Matter of OPM Leasing Services, Inc.

• Decision Date: 27 February 1985
• Docket Number: Bankruptcy No. 81 B 10533,Adv. No. 83-5333A.
• Citation: 46 BR 661
• Parties: In the Matter of O.P.M. LEASING SERVICES, INC., Debtor. James P. HASSETT, as Trustee of O.P.M. Leasing Services, Inc., Plaintiff, v. BLUE CROSS AND BLUE SHIELD OF GREATER NEW YORK, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

46 B.R. 661 (1985)

In the Matter of O.P.M. LEASING SERVICES, INC., DebtorJames P. HASSETT, as Trustee of O.P.M. Leasing Services, Inc., Plaintiff, v.BLUE CROSS AND BLUE SHIELD OF GREATER NEW YORK, Defendant.

Bankruptcy No. 81 B 10533, Adv. No. 83-5333A.

United States Bankruptcy Court, S.D. New York.

February 27, 1985.

COPYRIGHT MATERIAL OMITTED

Zalkin, Rodin & Goodman, New York City, for Trustee; Richard Toder and Lawrence Henin, New York City, of counsel.

Ellen Barrett Levin, New York City, for Blue Cross and Blue Shield of Greater New York; John Colucci, New York City, of counsel.

BURTON R. LIFLAND, Bankruptcy Judge.

This matter is before the Court on the Motion of James P. Hassett, the Trustee("the Trustee") of O.P.M. Leasing Services, Inc.("OPM") for summary judgment pursuant to Federal Rule of Civil Procedure 56 and Bankruptcy Rule 7056 to recover the sum of $122,121.38, plus interest thereon, from the defendant Blue Cross and Blue Shield of Greater New York ("BCBS").¹BCBS has cross-moved for summary judgment dismissing the Trustee's claim and for related relief.The instant adversary proceeding within this Chapter 11 case concerns an escrow agreement between OPM and BCBS under which BCBS received $122,121.38 on February 13, 1981.The issue presented is whether the release of this money was a transfer of property of the debtor which the Trustee can avoid under §§ 547and544 of the Bankruptcy Reform Act of 1978("the Code").

I.Statement of Facts

OPM, the debtor herein, is engaged in the business of buying, selling and leasing new and used computers and related equipment.On March 11, 1981, OPM filed a voluntary petition for reorganization under Chapter 11 of the Code.Pursuant to 11 U.S.C. § 151104,² the reorganization Trustee was appointed on March 27, 1982.

On or about October 5, 1976, Dav-Na Associates("Dav-Na"), a general partnership of Myron S. Goodman and Mordecai Weissman, the principals of OPM, entered into a lease agreement (the "Lease") with BCBS whereby Dav-Na agreed to lease certain computer and related equipment to BCBS for a period of 90 months.Section 17 of the Lease gave BCBS the right to terminate the lease at any time after 48 rental payments had been made, upon 120 days prior written notice, which notice could be given at any time after 44 monthly rental payments had been made ("the early termination option").³In the event that BCBS elected to exercise the early termination option, BCBS would become obligated to pay Dav-Na a specified percentage of the original purchase price of the leased equipment ("the termination payment"), as set forth in the Schedule of Termination Values, annexed to the Lease.

Dav-Na was obligated, upon receipt of the termination payment, to pay BCBS an amount equal to the termination payment plus interest thereon at the rate of 12 percent per annum accruing from the date of payment to the date of reimbursement ("the reimbursement agreement").If Dav-Na failed to reimburse BCBS for the amount of the termination payment, BCBS was entitled, to the extent permitted by law, to take possession of and sell the equipment to satisfy Dav-Na's reimbursement obligation.

Simultaneously with the execution of the Lease, Dav-Na and BCBS entered into an escrow agreement ("the escrow agreement") to provide BCBS with security for the performance by Dav-Na of its reimbursement obligation.In accordance with the escrow agreement, Dav-Na deposited with Singer, Hutner, Levine & Seeman, Esqs., attorneys for OPM ("the Escrow Agent"), the sum of $100,000 ("the escrow deposit").The Escrow Agent was immediately obligated to place the escrow deposit in an interest bearing account with a federally insured banking institution in New York City, and to deliver to Dav-Na all interest earned on the escrow deposit.Section 4 of the escrow agreement required the Escrow Agent, upon written notice from BCBS that Dav-Na had defaulted in performing its reimbursement obligation, to release to BCBS that portion of the escrow deposit and any interest therein equal to the default amount.There is nothing in the record to indicate that Dav-Na or its successor ever received any earned interest.Conversely and as shall be shown hereinafter the release to BCBS included accrued interest.

On or about December 23, 1976, in accordance with section 5.3(i) of the Lease, Dav-Na assigned all of its right, title and interest in the Lease to OPM, and OPM assumed all of Dav-Na's obligations under the Lease.On the same day, the escrow agreement was similarly assigned and assumed.OPM subsequently assigned all of its right, title and interest in the Lease, including rental payments due thereunder, to Citicorp Industrial Credit Corporation("Citicorp").

