Matter of Bevill, Bresler & Schulman Asset

• Decision Date: 23 October 1986
• Docket Number: 85-2224,Adv. No. 85-2103,Civ. A. No. 85-1728,85-5274.
• Citation: 67 BR 557
• Parties: In the Matter of BEVILL, BRESLER & SCHULMAN ASSET MANAGEMENT CORPORATION, Debtor. Saul S. COHEN, Trustee of Bevill, Bresler & Schulman Asset Management Corporation, Plaintiff, v. ARMY MORAL SUPPORT FUND: Bay Ridge Federal Savings & Loan; Broker's Capital; Bushnell Federal Savings & Loan; Champlain Valley Federal Savings & Loan; Chester Bank; Citizens Savings & Loan, Bellefontaine; Cross Country Federal Savings & Loan; Fidelity Savings & Loan, Berwyn, Illinois; First Federal Savings Bank; First Federal Savings & Loan, Freeport; First Federal Savings & Loan, Washington Court House; First National Bank of Elkhart; First National Bank of Skokie; First National Bank of Toms River; First Savings & Loan Association (Perth Amboy); Fort Lee Savings & Loan; Gibraltar Savings & Loan; Glen Ridge Savings & Loan; Government Employees Credit Union; Great American Federal Savings & Loan; Greenville Federal Savings & Loan; Harvest Home Savings & Loan; Hi-Plains Savings & Loan Association; Home Savings Association; Imperial Savings & Loan; Jefferson Building & Savings; Lesney Products Corp.; Lincoln Way Federal Savings & Loan; Mainland Savings & Loan; Mercer Savings & Loan Association; Merritt Commercial Savings & Loan; Midwest Government Securities; Niagara County Savings Bank; Newport National Bank of Providence; Old Borough Savings & Loan; Old Court Savings & Loan; Pennbank; Peoples Savings & Loan Assn.; Provident Savings & Loan; Prudential Federal Savings & Loan; Saranac Lake Federal Savings & Loan; Savers Bank; Savings Building & Loan; Security Savings & Loan; Seneca Federal Savings & Loan; Security Pacific Clearing & Services Corp.; Sentry Savings; Sewickley Savings & Loan Assn.; Southern Illinois Bank; United 558*558 Financial Savings Bank, F.S.B.; Universal Savings & Loan; Vernon Savings & Loan; Village Bank; First Federal Savings & Loan Assn. of Waterbury; General Trading Co., Inc.; Fidelity New York, F.A.; Wallkill Valley Federal Savings & Loan Assn.; First Federal Savings & Loan Assn. of Lincoln, Nebraska; Mutual Federal Savings & Loan Assn. of Sidney, Ohio; Morton Federal Savings & Loan; Odessa Savings Assn.; Calvert Insurance Company; Fairbanks Broadcasting Co., Inc.; Bradford Trust Company; Mona Williams; Westbury Savings & Loan; Worthen Bank & Trust Company, N.A.; Yonkers Savings Bank and Yorkridge Calvert Savings & Loan, Defendants. In the Matter of BEVILL, BRESLER & SCHULMAN, INC., Debtor. Richard W. HILL, Trustee for the Liquidation of Bevill, Bresler & Schulman, Inc., Plaintiff, v. FIDELITY NEW YORK, F.A., Champlain Valley Federal Savings & Loan Association; Worthen Bank & Trust Company, N.A.; Mainland Savings & Loan Association; City of Harrisburg, Pennsylvania; Maryland Savings-Share Insurance Corporation, as Conservator of Old Court Savings and Loan Inc.; and Security Pacific Clearing & Services Corporation, Defendants.
• Court: U.S. District Court — District of New Jersey

67 B.R. 557 (1986)

In the Matter of BEVILL, BRESLER & SCHULMAN ASSET MANAGEMENT CORPORATION, Debtor.

