Edelsberg v. Thompson McKinnon Securities Inc. (In Re Edelsberg)

Citations: 101 B.R. 386; 1989 Bankr. LEXIS 909Docket: 19-11207

Court: United States Bankruptcy Court, S.D. Florida.; June 7, 1989; Us Bankruptcy; United States Bankruptcy Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Sam and Esther Edelsberg filed for Chapter 13 bankruptcy on June 23, 1987, with an undisputed obligation to PaineWebber totaling $14,048.76. The case involved a series of transactions between Mr. Edelsberg and PaineWebber, starting with an open trading account from March to December 1985. On November 25, 1985, PaineWebber credited Mr. Edelsberg's account with $8,391.00, which was later identified as a returned check on December 12, 1985. This led to a judgment against Mr. Edelsberg on March 16, 1987, for the returned check amount, including prejudgment interest, costs, and attorney's fees.

PaineWebber garnished Thompson McKinnon Securities, Inc. (TMSI) on March 27, 1987, claiming Mr. Edelsberg's assets. TMSI responded that the only asset they held was a CAT bond in Mr. Edelsberg's individual retirement account, which they argued was exempt from creditor claims under federal law. TMSI also claimed a debt of $6,700 from Mr. Edelsberg and did not deliver the CAT bond to PaineWebber. Additionally, a similar situation occurred with TMSI, where Mr. Edelsberg issued a check for $6,700 that bounced, and subsequent smaller checks also failed.

Despite having setoff and hypothecation clauses in their contract with Mr. Edelsberg, TMSI did not take action to hypothecate or set off the CAT bond against Mr. Edelsberg's debt nor petitioned the court for relief. The matter was not set for trial but decided based on submitted documents and arguments.

An undisputed obligation of $6,900 to TMSI was acknowledged, alongside PaineWebber's Proof of Claim for $14,048.76 stemming from a Final Summary Judgment dated March 16, 1987, which lacked detailed facts about the underlying suit. TMSI also filed a Proof of Claim for $6,700 plus 10% annual interest as a general unsecured claim. Mr. Edelsberg listed an IRA worth $3,982.00 as an asset, and a Chapter 13 plan including this bond was confirmed on August 26, 1987, without objection. PaineWebber asserts a perfected security interest in the CAT bond via garnishment served on TMSI, which is retaining the bond based on a set-off theory.

PaineWebber's claim is set to fail due to several legal reasons. The security interest in the Edelsberg's CAT bond was not properly perfected under Florida law, particularly regarding garnishments. Even if TMSI had other assets that were subject to the Writ of Garnishment, any perfection falls within the preference period and is voidable under 547(b). PaineWebber's reliance on the judgment is hindered by the merger doctrine, preventing them from arguing a different underlying transaction.

The court acknowledges Florida Statutes 222.21 (1987) and Chapter 678, particularly amendments effective October 1, 1987, allowing creditors to access securities held by financial intermediaries, but simultaneously restricting access to retirement plans. The analysis is based on the law as it stood when the garnishment was served on March 30, 1987. It is determined that a CAT bond is a security under both the Securities Act of 1933 and Florida Statutes. As of March 30, 1987, no valid attachment or levy on the CAT bond occurred since PaineWebber never took possession. The garnishment was served 84 days prior to the Edelsbergs' Chapter 13 filing, with the court noting that a Writ of Garnishment is perfected upon service.

Lastly, PaineWebber's claim for an exception under 546(e) for 'settlement payments' is rejected as there was no actual settlement payment; rather, it was an attempt to execute a judgment. The underlying suit likely pertained to a returned check, with the intended settlement amount being $8,966.88, which was reduced to $8,004.06 after setoffs.

PaineWebber filed a lawsuit seeking $8,391.00, corresponding to a returned check. The garnishment concerning TMSI is deemed too distant from a 'settlement payment' as defined in 11 U.S.C. 741(8) to qualify for the exemption under 546(e). TMSI claimed a set-off against Edelsberg's IRA after December 2, 1986, but provided no evidence of the timing or occurrence of this set-off. Instead, TMSI initially argued the IRA was not subject to creditor claims and later filed an unsecured claim for the full amount post-petition, indicating no set-off had occurred. TMSI contended that set-off happened automatically with the reciprocal obligations, citing December 1986, but the law requires manual execution of set-offs, which must comply with New York state law. According to a three-part test established by New York courts, set-off requires a decision to exercise the right, an action fulfilling the set-off, and documentation evidencing this exercise. The court found no evidence of these steps being completed by TMSI, leading to the conclusion that TMSI waived its right to set-off. Furthermore, as set-off did not occur pre-petition, TMSI's refusal to transfer the asset may breach the automatic stay under 362. The court noted that it did not address the waiver of a completed set-off, as evidence indicated no set-off took place prior to the Chapter 13 plan confirmation. TMSI's waiver was passive, stemming from its failure to assert the right of set-off. Additionally, Florida Statutes 222.21, effective October 1, 1987, does not apply here. The debtor focused on 11 U.S.C. 1325 without addressing 29 U.S.C. 1056(d), leaving that argument unexamined. Under a Chapter 13 plan, debtors must meet the liquidation test, ensuring unsecured creditors receive at least what they would in a Chapter 7 liquidation. Both PaineWebber and TMSI are classified as unsecured creditors in this context, and the garnishment's procedural validity is irrelevant as it occurred within the preference period.

PaineWebber's Proof of Claim is categorized as an unsecured claim, with its security interest being voidable by the debtors under 11 U.S.C. § 547(b). TMSI also filed an unsecured Proof of Claim against the estate. The debtors accounted for their IRA funds in their schedules, including these in the calculations for payments to unsecured creditors, ensuring that these creditors received equivalent distributions as they would in a Chapter 7 case. Under 11 U.S.C. § 1327(b), the confirmation of a Chapter 13 plan transfers all estate property to the debtor unless specified otherwise in the plan, which does not grant TMSI rights to the IRA funds. The terms of the confirmed Chapter 13 plan bind both debtors and creditors, impacting any claims regardless of whether objections were filed (In re Flick, 14 B.R. 912). Additionally, property vested in the debtors post-confirmation is free from all creditor claims (11 U.S.C. § 1327(c)). 

After confirmation, unsecured creditors can challenge the plan through several procedural methods, including appeals, motions to alter or dismiss, and adversary proceedings to revoke confirmation (In re Moseley, 74 B.R. 791). Since both PaineWebber and TMSI did not challenge the confirmed plan, the court's confirmation led to the estate's property being vested in the debtors, exempt from pre-petition creditor claims. Consequently, the court ordered that the CAT bond be returned to Sam S. Edelsberg from Thompson McKinnon Securities, Inc. The Individual Retirement Account held by Edelsberg is declared free from pre-petition creditor claims and is to be returned with accrued interest. Notably, TMSI's ambiguous reply to PaineWebber's Writ of Garnishment raises uncertainty about their claims concerning set-offs against the CAT bond or other assets, but implies no set-off against the IRA occurred.