IN RE: CALUMET FARM, INC. CASE NO. 91-51414

UNITED STATES BANKRUPTCY COURT 

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

CALUMET FARM, INC. CASE NO. 91-51414

DEBTOR

 

AXMAR STABLE, a Division of The

Axmar Investment Company, a general

partnership of various trusts described

herein, through Betty G. Marcus, and

Ziuta G. Akston, as trustees therefor PLAINTIFF

 

 

vs. ADVERSARY NO. 91-5231

 

IBJ SCHRODER BANK & TRUST COMPANY

and CALUMET FARM, INC. DEFENDANTS

 

 

 

MEMORANDUM OPINION

 

 

This matter is pending on the motion of the defendant, IBJ Schroder Bank & Trust Company, for summary judgment on all counts of the plaintiff's amended complaint filed March 4, 1992.

FINDINGS OF FACT

On or after August 10, 1987, the plaintiff, Axmar Stable, and the debtor, Calumet Farm, Inc., entered into a partnership agreement by which they formed, pursuant to the laws of the Commonwealth of Kentucky, a general partnership under the name Calumet-Axmar Partnership, to acquire, own, breed, race and sell thoroughbred horses. The agreement is dated August 10, 1987, but may not have been executed by Betty G. Marcus in behalf of Axmar Stable until March of 1988. [Deposition of Betty G. Marcus, June 12, 1991, in Axmar Investment Co. v. Calumet Farm, Inc., Civil Action No. 91-212, U.S. District Court, E.D. Ky., Lexington Division, Vol. I, pgs. 79, 98-104 (Exhibit 33 to IBJ Schroder's motion for summary judgment, Mar. 20, 1992)]. References hereinafter to this transcript are indicated by the abbreviation Tr. and page number.

Betty G. Marcus, along with her husband, Robert P. Marcus, and her mother, Ziuta Akston, manages Axmar Stable as a division of Axmar Investment Company, a partnership of which Mr. and Mrs. Marcus and Mrs. Marcus' mother are the general partners.

Axmar Stable was established as a division of Axmar Investment Company in the late 1970's or early 1980's. At that time it employed Executive Bloodstock Management to manage its horse business. The officials of Executive Bloodstock Management were Barry Weisbord, bloodstock agent, Alan Goldberg, a horse trainer, and Marc Rash, an accountant. [Tr. 22-31].

In August of 1987, acting on the advice of Marc Rash, Axmar purchased four thoroughbred horses sold by Calumet through the Saratoga sales. Prior to the sale Mrs. Marcus and J. T. Lundy, President of Calumet, reached an understanding that if Axmar bought the horses at the sale, Calumet would have an option to buy back a one-half interest in the horses. This was the genesis of the partnership arrangement between the parties. [Tr. 46-70].

Utilizing a line of credit it had previously established at Citizens Fidelity Bank and Trust Company, Axmar paid $3,375,000 for four Calumet horses at the August 1987 Saratoga sales. Axmar contributed these four horses to the partnership. Calumet contributed to the partnership five thoroughbred horses. In entering into this transaction Mrs. Marcus relied on the advice of Executive Bloodstock Management and Marc Rash in particular. Mr. Rash had been advising her on the acquisition and management of horses of Axmar Stable for several years prior to this transaction.

Axmar Stable executed a note for $1,625,000 ostensibly representing the difference between the $3,375,000 it paid for the four Calumet thoroughbreds and $5,000,000, the amount each partner was to contribute to the capitalization of the partnership. However, this note was not made payable to the partnership. It is made payable to Calumet Farm, Inc. To secure payment of the note Axmar Stable executed a security agreement conveying to Calumet Farm, Inc. a security interest in Axmar's one-half interest in the Calumet-Axmar Partnership and the proceeds and products thereof. It seems to be conceded that Calumet perfected its security interest in Axmar's interest in the partnership. The partnership agreement provided that each partner would contribute to the partnership initially assets with a fair market value of $5,000,000. The only way this result can be achieved is on the assumption that the five horses which Calumet contributed to the partnership were valued at $1,625,000 in excess of $5,000,000 and that Axmar purchased a $1,625,000 interest in those five horses.

The partnership commenced business without any operating capital. According to Mrs. Marcus, Calumet was obligated to maintain the horses at its expense as a form of additional capital contribution to the partnership. The partnership agreement is silent as to the obligation of the parties in this respect.