After having made 44 monthly rental payments, on or about July 18, 1980, BCBS provided written notice of its intent to exercise the early termination option of the lease.On or about December 31, 1980, after 48 monthly rental payments had been made, and in accordance with the Schedule of Termination Values, BCBS paid Citicorp $2,594,683.10, representing 53.5% of the original purchase price of the leased equipment.OPM subsequently defaulted on its reimbursement obligation.On February 13, 1981, within the 90-day voidable preference period of Code§ 547, the escrow agent caused $122,121.38, the amount of the escrow deposit plus interest thereon, to be released to BCBS.

The Trustee commenced this adversary proceeding on March 16, 1983 seeking to recover the money transferred from the escrow account, plus interest, as a preferential transfer under § 547 of the Code.The Trustee has moved for summary judgment on this claim.He asserts that a preferential transfer occurred when the Escrow Agent transferred the funds in the escrow account to BCBS within weeks of OPM's bankruptcy filing.The basis of his claim is that OPM retained a legal interest in the escrow account which constituted property of the estate within the meaning of Code§ 541.

Alternatively, the Trustee seeks to utilize the "strong-arm" provisions of Code§ 544(a) to defeat BCBS' rights in the escrow account.The Trustee argues that the terms of the escrow agreement between OPM and BCBS created a security interest in the escrow account which BCBS failed to perfect, as required by Article 9 of New York Uniform Commercial Code("N.Y.U.C.C.").Consequently, urges the Trustee, BCBS' unperfected interest in the account is subordinate to the interest of a subsequent lien creditor, or a trustee in bankruptcy, and it can be recovered.

BCBS has cross-moved for summary judgment, seeking dismissal of the Trustee's complaint.BCBS asserts that the Trustee has not established the first element of a preferential transfer under § 547 of the Code, because the release of the escrow deposit was not a transfer of OPM's property.Rather, BCBS contends that the transfer from OPM took place in 1976 when the escrow account was first created.Thus, according to BCBS, the transfer which took place in February 1981 was not a transfer of property of the debtor within the meaning of § 547(e).

Next, BCBS seeks to refute the necessity of filing a U.C.C. financing statement to perfect its security interest in the escrow account, on two alternative grounds.First, BCBS asserts that the escrow account, as a deposit account, is exempt from the provisions of Article 9.Second, BCBS argues that it effectively perfected its security interest prior to the bankruptcy filing by taking possession of the escrowed funds, thereby defeating the Trustee's strong-arm powers.

Thus, the two issues for decision raised by the various arguments are as follows:

(1) Whether the transfer by the Escrow Agent to BCBS within the 90 day preference period constituted a transfer of property of the debtor within the meaning of Code§ 547(e).

(2) Whether the escrow account constituted an unperfected security interest in the escrowed funds, which the Trustee may avoid by virtue of his strong-arm powers, pursuant to Code§ 544(a).

For the following reasons, this Court holds that the release of the escrow deposit to BCBS on February 13, 1981 was neither a preferential transfer of property of OPM nor a transfer which may be avoided pursuant to the Trustee's strong-arm powers.The Trustee's motion for summary judgment is denied, and BCBS' cross-motion for summary judgment is granted.

II.Discussion of Law

A.Summary Judgment

Summary judgment is appropriate where the movant demonstrates the lack of any genuine issues of material fact to be tried.Burtnieks v. City of New York,716 F.2d 982, 985(2d Cir.1983).The mere assertion by both parties that summary judgment is appropriate does not warrant the granting of summary judgment unless one of the moving parties is entitled to judgment as a matter of law.Schwabenbaur v. Board of Education,667 F.2d 305, 313(2d Cir.1981);Home Insurance Co. v. Aetna Casualty and Surety Co.528 F.2d 1388, 1390(2d Cir.1976);Heyman v. Commerce and Industry Insurance Co.,524 F.2d 1317, 1320(2d Cir.1975).

Because there are no genuine issues of material fact in dispute, this case is ripe for summary judgment.

B.The Transfer Was Not A Preference

To establish an avoidable preference, the Trustee must prove by a preponderance of the evidence the following elements, as set forth in Code section 547(b):

(i) a transfer of property of the debtor;

(ii) to or for the benefit of a creditor;

(iii) for or on account of an antecedent debt;

(iv) made while the debtor was insolvent;

(v) made on or within 90 days before the date of filing of the petition;

(vi) that enables such creditor to receive more than it would receive in a Chapter 7 liquidation if the transfer had not been made.

11 U.S.C. § 547(b).SeeIn re Kennesaw Mint, Inc.,32 B.R. 799, 803(Bankr.N.D.Ga.1983);Matter of Richter & Phillips Jewelers & Distributors, Inc.,31 B.R. 512, 514(Bankr.S.D.Ohio1983);In re Gruber Bottling Works, Inc.,16 B.R. 348, 351...