Saul S. COHEN, Trustee of Bevill, Bresler & Schulman Asset Management Corporation, Plaintiff, v. ARMY MORAL SUPPORT FUND: Bay Ridge Federal Savings & Loan; Broker's Capital; Bushnell Federal Savings & Loan; Champlain Valley Federal Savings & Loan; Chester Bank; Citizens Savings & Loan, Bellefontaine; Cross Country Federal Savings & Loan; Fidelity Savings & Loan, Berwyn, Illinois; First Federal Savings Bank; First Federal Savings & Loan, Freeport; First Federal Savings & Loan, Washington Court House; First National Bank of Elkhart; First National Bank of Skokie; First National Bank of Toms River; First Savings & Loan Association (Perth Amboy); Fort Lee Savings & Loan; Gibraltar Savings & Loan; Glen Ridge Savings & Loan; Government Employees Credit Union; Great American Federal Savings & Loan; Greenville Federal Savings & Loan; Harvest Home Savings & Loan; Hi-Plains Savings & Loan Association; Home Savings Association; Imperial Savings & Loan; Jefferson Building & Savings; Lesney Products Corp.; Lincoln Way Federal Savings & Loan; Mainland Savings & Loan; Mercer Savings & Loan Association; Merritt Commercial Savings & Loan; Midwest Government Securities; Niagara County Savings Bank; Newport National Bank of Providence; Old Borough Savings & Loan; Old Court Savings & Loan; Pennbank; Peoples Savings & Loan Assn.; Provident Savings & Loan; Prudential Federal Savings & Loan; Saranac Lake Federal Savings & Loan; Savers Bank; Savings Building & Loan; Security Savings & Loan; Seneca Federal Savings & Loan; Security Pacific Clearing & Services Corp.; Sentry Savings; Sewickley Savings & Loan Assn.; Southern Illinois Bank; United

Financial Savings Bank, F.S.B.; Universal Savings & Loan; Vernon Savings & Loan; Village Bank; First Federal Savings & Loan Assn. of Waterbury; General Trading Co., Inc.; Fidelity New York, F.A.; Wallkill Valley Federal Savings & Loan Assn.; First Federal Savings & Loan Assn. of Lincoln, Nebraska; Mutual Federal Savings & Loan Assn. of Sidney, Ohio; Morton Federal Savings & Loan; Odessa Savings Assn.; Calvert Insurance Company; Fairbanks Broadcasting Co., Inc.; Bradford Trust Company; Mona Williams; Westbury Savings & Loan; Worthen Bank & Trust Company, N.A.; Yonkers Savings Bank and Yorkridge Calvert Savings & Loan, Defendants.

In the Matter of BEVILL, BRESLER & SCHULMAN, INC., Debtor.

Richard W. HILL, Trustee for the Liquidation of Bevill, Bresler & Schulman, Inc., Plaintiff, v. FIDELITY NEW YORK, F.A., Champlain Valley Federal Savings & Loan Association; Worthen Bank & Trust Company, N.A.; Mainland Savings & Loan Association; City of Harrisburg, Pennsylvania; Maryland Savings-Share Insurance Corporation, as Conservator of Old Court Savings and Loan Inc.; and Security Pacific Clearing & Services Corporation, Defendants.

Civ. A. Nos. 85-1728, 85-2224, Adv. Nos. 85-2103, 85-5274.

United States District Court, D. New Jersey.

October 23, 1986.

Ravin, Greenberg & Zackin by Jack M. Zackin, Gary N. Marks, Roseland, N.J., for Saul S. Cohen.

McCarter & English by Hayden Smith, Jr., Anne W. Crawford, John F. Brenner, Charles J. Benjamin, Newark, N.J., for Richard W. Hill.

Theodore H. Focht, Gen. Counsel, Securities Investor Protection Corp., by Michael E. Don, George F. Bingham, Washington, D.C.

Kirkpatrick & Lockhart by Joseph J. Brigati, Charles Lee Eisen, Douglas J. Scheidt, Washington, D.C., for Bayamon Federal Sav. & Loan Ass'n.

