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In re Applied Logic Corp.

decided: April 27, 1978.

IN RE APPLIED LOGIC CORPORATION, BANKRUPT. NEW JERSEY NATIONAL BANK, PLAINTIFF-APPELLANT,
v.
DANIEL GUTTERMAN, AS TRUSTEE OF APPLIED LOGIC CORPORATION, BANKRUPT, DEFENDANT-APPELLEE



Appeal from an order of the District Court for the Southern District of New York, Gerald L. Goettel, Judge, affirming a decision of Bankruptcy Judge Roy Babitt which disallowed the claim of appellant New Jersey National Bank for set-off and as a secured creditor.

Friendly, Mulligan and Meskill, Circuit Judges.

Author: Friendly

FRIENDLY, Circuit Judge:

This appeal from an order of Judge Goettel in the District Court for the Southern District of New York affirming an order of Bankruptcy Judge Babitt raises questions of some difficulty concerning a bank's rights to exercise a set-off of an unsecured debt owed it by the bankrupt against deposits and certificates of deposit held by the bank. The Bankruptcy Judge and the district court decided adversely to the bank. Although the case is close, we are constrained to reverse.

THE FACTS

The bankrupt, Applied Logic Corporation, (ALC) is a New Jersey corporation in the computer time sharing business whose headquarters were in Princeton, N.J. In 1967 it opened a demand checking account ("the account") with appellant New Jersey National Bank (NJNB) and was given a $100,000 line of credit. ALC incurred indebtedness to NJNB in much larger amounts and became indebted to other banks. By September, 1970, its bank debt had risen to $1,300,000, held as follows:

New Jersey National Bank $650,000

First National Bank of

Princeton 300,000

Chase Manhattan Bank 250,000

First National City Bank 100,000

$1,300,000

In addition ALC had entered into various equipment leases under which it was in arrears in an amount exceeding $2,000,000 and owed Digital Equipment Corp. (DEC) over $1,000,000 for purchases of equipment.

Discussions between ALC, the banks, five lessors, and DEC resulted in an agreement dated September 2, 1970. Summarily stated, this provided as follows: The five lessors granted a moratorium on all rental payments until August 1, 1971; the deferred payments were to be paid in 26 equal monthly installments beginning on that date except that if ALC's cash flow would not permit, the beginning date for the deferred payments could be postponed to August 1, 1972. The banks also agreed to forbear demand for payment of principal until August 1, 1971. The bank indebtedness was to be converted into two notes "payable at the New Jersey National Bank" one in the amount of $300,000, "which shall be held by New Jersey National Bank on behalf of First National Bank of Princeton", and the other in the amount of $1,000,000, "which shall be held by New Jersey National Bank on behalf of the other Banks."*fn1 Payment of interest on the $300,000 but not on the $1,000,000 note was deferred until August 1, 1971. ALC was to "conduct all banking of its funds at and through New Jersey National Bank until both notes are paid." Special arrangements, unnecessary here to detail, were made between ALC and DEC. NJNB extended to ALC an irrevocable line of credit in the amount of $750,000 until August 1, 1971. None of this was to be drawn down unless ALC raised $300,000 through the sale of convertible notes. The banks other than First National Bank of Princeton were to participate ratably in this line of credit. All loans taken by ALC pursuant to the new line of credit were to be secured in a manner detailed in the agreement and interest was to be paid monthly.

The 1970 agreement also provided for a committee of five members, one member for each of four lessors and NJNB, which was to monitor ALC's business. Any member of the Committee could cause the agreement to be terminated if for monthly periods ending on June 30, 1971, ALC's cash expenditures exceeded cash receipts by more than specified amounts, or operating revenues fell below specified amounts, or in certain other events. Any three members of the Committee could terminate the agreement if more rigorous terms were not met.

On May 25, 1971, ALC took down the last $100,000 of the line of credit provided by the 1970 agreement.*fn2 Although, as stated, Chase Manhattan Bank and First National City Bank had agreed to participate in the loan, NJNB alone advanced the $100,000. In the demand note evidencing the loan, ALC pledged as security:

All unencumbered assets, including specifically: Fixtures and equipment as listed in Schedule A-B attached, all inventory and after acquired inventory, all accounts receivable now or arising hereafter, all notes receivable as listed on Exhibit # 1, attached.

The note was accompanied by a security agreement and a financing statement containing the same statement of collateral, the latter of which apparently were filed in accordance with ยง 9-401 of New ...


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