The agreement provided that the day to day management of the partnership was to be conducted by the partners, and that in the event the parties were unable to resolve a decision, Marc Rash was to make a good faith decision that would resolve any dispute. Obviously, Mr. Rash was authorized to act for both parties in this respect. In consideration of his assistance in the formation of the partnership and continued assistance thereto, the partnership agreed to assign to Rash two lifetime breeding rights in any thoroughbred colt then owned by the partnership which is retired from racing and retained by the partnership for breeding purposes.

The partnership was short lived. In May of 1988 Calumet needed money to pay insurance premiums due to Equus Limited, Inc. for insurance on Calumet thoroughbreds. IBJ Schroder Bank & Trust Company agreed to grant to Calumet a loan in the amount of $3,050,400 for this purpose. To secure payment of the note evidencing this indebtedness Calumet executed a security agreement granting to the bank a security interest in the Axmar Stable note in the amount of $1,625,000 payable to Calumet and in the security agreement executed by Axmar to Calumet in connection with the note, and all the proceeds of the foregoing. The Axmar note and security agreement were assigned to the bank by an assignment dated May 31, 1988. Axmar consented to the assignment. See letter dated May 25, 1988, signed by Calumet and the bank advising Axmar Stable of this transaction and instructing Axmar that any payments on the note should be made to the bank. Axmar acknowledged receipt of this letter and accepted and confirmed these instructions on May 31, 1988. Exhibit No. 7 to IBJ Schroder's motion for summary judgment.

The loan agreement between Calumet and IBJ Schroder provided that to further secure Calumet's obligations under the note evidencing the loan, Calumet-Axmar Partnership shall, pursuant to an hypothecation agreement, assign, pledge and grant to the bank a security interest in and a lien upon all the horses from time to time listed on any Schedule A to the hypothecation agreement. The horses listed on Schedule A were all the horses owned by the partnership. The hypothecation agreement was executed by Betty G. Marcus for Axmar Stable on June 11, 1988. [Tr. 139].

According to Mrs. Marcus she signed the hypothecation agreement in reliance on representations of Marc Rash that IBJ Schroder Bank would make a separate loan to Axmar Stable in the amount of $2,000,000 on the same terms as the loan to Calumet secured by the same collateral, the horses of the partnership, and that she would be able to use the proceeds of this loan to pay off Axmar's $1,625,000 note to Calumet that had been assigned to the bank. The loan to Calumet was concluded. There was no separate loan transaction between the bank and Axmar Stable secured by the assets of the partnership.

On or about November 22, 1988, Gary Matthews, counsel for Calumet, called about Axmar's failure to make the first installment payment of $300,000 on the Axmar note to Calumet. This payment was due on or before October 1, 1988.

By way of explanation of nonpayment of the note Mrs. Marcus insists Marc Rash told her that Calumet would use part of the proceeds of the $3,050,400 loan it had obtained from the bank to pay off the Axmar note payable to Calumet that Calumet had assigned to the bank. But she says Calumet was not aware of Mr. Rash's representation that the loan proceeds would be used in this manner and they were not so used. There is no evidence that either IBJ Schroder Bank or Calumet were aware of the alleged representations of Mr. Rash in connection with this loan transaction. [Tr. 142-150].

Approximately one year later, in April of 1989, a proposal was submitted to IBJ Schroder Bank & Trust Company requesting a traditional credit facility in the amount of $5,000,000 for the Calumet-Axmar Partnership secured by the partnership assets and the guarantee of each partner to the extent of $2,500,000. Each partner would be able to draw up to $2,500,000 of the credit facility through the partnership. The partnership would initially borrow approximately $2,000,000 which would be allocated to Axmar's capital account and then distributed to Axmar. Axmar would use these funds to pay off its note to Calumet. This proposal was rejected by the Bank. The bank advised that to consider a loan under these terms Betty Marcus would have to personally guarantee the Axmar portion and the bank would have to be provided with a financial statement for her. See Exhibits 12 and 13 in support of IBJ Schroder's motion for summary judgment.

Thereafter, in June of 1989, IBJ Schroder Bank agreed to approve a $5,000,000 line of credit to Calumet Farm, Inc. secured by thoroughbred horses acceptable to the bank having a value of twice the amount of the loan. See Exhibits 14 and 15 in support of IBJ Schroder's motion for summary judgment. The need for collateral to secure this loan may have been a motivating factor for Calumet's desire to terminate the Calumet-Axmar Partnership.

