IN RE SECURITIES GROUP 1980
| Decision Date | 20 February 1991 |
| Docket Number | 87-303 to 87-305.,Adv. No. 85-214,84-431 and 84-433,84-428,Bankruptcy No. 84-431-BK-J-GP |
| Citation | 124 BR 875 |
| Parties | In re The SECURITIES GROUP 1980, Debtor. Louis LOWIN, Trustee of the Estate of The Securities Group 1980, Plaintiff, v. DAYTON SECURITIES ASSOCIATES, Defendant and Third Party Plaintiff, v. Kenneth T. KALTMAN, et al., Third Party Defendants. |
| Court | U.S. Bankruptcy Court — Middle District of Florida |
COPYRIGHT MATERIAL OMITTED
George E. Ridge, Jacksonville, Fla., for post-confirmation administrator, Louis Lowin.
Robert L. Young, Orlando, Fla., for Aircraft Investment Associates, et al.
Ira Rubin, Dayton, Ohio, for Dayton Securities Associates.
Roy Babitt, Phillip A. Kantor, co-counsel, New York City, for PM Associates, et al.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
1. TSG, TMG and TSG80 were three New York limited partnerships (sometimes referred to herein as the "Limited Partnerships") that were formed by Charles Agee Atkins. These Limited Partnerships were the general partners of The Securities Groups ("Groups"), a New York general partnership.
2. Groups began its operations as a joint operating account which coordinated the activities of TSG and TMG. After TSG80 was formed, its activities were also coordinated through Groups.
3. Among other things, Groups was a broker-dealer which invested in United States government securities. Under tax laws in effect until the early 1980s, income from these investments was deferred from year to year. Thus, TSG, TMG and TSG80 () were not required to recognize this income on an annual basis, although they were allowed to take immediate advantage of certain tax benefits arising from Groups' investments.
4. The defendants herein purchased interests in the Limited Partnerships by making initial capital contributions ("Initial Capital Contributions") and agreeing to make additional capital contributions ("Additional Capital Contributions") to those Partnerships in varying amounts, thereby becoming limited partners of TSG, TMG and TSG80. As such they took certain tax advantages and these tax advantages were their primary reason for investing in TSG, TMG and TSG80.
5. Pursuant to the Limited Partnership Agreements signed by the defendants and the Certificates of Limited Partnership filed with the County Clerk of New York County, New York, the defendants agreed to be personally and severally liable for Additional Capital Contributions to the Limited Partnerships in an amount equal to 300% of their Initial Capital Contributions. These Additional Capital Contributions were to be paid within 30 days after receiving a written capital call from the Limited Partnerships.1
6. Mr. Atkins (who was the founder of Groups and the Limited Partnerships) testified about the tax significance of the Additional Capital Contribution liability assumed by each limited partner. He noted that "an individual would commit $150,000 in cash as an investment and subsequently have an obligation to the firm for three times that amount, potentially, and therefore, the limited partner would potentially be able to take tax losses four times the amount of his original cash investment with the firm."
7. Similarly, Ira Kevelson (an expert witness called on behalf of certain defendants) testified that ordinarily, a limited partner's tax write-off could only be equal to the amount of his investment. However, if the limited partner was potentially liable for a loss in the amount of three times his actual investment, he was able to take a tax write-off equal to four times his investment.
8. The importance of the defendants' responsibility to pay Additional Capital Contributions is further reflected by the following statement which appeared in Groups' 1980 Annual Report:
The General Partners\' i.e., TMG, TSG and TSG80 net subscribed capital includes callable capital commitments of $173,657,000 which represent contractual obligations of TMG, TSG and TSG80 limited partners to contribute additional capital to satisfy recourse debt obligations of TMG, TSG and TSG80. The General Partners i.e., TMG, TSG and TSG80 are jointly and severally liable for all obligations of Groups.
9. After the defendants purchased their interests in the Limited Partnerships by making Initial Capital Contributions, Groups (and by extension, its general partners) became indebted to various creditors.
11. The "attached form of Consent" referred to in Mr. Atkins' letter expanded the "Business and Purposes" sections of the Limited Partnership Agreements to include "any and all business activities as may be permitted by law. . . ." A sufficient number of limited partners executed the Consent forms to allow for the amendment of the Limited Partnership Agreements.2
12. Prior to the autumn of 1982, it became apparent that changes in the tax laws would no longer permit broker-dealers such as Groups to continue to defer income from year to year as had previously been the practice. These changes would translate into adverse tax consequences for the defendants who, as limited partners in the Limited Partnerships, would now be required to recognize previously unrecognized income attributable to TSG, TMG and TSG80 as the general partners of Groups. This income recognition would obligate the limited partners to pay taxes on that income without receiving equivalent cash distributions from the Limited Partnerships in an amount adequate to pay the taxes.
13. In connection with the potential tax liabilities faced by the defendants, Mr. Atkins and others eventually decided to create a new partnership which would purchase the limited partnership interests of the defendants. This new partnership was formed under New York law in November 1982 and it was known as TSG Partners.
14. On November 15, 1982, TSG Partners offered to purchase all of the interests of the limited partners of TSG, TMG and TSG80 for an amount equal to 105% of the net asset value of the Limited Partnerships as of September 30, 1982 and the assumption of the limited partners' responsibility for Additional Capital Contributions "to satisfy recourse obligations of TSG, TMG and TSG80 of approximately $270,000,000." However, the defendants were specifically advised that if they accepted the tender offer they would still be responsible for the liabilities and obligations of the Limited Partnerships: "A Seller will, however, remain liable to creditors of his Partnership and The Securities Groups as described in the next paragraph."
16. The tender offer also disclosed that as of September 30, 1982, TSG Partners had a net worth of approximately $28,750,000 and
17. TSG Partners' tender offer also warned: "LIMITED PARTNERS WHO ACCEPT THIS OFFER MAY CONTINUE TO BE LIABLE FOR CERTAIN OBLIGATIONS OF THEIR PARTNERSHIPS UNDER CERTAIN CIRCUMSTANCES." In this regard, Allan Rinzler, who was the managing partner of defendants Dayton Securities Associates, Dayton Monetary Associates and Dayton Brokerage Associates, testified:
18. On January 3, 1983, the defendants and TSG Partners consummated the tender offer transaction. TSG Partners issued them appropriate promissory notes. On April 1, 1983, TSG Partners paid the defendants five percent of the amounts owed on these promissory notes.3
19. At the time that the defendants sold their interests to TSG Partners (thereby receiving a return of their Initial Capital Contribution), many of the creditors of Groups and the Limited Partnerships were unpaid. These creditors remain unpaid today.
20. In 1984, TSG, TMG, and TSG80 filed Petitions in this court under Chapter 11 of the Bankruptcy Code. Louis Lowin was later appointed as the Trustee of these estates.
21. On August 15, 1985, Louis Lowin (in his former capacity as Chapter 11 Trustee for the bankrupt estates) made a written call on all limited partners, as required by the Limited Partnership Agreements, for Additional Capital Contributions. The limited partners refused to honor this call.
22. Based in part upon the limited partners' failure to comply with the August...
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