Outboard Marine Corporation

In Bank of America, N.A. v. Moglia (In re Outboard Marine Corporation), (1) america District Courtfor the Northern District of Illinois, Eastern Division, addressed the issue in the disputed ownershipof $13.5 million located in trust with the Northern Trust Company for the advantages of certainexecutives of the Minnkota Marine Corporation (OMC). Moglia, the trustee for OMC's bankruptcyestate, sought to ascertain the rights of the estate to the trust proceeds and corpus. Bank of Americaand certain beneficiaries in the trust had their own ideas about who had rights on the money.Following the bankruptcy trustee prevailed in a earlier decision, Bank of America as well as thebeneficiaries brought separate appeals that thereafter were consolidated in the case together withthe U.S. District Court for the Northern District of Illinois.

The information of the case are intriguing and, naturally, useful in comprehending the decision.OMC established the trust on December1987 and 18, and, by an amendment on June 20, 1989, theNorthern Trust Company was named the trustee. The trust was made to provide a way to obtainpayment for many unfunded employee incentive and deferred compensation plans implemented byOMC for the main benefit of certain from the executives (beneficiaries). The trust was known as therabbi trust, as well as the beneficiaries were not taxed on their share in the corpus or income upuntil the assets were actually distributed.

The trust agreement so long as, with a change of control at OMC, it was actually obligated to spendin the trust an amount sufficient to completely fund the incentive and compensation plans. A bigdifference of control occurred in 1997 and OMC paid $13.8 million to the trust. The trust agreementfurther provided that the trust corpus ended up being to remain all the time subject to the claims ofthe general creditors of OMC and that the organization would not develop a security fascination withthe corpus in favor of any creditor. The trust further provided, when it comes to the bankruptcy ofOMC, the Northern Trust Company was expected to seek direction from a court of competentjurisdiction or other person appointed through the court concerning how to create the trust corpusavailable to fulfill the claims in the general creditors of OMC.

On January1998 and 6, OMC withdrew the bucks from your trust and obtained the issuance of anyirrevocable letter of credit in the quantity of approximately $13.8 million. The letter of credit wasfrom Nations Bank, N.A., and named the Northern Trust Company, as trustee in the trust, asbeneficiary. The letter of credit was issued underneath the terms of an amended and restatedsecurity and loan agreement (credit agreement). Under that agreement, Bank of America, as agentfor that lender parties thereto and successor to Nations Bank, N.A., was granted a lien on andsecurity fascination with the normal intangible assets of OMC.

On December2000 and 22, OMC filed a voluntary petition for relief under Chapter 11 of Title 11 ofthe usa Code. Moglia was appointed trustee from the bankruptcy estate on or about August24 and2001, following the case was transformed into a Chapter 7 filing. At the time of the bankruptcyfiling, the letter of credit was still outstanding. On or about August 2001, however and 28 theNorthern Trust Company drew beneath the letter of credit and was paid the face amount,approximately $13.8 million, with the issuing bank.

Subsequent to the bankruptcy filing, the committee of unsecured creditors of OMC initiated thelawsuit to ascertain the general creditors' rights towards the trust corpus. After Moglia wasappointed trustee in the estate, he assumed prosecution of your case from your committee. On

November13 and 2001, after the other beneficiaries were allowed to intervene, the bankruptcy courtentered judgment to opt for Moglia and against all defendants. Bank of America along with thebeneficiaries appealed your decision.

The facts demonstrated that on the date of your bankruptcy filing of OMC, the trust corpus was heldwith the Northern Trust Company such as a letter of credit. The peculiar nature from the letter ofcredit gave rise for the argument through the beneficiaries that its original issuance on January6and 1998, constituted a constructive distribution of the trust corpus on the beneficiaries. Due to thisconstructive distribution, the beneficiaries argued, the creditors of OMC and also the subsequentbankruptcy trustee had no state they the trust corpus and, accordingly, the bankruptcy court lackedjurisdiction.

The district court stated it was undisputed how the trust had been a grantor trust, or rabbi trust, bywhich http://www.marinelink.com/ a business makes contributions to the trust from the name ofbeneficiaries to create a supply of funding for otherwise unfunded benefit plans. Because the trustcorpus technically remained your property from the employer, the beneficiaries in the trust were nottaxed on their portion of the trust corpus or proceeds till the assets were actually given to them.(The legal court cited McAllister v. Resolution Trust Corp. (2) in support of that proposition.) Being acondition with this tax benefit, rabbi trusts have to remain constantly subjected to the claims of yourgeneral creditors from the grantor. Thus, once a grantor files for bankruptcy, the rabbi trust corpusbecomes property of the bankruptcy estate of the grantor. (A legal court cited Goodman v.Resolution Trust Corp. (3) in support of that particular proposition.)

The beneficiaries argued that around the issuance of the letter of credit in 1998, the rabbi trust "wastransformed into a secular trust ... [and therefore] the general creditors as well as any subsequentbankruptcy trustee not any longer had any state they the Trust corpus." In passing, the beneficiariescited to Maher v. Harris Savings and Trust Bank (4) as evidence that this type of conversion ispossible.