Axmar also wanted out of the partnership agreement because of the misunderstanding over whether Axmar's note to Calumet was to have been satisfied from the proceeds of the May 1988 loan from IBJ Schroder Bank to Calumet, a misunderstanding over whether Axmar was responsible for one-half of the expenses for upkeep of partnership horses, and the fact that Mrs. Marcus' husband had become seriously ill and they were no longer able together to enjoy their participation in the horse business. [Tr. 151-159; 162-170].

By their joint letter dated June 30, 1989, sent via telecopier, Gary Matthews, counsel for Calumet Farm, Inc., and Austin Mittler, counsel for Axmar Stable, advised Marc Rash that Axmar and Calumet had reached an agreement to terminate the Calumet-Axmar Partnership. Copies of the letter were sent to J. T. Lundy, President of Calumet, and Mrs. Marcus. [Tr. 172]. The terms of the agreement are set out in the letter. A draft Agreement for Sale of Partnership Interest dated July 10, 1989, indicates that under the original proposal Calumet was to purchase Axmar's interest in the partnership on terms similar to those subsequently incorporated into a redemption agreement. By cover letter dated July 11, 1989, Matthews sent to IBJ Schroder Bank copies of the June 30, 1989 letter containing the outlines of the partnership termination agreement and draft Agreement of Sale of Partnership Interest. The agreement provided that Calumet would cancel Axmar's note and security agreement relating thereto and would pay Axmar $3,375,000 in installments, that Calumet would obtain the consent of IBJ Schroder Bank to the foregoing and would obtain the consent of the bank to release Axmar from liability under the documents relating to the bank's May 25, 1988 loan to Calumet. See Exhibit No. 16 to IBJ Schroder's motion for summary judgment. The unpaid balance of this loan was approximately $2,000,000.

Negotiations for termination of the partnership agreement continued between July and December of 1989, as did the negotiations between Calumet and IBJ Schroder Bank for the $5,000,000 line of credit to Calumet. Apparently, Calumet was unable to provide collateral to secure repayment to Axmar of its investment in the partnership. [Tr. 174-175]. Under the terms of the June 30, 1989 agreement between the parties, Calumet was to purchase Axmar's interest in the partnership. The cash portion of the installments evidenced by the note to be executed by Calumet to Axmar for the purchase price was to be secured. The redemption agreement ultimately executed by the parties does not so provide.

Under the redemption agreement it is the partnership rather than Calumet that purchased Axmar's interest in the partnership. The note for the purchase price was executed by the partnership and is an obligation of the partnership although Calumet guaranteed payment of the note and agreed it is a primary obligor and not a secondary obligor on the note and that its liability on the note was joint and several with that of the partnership.

Axmar Stable and Calumet Farm, Inc., in their capacity as partners of the Calumet-Axmar Partnership and acting for and in behalf of the partnership, executed a redemption agreement whereby the partnership agreed to redeem all of Axmar's right, title and interest in the partnership. The agreement is dated December 11, 1989. It was apparently executed by J. T. Lundy in behalf of Calumet Farm, Inc. as a partner on or about that date. The agreement was executed by Betty G. Marcus in behalf of Axmar Stable in early January 1990. [Tr. 175-176]. Pertinent provisions of the redemption agreement are as follows:

1. Redemption of Partnership Interest. Subject to the terms and conditions and for the consideration hereinafter set forth, upon the execution of this Agreement, the entire right, title and interest which Axmar holds in the Partnership (the "Partnership Interest") shall be deemed to be redeemed. Upon the execution hereof, Axmar shall cease to be a partner in the Partnership and shall cease to have any obligations of a partner thereunder. The partnership covenants and agrees that, from and after the date hereof, the Partnership shall perform all obligations of the Partnership to third parties....

 

2. Transfer of Partnership Assets. Axmar hereby assigns and transfers to the Partnership ... any and all right, title and interest which Axmar has in the property and business of the Partnership, and represents to the Partnership only that, upon such transfer, the Partnership shall receive good and valid title to such right, title and interest of Axmar. The Partnership Interest and such right, title and interest are subject to the rights of IBJ Schroder Bank and Trust Company ("Schroder Bank") pursuant to an Hypothecation Agreement dated May 25, 1988 between Schroder Bank and the Partnership, an Assignment of Proceeds dated May 31, 1988 executed and delivered to Schroder Bank by the Partnership and any and all other documents relating to the pledge of Partnership Assets to secure loans from Schroder Bank to Calumet (collectively the "Schroder Documents"). The Partnership and Calumet hereby represent and warrant to Axmar that Schroder Bank has agreed to release Axmar unconditionally from any and all liabilities and obligations of any nature whatsoever relating to or arising out of the Schroder Documents, including any obligations or liabilities Axmar might otherwise have as signatory thereto, and that an accurate copy of the written release executed by Schroder Bank has previously been provided to Axmar.

