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Matter of Bevill

filed: February 22, 1990.

IN THE MATTER OF BEVILL, BRESLER & SCHULMAN ASSET MANAGEMENT CORPORATION, DEBTOR. SAUL S. COHEN, TRUSTEE OF BEVILL, BRESLER & SCHULMAN ASSET MANAGEMENT CORPORATION
v.
THE SAVINGS BUILDING & LOAN COMPANY, APPELLANT



On Appeal from the United States District Court for the District of New Jersey, D.C. Civil No. 87-4029.

Hutchinson, Cowen and Weis, Circuit Judges.

Author: Cowen

Opinion OF THE COURT

COWEN, Circuit Judge.

This appeal involves the application of the law of setoff to a series of securities repurchase agreements, or "repos," between Savings Building & Loan Company ("Savings") and Bevill, Bresler & Schulman Asset Management Corporation ("AMC"). After AMC filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code, its Trustee, Saul S. Cohen, commenced an action in district court to compel Savings to turnover the value of securities and interest payments AMC claimed it was owed under several repurchase agreements. As a defense to turnover, Savings set up its right to set off the value of the securities and interest payments against a claim it held against AMC. The district court granted summary judgment in favor of the Trustee and denied summary judgment to Savings. We will affirm in part and reverse in part.

I.

AMC was a dealer in government securities, incorporated in New Jersey and maintaining offices in Livingston, New Jersey. Savings, now known as First Federal Savings and Loan Association of Toledo, was one of AMC's customers. AMC and Savings transferred to one another large quantities of government securities by means of repurchase agreements, three of which are at issue here.

The nature of repurchase agreements and their importance in financing the national debt have been discussed extensively in two previous opinions. In re Bevill, Bresler & Schulman Asset Management Corp., 878 F.2d 742 (3d Cir. 1989); In re Bevill, Bresler & Schulman Asset Management Corp., 67 Bankr. 557 (D.N.J. 1986). Only a brief description is necessary here. A repurchase agreement consists of a sale of government-guaranteed securities for cash and a simultaneous agreement by the seller to repurchase the same securities, or ones of equivalent value, at a later date for a premium above the original price. Typically, the securities are sold for an amount of cash less than their face value. The seller may agree to repurchase the securities the next day, or after some longer period. The premium for repurchase is determined by market forces and is unrelated to the interest rates of the underlying securities.

From one point of view, repurchase agreements are nothing more than contracts for purchase and sale of securities. Repurchase agreements have been so characterized for purposes of determining the rights of creditors vis-a-vis the Trustee in these proceedings. In re Bevill, Bresler, 67 Bankr. at 598. There is no question, however, that repurchase agreements also closely resemble secured loans, 67 Bankr. at 597, in which the buyer of securities lends the seller cash for a brief period, using the securities as collateral. On the date of repurchase, the seller pays back the original loan amount plus a premium that may be regarded as interest. The collateral is returned to the seller.

Both parties agree on the material facts. On November 15, 1984, AMC entered into an agreement with Savings under which AMC sold Treasury Bonds, due November 15, 2012, bearing coupon interest of 10.375% and a face value of $1,065,000, to Savings for $934,000 in cash. Simultaneously, AMC agreed to repurchase these securities or their equivalent on February 21, 1985 for $983,197.15. This transaction was reflected in two customer confirmations issued by AMC to Savings, one memorializing AMC's sale of the bonds, the other memorializing AMC's agreement to repurchase. In addition, a separate repurchase agreement was executed. The repurchase agreement stated "Maturing coupons are to be the property of the Buyer," i.e., AMC. Savings paid AMC for the bonds and the bonds were delivered to Savings' custodial account at the SPS Clearing Division of Bradford Trust Company ("Bradford Trust").

On January 28, 1985, AMC entered an agreement with Savings under which AMC sold Government National Mortgage Association ("GNMA") Pool No. 69203, bearing an 11.50% interest rate and due July 15, 2013, to Savings for the face amount of $1,000,000. Simultaneously, AMC agreed to repurchase the security or its equivalent on July 26, 1985. Once again, this transaction was reflected in two customer confirmations, one for the sale and the other for the agreement to repurchase. A separate repurchase agreement was executed as well. This agreement stated that "Maturing coupons are to be the property of the Buyer," i.e., AMC. GNMA coupons take the form of monthly principal and interest payments. Savings paid for the security and the GNMA was delivered to Savings.

On February 21, 1985, in fulfillment of its obligation to repurchase the Treasury Bonds, AMC paid $983,197.15 to Savings. Savings, however, did not deliver the Treasury Bonds to AMC. That same day, AMC entered into three agreements with Savings under which AMC sold securities in three GNMA pools, Nos. 113007X, 111794X and 12811, carrying a total face value of $1,022,405.40, to Savings for a total of $1,000,000 in cash. According to the terms of this sale, AMC was to keep the securities in a "safekeeping" account at Bradford Trust, rather than delivering the securities to Savings. Although Savings paid AMC for the GNMAs, AMC never delivered the securities to safekeeping. The record shows that AMC did not hold the GNMAs in any account at Bradford. At the same time as this fraudulent sale, AMC agreed to repurchase the securities or their equivalent on August 20, 1985 for a total of $1,047,000 in cash. For each of these transactions, AMC issued two customer confirmations to Savings, one for the sale and one for the agreement to repurchase. Separate repurchase agreements were executed as well.

On April 7, 1985, AMC filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. On April 9, 1985, Saul S. Cohen was appointed Trustee. At the time of filing, Savings remained in possession of GNMA Pool No. 69203 and, in addition, retained monthly principal and interest payments on that security amounting to $65,223.33. It also retained possession of the United States Treasury Bonds and coupon interest that had accrued thereon.

On October 5, 1987, the Trustee commenced this action under 11 U.S.C. ยงยง 541, 542 seeking turnover of property held by Savings. Specifically, the Trustee sought turnover of the $1,065,000 of United States Treasury Bonds and all coupon interest accrued thereon (Count One), $65,223.33 in monthly principal and interest payments on GNMA Pool No. 69203 (Count Two) and coupon interest on $25,000 of United States Treasury Notes, due July 15, 1990 (Count Three). The Trustee later learned that AMC had ...


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