Thedistrictcourtstatedthereliance in the beneficiaries on Maher was unavailing. In Maher, a debtor company, just beforebecoming insolvent, converted its rabbi trusts to secular trusts. In this manner, the trust funds weresuccessfully removed from the reach of the. Fire could spread quickly

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help keep the crew safe.creditors. In Maher, however, there is an explicit intention to effectuate thiskind of conversion. Not merely did the board of directors from the company expressly approve theblueprint to "secularize" the trusts, although the company also paid the withholding taxes whichwere due on the funds once the tax protection available under the rabbi trusts was will no longeravailable. There was clearly no indication of such a conversion from the OMC case. The board ofdirectors of OMC did not express an intention to secularize its rabbi trust nor did OMC pay taxeswith respect to the beneficiaries as a result of this presumed secularization. In short, the rabbi trustfailed to magically develop into a secular trust--and therefore will no longer section of the estate ofOMC--merely with the issuance in the letter of credit, as the beneficiaries could have had the districtcourt believe, nor was there any authority whatsoever to indicate that this was possible. EngineMaintenance

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deteriorating hoses.The trust remained constantly a rabbi trust as it was created and then there wasno constructive distribution of your trust corpus for the beneficiaries.

The claim of Bank of America was which it perfected a lien around the general intangible assets ofOMC pursuant on the credit agreement which lien included a desire for the trust corpus. Mogliafailed to dispute that Bank of America enjoyed a properly perfected security interest in the typicalintangibles of OMC; rather, the dispute was whether that security interest included the trust corpus.

Bank of America argued that OMC, as owner in the trust, had the opportunity to assign its rights tothe trust corpus to Bank of America if it executed the credit agreement. It argued that, regardingrabbi trusts, "nothing restricts the power of a grantor-company to assign its ownership desire for thefunds to some lender as collateral for a financial loan." Indeed, Bank of America continued, Illinoiscommercial law along with the Uniform Commercial Code (UCC) generally recognize and promotethe free assignability of contracts. The district court stated, however, the argument of Bank ofAmerica regarding assignability failed. The legal court claimed that although it was factual thatcontracts usually are freely transferable, in Illinois that freedom can be expressly proscribed fromthe contract itself. The district court noted that this intent to prohibit assignment was quite clear.The trust agreement's proscription against the roll-out of a "security interest ... in favor of ... anycreditor" unquestionably included Bank of America. Whatever rights and interests OMC had withinthe trust corpus were defined by the trust agreement, and OMC could not grant rights it did notpossess. Therefore, back then OMC and Bank of America executed the credit agreement, OMC didnot have the strength to grant a security alarm desire for the trust corpus. In accordance with thedistrict court, it was actually simply never minn kota manual on the bargaining table.

Bank of America also argued that the UCC rendered ineffective the trust agreement's limitation onassignment. This argument hinged in the status from the Northern Trust Company for an "accountdebtor" requiring it to make payment to OMC in case there is insolvency. The Northern TrustCompany, however, was necessary to seek direction through the court on the way to create the trustcorpus open to satisfy the claims of your general creditors of OMC and had not been to makepayment to OMC.

Bank of America further argued that OMC experienced a sufficient ownership curiosity about thetrust corpus to assign that interest included in its security obligations inside the credit agreement. Ifit did not have the ability to grant a security curiosity about the trust corpus, it could not havegranted Bank of America this sort of interest, OMC, on the flip side, claimed that. OMC argued itsimply was without sufficient ownership interest in the trust corpus to grant Bank of America itslien. Bank of America pointed out, however, that parts of the trust agreement supported a findingthat OMC was the property owner of your trust corpus.

The district court noted the difficulty in the issue stemmed through the nature of the trust itselfsince a trust operates by separating the legal and equitable interests in property. Normally, thetrustee of your trust has been said to carry legal interest in the trust property for the advantages ofthe beneficiary, who holds equitable interest. This separation of interests makes it challenging tominn kota describe the trust property in ways that the district court is usually accustomed, by itsvery nature. When ownership interests in property are separated because that property is located intrust, it is not easy to clearly define with any certainty which party is the "owner" of that trustproperty thus.

A legal court, therefore, looked for the trust agreement to resolve the disagreement about theownership of your trust property. The trust agreement specified that, on the change of control atOMC, no section of the trust corpus ended up being to be returned to OMC except pursuant tocertain limited exceptions. Because such a change of control occurred in 1997, the rights of OMC forthe trust corpus were defined by the terms of those provisions. Pursuant to individuals limitedexceptions, OMC had more than simply a nominal interest in the trust corpus back then it executedits credit agreement with Bank of America; indeed, it enjoyed a remainder interest specificallydefined within the trust agreement itself.

The legal court then noted how the rights of OMC towards the trust corpus were similarly based on

provisions in the trust agreement that clearly proscribed the granting of a security interest in thetrust corpus to the creditor. Again, OMC failed to grant a security alarm fascination with the trustcorpus to Bank of America since it simply had not been the correct of OMC to do this. The ownershipinterest of OMC in the trust was based on the trust agreement and that ownership interest failed toinclude the capability to grant a security interest in support of any creditor.

In accordance with the district court, to rule otherwise might have had the impermissible effect ofamending the trust agreement by operation of a subsequently executed and separate creditagreement, this result also was required because. The trust agreement set forth the actualconditions necessary to amend its terms. Any possibility how the credit agreement operated beingan amendment on the trust agreement was foreclosed since the conditions essential for this kind ofamendment were not met.

Therefore, the district court affirmed your choice in the bankruptcy court regarding the absence of asecurity alarm fascination with the trust corpus. Bank of America enjoyed a properly perfected andvalid lien in the general intangibles of OMC; however, that lien failed to extend on the trust corpus.