Walk-In Med. Ctrs., Inc. v. Breuer Capital Corp.

Decision Date19 November 1991
Docket NumberCiv. A. No. 90-B-567.
Citation778 F. Supp. 1116
PartiesWALK-IN MEDICAL CENTERS, INC., Plaintiff, v. BREUER CAPITAL CORPORATION, Defendant, Mildred Faye Breuer and Grant William Breuer, Garnishees.
CourtU.S. District Court — District of Colorado

COPYRIGHT MATERIAL OMITTED

David Goldberg, Kenneth S. Kramer, Berenbaum & Weinshienk, P.C., Denver, Colo., for Walk-In Medical Centers, Inc.

F. Kelly Smith, Wheat Ridge, Colo., for Mildred Faye Breuer.

J. Bryan Howell, Mitchell & Howell, P.C., Parker, Colo., for Grant William Breuer.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

BABCOCK, District Judge.

This garnishment action was tried to the court for three days beginning on October 28, 1991. The following are my findings of fact and conclusions of law.

I. FINDINGS OF FACT
A. Background, Procedure, and Parties

Plaintiff, Walk-In Medical Centers, Inc. (Walk-In), sued defendant Breuer Capital Corporation (BCC) in the U.S. District Court for the Southern District of New York on January 31, 1984 for breach of a firm commitment underwriting agreement. On December 30, 1986, that court awarded plaintiff damages of $2,610,000.00, plus interest from January 25, 1984. See, Walk-In Medical Centers, Inc. v. Breuer Capital Corporation, 651 F.Supp. 1009 (S.D.N.Y.1986). Mildred Faye Breuer (Faye Breuer) and Grant William Breuer (G.W. Breuer), garnishees here, were not parties to the New York action. The judgment entered against BCC was affirmed by the Second Circuit Court of Appeals. See, Walk-In Medical Centers, Inc. v. Breuer Capital Corporation, 818 F.2d 260 (2d Cir. 1987).

Walk-In lodged the New York judgment against BCC with the U.S. District Court for the District of Colorado in February 1988. In September 1988, Walk-In served writs of garnishment on Faye Breuer and G.W. Breuer seeking to recover BCC's assets. The Breuers denied that they held any BCC asset or owed any money to that corporation. Walk-In traversed the Breuers' answers to the garnishment writs.

Walk-In is a Florida corporation. Its principal office and place of business is at Clearwater, Florida. Walk-In is in the business of establishing, developing, and administering public medical centers for the diagnosis and treatment of non-emergency illness or injury.

BCC was formed as a subchapter S corporation on April 1, 1983 under the laws of Colorado. It was an investment firm and broker-dealer registered with the U.S. Securities and Exchange Commission (SEC) and with the National Association of Securities Dealers (NASD). At all relevant times, BCC was in compliance with all SEC and NASD regulations and net capital requirements.

Faye Breuer was BCC's sole shareholder. She was also its president, treasurer, director, registered agent and principal. G.W. Breuer has been married to Faye Breuer for 18 years. He was never an officer, director, shareholder, agent, employee, principal of or consultant to BCC.

B. The Underwriting and Temporary Subordinated Loan

On August 11, 1983, BCC executed in New York City a letter of intent to act as underwriter on a firm commitment basis for the public offering of 500,000 shares of Walk-In common stock. A "firm commitment" underwriting requires the broker-dealer itself to purchase all unsold shares at the offering price.

To meet SEC and NASD net capital requirements to proceed with this underwriting, Faye Breuer drew down $900,000 on her joint line of credit with G.W. Breuer at Mercantile National Bank in Dallas, Texas. Faye Breuer then loaned the money to BCC on January 17, 1984 under a temporary subordinated loan agreement approved by the NASD. The loan had a scheduled maturity date of January 30, 1984. As the lender, Faye Breuer expressly agreed:

that the obligations of the Broker-Dealer under this Agreement with respect to the repayment of principal and interest shall be and are subordinate in right of payment and subject to the prior payment or provision for payment in full of all claims of all other present or future creditors of the Broker-Dealer arising out of any matter occurring prior to the date of maturity.

On January 18, 1984, Walk-In and BCC executed the firm commitment underwriting agreement in which BCC agreed to sell 500,000 Walk-In shares at $5.40 a share. The agreement contained a "market out" clause which entitled BCC to cancel its obligations upon the occurrence of certain adverse market conditions. The underwriting was originally set to close on January 30, 1984, but all parties agreed to accelerate the closing to January 25, 1984.