 

3. Note. Simultaneously with the execution of this Agreement, the Partnership is executing and delivering to Axmar a promissory note in the form attached hereto as Attachment A (the "Note") in the principal amount of $1,675,000 payable in two installments as follows: $837,500 on or before December 1, 1990 and $837,500 on or before December 1, 1991.

 

4. Live Foal Seasons.

 

(a) Conveyance of Seasons. On or before December 1, 1989, the Partnership shall convey to Axmar the 1990 live foal seasons set forth below having a total value equal to $1,700,000. For purposes hereof, each such live foal season shall be assigned the value (the "Assigned Value") set forth opposite such season below.

 

Live Foal Seasons Value For Each Season

 

Three (3) live foal seasons $250,000.00

to ALYDAR

 

Four (4) live foal seasons $100,000.00

to SECRETO

 

Five (5) live foal seasons $50,000.00

to WILD AGAIN

 

Five (5) live foal seasons $30,000.00

to CAPOTE

 

Five (5) live foal seasons $30,000.00

to MOGAMBO

 

. . . .

 

It should be noted at this point that the partnership probably did not have funds or sufficient income to make the note payments required by paragraph 3 of the redemption agreement. Nor did the partnership own any live foal seasons in the stallions listed in paragraph 4(a) of the redemption agreement and therefore had no such seasons to convey to Axmar as required by this paragraph of the redemption agreement. However, by paragraph 16 of the redemption agreement Calumet agreed to make capital contributions in cash and seasons to the partnership in order to fully enable the partnership to perform its obligations under the agreement.

Other pertinent provisions of the redemption agreement, including paragraph 16 containing the guarantee of performance by Calumet, are as follows:

5. Cancellation of Axmar Note. Upon the execution of this Agreement, the promissory note dated August 11, 1987 in the original principal amount of $1,625,000 executed and delivered by Axmar to Calumet (the "Axmar Note") and the Security Agreement of even date therewith between Axmar and Calumet securing the Axmar Note shall be cancelled and terminated in their entirety and shall be of no further force or effect, the parties hereto shall have no obligations thereunder and any and all obligations of Axmar under the Axmar Note, including any past or future obligations to pay principal, interest or penalties, shall be cancelled and terminated in their entirety. Calumet and the Partnership hereby represent and warrant that all consents required of Schroder Bank to the cancellation of the Axmar Note have been obtained, and an accurate copy of the written consent signed by Schroder Bank have been provided to Axmar.

 

6. Application of Sale Proceeds, Racing Revenue. The Partnership hereby covenants and agrees that, until such time as the Note is paid in full, fifty percent (50%) of the net proceeds (after deducting sales expenses) received by the Partnership and/or Calumet from any sale or transfer of any or all of the Partnership Assets shall be paid to Axmar, and that the Partnership shall pay to Axmar, from its own funds and not from such proceeds, an additional amount equal to fifty percent (50%) of such net proceeds. Such amounts shall be applied (i) if received by Axmar on or before November 15, 1989, as a payment in cash pursuant to Section 4(c) of a portion of the $1,700,000 in value specified therein, or (ii) if received by Axmar after November 15, 1989, to prepayment of the then outstanding installments of principal under the Note, and any accrued but unpaid interest thereon, in inverse order of maturity, provided, however, that if the purchase price for a Partnership Asset is to be paid to the Partnership or Calumet in installments, then for purposes of this Section 6, such purchase price shall be deemed not to have been received by the Partnership or Calumet to the extent any such installments remain unpaid.

 

The partnership further covenants and agrees with respect to each horse included on Exhibit 1 hereto that the Partnership will pay to Axmar an amount equal to any net racing income (after deducting trainer's and jockey's percentages) in excess of $500,000 earned by such horse, such amount to be applied to prepayment of the then outstanding principal balance of the Note, and any accrued but unpaid interest thereon, in inverse order of maturity. The Partnership and Calumet hereby represent and warrant that any consent required of Schroder Bank to such application of such sale proceeds and racing income has been obtained and that an accurate copy of the written consent signed by Schroder Bank has been provided to Axmar.

 

7. Allocation of Liquidation Payment. The Partnership's payments to Axmar pursuant to this Agreement, whether in cash or property, shall be allocated in accordance with the fair market value of Partnership's assets, so that the portion of such payments attributable to Axmar's interest in the Partnership's property as defined by Section 736(b) of the Internal Revenue Code of 1986, as amended (the "Code"), shall be treated by the parties thereto as a distribution in liquidation of the Partnership.

