In re OPM Leasing Services, Inc.
| Decision Date | 10 September 1982 |
| Docket Number | Adv. No. 82-5281A.,Bankruptcy No. 81 B 10533 |
| Parties | In re O.P.M. LEASING SERVICES, INC., Debtor. James P. HASSETT, as Chapter 11 Trustee of O.P.M. Leasing Services, Inc., Plaintiff, v. REVLON, INC., Defendant. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
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Zalkin, Rodin & Goodman by Richard S. Toder, Menachem O. Zelmanovitz, Steven D. Tick, New York City, for James P. Hassett, as trustee of O.P.M. Leasing Services, Inc.
Paul, Weiss, Rifkind, Wharton & Garrison by Helen Davis Chaitman, New York City, for Revlon, Inc.
DECISION ON REVLON, INC.'S MOTION FOR SUMMARY JUDGMENT AND ON THE O.P.M. TRUSTEE'S CROSS-MOTION FOR SUMMARY JUDGMENT
This matter is before the Court on the Motion of Revlon, Inc. ("Revlon") for Summary Judgment pursuant to Bankruptcy Rule 7561 and Rule 56 of the Federal Rules of Civil Procedure to dismiss the claim of the trustee of O.P.M. Leasing Services, Inc. ("O.P.M.") ("the Trustee"). Revlon also seeks summary judgment on its counterclaims against the Trustee. The Trustee has crossmoved herein for summary judgment dismissing Revlon's counterclaims and for related relief.
The instant adversary proceeding within this Chapter 11 case concerns two leases of computer equipment by means of Equipment Schedule Nos. 3 and 4 by O.P.M., the debtor herein, to defendant Revlon.
On March 11, 1981, O.P.M. filed a voluntary petition for reorganization in this Court under Chapter 11 of the Bankruptcy Code ("the Code"). On March 23, 1981, this Court ordered the appointment of a trustee, and on March 27, 1981, the Trustee was so appointed. O.P.M. is engaged in the business of buying, selling and leasing new and used computers and related equipment. On or about June 29, 1978, Revlon and O.P.M. entered into a Master Agreement of Lease ("the Master Lease") of certain computer equipment as set forth from time to time in Equipment Schedules ("the Schedules"). Pursuant to the Master Lease, each Schedule incorporates all the terms and conditions of the Master Lease unless a particular schedule declares otherwise. Pursuant to Master Lease Section 1, each Schedule constitutes a distinct and separate agreement of the parties to be construed under New York law.
Under the Master Lease, each Schedule is to be a net lease wherein, besides the monthly rental payments, the lessee is obligated to preserve the physical condition of the leased equipment and to return the equipment at the expiration of the lease term in the same condition as when the lessee received it, less normal wear and tear. Also, lessee must pay or reimburse to lessor all applicable taxes and fees, maintain insurance on the leased equipment, and pay all maintenance expenses. Master Lease Section 6.1 also expressly provides that the relationship between O.P.M. and Revlon is that of lessor and lessee.
Obligations on the lessor's part pursuant to the Master Lease include: (1) its obligation pursuant to Section 8 to pay for the cost of returning the equipment at the expiration of the lease term; (2) its obligation pursuant to Section 14 to defend Revlon at its own expense against any action or claim against Revlon for infringement of any patent or copyright based on any of the equipment and to indemnify Revlon from any such claim; and (3) its obligation if any such patent or copyright claim is held to be an infringement either to procure for Revlon the right to continue using the equipment, to modify the equipment to render it noninfringing, or to replace it with equally suitable equipment at the same rental terms.
