of July 1980, The Securities Groups Asset Management Group included "The Leasing Group, Inc., our equipment financing affiliate, which became active in July 1980." Pl.Ex. 38, 95; See also, Pl.Ex. 2. The Leasing Group, Inc. ("Leasing") was TSG's wholly owned subsidiary and was created by Groups to take advantage of opportunities in the equipment leasing business. Leasing's business related to Group's overall investment strategy by Pl.Ex. 95.
Steven R. Hageman, one of Group's general partners, testified to the business purpose of creating Leasing:
In November, 1980, Steven R. Hageman together with Robert G. Hageman, the President of Leasing, approached George D. Morgan, III, Vice-President of Morgan Guaranty, to discuss an extension of credit to Leasing. Groups' general partners informed the Morgan Banks that Leasing had been created by Groups to increase its stability and to provide additional tax benefits for the limited partners of Groups.
At the time Groups solicited the loans from the Morgan Banks, Leasing's capitalization was insufficient to warrant any extension of credit. Group's credit, however, could support the proposed loans.
The Morgan Banks ultimately extended three loans to Leasing, totaling almost $7.4 million. The first loan was made August 11, 1981, in the amount of $2.5 million. The second was made August 31, 1981, for $2.5 million and the third on January 15, 1982, in the amount of $2,361,997.13. The loans were to finance the purchase and lease of three oil drilling rigs and each note was secured by this oil-well drilling equipment. In addition, Groups unconditionally guaranteed the obligations to the Morgan Banks by written contracts executed in the Fall of 1981 and in early Spring 1982.
Each note further provided for amortization of principal and interest on specified terms, and included a provision that:
"If this note is not paid in full when due, the undersigned defined to include successors or assigns agrees to pay all costs and expenses of collection, including a reasonable attorney\'s fee."
Pl.Ex. 54, Exh. B; Pl.Ex. 62, Exh. B.
In extending credit to Leasing, the Morgan Banks attached little or no importance to either the creditworthiness of Leasing or to the value of the collateral, but instead relied on the financial strength of Groups. Callable capital commitments of $173 million were reported on Group's 1980 audited balance sheets.
The foundation of the Morgan Banks' decision to lend credit is detailed in a contemporaneous credit memorandum of August 27, 1981 by Lorenzo Villalon, who was charged with investigating the credit information upon which the Banks relied. From this memorandum, it is apparent that the Banks focused primarily on the financial strength of Groups:
Steven R. Hageman and Robert F. Gubitosi, both general partners and members of the Executive Committee of Groups, executed the separate guaranties supporting the three loans. Both testified that in addition to having the legal authority of a general partner to act for the partnership, they were authorized by Group's managing partner, to execute the guaranties. Atkins, whose testimony was offered by the objectors, did not dispute the authority of the general partners to execute the guaranties, the validity of the guaranties, or the relationship between the guaranties and Group's business.
The oil rigs secured by the loans were leased to Empire Oil and Gas Company ("Empire Oil"). In September, 1982, Empire Oil filed a petition for relief under Chapter 11 of the Bankruptcy Code in Colorado. 11 U.S.C. § 101, et seq. Consequently, Leasing was unable to perform its obligations to the Morgan Banks.
Despite Leasing's inability to meet its monthly obligations, there was no interruption in payments to the Morgan Banks because Groups acted promptly to service the debt pursuant to the guaranties which had been given in 1981 and 1982. Groups continued to make such payments for over two years. In March, 1983, Groups acquired Leasing's rights in the oil rigs and formally assumed Leasing's obligations to the Morgan Banks. Pl.Ex. 92.
In addition to the payments and the assumption, Group's guaranty obligations were repeatedly ratified by Groups. On August 31, 1983, Atkins met with Mr. Murray of Morgan Bank to explain an ongoing "Liquidation Plan" of Groups' business which listed as a liability of Groups an "Oil Rig Debt — $4,900,000." Contemporaneous memoranda in the Morgan Banks' files evidenced Atkins' stated intention on behalf of Groups to pay these outstanding obligations.
In January 1984, Atkins, in a letter to the Morgan Banks, described a plan to transfer the assets and liabilities of Groups to the Southern California Savings and Loan Association ("SoCal"). Pl.Ex. 98. The schedule of assets and liabilities to be transferred expressly included Groups' continuing obligation to the Morgan Banks (unless and until the transfers to SoCal were approved by the Federal Bank Board). The letter reads:
"The responsibility for the payment of interest and amortization on the debt remains with The Securities Groups and we intend to continue to honor our obligation."
On March 30, 1984, within ninety days prior to the filing Chapter 11 petitions for TMG, TSG, TSG80, Groups, and Charles Atkins, individually, Atkins again wrote the Morgan Banks. This time Atkins acknowledged, but then announced Groups' anticipatory breach of, Groups' obligations:
"We have been advised by counsel that Groups is not responsible for making any further payments to Morgan, and this constitutes our notice to you that no further payments will be made to Morgan by Groups."
Groups made no further payments to the Morgan Banks. The Morgan Banks sent written demand for payment in full and then commenced separate foreclosure suits against Groups. Those suits were stayed by the provisions of 11 U.S.C. § 362 when Groups filed for relief under Chapter 11 of the Bankruptcy Code on May 25, 1984.
By Order of this Court of July 11, 1984, the Morgan Banks were given relief from the automatic stay to complete foreclosure and to auction off the oil-well drilling equipment. Both Groups and Leasing were given notice of the public auction to be held in Hobbs, New Mexico on August 15, 1984. This auction netted $892,058.20.
The Banks used to proceeds to offset Groups' liability to the Morgan Banks. A portion of these proceeds ($300,000) was eventually paid to the Trustee of the...
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