 

. . . .

 

10. Release. The Partnership and Calumet hereby agree that upon the execution of this Agreement, any and all obligations of Axmar under the Partnership Agreement, including any obligations to pay past or future partnership expenses or contributions or to perform any covenants and agreements set forth in the Partnership Agreement, shall be cancelled and terminated in their entirety, and Axmar shall have no obligation to perform the same. Simultaneously with the execution hereof, the parties are executing and delivering a mutual release in the form attached hereto as Attachment B.

 

. . . .

 

12. Lifetime Breeding Rights.

 

(a) Grant of Rights. The Partnership hereby agrees that Axmar shall be entitled to one lifetime breeding right in each of the Partnership colts listed on Exhibit 1 hereto which shall become a stallion. Each of such breeding rights shall entitle the holder thereof, at no cost to such holder, to nominate one mare to bred (sic) to each such colt each breeding season (an "Annual Nomination") after such colt becomes a stallion ... and is breeding sound. In the event that the Partnership and/or Calumet sells, syndicates or otherwise transfers a colt listed on Exhibit 1, or an interest therein, the agreements and other documents relating to such sale, syndication or transfer shall refer to, and shall provide that the transferee and the transferee's successors and assigns will honor, the breeding rights set forth in this Section 12, and the Partnership and/or Calumet shall deliver a copy of such documents to Axmar.

 

. . . .

 

14. Partnership Filings: Racing of Partnership Horses.

 

(a) Required Filings. The Partnership shall provide any and all notifications, shall make any and all filings, and shall file any and all amendments, required as a result of the redemption of the Partnership Interest hereunder by racing authorities in any jurisdictions in which the Partnership's horses race or are authorized or licensed to race.

 

(b) Racing. To the extent permitted under applicable state laws and regulations, the parties agree that, until December 31, 1989, each of the Partnership's horses identified in Exhibit 1 hereto shall be raced in the same name(s) as the name(s) in which such horse was raced prior to the date hereof.

 

. . . .

 

16. Guarantee of Performance.

 

(a) Guarantee. Calumet unconditionally, irrevocably and absolutely guarantees the due and punctual payment of the principal of the Note, any interest thereon, any other monies due or which may become due thereon and any other amounts payable by the Partnership under this Agreement (including the exhibits and attachments hereto) and the due and punctual performance and observance of each and every covenant and agreement required to be performed and observed by the Partnership under this Agreement (including the exhibits and attachments hereto). Calumet further agrees to take whatever actions may be necessary or advisable, including making additional capital contributions to the Partnership in cash or in stallion seasons or their property, in order to enable the Partnership to perform fully its obligations hereunder. Calumet shall be required to meet its obligations pursuant to this Section 16 regardless of (i) whether Axmar shall have taken any steps to enforce any of its rights against the Partnership or any other person, (ii) the termination of this Agreement as a result of the default of the Partnership hereunder, or (iii) any other condition or contingency.

 

(b) Liabilities Primary. Calumet agrees that its liabilities hereunder shall be primary and not secondary, and shall be joint and several with those of the Partnership; that a separate action or actions may be brought and prosecuted against Calumet regardless of whether any action is brought against the Partnership or whether the Partnership is joined in any such action or actions; and that Calumet waives the benefit of any statute of limitations affecting its liability hereunder or the enforcement hereof. Notice of acceptance and notice of any obligations or liabilities contracted or incurred by the Partnership are hereby waived by Calumet. Calumet hereby waives diligence, presentment, notice of dishonor, protest, demand notice of non-payment or non-performance, and indulgences and notices of every kind.

 

17. Miscellaneous

 

. . . .

 

(h) Governing Law. This Agreement shall be construed and enforced in accordance with and the rights of the parties shall be governed by the laws of the State of Kentucky (not including the choice-of-law rules thereof).

 

. . . .

 

Exhibit No. 23 to IBJ Schroder's motion for summary judgment. Axmar Exhibit No. 8.

On December 11, 1989, the same date as the date of the foregoing redemption agreement, IBJ Schroder Bank confirmed its agreement to grant to Calumet Farm, Inc. a revolving credit facility in the amount of $5,000,000, and on that date Calumet Farm, Inc. executed a promissory note to the bank evidencing the loan. Exhibits Nos. 24 and 25 to IBJ Schroder's motion for summary judgment.

