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PRUDENTIAL INS. CO. OF AMERICA v. BMC INDUS.

March 31, 1986

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, et al., Plaintiffs, against BMC INDUSTRIES, INC., Defendants


The opinion of the court was delivered by: SWEET

SWEET, D.J.

Plaintiffs, the Prudential Insurance Company of America, Teachers Insurance and Annuity Association of America, Manufacturers Hanover Trust Company and State Street Bank and Trust Company (collectively the "Plaintiffs"), entered into an agreement (the "Note Agreement") for the purchase and sale of convertible subordinated notes (the "Notes") with the defendant, BMC Industries, Inc. ("BMC") on December 13, 1984. The Note Agreement provided for the sale of $30,000,000 of BMC's notes to the Plaintiffs and obligated BMC to make interest payments on the unpaid balance at the rate of 12 1/2% per year, payable on February 1, May 1, August 1, and November 1 of each year. In this action, the Plaintiffs allege that BMC failed to disclose material information and misrepresented material facts during the negotiations prior to the signing of the Note Agreement and seek rescission of that agreement.

The Plaintiffs have now brought consecutive motions seeking permission to deposit interest payments to the court pursuant to Rule 67, Fed.R.Civ.P., or in the alternative, to strike BMC's defense alleging ratification of the Note Agreement. As more fully described below, the Plaintiffs' motions will be denied.

 Prior Proceedings

 The complaint alleges that on December 14, 1984, one day after the parties executed the agreement, the Plaintiffs learned of alleged misstatements and omissions which occurred during the previous four months. The parties were unable to negotiate a resolution. On January 22, 1985, the Plaintiffs assert that they made a demand for rescission, and on June 25, 1985, the Plaintiffs commenced this action. The complaint seeks, among other relief, rescission of the Note Agreement and restoration to each plaintiff of the amount paid to BMC for the purchase of the Notes plus interest.

 During February, 1985 and May, 1985, BMC wired interest payments required under the Note Agreement to the Plaintiffs. All of these payments were returned except for certain payments received by Manufacturers Hanover. There is a dispute about whether the retention of those payments was intentional or merely a clerical error. On August 1, 1985, BMC sent the third interest payment, which was not returned. On August 27, 1985, the Plaintiffs submitted its Rule 67 motion for an order permitting the Plaintiffs to retain the third interest payment or pay it into court without prejudice to its claims in this action. The motion was deferred until December 20, 1985 due to a pending motion to transfer the litigation which was eventually denied. BMC sent a fourth interest payment to the Plaintiffs on November 6, 1985 which was also retained. There is a dispute as to whether the parties had consented to the acceptance of this interest payment without prejudice to the Plaintiffs' claims in this action. The Plaintiffs assert that BMC agreed that this fourth payment was made subject to the pending Rule 67 motion. However, BMC stated by letter of November 6, 1985 that "acceptance of these interest payments constitutes ratification of the Note Agreement."

 The Plaintiffs thereupon filed another motion on January 2, 1986, pursuant to Rule 12(f), Fed.R.Civ.P., to strike BMC's Sixteenth Defense which asserts: "Plaintiffs are not entitled to equitable relief because they have ratified the Note Agreement by their conduct since its execution, including acceptance of interest payments made by BMC to them thereunder."

 Discussion

 A. Rule 67

 The Plaintiffs have brought a motion pursuant to Rule 67, Fed.R.Civ.P., seeking to have the court approve the deposit into the court of all interest payments received by the Plaintiffs. This motion, which was submitted one month before the motion to strike BMC's defense of ratification, seeks to use the procedural device of Rule 67 to resolve the issue of whether the Plaintiffs' acceptance of the interest payments constituted ratification of the Note Agreement.

 Essentially, the Plaintiffs wish to have the payments held safely at a distance by the court, thereby avoiding the issue of ratification by acceptance on the one hand and the possibility of later unavailability should the funds be returned to BMC. Initially the Plaintiffs requested that BMC be compelled to make interest payments to the court, but this aspect of the motion was appropriately withdrawn since no authority for such an order is provided by Rule 67. Thus, the motion merely contemplates that funds now in the possession of the Plaintiffs be voluntarily deposited pending the outcome of this action.

 The Plaintiffs' motion to invoke Rule 67 will be denied since this procedural device was only intended to provide a place of safekeeping for disputed funds pending resolution of a legal dispute and not to provide a means of altering the contractual relationships and legal duties of each party. As several courts have held, Rule 67 may not be used to effect a legal transfer of property between the litigants. In Dinkins v. General Aniline & Film Corp., 214 F. Supp. 281 (S.D.N.Y. 1963), the court denied a motion by the defendant to permit the deposit of moneys due under a contract to the court rather than to the plaintiff while at the same time asserting his compliance with the contract. See also General Pencil Co. v. George N. Kahn Co., 246 F. Supp. 60, 61-62 (S.D.N.Y. 1965). Similarly, in Baxter v. United Forest Products Co., 406 F.2d 1120, 1126 (8th Cir. 1969), the plaintiff affirmed a contract and sued for damages, but at the same time sought to utilize Rule 67 to avoid having to fulfill its obligation to make payments to the defendant pursuant to the contract. The court held that it would be inappropriate to construe Rule 67 as a means of altering the legal rights and duties of each party. Moreover, the court held that Rule 67 was "not intended as an 'equitable' alternative to the applicability of state law under Rule 67" to seize property for the purpose of securing a later judgment. Id. at 1126. In accordance with these principles, therefore, the Plaintiffs will not be permitted to deposit interest payments with the court simply to avoid confronting the issue of ratification raised by BMC's Sixteenth Defense.

 Rule 67 is also inappropriate because the sum of money is not itself in dispute. Each side concedes that the Plaintiffs are entitled to payments in excess of the funds already in their possession no matter what the outcome of this litigation. The dispute is not over the disposition of these funds but rather over the underlying contract and thus the final duty of BMC to continue payments as interest on a valid contract or to restore the consideration paid for a voidable contract with credit for payments already made. Since there is no real dispute concerning the funds ...


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