Matter of Bevill, Bresler & Schulman, Inc.
| Decision Date | 13 January 1989 |
| Docket Number | Adv. No. 85-0180 (SIPA),87-530.,Civ. No. 85-2224 (DRD) |
| Citation | 94 BR 817 |
| Parties | In the Matter of BEVILL, BRESLER & SCHULMAN, INC., Debtor. Richard W. HILL, Trustee under S.I.P.A. for the liquidation of Bevill, Bresler & Schulman, Inc., Plaintiff, v. SPENCER SAVINGS & LOAN ASSOCIATION, Defendant-third party plaintiff, v. CHASE MANHATTAN BANK-LONDON, Third party Defendant. Richard W. HILL, Plaintiff, v. HAWTHORNE SAVINGS & LOAN ASSOCIATION, Defendant. |
| Court | U.S. District Court — District of New Jersey |
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McCarter & English by Hayden Smith, Jr., Newark, N.J., for Richard W. Hill, trustee under the Securities Investor Protection Act for the liquidation of Bevill, Bresler & Schulman, Inc.
Ross & Hardies by Helen Davis Chaitman, Somerset, N.J., for Spencer Sav. & Loan Ass'n and Hawthorne Sav. & Loan Ass'n.
This is an adversary proceeding brought by Richard W. Hill, the Trustee of the debtor Bevill, Bresler & Schulman, Inc. ("BBS") under the Securities Investor Protection Act ("SIPA"), against two former customers of BBS, Hawthorne Savings & Loan Association ("Hawthorne") and Spencer Savings & Loan Association ("Spencer"). The Trustee is seeking partial summary judgment pursuant to Fed.R. Civ.P. 56 on his claim that certain transfers involving Hawthorne and Spencer violated section 549 of the Bankruptcy Code, as incorporated by section 78fff-2(c)(3) of SIPA.
The following facts are either undisputed or, having been alleged by Hawthorne and Spencer, are assumed to be true for purposes of deciding the present summary judgment motion.
The Parties:
Spencer is a New Jersey chartered savings and loan association. Hawthorne is a California chartered savings and loan association. Prior to May 8, 1985, BBS was a licensed broker-dealer of securities doing business in the state of New Jersey. The Trustee is the trustee under SIPA for the liquidation of BBS.
Spencer's Relationship with BBS:1
From approximately 1983 to 1985, Spencer purchased securities and debt instruments through BBS, utilizing the services of its broker at BBS, John Zeimitz ("Zeimitz"). Zeimitz dep. at 11. Spencer followed an extremely conservative investment policy under which it took physical possession of all securities it purchased. Orofino aff. par. 3; Zeimitz aff. par. 3; Zeimitz dep. at 56.
In order to lock into a slightly higher interest rate than was available on domestic certificates of deposit, on occasion Spencer purchased Eurodollar certificates of deposit ("Euro CDs") issued in London. Orofino aff. par. 2; Zeimitz aff. par. 4. Again, Spencer was very conservative with respect to its investments and purchased Euro CDs only from the 25 largest banks in the world, and only Euro CDs which were issued in, and governed by the laws of England. Orofino aff. par. 3. When a representative of Spencer first talked with BBS regarding the purchase of Euro CDs, Zeimitz explained that Euro CDs are physical securities which cannot be taken out of England and which must be presented to the issuer in London for payment. Hence, Spencer could not follow its standard policy and take physical possession of the Euro CDs which it purchased through BBS. Orofino aff. par. 4; Zeimitz aff. par. 4 Zeimitz dep. at 61.
As a service to its customers, and in order to facilitate its own sale of Euro CDs, BBS established a safekeeping account at Chase Manhattan Bank-London ("Chase"), so that Chase could safekeep the Euro CDs of the customers of BBS. Zeimitz aff. par. 5; Orofino aff. par. 4; Zeimitz dep. at 13.
Zeimitz believed, and so advised Spencer, that Chase maintained a separate safekeeping account for Spencer pursuant to the telexed instructions which BBS sent Chase concerning each CD purchased by Spencer. Zeimitz aff. pars. 5, 6, 13, 14; Orofino aff. pars. 2-4; Zeimitz dep. at 13, 75-76, 96. Between April 26, 1984 and March 27, 1985, in reliance upon these representations, Spencer purchased through BBS 19 Euro CD's in the principal amount of $20 million. Spencer has submitted evidence that it would not have purchased Euro CD's from BBS without BBS's assurance that those CDs were being maintained by Chase in a separate safekeeping account for Spencer. Orofino 2 aff. par. 42. This assurance came in at least two forms. First, with respect to each Euro CD purchased by Spencer, BBS sent a telex to Chase instructing Chase to hold the CD "in safekeeping for Spencer." Orofino 2 aff. par. 5. Second, BBS sent Spencer a confirmation showing that the CD was held in safekeeping. Zeimitz Dep. at 35; exhibit B to Orofino 2 aff.