To secure payment of its December 11, 1989 note to IBJ Schroder Bank and Trust Company, Calumet executed a security agreement dated December 12, 1989 conveying to the bank a security interest in thoroughbred horses identified in a Schedule A to the security agreement. The horses listed on Schedule A were the horses belonging to the partnership. Exhibit No. 26 to the motion of IBJ Schroder Bank for summary judgment. On January 10, 1990, the bank filed a UCC-1 Form in the office of the Fayette County Clerk to perfect its security interest in the horses.

On January 2, 1990, Calumet Farm, Inc., as the remaining partner of the Calumet-Axmar Partnership, executed a bill of sale transferring all of the partnership's interest in the nine thoroughbred horses belonging to the partnership to Calumet Farm, Inc. The consideration for the transfer as recited in the bill of sale was one dollar ($1.00) and other good and valuable consideration, receipt of which was acknowledged. Exhibit No. 29 to IBJ Schroder's motion for summary judgment.

On July 11, 1991, when Calumet Farm, Inc. filed its petition for relief under chapter 11 of the Bankruptcy Code, the thoroughbred horses that had formerly belonged to the partnership were in Calumet's possession. On September 6, 1991, this court, acting on IBJ Schroder's motion for relief from stay, entered an order authorizing the sale of the horses by IBJ Schroder Bank at private sale or by auction by the Keeneland Association, Inc. at the Keeneland sales. The horses, with the exception of COUNT ALY, were sold for $1,911,500. The order of sale provided that Axmar could commence an adversary proceeding seeking to establish its entitlement to the proceeds of sale. The order provides the proceeds of sale shall be held by IBJ Schroder Bank in an interest bearing account until the claim of Axmar to one half of the proceeds of sale is determined.

By this adversary proceeding, commenced pursuant to the foregoing order, Axmar seeks to impose a constructive trust upon at least 50% of the proceeds of the sale. Axmar's claim to half of the proceeds of sale is based upon its original 50% interest in the thoroughbreds and the provisions of paragraph 6 of the redemption agreement by which the partnership agreed that until such time as the redemption note was paid in full 50% of the net proceeds received by the Partnership and/or Calumet from any sale or transfer of any or all of the partnership assets shall be paid to Axmar. By letter issued in connection with the December 11, 1989 $5,000,000 loan to Calumet, IBJ Schroder Bank agreed that half of any proceeds of sale of any of the thoroughbreds could be paid to Axmar provided Calumet's loan to it was not in default at the time of the sale. Exhibit No. 24 to IBJ Schroder's motion for summary judgment.

By its complaint Axmar alleges nine separate causes of action on which it bases its claim to one half the net proceeds realized from the sale of the thoroughbred horses formerly owned by the partnership.

1. The Redemption Agreement provides that until the Redemption Note in the sum of $1,675,000 is paid in full 50% of the net proceeds received by the partnership from any sale of the horses would be paid to Axmar.

 

2. Pursuant to the Partnership Agreement, Redemption Agreement, and applicable partnership law, Axmar maintains a co-tenancy in the partnership and is a co-owner of the horses and the proceeds thereof.

 

3. Calumet's pledge of the horses to Schroder in connection with the Revolving Credit Agreement was in violation of the Partnership Agreement, Redemption Agreement, and applicable law, and is invalid.

 

4. By the release letter dated December 11, 1989 [Exhibit E to the complaint; Exhibit 27 to Schroder's motion for summary judgment] issued by Schroder Bank to Calumet preliminary to the Revolving Credit Agreement between the bank and Calumet, Schroder released its security interest in Axmar's 50% interest in the thoroughbred horses belonging to the partnership.

 

5. All advances made by Schroder to Calumet on and after December 11, 1989 were made pursuant to the Revolving Credit Agreement to which neither Axmar nor the Partnership were parties; none of the advances were for the benefit of the Partnership. The pledge of Calumet to secure this line of credit did not encumber partnership assets.

 

6. The transfer [accomplished by the bill of sale transferring the interest of the partnership in the thoroughbred horses to Calumet] was constructively fraudulent and is voidable pursuant to KRS 378.020 because the transfer was not made for valuable consideration.

 

7. The transfer was made with actual intent to hinder, delay and defraud creditors and is voidable pursuant to KRS 378.010.

 

8. Calumet and Schroder wrongfully converted the horses of the partnership to their own use.

 

9. A constructive trust should be imposed on 50% of the proceeds of the sale of the horses because Axmar was induced by Schroder, Calumet and Rash to pledge Axmar's interest in the horses in the Partnership for no consideration to the Partnership or to Axmar.