Rhoads & Sinon by Charles J. Ferry, Dean H. Dusinberre, Harrisburg, Pa., for City of Harrisburg, Pa.

Cowen, Liebowitz & Latman, P.C. by J. Christopher Jensen, New York City, for Federal Sav. & Loan Ins. Corp. as Receiver of Mainland Sav. Ass'n Buckley, Kremer, O'Reilly, Pieper, Hoban & Marsh, Mineola, N.Y., for Fidelity N.Y., FSB.

Milbank, Tweed, Hadley & McCloy by Russell E. Brooks, Joseph S. Genova, Stephen J. Shimshak, New York City, for Huntington Sav. & Loan Ass'n.

Weil, Gotshal & Manges by Martin J. Bienenstock, Tonny K. Ho, Deryck A. Palmer, New York City, for Cuero Federal Sav. & Loan Ass'n.

William J. Scanlon Law Offices by Kathleen M. Scanlon, Fort Lee, N.J., for Fort Lee Sav. & Loan Ass'n.

Rose Law Firm, P.A. by Allen W. Bird, II, Michael R. Johns, Little Rock, Ark., and Scarpone & Edelson, P.C. by James A. Scarpone, Newark, N.J., for Worthen Bank & Trust Co. N.A.

Gaston, Snow, Beekman & Bogue by Catherine A. Ludden, New York City, for Sec. Pacific Clearing & Services Corp.

Wilkie, Farr & Gallagher by Roger D. Blanc, James J. Calder, William H. Rooney, New York City, for Prudential Federal Sav. & Loan Ass'n.

Kraft & Hughes by John B. Hall, Newark, N.J., and Ira Lee Sorkin, Regional Adm'r S.E.C. by Jason R. Gettinger, New York City.

Federal Reserve Bank of N.Y. by Mary Sue Sullivan, Andrew C. Harvard, New York City.

Cadwalader, Wickersham & Taft by Barry J. Dichter, H. Peter Haveles, Jr., Leslie R. Caldwell, Leonard J. Cali, New York City, for Official Committee of Reverse Repurchase Participants.

Carpenter, Bennett & Morrissey by Jerome E. Sharfman, Newark, N.J., and Okin, Pressler, Cohen & Hollander by Paul S. Hollander, Fort Lee, N.J., and Hahn & Hessen by Gilbert Backenroth, New York City, for Unofficial Committee of Repo Participants, Champlain Valley Federal Sav. & Loan Ass'n, First Federal Sav. & Loan Ass'n of Freeport, and Lesney Products Corp.

Hannoch Weisman by Ronald M. Sturtz, Arlene E. Mirsky, Roseland, N.J., for Official Creditors' Committee.

Clancy & Foster by Charles Clancy, East Orange, N.J., for Gibraltar Sav. & Loan Ass'n.

Gagliano, Tucci, Iadanza & Reisner by Ronald L. Reisner, West Long Branch, N.J., for East Jersey Sav. & Loan Ass'n.

Porter, Wright, Morris & Arthur by H. Grant Stephenson, Columbus, Ohio, for Connie J. Harris, Successor-in-Interest to Jefferson Bldg. & Sav. Co.

                                     TABLE OF CONTENTS
                      I.   INTRODUCTION
                      II.  PROCEDURAL BACKGROUND
                      III. FACTUAL BACKGROUND
                           A. The Debtors
                           B. Repos and the Repo Market
                           C. The Test Cases
                              1. Overview
                              2. The AMC Test Case Transactions
                                 a. GNMA Pool #69692
                                 b. GNMA Pool #61337
                                 c. U.S. Treasury Notes, 11.125%
                                 d. GNMA Pool #40566
                                 e. GNMA Pool #57318
                              3. The BBS, Inc. Test Case Transactions
                                 a. GNMA Pool #47448
                

