In re Osgood

• Citation: 203 BR 865
• Decision Date: 09 January 1997
• Docket Number: Adv. No. 96-1032.,Bankruptcy No. 93-18838-JNF
• Parties: In re Benjamin C. OSGOOD, Debtor. Jillian K. AYLWARD, Chapter 7 Trustee, Plaintiff, v. LAWRENCE SAVINGS BANK, Defendant.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

203 B.R. 865 (1997)

In re Benjamin C. OSGOOD, Debtor Jillian K. AYLWARD, Chapter 7 Trustee, Plaintiff, v. LAWRENCE SAVINGS BANK, Defendant.

Bankruptcy No. 93-18838-JNF, Adv. No. 96-1032.

United States Bankruptcy Court, D. Massachusetts.

January 9, 1997.

William R. Moorman, Craig & Macauley, Boston, MA, for Plaintiff/Trustee.

Sarah N.A. Camougis, Edwards & Angele, Boston, MA, for Defendant.

MEMORANDUM

JOAN N. FEENEY, Bankruptcy Judge.

I. INTRODUCTION

The matters before the Court are 1) the "Motion for Summary Judgment Submitted by Defendant Lawrence Savings Bank" and 2) the "Opposition of Jillian K. Aylward, Chapter 7 Trustee to Motion for Summary Judgment Submitted by Defendant Lawrence Savings Bank and Cross Motion for Summary Judgment." On September 19, 1996, the Court held a hearing and took the matter under advisement. On September 30, 1996, counsel for the defendant submitted a copy of a Mortgage, Security and Trust Agreement (the "Trust Agreement") dated December 1, 1985 which the Court requested at the hearing.

The material facts necessary to resolve these matters are not disputed. Based upon the "Joint Statement of Fact in Support of Motion for Summary Judgment" which the parties filed on July 24, 1996, and the Trust Agreement, the Court makes the following findings of fact and conclusions of law in accordance with Fed.R.Bankr.P. 7052.

II. FACTS

On October 1, 1993, an involuntary Chapter 7 petition was filed against Benjamin C. Osgood ("Osgood" or the "Debtor"). On December 21, 1993, an order for relief was entered. On Schedule B-Personal Property, the Debtor listed as an asset an industrial revenue bond (the "bond") with a current market value of $85,622.00. On Schedule D-Creditors Holding Secured Claims, the Debtor listed Lawrence Savings Bank (the "Bank") as a secured creditor. He described the debt owed to the Bank as an "Attachment/Restraining Order 5/5/93 Secured by IRB" in the amount of $132,687.00. According to his Statement of Financial Affairs, in 1993, the Debtor received income from the bond in the amount of $3,335.55. On August 31, 1995, the Bank filed an Amended Proof of Claim in the sum of $140,613.67. The Bank indicated that approximately $80,613.67 of its claim was unsecured and $60,000.00 was secured by "attachments on real estate/pers. property."

On January 19, 1996, the Trustee brought this adversary proceeding against the Bank, seeking (1) a declaratory judgment that the Bank has no interest in the bond or, alternatively, if the Bank holds a claim secured by the bond, its interest is not a secured claim pursuant to 11 U.S.C. § 506(a); (2) avoidance of any lien obtained by the Bank pursuant to 11 U.S.C. § 544(a); (3) recovery of any rights and interests transferred to the Bank pursuant to 11 U.S.C. § 550; and (4) disallowance of the Bank's claims pursuant to 11 U.S.C. § 502(d). On February 21, 1996, the Bank filed an Answer and Counterclaim. Through its counterclaim, the Bank sought the following relief: (1) a declaration that it holds a lien against the bond; (2) turnover of the bond as well as all principal and interest payments due under the bond; and (3) an accounting of principal and/or interest payments received by the Trustee.

The bond that is the subject of this adversary proceeding was one of three bonds issued on December 1, 1985 by the Town of North Andover, acting by and through its Industrial Development Financing Authority (the "Issuer"), as part of a $2,000,000 issue.¹ The bond purchased by the Debtor, numbered "R3" and in registered form, was in the face amount of $100,000. It was subordinated to a bond numbered "R1" which was issued on the same date to Union National Bank ("Union") in the face amount of $1,800,000. Principal and interest were to be paid monthly to the Debtor for twenty years. Under the Trust Agreement, Union became trustee of several trusts created for the payment of the bonds. State Street Bank and Trust Company ("State Street Bank") succeeded Union as trustee.

In 1988, the Debtor and other borrowers brought an action against the Bank in Massachusetts Superior Court, alleging lender liability claims in connection with certain promissory notes given to the Bank. The Bank counterclaimed and prevailed, obtaining summary judgment on all counts in 1991. After conducting foreclosure sales on the properties securing the promissory notes, the Bank, on August 20, 1992, filed an Amended and Supplemental Counterclaim to collect deficiencies. Through counts three and four, it sought judgment against the Debtor in the amount of $132,687.67.

