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In re Continental Vending Machine Corp.

decided: January 22, 1974.

IN THE MATTER OF CONTINENTAL VENDING MACHINE CORP. AND CONTINENTAL APCO, INC., DEBTORS. JAMES TALCOTT, INC., APPELLANT,
v.
IRVING L. WHARTON, TRUSTEE, APPELLEE



Appeal from a judgment and order of the United States District Court for the Eastern District of New York, Jacob Mishler, Chief Judge, denying an application by James Talcott, Inc. for an order directing the trustee in bankruptcy of Continental Vending Machine Corp. to pay it $333,550 principal plus $541,936 interest claimed to be due as of December 31, 1971, on certificates issued by the trustee and by a conservator for Continental and directing Talcott to render an accounting of all moneys received from or on account of Continental and its wholly owned subsidiary, Continental Apco, Inc. Remanded for further proceedings.

Lumbard, Mansfield and Mulligan, Circuit Judges.

Author: Mansfield

MANSFIELD, Circuit Judge:

This appeal arises from a refusal by the trustee in bankruptcy of Continental Vending Machine Corp. ("Continental") to make payment on several certificates issued by him and by his fiduciary predecessor, a court appointed conservator for Continental, in connection with three loans by James Talcott, Inc. ("Talcott"), a New York corporation, to Continental and its wholly owned subsidiary, Continental Apco, Inc. ("Apco"). Talcott applied for a court order directing payment on the certificates on September 25, 1972. The trustee maintained, and the district court found, that payment should be denied on the ground that Talcott had disregarded its obligation under an agreement entered into by it on August 14, 1964, which was construed by the court to require it, before it could look to the trustee for payment, first to use certain funds realized from the sale of certain of Continental's vending routes to satisfy the certificates. The district court also ordered Talcott to account for all moneys received from or on account of Continental or Apco and to apply them according to its agreement as construed by the court. Because we do not accept the view that the agreement was unambiguous we remand for more detailed findings and conclusions as to the circumstances surrounding the agreement and the intent of the parties in entering it.

Continental and its subsidiary Apco are in the vending machine business, with Continental operating several "routes" of vending machines and Apco manufacturing such machines. Continental's agreement with Talcott, dated August 14, 1963, the terms of which are at issue here, was entered by the parties in the course of a long series of financial arrangements involving Apco as well as Continental and beginning, for our purposes, in 1960. Any attempt to understand the obligations of the parties requires a review of their rather complex and convoluted prior dealings with each other.

The background begins on May 11, 1960, when Talcott, a New York corporation engaged principally in the business of lending money, agreed to advance to Continental up to 75% of the net amount of Continental's accounts receivable in exchange for an assignment to Talcott of these accounts plus the right to hold "all property of [Continental] at any time to its [Continental's] credit or in [Talcott's] possession or upon or in which [Talcott] may have a lien or security interest, as security for any and all obligations of [Continental] at any time owing to [Talcott] . . . ." On April 1, 1961, Talcott entered a similar financing agreement with Apco and received an assignment of Apco's accounts receivable.

Early in 1963 a deteriorating financial situation at Continental led to the court's appointment, upon application of the Securities and Exchange Commission to the Southern District of New York, of a conservator, John P. Campbell. Apco was not a party to the conservatorship proceedings and continued to operate as a going concern outside the conservatorship. On May 29, 1963, Campbell, acting with authorization from Judge Bonsal of the Southern District, borrowed $175,000 from Talcott for Continental and gave a conservator's certificate*fn1 guaranteeing repayment of this loan.

On June 24, 1963, Apco borrowed $200,000 from Talcott to keep its operations continuing. In connection with this loan Apco delivered to Talcott notes promising repayment, which stated that the notes were issued pursuant to the April 1, 1961, financing agreement between Apco and Talcott and that they were entitled "to all the benefits of any security provided therein." Six months later, after Continental had gone into reorganization pursuant to Chapter X of the Bankruptcy Act, 11 U.S.C. ยง 501, et seq., its trustees in bankruptcy were authorized to issue certificates guaranteeing repayment of Talcott's earlier $200,000 loan to Apco.

Thus, at all times relevant to this appeal, Talcott's May 29, 1963, loan of $175,000 to Continental was evidenced by conservator's certificates and Talcott's June 24, 1963, loan of $200,000 to Apco was not only evidenced by Apco's promissory notes and secured by the assignment of receivables pursuant to the April 1961 financing agreement but also guaranteed by certificates issued by trustees for Continental. In addition Talcott, as the financier of many of Continental's "routes," held (1) mortgages and conditional sales agreements on the vending machines located on these routes, (2) assignments of route location contracts, and (3) provisions for cross-collateral in route financing agreements, similar to the provisions that were part of the 1960, 1961 and 1963 financing agreements already described.

The involuntary petition for the reorganization of Continental under Chapter X of the Bankruptcy Act was filed in the United States District Court for the Eastern District of New York on July 10, 1963, and approved by Judge Mishler of that court on July 12, 1963, with Campbell and Irving I. Wharton being appointed as trustees. When Apco, still neither in conservatorship nor in reorganization, needed more money to stay in business and to exhibit a new machine to the industry, it sought a further loan from Talcott which agreed, subject to approval by the Eastern District of New York, to lend it an additional $650,000 pursuant to the terms of existing financing agreements (i.e., the April 1, 1961, and June 24, 1963, agreements between the parties), to be evidenced by promissory notes, provided the loan would be additionally secured by certificates issued by Continental's trustees guaranteeing repayment of the loan and, subject to certain conditions, by part of the proceeds expected to be realized from Continental's sale of certain of its vending routes. An agreement purporting to incorporate the terms of the loan was drafted. Since this appeal arises out of a dispute as to the meaning of certain provisions of that agreement, it is the key document for present purposes.

On August 14, 1973, an application was made by Continental's trustees and by Apco for authorization to enter into the agreement with Talcott for the $650,000 loan. The application stated that the debt service on the routes to be sold exceeded the cash flow (profit before debt service) by some $500,000 per year and that because of "the enormous amount of debt claimed by (creditors with loans secured by the routes) there appears to be no equity in the routes." However, the application went on to state that the debtor owned the inventory in these routes, estimated as worth $450,000, free and clear of any liens, that sale of the routes would enable the debtor to realize on the inventory, and that the $650,000 loan from Talcott would provide working capital that would enable manufacture of machines to be undertaken.

The agreement itself, also dated August 14, 1963, stated in pertinent part:

"The Trustees of Continental will bring on for sale . . . . the so-called Santa Ana, San Francisco and Buffalo cigarette and music routes. . . . . The total funds received from the sale of the three routes above-mentioned, exclusive of the amounts attributable to inventory value, shall be paid to you [Talcott] on closing of the sale, and you hereby agree to credit Continental in reduction of its debts, obligations and liabilities to you the total amount of the funds received by you from such sale less all payments [necessary to satisfy vendor's or lendor's liens or encumbrances] . . . . You further agree that after you have given such credit . . . . the surplus, if any, then remaining in your hands shall be turned over to the Trustees.

"We also represent that the said Trustees will bring on for sale . . . . the so-called Detroit route . . . . the so-called Hammond, Indiana route and the ...


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