Appeal from a judgment of the United States District Court for the Eastern District of New York, granting plaintiff trustee in bankruptcy summary judgment on two counts alleging the payment of voidable preferences under § 60 of the Bankruptcy Act. With respect to the first payment, we reverse on the ground that the transfer occurred more than four months before bankruptcy; with respect to the second payment, we remand in order that certain material issues of fact may be resolved.
Before Lumbard, Moore and Meskill, Circuit Judges.
Chemical Bank appeals from a judgment of the United States District Court for the Eastern District of New York, granting the plaintiff trustee in bankruptcy summary judgment on two counts alleging the payment of voidable preferences under § 60 of the Bankruptcy Act, 11 U.S.C. § 96(a) and (b). Chemical Bank also appeals from various interlocutory orders denying its motions to transfer, to add counterclaims, and to implead third parties. The district court held that the two payments in question were voidable preferences after concluding that the first payment was transferred within four months of bankruptcy and that there were no material issues of fact with respect to any of the other elements necessary to establish a voidable preference. We reverse the district court, 454 F. Supp. 341, with respect to the first payment on the ground that the transfer occurred more than four months before bankruptcy, and we remand the question of the second payment on the ground that there are material issues of fact present with regard to several of the necessary elements for a voidable preference. Chemical Bank's motion to transfer is dismissed as moot, and on remand Chemical Bank is granted leave to renew its motions to add counterclaims and to implead third parties.
This case stems from a set of complex contractual agreements between two broker dealers and two creditor banks in the early 1970s.*fn1 The two broker dealers are Walston & Company, Inc., ("Walston") and duPont Glore Forgan, Inc., ("DGF"). The two banks are Security National Bank ("SNB") and the Bank of America National Trust and Savings Association ("BOA"). The Chemical Bank subsequently acquired SNB's assets and assumed certain of its contingent liabilities, and was substituted as the defendant in this action on December 21, 1976. For simplicity's sake, SNB will be referred to as Chemical Bank.
The series of transactions in dispute here began in November, 1972, when Chemical Bank agreed to lend broker-dealer Walston $5 million. Walston entered into a Subordinated Loan Agreement ("SLA") with Chemical Bank for the $5 million*fn2 on November 27, 1972 and the SLA was duly approved by the New York Stock Exchange ("NYSE").*fn3 On February 16, 1973 Walston entered into a substantially identical loan agreement with BOA in the amount of.$2.5 million.
As this Court has previously noted, a number of Wall Street brokerage firms were in deep financial trouble in the early 1970s.*fn4 In 1973 the Perot Interests*fn5 held a minority interest in Walston and a controlling interest in DGF. By June, 1973, DGF was in such serious financial difficulty that the NYSE ordered it to reduce its net capital ratio to less than 10-to-1 by July 2, 1973. The Perot Interests responded by orchestrating a realignment of Walston's and DGF's business. They proposed that Walston and DGF operate as one entity under the name duPont Walston, Inc. Under the terms of the proposed realignment, Walston was to transfer $16.7 million in cash to DGF in return for $8.6 million in DGF subordinated debentures and $8.1 million in DGF preferred stock. The consent of Chemical Bank and BOA was essential to the consummation of the proposed realignment, but both banks refused to consent to such a diminution of Walston's ability to repay their loans unless they received additional protection. Walston thus agreed to divide the proposed $8.6 million DGF debenture into two debentures with face amounts proportionate to Chemical Bank's $5 million loan and BOA's.$2.5 million loan. Walston accordingly pledged a $5,733,333 DGF Debenture to Chemical and a $2,866,667 DGF Debenture to BOA. Walston's Board approved the Realignment on July 1, 1973, and it was formally agreed to by DGF and Walston on July 2, 1973.
To effect the pledge, on July 2, 1973 Chemical Bank and Walston entered into a Pledge Agreement ("PA")*fn6 and an amendment to the SLA. The PA provided in Paragraph 1 that Chemical Bank was being given an immediate security interest in the DGF Debenture:
... BORROWER has pledged with BANK, as pledgee, under the provisions of this Agreement and does hereby grant BANK a security interest in the Senior Subordinated Debenture, due June 30, 1983, of DGF in the principal amount of $5,733,333 payable to BORROWER (the "DGF Debenture') as collateral security for the payment of the indebtedness represented by the Note...."