On Sunday, April 7, 1985, at 10:20 p.m., Bevill, Bresler & Schulman Asset Management Corp. ("AMC"), an affiliate of BBS, filed a voluntary Chapter 11 bankruptcy petition in the Bankruptcy Court. On the following day, April 8, 1985, the Securities and Exchange Commission ("SEC") filed a complaint against AMC, BBS and several other affiliated corporations and partnerships, alleging violations of the antifraud provisions of the federal securities laws.
Prior to April 8, 1985, Zeimitz had never heard of AMC and knew nothing about it. On April 8, 1985, Zeimitz attended a meeting at BBS at which he claims BBS brokers were assured that the AMC filing did not adversely affect BBS and that BBS was to conduct business as usual. Zeimitz dep. at 39-24.3
BBS brokers were nonetheless flooded with calls from concerned customers who had heard of AMC's filing. On April 8th, Zeimitz called Frank Orofino at Spencer and advised him, in view of the confusion concerning the role and activities of AMC, to move the 18 Euro CDs then being held for Spencer at Chase to an institution with which BBS had no relationship. Id. at 42-45. On the same day, Orofino arranged for the Euro CDs to be delivered to the Federal Home Loan Bank's safekeeping account at Bankers Trust Company in London ("Bankers Trust") Id. at 46.
After speaking with Orofino, Zeimitz, sometime after noon on April 8, 1985, instructed the back office personnel at BBS to telex Chase instructing Chase to transfer all of Spencer's Euro CDs "free" to Bankers Trust for the account of Spencer. Id. On April 9, 1985, at 7:20 p.m., BBS sent the telex pursuant to Zeimitz's instructions. As per the instructions of BBS, Chase completed delivery of 18 Euro CDs in the face amount of $19 million to Bankers Trust at 4:30 p.m. London time on April 10, 1985 (10:30 a.m. Eastern Standard Time). With respect to each of the Euro CDs of Spencer delivered to Bankers Trust, Spencer received payment from the issuer within a few days after its maturity date.
Late in the afternoon of April 10, 1985, approximately six hours after Bankers Trust received possession of Spencer's Euro CDs, Richard W. Hill was appointed Temporary Receiver of BBS and three affiliated corporations in the SEC action. As Temporary Receiver, Hill took control of all securities still in the actual or constructive possession of BBS.
On May 2, 1985, a number of creditors of BBS filed an involuntary petition for relief against BBS under the Bankruptcy Code. On May 6, 1985, the Securities Investor Protection Corporation ("SIPC") file an application for a protective decree pursuant to section 78eee of SIPA. On May 8, 1985, by Order of the District Court, Hill was appointed trustee for the liquidation of BBS under SIPA.
Hawthorne's Relationship with BBS:
Hawthorne first became acquainted with BBS in November of 1984 when Bill Manwald, a broker at BBS, called Douglas J. Herbst, the Vice President and Chief Financial Officer of Hawthorne. Herbst Aff. at par. 4. In December of 1984, Hawthorne made its first trade through BBS by purchasing a corporate note. Id. at par. 5. Hawthorne subsequently traded "a few corporate and/or government notes through Manwald at BBS." Id.
In late February or early March of 1985, Manwald informed Hawthorne about trading opportunities in Euro CDs. Id. at par. 6. After "numerous problems" and two failed attempts at completing a trade, Hawthorne eventually made its first purchase of Euro CDs through BBS. Id. at par. 7. Like Spencer, it was Hawthorne's practice to take physical possession of securities it purchased. Id. at par. 6. However, since the Euro CD's could not be taken out of London, Hawthorne made arrangements with Irving Trust in London to take physical possession of them. Id. Accordingly, the CDs from the first trade were deposited into a safekeeping account for Hawthorne at Irving Trust.
Soon after Hawthorne's first Euro CD transaction with BBS, Manwald approached it about two more purchases involving a $4 million Mitsubishi Bank Ltd. Euro CD and a $1 million Tokai Bank Ltd. Euro CD. Id. at par. 8. Herbst indicated to Manwald that Hawthorne was interested in these purchases, but that he had reservations due to the difficulties involved with Hawthorne's first purchase of a Euro CD. Id. Manwald suggested that BBS could set up a safekeeping account for Hawthorne's Euro CDs at Chase to facilitate a smoother transaction. Id.
Herbst insisted that the Chase safekeeping account must be Hawthorne's account, in Hawthorne's name. Id. at par. 9. After Manwald assured Herbst that this would be done, Herbst authorized the two new purchases on behalf of Hawthorne. Herbst requested that Manwald send him "all of the necessary documentation to set up a safekeeping account for Hawthorne at Chase." Id. at par. 10.
After returning from a two week honeymoon on April 1, 1985, Herbst found two letters in his mail from BBS. Id. at par. 11. These letters indicated that the two Euro CDs had been purchased and were being held in safekeeping at Chase. At this time, however, Herbst had not received any communications from Chase confirming that a safekeeping account had been opened for Hawthorne at Chase, nor had he received confirmation of the receipt of the CDs into such an account or the necessary...
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