In re Singer Products Co., Inc.
| Decision Date | 08 August 1989 |
| Docket Number | Adv. No. 187-0060.,Bankruptcy No. 186-61677 to 186-61679 |
| Citation | 102 BR 912 |
| Parties | In re SINGER PRODUCTS COMPANY, INC., Guiterman Co., Inc., and Cinefot Overseas Corp., Debtors. SINGER PRODUCTS COMPANY, INC., as Debtor-in-Possession, Plaintiff, v. FIRST AMERICAN BANK OF NEW YORK, Defendant. CHEMICAL BANK, Third Party Plaintiff-Intervenor, v. FIRST AMERICAN BANK OF NEW YORK, Third Party Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of New York |
COPYRIGHT MATERIAL OMITTED
Salomon, Green & Ostrow by Chester B. Salomon and Nicholas Kajon, and Morgan, Lewis & Bockius by Gerald Freedman, New York City, for debtors.
Zalkin, Rodin & Goodman by Andrew D. Gottfried and Neil E. Herman, New York City, for Chemical Bank.
Dechert, Price & Rhoads by Paul F. Helfer and Karen G. Turner, New York City, for First American Bank of New York.
Rosenberg, Rosenberg & Koral by Louis Rosenberg, Brooklyn, N.Y., for Creditors' Committee.
DECISION
For many years prior to the filing of this case on August 27, 1986, Singer and Chemical Bank enjoyed a healthy banking relationship. Chemical was both depository bank and lender to Singer and as of the filing date Singer was indebted to Chemical in excess of $3,000,000, including contingent liabilities. These obligations were secured by, inter alia, all of Singer's present and future personal property, including accounts receivable, inventory, contract rights, documents, instrument, general intangibles and proceeds.
On or about March 11, 1986 Singer obtained two lines of credit from First American Bank of New York ("FABNY"); one denominated "secured" in the amount of $4 million secured by "documentary collection items", and one denominated as "unsecured" in the amount of $1 million.
In setting up the unsecured line, Singer executed FABNY'S printed boiler plate security agreement which sought to cross collateralize all of Singer's obligations by defining the obligation secured thereby as any obligation whatsoever owed by Singer to FABNY.
This cross-collateralization provision was never used by FABNY until shortly prior to Singer's filing when FABNY first discovered Singer's financial difficulties. FABNY maintains that the cross-collateralization agreement was intended to be operative from its inception. Singer maintains that it was never intended to become operative.
This decision addresses the scope of FABNY's security, the manner by which the "documentary collection" proceeds were generated, the priorities which arose incidental thereto, the apparently conflicting priorities between Chemical and FABNY, and the extent to which 11 U.S.C. § 547 (Preferences) impacts upon FABNY's unilateral allocation of these proceeds among both lines of credit.
On August 27, 1986 the debtors, Singer Products Company, Inc. and its subsidiaries Guiterman Co., Inc., and Cinefot Overseas Corp. (hereinafter "Singer"), filed their respective Chapter 11 petitions in bankruptcy. On March 4, 1987, Singer initiated this adversary proceeding by filing a complaint against FABNY, asserting claims under sections 542, 547 and 553 of the Bankruptcy Code (hereinafter "Code").
The complaint alleges that Singer and FABNY entered into an agreement obligating FABNY to create for Singer two separate credit facilities, one unsecured, the other secured. Singer alleges that in or about March, 1986, FABNY advanced the sum of $1,000,000.00 on the unsecured line of credit, and between June 1, 1986 and the filing date drew down1 the sum of approximately $316,194.94 against that outstanding balance. Singer also alleges that on or about April 8, 1986 and June 4, 1986 FABNY advanced the sums of $400,000.00 and $175,000.00 on the secured line of credit and thereafter drew down the sum of approximately $272,590.72. Based upon these draw-downs, Singer maintains that FABNY obtained a preference in the amount of $588,785.66 since FABNY's security interests were not secured until it filed its financing statements on June 25, 1986, well within 90 days of Singer's filing. Singer also alleges that since the draw-downs were applied against the proceeds of liquidated accounts receivable and inventory, FABNY's right to these proceeds were subordinate to Chemical's prior lien upon Singer's accounts receivable and inventory. Singer therefore requests a turnover of both pre and post-petition proceeds of accounts receivable and inventory pursuant to Code §§ 542 and 549. Singer also requests an accounting and turnover of all collections received by FABNY post-petition.
