In re Thrifty Oil Co., Bankruptcy No. 92-09132-A11 to 92-09136-A11.
| Decision Date | 05 August 1997 |
| Docket Number | Bankruptcy No. 92-09132-A11 to 92-09136-A11. |
| Parties | In re THRIFTY OIL COMPANY, a California corporation; Golden West Refining Company, a California corporation; CLUJ Distribution Company, a California corporation; and Golden West Distribution Company, a California Corporation, Debtors. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Southern District of California |
Robert A. Greenfield, Isaac M. Pachulski, Stutman, Treister & Glatt, Los Angles, CA, for Debtors.
Tiffany L. Carroll, Office of U.S. Trustee, Southern Dist. of CA, San Diego, CA, United States Trustee.
Joel Ohlgren, Sheppard, Mullin, Richter & Hampton, Los Angeles, CA, for the OCC.
Victor Vilaplana, Sheppard, Mullin, Richter & Hampton, San Diego, CA, for the OCC.
Patrick C. Shea, David E. Kleinfeld, Matthew S. Walker, Pillsbury Madison & Sutro, LLP, San Diego, CA, for Bank of America.
Leonard L. Gumport, Gumport, Rietman & Montgomery, Los Angeles, CA, for Debtor.
Bank of America National Trust and Savings Association ("BofA") filed claim No. 650B, which arises from revested debtor's ("Thrifty") guaranty of Golden West Refining Company's ("GWR") obligation to the bank. Thrifty objected to BofA's claim and because of the apparent need for further discovery and an evidentiary hearing, the matter was deemed a contested matter under Fed. R.Bankr.P. 9014.1 After conducting discovery, BofA and Thrifty brought these cross motions for summary judgment. This Court has jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B).
A motion for summary judgment may be granted if, upon consideration of the pleadings, depositions and declarations, the court is persuaded that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56. Although Thrifty's opposition states that there are many "disputed issues of fact," upon a closer examination, many of the claimed factual disputes are really legal questions. Also, the Court finds many of the alleged "disputed" facts are nonmaterial. Materiality of disputed facts is examined when determining whether summary judgment is appropriate. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d 202 (1986). In addition, the court must draw all inferences in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986).
The following factual summary sets out each undisputed fact which the Court believes is material to the decision of this motion for summary judgment.
In August 1989, GWR solicited a $75 million term loan ("Term Loan") from BofA and other potential lenders, in part to refinance a $52.1 million promissory note payable to Chevron (which note bore an 11% fixed rate), and in part to finance capital improvements. BofA submitted a loan proposal to GWR on September 29, 1989. (Exh. 1) Negotiations ensued and a final term sheet for the loan dated January 10, 1990 was executed by GWR on January 12, 1990. (Exh. 13). The term sheet provided for a variable interest rate Term Loan (called "Facility B") and also provided that the Term Loan would be fully underwritten by BofA. The term sheet also stated that GWR would enter into an interest rate swap ("Swaps") with BofA to hedge the Term Loan's interest rate fluctuations. (Exh. 13, Bates No. 51). The Term Loan for $45 million closed on or about July 31, 1990. The syndication of the Term Loan closed on December 20, 1990. After syndication was completed, BofA was a lender on less than one-half the principal balance of the Term Loan. GWR borrowed an additional $7 million under the Term Loan on November 6, 1991.
Thrifty executed an unsecured guaranty dated as of July 30, 1990 in which it guaranteed "all obligations of Borrower GWR under the Loan Documents which was defined in the Term Loan Agreement to include both the Term Loan Agreement and Approved Swap Agreements." (Exh. 39, Bates No. 458).
GWR entered into its first interest rate swap with BofA on June 20, 1990 with a notional amount of $21.5 million and a delayed start date of August 1, 1990. GWR entered into a second swap with BofA on July 12, 1990 with the notional amount of $10.75 million with a delayed start date of August 1, 1990. On August 1, 1990, GWR entered into a third swap with BofA with a notional amount of $12.75 million which had a start date of August 3, 1990. The Term Loan and the Swaps were cross-collateralized and cross-defaulted. BofA sent out confirmations of the three swaps which included statements that they would be governed by the standard form recommended by the International Swap Dealers Association, Inc. ("ISDA") which was later signed by both parties (collectively "Swap Agreement"). Under the Swap Agreement, GWR made payments based on fixed interest rates multiplied by the notional amounts and BofA made payments based on three month LIBOR2 multiplied by the notional amounts. BofA's swap operations department sent GWR the payment notices pertaining to the Swaps. (Exh. 70-77). GWR's bankruptcy filing on July 31, 1992 constituted an early termination event of the Swap Agreement under the ISDA Agreement (Exh. 79, Bates No. 586) giving rise to termination damages of $5,428,500 as calculated according to the ISDA Agreement.
