In re OPM Leasing Services, Inc., Reorganization No. 81 B 10533

• Decision Date: 14 July 1982
• Docket Number: Adv. No. 81-5524A.,Reorganization No. 81 B 10533
• Citation: 21 BR 993
• Parties: In re O.P.M. LEASING SERVICES, INC., Debtor. STATE OF WEST VIRGINIA, DEPARTMENT OF FINANCE AND ADMINISTRATION, Plaintiff, v. James P. HASSETT, as Reorganization Trustee of O.P.M. Leasing Services, O.P.M. Leasing Services, Inc., La Salle National Bank, International Business Machines Corporation, Computer Equipment Services Corporation, Formerly Known as Electronic Memories and Magnetics Corporation, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

21 B.R. 993 (1982)

In re O.P.M. LEASING SERVICES, INC., Debtor.

STATE OF WEST VIRGINIA, DEPARTMENT OF FINANCE AND ADMINISTRATION, Plaintiff, v. James P. HASSETT, as Reorganization Trustee of O.P.M. Leasing Services, O.P.M. Leasing Services, Inc., La Salle National Bank, International Business Machines Corporation, Computer Equipment Services Corporation, Formerly Known as Electronic Memories and Magnetics Corporation, Defendants.

Reorganization No. 81 B 10533, Adv. No. 81-5524A.

United States Bankruptcy Court, S.D. New York.

July 14, 1982.

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Glass & Howard, New York City, for State of West Virginia, Dept. of Finance and Administration; Robert Howard, New York City, of counsel.

Zalkin, Rodin & Goodman, New York City, for James P. Hassett, as Chapter 11 Trustee of O.P.M. Leasing Services, Inc.; Richard Toder, New York City, of counsel.

Milbank, Tweed, Hadley & McCloy, New York City, for LaSalle Nat. Bank; John Gellene, New York City, of counsel.

Chauncey H. Browning, Atty. Gen. for State of W. Va., for plaintiff; E. Wayne Basconi, Asst. Atty. Gen., Charleston, W. Va., of counsel.

DECISION ON LASALLE NATIONAL BANK'S MOTION FOR SUMMARY JUDGMENT AND FOR JUDGMENT ON LA SALLE'S COUNTERCLAIM

BURTON R. LIFLAND, Bankruptcy Judge.

This matter is before the Court on the Motion of LaSalle National Bank ("LaSalle") for Summary Judgment pursuant to Bankruptcy Rule 756¹ and Rule 56 of the Federal Rules of Civil Procedure to dismiss the claim of the State of West Virginia, Department of Finance and Administration ("West Virginia"), and to recover judgment as to liability on LaSalle's counterclaim for accelerated rents.

I. STATEMENT OF FACTS

The instant adversary proceeding within this Chapter 11 case concerns a set of 22 leases of computer equipment (the "Equipment Schedules") by O.P.M. Leasing Services, Inc. ("OPM"), the debtor herein, to plaintiff West Virginia. Pursuant to three security agreements (the "Security Agreements") and three agreements captioned "Consent and Agreement", 19 of these leases are now pledged to defendant LaSalle as security for OPM's indebtedness under three notes held by LaSalle.

West Virginia commenced this adversary proceeding on August 19, 1981 against James P. Hassett as Reorganization Trustee of OPM ("the Trustee"), OPM, LaSalle, International Business Machines Corporation ("IBM") and Computer Equipment Services Corporation ("CES"). The complaint seeks a turnover of $107,252.36, plus accrued interest, from the OPM estate to IBM and CES ("the Maintenance Providers") for maintenance payments which OPM is alleged to have failed to provide, a declaration that the Equipment Schedules have been terminated and an order of the Bankruptcy Court enjoining the Maintenance Providers from terminating maintenance on the hardware pending resolution of the adversary proceeding.²

The basis which West Virginia has asserted for this relief is OPM's alleged breach of the Equipment Schedules in its failure to make monthly payments of maintenance fees directly to defendants IBM and CES on 20 of the 22 Equipment Schedules (the "Maintenance Providers"). According to West Virginia's pleadings, this breach by OPM terminates LaSalle's rights as assignee to receive lease payments. Alternatively, West Virginia asserts in its pleadings that LaSalle's purported knowledge of OPM's breach prevents it from claiming that the Equipment Schedules have not terminated.

LaSalle's answer denies all of the material allegations of the complaint and alleges as an affirmative defense that the terms of the Consent and Agreements executed by West Virginia bar West Virginia's claim. LaSalle also asserts in a counterclaim that beginning in March, 1981, West Virginia failed to make the full amount of lease payments under the Equipment Schedules assigned to LaSalle. LaSalle gave written notice of West Virginia's default and of its election to accelerate the balance of assigned lease payments pursuant to Section 12.2 of the Master Lease. Accordingly, LaSalle seeks judgment herein on its counterclaim in the amount of $2,116,388.30, although LaSalle's present motion seeks judgment on liability only.