At a January 23, 1984 meeting, Ray Dirks, a friend of the Breuers and a broker-dealer himself, told George Resch, president of Walk-In, that BCC would exercise the market-out clause and terminate the underwriting. This action was taken on advice of BCC's attorney. The meeting took place in Tampa, Florida and both Faye and G.W. Breuer were present. After the announcement, G.W. Breuer explained BCC's position to George Resch and G.W. Breuer attempted to negotiate a resolution of the problem.

Walk-In demanded performance on January 25, 1984. BCC failed to perform and Walk-In filed suit on January 31, 1984. Both Breuers knew of the lawsuit shortly after it was filed. On June 8, 1984, Faye Breuer and BCC received their attorney's opinion that BCC had not breached the Walk-In underwriting agreement and that Walk-In would probably not prevail in the New York lawsuit. Until judgment was announced on December 30, 1986, Faye Breuer believed in good faith that BCC would win the New York lawsuit. However, the judgment determined that the market-out clause in the underwriting agreement did not insulate BCC from its breach of that contract.

In early February, 1984, the SEC and NASD investigated the failed underwriting but neither organization issued formal findings or conclusions. BCC was never sanctioned for its walk out from the Walk-In underwriting.

During this time, G.W. Breuer was under pressure from the Mercantile National Bank to pay off the $900,000 draw on the Breuer's joint line of credit because the fall in the price of oil had decreased the value of his collateral for the line of credit. Faye Breuer knew of this pressure on her husband.

In early February, 1984, BCC sought permission from the NASD to repay the $900,000 subordinated loan to Faye Breuer. The NASD initially refused permission, but later that month NASD's position became neutral on whether the loan could be repaid.

BCC paid out $600,000 to Mercantile National Bank to reduce the Breuer's line of credit on February 22, 1984. Subsequently, two more installments of $200,000 and $100,000 were paid to that bank in May and August respectively.

On February 24, 1984, BCC elected to report to NASD under the alternate net capital requirements of the SEC and NASD. The alternate net capital rules did not require BCC to "book" contingent liabilities and increased its net capital requirement from $25,000 to $100,000. Broker-dealers are free to make this election. There is no persuasive or satisfying evidence that BCC ever violated either its net capital requirements or any NASD regulation by repayment of the temporary subordinated loan.

However, I find that Walk-In was a "creditor" within the meaning of the temporary subordinated loan agreement because its claim arose at the failed closing on January 25, 1984, before January 30, 1984, the loan agreement's scheduled maturity date. Further, Faye Breuer then breached the terms of the loan agreement when she accepted and retained repayment of this loan before BCC made provision for payment of Walk-In's claim.

C. BCC Financing and Operations

On February 22, 1984, G.W. Breuer gave Faye Breuer 1,760 shares of Digital Switch convertible subordinated debentures and 215,900 shares of Digital Switch common stock. These securities had a net margined value of $4,226,506.00. However, the securities were declining in value and G.W. Breuer had lost approximately $2 million on them before he gave them to his wife. Faye Breuer knew that her husband was losing money on these securities.

At a special meeting of the BCC board of directors on February 24, 1984, Faye Breuer stated that BCC needed more capital and she transferred the Digital Switch securities to the corporation. Next, at a special meeting of the BCC board of directors on May 11, 1984, Faye Breuer again stated that BCC was in need of additional net capital and she transferred to the corporation various securities she owned with a net value of $799,816.70. Then, on June 11, 1984, G.W. Breuer gave his wife 600,000 shares of stock in various companies. At a special meeting of the Board of Directors on that day, Faye Breuer again stated that the corporation needed to increase its net capital and she transferred the bulk of this stock to BCC.

Faye Breuer called a special meeting of the board of directors on October 19, 1984, during which she stated that BCC was no longer in need of the net capital that she had contributed. She directed that the Digital Switch shares be transferred directly to G.W. Breuer. At this time, G.W. Breuer had no right, title or claim to these securities, nor did he have any loan agreement with the corporation or his wife. Again on December 24, 1984, Faye Breuer caused the BCC board of directors to transfer additional securities to G.W. Breuer because, in her opinion, BCC was no longer in need of this contribution to its net capital. Also at this time, G.W. Breuer had no right, title or claim to these securities nor did he have any loan agreement with the corporation or his wife.

The total value of BCC capital transferred to G.W. Breuer in 1984 was approximately $1.9 million. While BCC owned these securities, the corporation paid the interest and margin calls attributable to them. There is no persuasive or satisfying evidence that the Breuers gained any tax advantage or otherwise personally benefitted from the transfer of these securities into and out of BCC.

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