On September 28, 1994, Thrifty, GWR and their affiliates filed the "Joint Plan of Reorganization (As Modified) (September 28, 1994)" (The "Plan"). In connection with the Plan, the Court approved a Bank Group Settlement Agreement among BofA, GWR, Thrifty and others which fixed BofA's termination damage claim at $5,428,500. BofA filed a claim for $5,428,500 to which Thrifty has objected. Thrifty contends that the claim should be disallowed either as prohibited by section 502(b)(2) as unmatured interest or as violating California's Bucket Shop laws.3
A. Are "termination damages" under the Swap Agreement unmatured interest prohibited by 11 U.S.C. section 502(b)(2)?
B. Do the Swaps violate the California Bucket Shop Laws?
To better understand this Court's decision, a discussion of a swap is relevant. A swap is considered a derivative which is a "bilateral contract or payments exchange agreement whose value derives . . . from the value of an underlying asset or underlying reference rate or index." Procter & Gamble Co. v. Bankers Trust Co., 925 F.Supp. 1270, 1275 (S.D.Ohio 1996). In essence, it is an agreement to exchange cash flows over a period of time. See, Procter & Gamble Co., 925 F.Supp. at 1275; Martin J. Bienenstock & Paul M. Basta, Treatment of Derivatives under the Bankruptcy Code, P.L.I. No. N4-4585 (1994). The cash flows are calculated by multiplying the respective interest rates by a notional amount. Procter & Gamble Co., 925 F.Supp. at 1275. The notional amount is an agreed principal amount against which the accruing interest obligations between the parties are calculated. S. Tucker, Interest Rate Swaps and the 1990 Amendments to the United States Bankruptcy Code: A Measure of Certainty Within the Swap Market Contracts, 1991 Utah L.Rev. 581, 586 n. 32. Usually it is a hypothetical amount that is never actually paid or received. Id.
GWR and BofA entered into three Swaps having a total notional amount of $45 million. GWR agreed to pay a fixed rate of interest to BofA while BofA agreed to pay a floating rate of interest to GWR. The "net amount" is what actually changed hands. In this case, because the interest rates declined during the Swaps period, GWR made periodic payments to BofA. (Exh. 70-75).
A. Termination Damages as Unmatured Interest
Thrifty argues that BofA's termination damages claim represents unmatured interest prohibited by section 11 U.S.C. 502(b)(2). The general rule disallowing unmatured interest is a rule of administrative convenience and fairness to all creditors and is not an absolute rule. See, In re Hanna, 872 F.2d 829, 830 (8th Cir.1989). The rule makes it possible to calculate the amount of claims with certainty. See, In re Quick, 152 B.R. 902, 906 (Bankr.W.D.Va.1992). Id. Further, it assures that creditors at the bottom rungs of the priority ladder are not prejudiced by delay in payment to higher priority creditors.
Thrifty contends the termination damages claim is the result of an integrated transaction that includes both the Term Loan Agreement and the Swap Agreement and which essentially created a fixed rate loan. BofA argues that the Term Loan Agreement and the Swap Agreement are separate transactions and the obligations arising from premature termination of the Swap Agreement arise only because of the breach of the terms of the Swap Agreement and not because BofA intended to disguise unmatured interest.
Interest is money "paid to compensate for the delay and risk involved in the ultimate repayment of monies loaned." In re Pengo Industries, Inc., 962 F.2d 543, 546 (5th Cir.1992). The money loaned in this case is the amount loaned under the Term Loan Agreement. To characterize the termination damages as interest, the Court must conclude that it was the parties' intent that the Swap payments compensate BofA for delay and risk in the repayment of the Term Loan. To reach this conclusion the Court must examine GWR and BofA's intent in entering into the Term Loan and Swaps.
Thrifty contends there is a substantial factual dispute as to the intent of the parties. Both BofA and Thrifty cite In re Comark, 145 B.R. 47 (9th Cir. BAP 1992) to support their respective positions regarding intent. Comark involved a pre-petition transfer pursuant to a repurchase agreement from the debtor to another entity. The court had to determine whether the transaction was a loan or a security transaction in order to apply section 546(e). Id. at 49. The court explained that to...
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