Moreover, both parties maintain additional obligations pursuant to Section 7.2 of the Master Lease. Under this Section, lessee is obligated to enter into and maintain in force a supplier's standard maintenance contract for the maintenance of the leased equipment. However, if an equipment schedule so provides, lessee's rental payments may include an estimated monthly maintenance charge. In such cases, the lessors are obligated to make monthly maintenance payments directly to the Maintenance Provider for maintenance services. Should the actual monthly maintenance charge exceed the estimate, lessee is obligated to reimburse lessor for the difference. Conversely, should the estimate exceed the actual monthly maintenance charge, lessor is to reimburse Lessee for the difference. Section 7.2 of the Master Lease further provides that in the event lessor fails to pay a monthly maintenance charge (and fails to cure within sixty days), lessee has the right of reimbursement and may exercise an option to extend the lease term at a rental of one dollar per month for an additional 96 months less the number of months comprising such lease term. ("the Dollar Option")
On December 15, 1978, O.P.M. and Revlon entered into Equipment Schedule No. 3 for a term of 37 months expiring January 31, 1982. The rental payments for months 14 through 37, the final 24 months, included an estimated monthly maintenance charge of $3,350. Today, according to the Trustee, the Schedule 3 equipment is worth approximately $100,000 and in 1986, when the Dollar Option expires, the equipment will be virtually worthless. See Affidavit of Michael R. Seekings in Support of Trustee's Motion ¶ 8. Revlon does not contradict that this equipment has substantial value today and that it will be virtually worthless at the expiration of the Dollar Option.
O.P.M. assigned its right to receive the final 35 monthly rental payments under Schedule 3 to the Philadelphia Savings Fund Society ("PSFS") and simultaneously granted PSFS a first security interest in the Equipment. PSFS did not assume O.P.M.'s numerous obligations under this Schedule, as detailed supra. All the assigned rentals have been paid to PSFS and PSFS no longer has any interest in either the equipment or in Schedule 3.
On April 23, 1979, O.P.M. and Revlon entered into Equipment Schedule 4 for a lease term of 64 months. The rental payments for months 13 through 64 on this unexpired lease include an estimated monthly maintenance charge of $8,320. Equipment Schedule 4 paragraph 5 also provides that a maintenance default by lessor under Schedule 3 will constitute a maintenance default by lessor under Equipment Schedule 4. However, there is no provision in the Master Lease or in Schedule 3 or 4 deeming a maintenance default under Schedule 4 as such a default under Schedule 3.
Moreover, Revlon was granted a very limited right to assign Schedules 3 and 4 under Section 5.2 of the Master Lease. Section 5.2 provides:
Revlon never advised O.P.M. or the Trustee that it intended to assign Schedule 3 to any other entity.
By letter dated March 16, 1981, IBM ("the Maintenance Provider") advised Revlon that effective March 9, 1981, it had terminated the Maintenance Agreement covering the Schedule 3 and 4 equipment because of O.P.M.'s failure to pay monthly maintenance charges since November 1, 1980. The Trustee shortly after his appointment similarly failed to make such maintenance payments. Revlon then agreed to make monthly maintenance payments on the Schedule 3 and 4 equipment directly to I.B.M. In addition, Revlon made 24 monthly rental payments directly to O.P.M.'s assignee, PSFS, which payments included estimated maintenance charges.
Shortly after Revlon's direct assumption of the contract with the Maintenance Provider, Revlon purported to exercise its rights under the Dollar Option by complying with the conditions set forth in Master Lease Section 7.2 for its exercise. By letter dated March 27, 1981, Revlon notified O.P.M. of its maintenance default. O.P.M. failed to cure the default and by letter dated June 16, 1981, Revlon notified O.P.M. that it was exercising its rights under the Dollar Option with respect to Schedules 3. On or about December 23, 1981, Revlon sent a check for $60.00 to the Trustee as prepayment of the rentals for the ensuing 60 months under the Dollar Option. Revlon has refused to return the equipment to the Trustee and has not paid any other monies for it besides the $60.00 payment under the Dollar Option.
On February 19, 1982 the Trustee commenced this adversary proceeding seeking (i) the immediate turnover to him of the Schedule 3 equipment; (ii) the payment by Revlon to him of a reasonable rental for use of the Schedule 3 equipment for the period commencing January 31, 1982, the lease expiration date, until such equipment has been returned; and (iii) the recovery from Revlon of all damages and expenses incurred by the Trustee, including reasonable attorney's fees.
On March 22, 1982, Revlon served its Answer and Counterclaim generally denying the Trustee's right to the relief he seeks and seeking: (i) a declaration that it is entitled to continued possession of the equipment for the remaining 59 months at $1.00 per month; (ii) relief from the automatic stay in order to assign its lease of the equipment; (iii) a declaration that it has an equitable lien on the Schedule 3 and 4 equipment in an amount exceeding $140,000; and (iv) a declaration that it has an administrative claim and a lien on the equipment in an...
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