In re NAL Financial Group, Inc.
| Decision Date | 02 August 1999 |
| Docket Number | Bankruptcy No. 98-21966-BKC-PGH to 98-21972-BKC-PGH. |
| Citation | 237 BR 225 |
| Parties | In re NAL FINANCIAL GROUP, INC., Nal Acceptance Corp., Performance Cars of South Florida, Inc., Autorics, Inc., Nal Insurance Services, Inc., Special Finance, Inc., Nal Mortgage Corporation, Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of Florida |
Mindy Mora, Stroock & Stroock & Lavan, LLP, Miami, FL.
Paul J. Battista, Genovese, Lichtman, Joblove & Battista, Miami, FL.
James E. Shepherd, Pohl & Short, P.A., Winter Park, FL.
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER ON THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS' MOTION FOR SUMMARY JUDGMENT AGAINST INTERBANC MORTGAGE SERVICES, INC.
THIS MATTER came before the Court on March 9, 1999, upon the Official Committee of Unsecured Creditors' (the "Committee") Motion for Summary Judgment Against Interbanc Mortgage Services, Inc. (the "Motion for Summary Judgment"). On March 23, 1999, Interbanc Mortgage Services, Inc. ("Interbanc") filed a Response to the Committee's Motion for Summary Judgment (the "Response"). On March 25, 1999, Interbanc filed the Affidavit of Paul Henderson in Opposition to Motion for Summary Judgment filed by Committee Against Interbanc Mortgage Services ("Henderson's Affidavit"). Subsequently, on April 5, 1999, the Committee filed a Reply Memorandum of Law in Support of its Motion for Summary Judgment Against Interbanc Mortgage Services, Inc. (the "Reply"). The parties filed a Joint Stipulation of Facts on April 9, 1999. Then, on April 26, 1999, Interbanc filed a Response to the Committee's Reply Memorandum of Law in Support of its Motion for Summary Judgment (the "Response to the Reply"). Having reviewed the Motion for Summary Judgment, the Response, Henderson's Affidavit, the Reply, the Joint Stipulation of Facts, and the Response to the Reply, the Court finds that there are no genuine issues of material fact. Therefore, summary judgment is appropriate. See Clemons v. Dougherty County, 684 F.2d 1365, 1368 (11th Cir.1982) (citing Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970)). The Court, being fully advised in the premises, hereby enters the following Findings of Fact, Conclusions of Law, and Order.
On or about December 27, 1995, Interbanc paid $200,000 to NAL Financial Group, Inc. ("NALF") and NALF issued to Interbanc two (2) "Units." The rights and obligations of NALF and Interbanc with respect to this transaction are set forth in four (4) documents: the Securities Purchase Agreement, the Registration Rights Agreement, the 9% Subordinated Convertible Debenture, and the Warrant to Purchase Common Stock of NAL Financial Group Inc. Pursuant to the Securities Purchase Agreement, a "Unit" consisted of a $100,000 Principal Amount, a 9% Subordinated Convertible Debenture issued by NALF (the "Debentures"), and 4,500 Common Stock Purchase Warrants with an exercise price of $15.00 per share with respect to the common stock of NALF. The Debentures, according to the Securities Purchase Agreement, were convertible into restricted shares of NALF's common stock (the "Restricted Stock"). NALF did not include the Debentures or Restricted Stock in any registration statements it filed with the Securities and Exchange Commission ("SEC") during 1996. On or about June 24, 1997, Interbanc converted its Debentures into Restricted Stock and subsequently sold that Restricted Stock.
In 1997, Interbanc filed suit (Case # C197-7876) in the Circuit Court in and for Orange County, Florida (the "Circuit Court Case"), against NALF alleging that Interbanc was damaged when NALF failed to register the Debentures for two stock offerings subsequent to the execution of the Securities Purchase Agreement. The Securities Purchase Agreement and the Registration Rights Agreement required that NALF use its best efforts to register the Debentures on or before May 15, 1996. The Complaint filed in the Circuit Court Case is comprised of three counts: (1) Fraudulent Inducement, (2) Breach of Fiduciary Duty, and (3) Breach of Contract. On February 12, 1998, the Orange County Circuit Court entered an Order on NALF's and Robert R. Bartolini's ("Bartolini") motion to dismiss complaint. In this Order, Interbanc's claims for fraudulent inducement and breach of fiduciary duty were dismissed without prejudice, the motion to dismiss complaint was denied as to Interbanc's claim for breach of contract, Interbanc was given twenty days to file amended counts for fraudulent inducement and breach of fiduciary duty, and NALF and Bartolini were directed to file an answer within twenty (20) days.
