In re OPM Leasing Services
| Decision Date | 19 June 1986 |
| Docket Number | Bankruptcy No. 81 B 10533,81 B 11203,81 B 11749,81 B 11850 and 83 B 10776 (BRL). |
| Citation | 61 BR 596 |
| Parties | In re O.P.M. LEASING SERVICES, Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Zalkin, Rodin & Goodman, New York City by Andrew Gottfried, Menachem O. Zelmanovitz, Neil E. Herman, for trustee.
Davis & Hockenberg, Des Moines, Iowa by Mark Walz, for Lockheed.
DECISION AND ORDER DENYING LOCKHEED'S CLAIM FOR ATTORNEYS' FEES AND EXPENSES
Lockheed Corporation ("Lockheed"), in Claim Number M52100, seeks $195,463.09 in attorneys' fees and expenses from the debtor, O.P.M. Leasing Services, Inc. ("O.P.M."). Lockheed incurred these fees defending a suit in Iowa brought by a third party, Steel Warehousing Inc. ("Steel"). Steel had instituted that suit to quiet title to certain computer equipment it purchased from O.P.M. and to which Lockheed also claimed title. Lockheed argues that because O.P.M. allegedly breached express and implied warranties of title under the New York Uniform Commercial Code ("N.Y.U.C.C.") and general contract principles it is entitled to recovery. James P. Hassett, the Trustee for O.P.M. ("Trustee"), objects to Lockheed's claim and contends that it should be expunged.
O.P.M. is in the business of buying, selling and leasing new and used computers and related equipment. On March 11, 1981, it filed its Chapter 11 petition for reorganization under the Bankruptcy Reform Act of 1978 ("Code"). The O.P.M. filing was "precipitated by discovery and newspaper reports that O.P.M. had served as the vehicle for a massive lease fraud exceeding $100 million." Report of the Trustee Concerning Fraud and Other Misconduct in the Management of the Affairs of the Debtor at 2 (1983). The principals of O.P.M. were convicted and sentenced to lengthy prison terms as a result of their participation in the fraud and other misconduct in the management of O.P.M.'s affairs.
On March 24, 1981, this court directed the United States Trustee to appoint a trustee for O.P.M. Three days later, James P. Hassett was appointed Trustee. He assumed the responsibility of directing the business operations of O.P.M., conducting an investigation of O.P.M.'s past financial affairs, and pursuing various claims available to the O.P.M. estate; he has worked towards insuring the largest recovery for all creditors and has reviewed the claims filed in these proceedings. The Trustee has objected to the claim for fees and expenses filed by Lockheed. Because the Lockheed-O.P.M. history is relevant to the present inquiry, it is set forth in detail.
On June 28, 1978, O.P.M. entered into a Master Lease with Lockheed, and agreed to lease certain computer equipment to Lockheed. As was typical in all O.P.M. transactions, the parties agreed to supplement the Master Lease with various Equipment Schedules ("Schedules") which described the precise equipment to be leased. See In re O.P.M. Leasing Services, Inc. (Hassett v. Revlon), 23 B.R. 104, 108 (Bankr.S.D.N. Y.1982) (). Schedule No. 7 ("Schedule 7") was signed by Lockheed and O.P.M. on September 18, 1980 and involved the lease of certain International Business Machines ("IBM") equipment.
Although the Master Lease and Schedule 7 contemplated O.P.M. being the lessor and Lockheed the lessee of the equipment, intermediate transactions were required to move the parties into this alignment. Lockheed, not O.P.M., was to purchase the equipment directly from IBM and then resell it to O.P.M. In turn, O.P.M. would lease the equipment back to Lockheed in a typical sale leaseback transaction. The sale leaseback aspect of the transaction is reflected in an October 17, 1980 letter from O.P.M. requesting Lockheed to execute and return a Lockheed-O.P.M. purchase agreement and a bill of sale in which Lockheed warranted that the equipment was free and clear of all liens. Paragraph 2 of the letter states: "Kindly have this Purchase Agreement executed and returned to . . . O.P.M. in escrow so that we can complete the sale leaseback and equity transaction on October 27, 1980" (emphasis added).
On October 21,1 1980, Lockheed completed the initial step in the contemplated transaction by purchasing the equipment from IBM ("IBM-Lockheed purchase agreement") for $2,365,000. Lockheed agreed to pay $591,250 as a cash down payment upon installation of the equipment, and monthly installments of $54,290, inclusive of finance charges until IBM was paid in full. In order to secure payment of the purchase price, IBM retained a purchase money security interest in the equipment ("IBM lien").