 

CONCLUSIONS OF LAW

The ultimate relief sought by Axmar Stable on each of its enumerated causes of action is a judgment determining that it is entitled to one-half of the net proceeds realized from the sale of the thoroughbred horses that formerly were the property of the Calumet-Axmar partnership and satisfaction of the judgment by imposition of a trust on the proceeds of sale.

The conveyance by Axmar pursuant to the terms of the redemption agreement of all of Axmar's right, title and interest in the property and business of the partnership and the concomitant release of Axmar of any further obligations of a partner under the partnership agreement dissolved the partnership. KRS 362.290; Flexer Theatres of Mississippi, Inc. v. United States of America, 224 F.2d 445 (6th Cir. 1955).

Thereafter, Calumet, as the surviving partner, had the right and the duty to wind up the affairs of the partnership and to distribute the assets of the partnership as specified by statute or in accordance with the understanding of the parties. KRS 362.330 and 362.345. The debt of the partnership to Axmar evidenced by the redemption note was entitled to priority in distribution, subject to any agreement of the parties to the contrary. KRS 362.345. There was an agreement to the contrary to the extent that one-half of the proceeds of sale of any of the thoroughbred horses was to be paid to Axmar, as well as a percentage of the net earnings in excess of $500,000 of any of the horses from racing.

The conveyance of Axmar's interest in the partnership property to the partnership in exchange for the consideration stated in the redemption agreement increased the interest of Calumet in the partnership as the surviving partner but did not necessarily have the effect of vesting title to partnership property in Calumet. Calumet remained subject to the limitation that it could only pledge its interest in the partnership to secure an indebtedness of Calumet. KRS 362.280.

The partnership was not terminated upon dissolution; it remained in effect for the purpose of winding up the affairs of the partnership.

There is an issue of fact as to whether Axmar was aware that Calumet intended to pledge the partnership assets to secure the $5,000,000 revolving line of credit Calumet was to receive from IBJ Schroder Bank. The court may surmise but cannot determine conclusively that Axmar was fully aware of the details of this proposed transaction.

Axmar was advised that Calumet would not be able to grant security to secure payment of the redemption note. Axmar was aware that IBJ Schroder's prior security interest in the partnership horses was to be released pursuant to the terms of the redemption agreement. Knowing this, Axmar did not insist on a grant of a security interest in partnership horses to secure payment of the redemption note.

The redemption agreement acknowledges that prior to the execution thereof Axmar was provided a copy of the December 11, 1989 release letter from IBJ Schroder Bank to Calumet whereby the bank agreed to release Axmar from liability on the so-called Schroder Documents. These documents included Axmar's August 11, 1987 note in the amount of $1,625,000 payable to Calumet and the security agreement securing the note, which had been assigned to the bank as security for the bank's May 25, 1989 loan in the amount of $3,050,400 to Calumet. The bank also agreed to release Axmar from liability on the hypothecation agreement that had been executed by the partnership to secure payment of foregoing loan to Calumet.

The release letter states that the release of liability under these documents was conditioned on payment in full of the May 25, 1989 loan made by the bank to Calumet. The balance due on the loan was approximately $2,000,000.

The release letter memorializes the fact that there is an agreement between the bank and Calumet whereby the bank is granting to Calumet a revolving credit facility, secured by the horses listed on any Schedule A to the security agreement dated the date hereof. The security agreement is dated December 12, 1989. A UCC-1 Form placing third parties on notice of the transaction was filed in the office of the Fayette County Clerk on January 10, 1990. The horses identified in an exhibit to the UCC-1 Form are the horses that formerly belonged to the partnership. The court cannot determine whether the UCC-1 Form was filed before or after Axmar executed the redemption agreement. According to the record Mrs. Marcus executed the redemption agreement several weeks after the date of the agreement.

Axmar contends it was not aware that the amount of the December 11, 1989 loan to Calumet was to be greater than the amount owed on the existing loan that was to be paid off, and was not aware that the horses formerly owned by the partnership were to be pledged to the bank to secure the new loan. Axmar further contends that it was not aware of the fact that on January 2, 1990, Calumet, purporting to act in behalf of the Calumet-Axmar Partnership, conveyed title to the partnership horses to Calumet without consideration.

Acknowledging that there may be unresolved issues of fact with respect to the foregoing matters, the court is persuaded there are insurmountable hurdles to recovery by Axmar on its complaint and that IBJ Schroder Bank is entitled to summary judgment as a matter of law.