                                 b. GNMA Pool #63571
                                 c. FHLB, Cusip #31388MX5
                                 d. U.S. Treasury Bills, Cusip #912794HQ0
                       IV. ISSUES
                        V. DISCUSSION
                           A. Legal Characterization of Repo and Reverse Repo Transactions
                              1. Contentions of the Parties
                              2. Applicable Law
                              3. Express Terms of Repo and Reverse Repo Agreements
                              4. Extrinsic Evidence of Intent
                                 a. Books and Records of the Parties
                                 b. Accounting Conventions
                                 c. Regulatory Treatment
                                 d. Trade Custom and Usage
                              5. Decisional Law
                                 a. Tax Cases
                                 b. Securities Fraud Cases
                                 c. Bankruptcy Cases
                              6. Conclusion
                           B. Customer Status under SIPA
                           C. Treatment of Reverse Repo Agreements
                           D. Delivery/Transfer of Securities to AMC Repo Participants
                              1. Section 8-313(1)(a) of the N.Y.U.C.C. and N.J.U.C.C
                              2. N.J.U.C.C. § 12A:8-313(1)(e) and N.Y.U.C.C. § 8-313(1)(g)
                              3. N.J.U.C.C. § 12A:8-313(1)(d)
                              4. N.J.U.C.C. § 12A:8-313(1)(c) and N.Y.U.C.C. § 8-313(1)(d)
                              5. Conclusions as to Deliver/Transfer
                                 a. Certificated and Book-Entry Securities in the AMC Clearing
                                    Account
                                 b. Certificated Securities in the AMC Safekeeping Account
                                 c. Book-Entry Securities in the AMC Safekeeping Account
                           E. Imposition of Constructive Trusts over Securities in the AMC Clearing
                              Account
                       VI. CONCLUSIONS
                                      GROSSARY OF ABBREVIATIONS
                    AMC - Bevill, Bresler & Schulman Asset Management Corporation
                    Bayamon - Bayamon Federal Savings & Loan Association of Puerto Rico
                    BBS, Inc. - Bevill, Bresler & Schulman, Inc
                    Bradford - Bradford Trust Company
                    Champlain - Champlain Valley Federal Savings & Loan Association of Plattsburgh
                    Clearing Agreement - Clearing, Custody and Financing Agreement
                    The Code - The Bankruptcy Code, 11 U.S.C. § 101, et seq
                    Cuero - Cuero Federal Savings & Loan Association
                

                    Dauphin - County of Dauphin, Pennsylvania
                    Dominion - Dominion Bank, N.A
                    FHLB - Federal Home Loan Bank Board
                    Fidelity - Fidelity New York, F.A.
                    FRBNY - Federal Reserve Bank of New York
                    Freeport - First Federal Savings & Loan Association of Freeport
                    GAAP - generally accepted accounting principles
                    GNMA - Government National Mortgage Association
                    Hamilton - Hamilton Bank
                    Harrisburg - City of Harrisburg, Pennsylvania
                    Huntington - Huntington Savings & Loan Association
                    Lesney - Lesney Products Corp.
                    Mainland - Mainland Savings & Loan Association
                    Merritt - Merritt Commercial Savings & Loan Association
                    NASD - National Association of Securities Dealers, Inc.
                    N.J.U.C.C. - Uniform Commercial Code of New Jersey, N.J.S.A. 12A:1-101, et seq.
                    N.Y.U.C.C. - Uniform Commercial Code of New York, N.Y Consolidated Laws,
                                  Uniform Commercial Code § 1-101, et seq. (McKinney Supp. 1986)
                    Perth Amboy - First Savings & Loan of Perth Amboy
                    PSA - Public Securities Association
                    Prudential - Prudential Federal Savings & Loan Association
                    Repo - Repurchase transaction in government or agency securities
                    Repo Committee - Unofficial Committee of Repurchase Participants
                    Repo participant - Participant in repurchase transaction with AMC or BBS, Inc.

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