The reply of West Virginia to LaSalle's counterclaim denies all its material allegations and asserts nine affirmative defenses. These defenses include sovereign immunity under the Tenth and Eleventh Amendments and under West Virginia law, waiver by LaSalle of its right to accelerate rent payments, full payment of all rentals due to LaSalle and that LaSalle is bound by its assignor's default in making maintenance payments.

The Trustee has also contemporaneously moved to reject the 19 leases which were assigned to LaSalle.³ LaSalle opposes this motion to reject based on its concern that its security interest in the lease payments will not be adequately protected if West Virginia's absolute and unconditional promise to pay rents is not fully enforced.

The Agreements Governing the Transactions at Issue

The rights and duties of each of the three parties to the computer leases at issue herein are specified in the Master Lease as well as in the Equipment Schedules, the Security Agreements and the Consents and Agreements.

West Virginia, as lessee, and OPM, as lessor, are parties to the Master Lease dated March 28, 1980. Each Equipment Schedule incorporates all of the terms and conditions of the Master Lease. The Master Lease and each Equipment Schedule are to be construed in accordance with New York law.

Section 5.3 of the Master Lease between OPM and West Virginia contains detailed provisions regarding assignments of Equipment Schedules by OPM. Section 5.3(ii) provides that OPM's "assignee shall not be obligated to perform any of the obligations of (OPM) under any Equipment Schedule other than OPM's obligation not to take any action to disturb Lessee's quiet and peaceful possession of the Equipment." In Section 5.3(iii) the parties agree that "(l)essee's obligation to pay directly to such assignee the amounts due from lessee under any Equipment Schedule . . . shall be absolutely unconditional and shall be payable whether or not any Equipment Schedule is terminated by operation of law, any act of the parties or otherwise." (emphasis added) ("the hell or high water clause"). In Section 5.3(iv), OPM and West Virginia agreed that West Virginia is to pay all amounts due under any Equipment Schedule to OPM's assignee "notwithstanding any defense, offset or counterclaim whatever whether by reason of breach of such Equipment Schedule or otherwise which it may or might now or hereafter have as against Lessor (Lessee reserving its right to have recourse directly against Lessor on account of any such counterclaim or offset)." ("the waiver of defenses clause"). Section 14 of the Master Lease provides that the lessee's unconditional obligation to an assignee continues "until all amounts . . . shall have been paid in full."

Each Equipment Schedule obligates OPM to reimburse West Virginia for monthly maintenance charges actually paid by West Virginia under West Virginia's separate maintenance agreements with the Maintenance Providers for the leased equipment. However, Paragraph 4(a) of each Equipment Schedule provides that OPM's obligation to pay for maintenance of the equipment leased to lessee "shall in (no) manner diminish, impair or otherwise affect any of Lessee's obligations under this Equipment Schedule, including, without limitation, the payment of all monthly rental payments . . ." Thus, by the terms of these Schedules, West Virginia specifically agreed that any breach of OPM's maintenance obligations shall not affect West Virginia's duty to make monthly lease payments.

The three Security Agreements, identical in form, assign as security to LaSalle OPM's interest in 19 of OPM's 22 Equipment Schedules.⁴ Each Security Agreement provides for the assignment of all of West Virginia's monthly lease payments to LaSalle.⁵ According to these Security Agreements, LaSalle may demand payment or delivery of and shall receive and collect all money under the assigned Equipment Schedules and apply the funds to OPM's indebtedness. Furthermore, according to Section 1.08 of these Security Agreements, upon a default by West Virginia under the Master Lease, LaSalle is entitled to exercise all of OPM's rights under the assigned Equipment Schedules, but is not thereby to assume any of OPM's obligations to West Virginia.

In each Consent and Agreement, West Virginia acknowledges and consents to OPM's assignment of Equipment Schedules to LaSalle. West Virginia also agrees therein to make all monthly lease payments to LaSalle "without abatement, reduction, counterclaim or offset . . . as a result of any breach of any obligation of OPM." See Affidavit of Ray H. Camp in support of LaSalle's Summary Judgment Motion ("Camp Affidavit"), Exhibits 9, 10 and 11 at 2.

In addition, opinions from the office of the highest legal officer of West Virginia as to the enforceability of the Equipment Schedules were provided on two occasions. The Deputy Attorney General wrote that the Equipment Schedules and Consents and Agreements each constituted "a legal, valid and binding instrument enforceable in accordance with its terms against (West Virginia)". He qualified this opinion only by asserting: "My opinion is qualified to the extent that the remedies available to enforce your rights under the Transactional Documents may be limited by bankruptcy, insolvency and other laws respecting creditors' rights and remedies generally." See Camp Affidavit, Exhibit 5, at 3, Exhibit 7 at 13.

West Virginia concedes having made no monthly lease payments during March, April, May and June 1981. Following these four successive months of default, on July 3, 1981, LaSalle gave West Virginia written notice of its default and of LaSalle's election to accelerate the balance of lease payments. It was not until after...