We assume for purposes of decision that Axmar can prove that the transfer of the thoroughbred horses from the Calumet-Axmar partnership to Calumet Farm, Inc. accomplished by the bill of sale dated January 2, 1990 was actually or constructively fraudulent, at least to the extent of Axmar's prior interest in the horses, for which reason the transfer might ordinarily be avoidable by Axmar under applicable state law. However, as a result of the transfer Calumet acquired title to the horses and was in possession of the horses when bankruptcy intervened on July 11, 1991. On that date the debtor in possession as trustee acquired a judicial lien on the horses and any interest of Axmar therein pursuant to the provisions of 11 U.S.C. 544(a). The law applicable to such a factual situation may be summarized as follows. Where property conveyed in fraud of creditors is first attached by creditors of the transferee who have no knowledge of the fraud, their attachment will prevail as against the rights of the defrauded creditors of the transferor. The trustee in bankruptcy is such an attaching creditor without notice. City of New York v. Johnson, 137 F.2d 163 (2d Cir. 1943); In re Gruber Industries, Inc., 345 F.Supp. 1076 (1972). If Axmar were successful in this litigation the proceeds of any recovery would inure to the estate rather than to Axmar.

There were two transfers of an interest in the horses of the partnership, the transfer by the bill of sale from the partnership to Calumet and the transfer accomplished upon the attachment of IBJ Schroder's security interest in the horses. The security interest of the bank in the horses attached when Calumet acquired an interest in the horses. One could argue this occurred after execution of the security agreement when Axmar signed the redemption agreement conveying its interest in the horses to the partnership of which Calumet was then the sole partner or that the transfer of the security interest to Schroder occurred only after execution of the bill of sale transferring title to the horses to Calumet. For purposes of decision in this matter the exact timing of the transfer of the security interest to Schroder may not be material.

Pursuant to the terms of the redemption agreement Calumet acknowledged that it is primarily and not secondarily liable and is jointly and severally liable with the partnership on the redemption note executed by the partnership to Axmar. Thus Axmar not only is a creditor of the partnership but a creditor of Calumet as well. If Axmar as a creditor of Calumet has a cause of action under state law under any of the counts of the complaint to set aside or invalidate the security interest of IBJ Schroder Bank in the thoroughbred horses in question, the debtor in possession (trustee) is entitled to stand in the shoes of Axmar in pursuing any such action. 11 U.S.C. 544(b). Axmar's causes of action to invalidate Schroder's security interest in the horses to the extent of Axmar's interest therein, if such causes of action exist, are property of the estate. In pursuing any such action grounded on state law, including state fraudulent conveyance laws, Axmar is attempting to exercise control over property (a cause of action) that is property of the estate. Consequently, pursuit of any such action by Axmar may be in violation of the automatic stay. In re MortgageAmerica Corp., 714 F.2d 1266 (5th Cir. 1983).

Based on the foregoing authorities the court is of the opinion IBJ Schroder Bank & Trust Company is, as a matter of law, entitled to summary judgment dismissing the complaint. This ruling is without prejudice to any rights of the debtor in possession with respect to the causes of action asserted by Axmar Stable.

Dated:

By the court -

 

___________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

Eric A. Rosen, Esq.

Taft A. McKinstry, Esq.

Adam C. Harris, Esq.

Bernard Lovely, Esq.

Sarah Charles Wright, Esq.

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

 

 

 

IN RE:

 

CALUMET FARM, INC. CASE NO. 91-51414

 

DEBTOR

 

 

AXMAR STABLE, a Division of The

Axmar Investment Company, a general

partnership of various trusts described

herein, through Betty G. Marcus, and

Ziuta G. Akston, as trustees therefor PLAINTIFF

 

 

vs. ADVERSARY NO. 91-5231

 

IBJ SCHRODER BANK & TRUST COMPANY

and CALUMET FARM, INC. DEFENDANTS

 

 

 

ORDER

 

 

For the reasons stated in the Memorandum Opinion of the court this day entered, the motion of IBJ Schroder Bank & Trust Company for summary judgment on all counts of the plaintiff's amended complaint filed March 4, 1992, is sustained. The complaint should be and hereby is dismissed. This ruling is without prejudice to any rights of the debtor in possession to pursue any of the causes of action asserted by the plaintiff in the amended complaint.

Dated:

By the court -

 

___________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

Eric A. Rosen, Esq.

Taft A. McKinstry, Esq.

Adam C. Harris, Esq.

Bernard Lovely, Esq.

Sarah Charles Wright, Esq.