On October 27, 1980, the Lockheed-O.P.M. purchase agreement was also signed by O.P.M., and the agreement with the attached bill of sale was formally executed. O.P.M. agreed to purchase the equipment for $2,365,000, the same amount Lockheed had agreed to pay. The payment terms were identical to those in the Lockheed-IBM transaction and O.P.M. assumed the obligation to pay the cash down payment upon installation of the equipment and the monthly payments thereafter. With the execution of these documents, the groundwork was laid to achieve the parties' primary objective, the leaseback of the equipment by O.P.M. to Lockheed pursuant to the Master Lease and Schedule 7.
As a result of these transactions, O.P.M. held title to the equipment which it leased to Lockheed as lessee. However, O.P.M.'s title was not the clear title represented in the various documents because it was subject to the IBM lien which had attached when Lockheed initially purchased the equipment from IBM. The IBM lien is not evidenced in any of the Lockheed-O.P.M. documents because Lockheed executed an unconditional bill of sale, which is attached as Exhibit B to the Lockheed-OPM purchase agreement. In this bill of sale, Lockheed states:
Seller Lockheed hereby expressly represents and warrants that on the date hereof (i) Lockheed has good and marketable title to the Equipment, free and clear of any liens, claims and encumbrances whatsoever and Lockheed will defend said title; (ii) Lockheed has conveyed to Buyer O.P.M., and O.P.M. has acquired, good and marketable title to the Equipment, free and clear of any liens, claims and encumbrances whatsoever; (iii) Lockheed has full right, power and authority to convey the equipment, to Buyer; and (iv) the representations and warranties of Lockheed contained in Section 5(a) of the Purchase Agreement, dated October 27, 1980 (the "Purchase Agreement") between Lockheed and O.P.M. are true, correct and complete as of the date hereof.
(emphasis added). On October 27, 1980 when all of these documents were executed and were released from escrow, the IBM lien was valid and Lockheed knew or should have known that the bill of sale was inaccurate.
Although apparently unknown to Lockheed, but not in violation of any of the lease provisions, O.P.M. sold the equipment, subject both to the Lockheed lease and to the IBM lien, to Starfire Leasing Corporation ("Starfire") on October 27, 1980 for $2,476,750. Starfire contemporaneously sold the equipment, subject also to the Lockheed lease and the IBM lien, for $2,483,250 to Steel, which purchased the equipment to obtain its tax benefits. Steel in turn leased the equipment back to O.P.M. on October 27, 1980. Steel thus held title to the equipment and leased it to O.P.M. subject to the aforementioned interests. Lockheed was the ultimate lessee of the equipment.
After the equipment was installed pursuant to the terms of the Lockheed-IBM purchase agreement, Lockheed paid the required down payment. However, O.P.M. never reimbursed Lockheed and never made any of the required monthly payments to IBM. On March 6, 1981, Lockheed wrote to O.P.M., stating that O.P.M. had breached the Lockheed-O.P.M. purchase agreement, and that since Lockheed had complied with all conditions precedent to payment by O.P.M., Lockheed was excused from any further performance under the Lockheed-O.P.M. agreements. By sending this letter and deeming its agreements with O.P.M. terminated, Lockheed considered itself excused from Section 11 of the Master Lease. That section, known as the "hell and high water" clause, required Lockheed to perform regardless of any breach by O.P.M.2
Lockheed "mitigated" its damages by entering into a separate agreement with IBM for the purchase of the equipment on an installment payment basis. Pursuant to this new arrangement with IBM, Lockheed paid IBM in full. The equipment remained in Lockheed's possession and Lockheed believed itself to be the title holder.
Nevertheless, pursuant to the chain of documents signed by the parties on October 27, 1980, Steel had a colorable claim as title holder of the equipment, and commenced an action against Lockheed and other defendants in the United States District Court for the Southern District of Iowa ("Iowa Action") seeking, inter alia, to quiet title to the equipment. Steel sought only to protect the title and accompanying tax benefits that it believed it had purchased from Starfire; it did not seek possession of the equipment. In its answer to Steel's complaint, Lockheed asserted that it had title to the equipment, subject to the IBM lien, and that Steel had no interest whatsoever in the equipment.
After three years of discovery and pretrial litigation, Lockheed settled its disputes with Steel for what it termed a "sizeable sum." Transcript, Jan. 30, 1986, at 18. The issues raised in the Iowa suit, specifically the issue of title to the equipment, were never determined on the merits. Lockheed spent $185,463.09 in legal fees and approximately $10,000.00 in out-of-pocket expenditures for a total of $195,463.09 defending the Iowa Action. Lockheed, in filing a claim against the O.P.M. estate, now seeks to recover these fees and expenses.
Lockheed presents a panoply of arguments in support of its claim for...
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