On March 23, 1998, NALF filed for reorganization under Chapter 11 of the Bankruptcy Code. On August 7, 1998, Interbanc filed its Proof of Claim for an unsecured non-priority claim in the amount of $232,148.701 against NALF ("Claim Number 102"). Interbanc listed the Circuit Court Case as the basis for this claim. On July 20, 1998, NALF filed Debtor's Plan of Reorganization (the "Plan") and the Disclosure Statement for Debtor's Plan of Reorganization (the "Disclosure Statement"). October 5, 1998, the Court entered an Order confirming the Plan (the "Confirmation Order"). In the Confirmation Order, the Committee was authorized to object to proofs of claims filed by NALF's creditors. Accordingly, the Committee filed two objections to Claim Number 102, the latter of which asserts that pursuant to 11 U.S.C. § 510(b) Claim Number 102 should be subordinated in payment to the claims of all unsecured creditors and have the same priority as a Class 9 interest (equity security holders) under NALF's Plan. Interbanc filed two responses, the first to the Committee's original objection and the second to the Committee's amended objection. Interbanc's second response states that the claim is for breach of an agreement between Interbanc and NALF dated December 6, 1996, and that NALF breached that agreement by failing to register Interbanc's Restricted Stock.
On March 9, 1999, the Committee filed the instant Motion for Summary Judgment on its objection to Claim Number 102. Consistent with its second objection to that claim, the Committee asserts in the Motion for Summary Judgment that because the claim is for damages arising out of the sale of securities, it must be subordinated to the claims of general unsecured creditors and have the same priority as a Class 9 interest (equity security holders) under NALF's plan of reorganization pursuant to 11 U.S.C. § 510(b). In the Response filed on March 23, 1999, Interbanc argues that Claim Number 102 should not be subordinated to the claims of general unsecured creditors because the claim arose from the obligations set forth in the Debentures and NALF's breach of those obligations. Interbanc asserts that because NALF failed to register the Restricted Stock with the SEC soon after Interbanc exercised its option to convert the Debentures to Restricted Stock, Interbanc incurred damages by not being able to sell that stock for a significant profit. Once the Restricted Stock was registered, Interbanc, pursuant to NALF's CEO's advice, sold it for a loss in order to mitigate its damages. Interbanc notes that NALF never regarded Interbanc as an equity security holder; NALF treated the Debentures as debt instruments in the Plan.2 For this reason, Interbanc requests that it be given the same priority as every other general unsecured creditor of NALF.
In Henderson's Affidavit filed on March 25, 1999, he asserts that the original transaction between Interbanc and NALF was a loan and not the purchase of equity in NALF and that the Debentures were evidenced as debt on NALF's books. Henderson further asserts that Interbanc's claim for damages arose from NALF's failure to register the Restricted Stock with the SEC and not from the purchase of any securities. Henderson insists that Interbanc is entitled to the return of the $200,000.00 it loaned to NALF plus interest at the rate of 9% per annum and damages arising out of NALF's breach of the terms of the Debentures in the amount of $203,495.00 plus accrued interest.
In the Reply filed on April 5, 1999, the Committee cites to the Securities Purchase Agreement to illustrate that the transaction between NALF and Interbanc was an investment and not an ordinary loan. Because the Debentures are repeatedly referred to as securities and the risks of investing are clearly disclosed, the Committee argues that Interbanc became an equity security holder when it entered into the Securities Purchase Agreement with NALF. Even if the Court finds that Interbanc was not an equity security holder at that point, the Committee asserts that when Interbanc exercised its option to convert the Debentures into Restricted Stock, Interbanc became an equity security holder. The Committee notes that Interbanc did not loan money to NALF with the expectation that it would recover the principal plus interest; rather, Interbanc invested money in NALF expecting its investment to significantly increase in value. The Committee also points out that Interbanc did not assert a claim for the return of the $200,000.00 it loaned NALF plus interest while it held the Debentures. Interbanc converted those Debentures and sold the Restricted Stock before asserting such a claim. Furthermore, Interbanc's damages claim for breach of the Debentures was not made until after Interbanc converted the Debentures to Restricted Stock. This damages claim, according to the Committee, should have been made "while Interbanc still owned the debentures, i.e., before it voluntarily converted the debentures into stock."3 Finally, the Committee argues that Interbanc's claim that NALF breached its obligation to register the Restricted Stock in a timely fashion is a claim that "directly concerns a stock transaction, and is not merely a claim on a debt." "Because Interbanc has alleged a defect in the...
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