The PA gave Walston a limited right to receive payments of interest or principal on the debenture, but not in the event of any default. The SLA was amended to conform with the PA. A new Paragraph 8 was added to the SLA stating that Paragraph 3 of the SLA (which consisted of a subordination and no-security provision) was to be construed consistently with the PA.*fn7 At the same time Walston and BOA executed a substantially identical Pledge Agreement granting BOA a security interest in the $2,866,667 DGF Debenture, and BOA's loan agreement was amended accordingly. The DGF Debentures were issued at the time of the Realignment on July 2, 1973, and Chemical Bank took immediate possession of the debenture pledged to it by Walston. The BOA also took possession of the DGF Debenture pledged by Walston.
In January, 1974, at Walston's request, DGF made prepayments to Walston on the DGF Debenture totalling $3.5 million. This reduced the collateral on Chemical Bank's $5 million loan from $5.7 million to $2.2 million. After due protest, Chemical Bank commenced a state court action on February 26, 1974 against Walston, DGF, and others for, inter alia, the recovery of the prepaid $3.5 million. That suit was settled on March 26, 1974 by the payment from DGF to Chemical Bank of $2,233,333. At the same time BOA received a full payment of $2,866,667 on its DGF Debenture.*fn8 Pursuant to an agreement between Chemical Bank and BOA, BOA endorsed over to Chemical Bank a check for $366,666, representing the difference between the $2,866,667 DGF Debenture securing BOA's loan and the $2,500,000 amount of the loan itself. It was understood by both Walston and Chemical Bank that these payments of $2,233,333 and $366,666 would be applied to the reduction of Walston's Senior Subordinated Note.
Walston petitioned for an arrangement under Chapter XI of the Bankruptcy Act on March 27, 1974, and was adjudicated a bankrupt on May 30, 1974. The plaintiff, in his capacity as trustee in bankruptcy for duPont Walston, Inc., filed a 13 count complaint in October, 1974 in the Eastern District of New York alleging that the $2,233,333 and $366,666 payments were transfers of Walston's property recoverable as voidable preferences, fraudulent transfers under § 67(d) of the Bankruptcy Act, and fraudulent conveyances under New York law. Plaintiff filed a motion for summary judgment in September, 1977, and Chemical Bank filed a cross-motion for summary judgment a month later. Chemical Bank had previously filed motions to add counterclaims, to implead third parties, and to transfer.
On July 12, 1978, the district court granted the plaintiff's motion for summary judgment and denied Chemical Bank's motion for summary judgment (all of Chemical Bank's interlocutory order motions were subsequently denied as well). The district court granted the plaintiff summary judgment on Counts One and Thirteen of the Complaint (and dismissed as moot the remaining counts), finding that the two March 26, 1974 payments constituted voidable preferences under § 60(a)(2) of the Bankruptcy Act. The court reached this result after concluding that Chemical Bank's security interest in the $5,733,333 DGF Debenture attached on March 26, 1974 when Chemical Bank received the proceeds of its collateral rather than on July 2, 1973 as specified in the PA. The district court found the parties intended such deferred attachment after reading the PA in the light of the SLA rather than the SLA in light of the PA and the SLA Amendment (whose new Paragraph 8 explicitly amended the subordination clause of the SLA). The district court further found that since there were no material issues of fact with respect to any of the other essential elements necessary to establish a voidable preference, both the $2,233,333 and the $366,666 payments qualified as such. Allegaert v. Chemical Bank, 454 F. Supp. 341 (E.D.N.Y.1978).
It is the position of the defendant Chemical Bank that the district court erred in granting plaintiff summary judgment first because the larger transfer complained of actually occurred on July 2, 1973 with the perfection of the security interest created by the PA, and second because there are genuine issues of material fact present with regard to the necessary elements of a voidable preference. Chemical Bank also appeals from the district court's interlocutory orders denying its motions to transfer, to implead third parties, and to counterclaim.
The plaintiff trustee adopts the district court's interpretation of the PA and SLA, and argues here that Chemical Bank could not have perfected a security interest because the DGF Debenture was neither a "security" nor an "instrument" within the meaning of the New York Uniform Commercial Code ("NYUCC"). The plaintiff trustee also argues that, even if the transfers in question are not voidable preferences, the subordination provisions of the SLA remain in effect. Finally, the plaintiff trustee claims that the district court should have awarded interest on the judgment from the date the preferential transfer occurred rather than from the date when the action was commenced.
We first turn to the question of whether the $2,233,333 payment to Chemical Bank constitutes a voidable preference.
To establish that a voidable preference has occurred, a plaintiff must prove each of the seven elements set forth in § 60 of the Bankruptcy Act, 11 U.S.C. § 96(a) and (b). These elements have been summarized as follows:
(1) making or suffering a transfer of his property,
(2) to or for the benefit of a creditor,
(3) for or on account of an antecedent debt (resulting in a ...