Approximately eight months later, on April 13, 1993, the Bank filed in the state court action a pleading entitled "Motion to Reach and Apply by Preliminary Injunction in the Form of an Equitable Attachment" (the "Motion"). In paragraph two of the Motion, the Bank citing M.G.L. c. 214, § 3(6), stated that it "is a creditor of the defendant Osgood, and as such may reach and apply funds of the defendant in payment of the debt" (emphasis in original). The Bank attached to its Motion an Affidavit of James D. McGinley (the "Affidavit"), which listed various ownership interests of the Debtor, including the bond. The Affidavit stated that "the Bank, without approval of its Motion . . . has no security for any judgment that it may obtain against" the Debtor. On May 5, 1993, the Superior Court entered a Preliminary Injunction Order (the "injunction"), which provided in part the following:

. . . the Bank\'s Motion to Reach and Apply by Preliminary Injunction in the Form of an Equitable Attachment is ALLOWED and its sic hereby ORDERED:

(a) that defendant Benjamin C. Osgood, his agents, employees, successors and assigns are restrained and enjoined from selling, assigning, transferring, alienating, conveying, mortgaging, hypothecating, or otherwise encumbering or disposing of any rights he has to payments under his beneficial interest in the Bianchi Realty Trust, up to the value of $132,687.67.

(b) that defendant Benjamin C. Osgood, his agents, employees, successors and assigns are restrained and enjoined from selling, assigning, transferring, alienating, conveying, mortgaging, hypothecating, or otherwise encumbering or disposing of any rights he has under a certain Industrial Revenue Bond.

The Bank did not obtain a judgment with respect to its Amended and Supplemental Counterclaim for collection of deficiencies because the state court proceedings were stayed upon the filing of the involuntary petition against the Debtor.

The Bank never took possession of the bond.² In fact, State Street Bank continued to make principal and interest payments to the Debtor. It has made post-petition principal and interest payments to the Chapter 7 Trustee.

III. THE POSITIONS OF THE PARTIES

A. The Chapter 7 Trustee

The Trustee first argues that the bond is a certificated security within the meaning of Article 8 of the Uniform Commercial Code. According to the Trustee, in order for the Bank to have attached the Debtor's interest in the bond, it would have been required to seize possession of the bond instrument pursuant to M.G.L. c. 106, § 8-317(1).

Alternatively, the Trustee contends that the injunction that the Bank obtained was insufficient to constitute an equitable lien against the bond because the injunction restrained only the Debtor. In the Trustee's view, in addition to seeking a restraining order, the Bank should have commenced a separate civil action to reach and apply against State Street Bank in order to obtain the right to payment under the bond. At the September 19th hearing, counsel to the Trustee argued that an injunction alone might have been sufficient to give rise to an equitable lien if the order enjoined State Street Bank, the trustee, from paying the Debtor.

The Trustee further argues that, even assuming that the Bank acquired an equitable lien against the bond, she can avoid its lien pursuant to 11 U.S.C. § 544,³ unless the Bank perfected its lien. The Trustee contends that, because the bond is a negotiable instrument, the Bank could perfect its lien only by taking possession of the bond. Therefore, because the Bank did not take possession of the bond, the Trustee's status as a hypothetical lien creditor gives her priority over the Bank's unperfected security interest.

B. The Bank

The Bank takes the position that the bond is neither "property of the estate" nor "an obligation of the issuer" and, therefore, does not constitute a certificated security as that term is defined by M.G.L. c. 106, § 8-102(1)(a). Thus, according to the Bank, the requirement under M.G.L. c. 106, § 8-317 that it take possession of the bond in order to acquire a valid attachment is inapplicable.

Moreover, the Bank contends that, despite its failure to commence an action to reach and apply, "the entry of the injunction against the Debtor equitably charged the bond, and all rights incident thereto, with a judicial lien in favor of the Bank." In its memorandum filed on September 13, 1996, the Bank stated that it "is not relying on a reach and apply prayer in its Counterclaim . . . to sustain its claim of an equitable lien" against the bond. According to the Bank, a reach and apply action is not the exclusive method for the creation of an equitable lien. It maintains that the injunction was sufficient to give rise to a valid lien.

With respect to the Trustee's avoidance claim, the Bank argues that its alleged lien is not a consensual security interest because it was not created by contract. Thus, the Bank was not required to perfect its lien by taking possession of the bond. The Bank maintains that judicial liens such as the one it obtained are not subject to perfection requirements.

IV. DISCUSSION

The Court must determine whether, under Massachusetts law, the injunction obtained by the Bank against the Debtor gave rise to an equitable lien against the bond. If so, then the Court must consider whether the Trustee is entitled to...