FABNY answered the complaint averring that the sums collected by it pre-petition are not voidable preferences; and to the extent that they might otherwise be so, they fall squarely within the exceptions outlined in § 547(c).
Chemical Bank then moved to intervene as a party plaintiff claiming a superior interest in Singer's accounts receivable and inventory pursuant to New York Uniform Commercial Code ("NYUCC") § 9-312 as a prior in time financier, and sought to assert claims against FABNY for conversion, money had and received, and to impose a trust upon all funds collected by FABNY alleged to be the proceeds of Singer's accounts receivable and inventory. Singer's Unsecured Creditors' Committee also sought to intervene as a party plaintiff.
Both motions to intervene were granted.
Chemical's complaint sought in addition to the claims discussed above, the first $220,000.00 of any net recovery Singer might obtain from FABNY.2
FABNY's original answer claimed that it, and not Chemical, had the superior interest in Singer's "accounts receivable, inventory and proceeds", claiming that as a "collecting bank", it had security in the accounts receivable, inventory and proceeds thereof superior to any security previously granted to Chemical.
Singer answered Chemical's third party complaint admitting Chemical's entitlement only to the first $170,000.00 which Singer might obtain from FABNY maintaining that this was the only amount Singer had utilized under Chemical's cash collateral order dated December 30, 1986.3
FABNY then sought to amend its answer to paragraph 4 of Chemical's complaint.4 FABNY alleged that after further review of its files, it had discovered that its original answer might not have adequately pleaded FABNY's right to apply the proceeds of its collateral to Singer's unsecured balance, and maintained for the first time that Singer's so-called unsecured line of credit had always been secured by virtue of the cross-collateralization provision contained in the security agreement.
Singer urged the court not to permit the amendment, arguing that FABNY could not sustain this newly-taken position because it was contradicted by documents in FABNY's loan files. Singer pointed, for example, to the "line of credit agreement" on the stationery of Robert Montano, a Vice President of FABNY, which stated:
Singer argued that the contents of this letter agreement and FABNY's other documents were indicative of its intent to provide Singer with an unsecured line of credit.
FABNY's motion to amend was granted without a ruling on the sufficiency of its legal arguments which were preserved and are now under consideration in these motions and cross-motions for summary judgment now before the court.
FABNY's claimed security upon Singer's "Documentary Collection items," outlined in the "Security Agreement for Own Obligations" ("Security Agreement") arose in the following fashion. Singer sold its product overseas. When it shipped its product it would transmit documents of title together with written collection instructions to an overseas bank selected exclusively by Singer. Accompanying these instructions would be a draft. The collection instructions to the overseas bank consisted of a FABNY form obtained by Singer from FABNY which Singer would complete either by filling in blanks, or by checking appropriate alternatives. Depending upon the manner by which Singer completed this form prior to sending it to the overseas bank, some of the drafts would be payable on sight while others would be payable some time after acceptance. The overseas bank sometimes would be authorized to deliver the documents of title upon acceptance of the draft, and at other times delivery would be authorized only upon its payment by the customer to the overseas bank. The accompanying draft, however, was always payable to FABNY, at least with regard to the exhibits submitted on these summary judgment motions.
Although FABNY was named payee, neither the draft nor the collecting instructions given by Singer to the overseas bank indicated whether payment to FABNY was intended to be for the benefit of FABNY or whether remittance to FABNY would be as Singer's depository bank and there is nothing before the court to indicate that any of the overseas customers or overseas banks ever were aware of the lending or security arrangements had between Singer and FABNY. Although it is unclear why, a substantial number of remittances from these overseas bank appear to have been made directly to Singer unrestricted in form. While this could have enabled Singer to use these funds for its own purpose had it chosen this course, Singer never did so. Rather, Singer, voluntarily and without demand by FABNY, forwarded these receipts to FABNY sometimes as they came in and sometimes...
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