United States Bankruptcy Court
FOB THE NORTHERN DISTRICT OF NEW YORK
_______________________________________
_______________________________________
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IN RE:
THE BENETT FUNDING GROUP, INC. CASE NO. 96-61376
Chapter II.
Debtors Substantively Consolidated
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MOTION BY RFI-2 TO AMEND PRIOR ORDER
_______________________________________ FILED
_______________________________________ SEP 08 1998
OFFICE OF THE
MEMORAMDUM-DECISION, FINDINGS OF FACT, BANKRUPTCY CLERK
CONCLUSIONS OF LAW AND ORDER UTICA, NY
_______________________________________
STEPHEN D. GERLING
U.S. Bankruptcy Judge
U.S. Courthouse
Utica, N.Y. 13502
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF NEW YORK
_________________________________
IN RE:
THE BENETT FUNDING GROUP, INC. CASE NO. 96-61376
Chapter II.
Debtors Substantively Consolidated
_________________________________
APPEARANCES:
SHEARMAN & STERLING ARTHUR NORMAN FIELD, ESQ.
Attorneys for Resort Funding, Inc. GEORGE J. WADE, ESQ.
599 Lexington Avenue RICHARD A LINGG, ESQ.
New York, New York 10022-6069 Of Counsel
SIMPSON, THACHER & BARTLETT GEORGE NEWCOMBE, ESQ.
Attorneys for the ss. 1104 Trustee JAMES GAMBLE, ESQ.
425 Lexington Avenue Of Counsel
New York, New York 10017
WASSERMAN, JURISTA & STOLZ DANIEL STOLZ, ESQ.
Attorneys for Official Committee Of Counsel
Unsecured Creditors
225 Millburn Drive
Millburn, New Jersey 07041
GUY VAN BAALEN, ESQ.
Assistant U.S. Trustee
10 Broad Street
Utica, New York 13501
HANCOCK & ESTABROOK, LLP STEPHEN DONATO, ESQ.
Attorneys for Various Banks DANIEL BERMAN, ESQ.
1500 Mony Tower I
Syracuse, New York 13202
HARTER, SECREST & EMERY JOHN WEIDER, ESQ.
Attorneys for Various Banks Of Counsel
700 Midtown Tower
Rochester, New York 14604-2070
BOND, SCHOENECK & KING, LLP JOSEPH ZAGRANICZNY, ESQ.
Attorneys for Various Banks Of Counsel
One Lincoln Center
Syracuse, New York 13202
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GREEN & SEIFTER
Attorneys for Various Banks ROBERT WEILER, ESQ.
One Lincoln Center Of Counsel
Syracuse, New York 13202
Hon. Stephen D. Gerling, Chief U.S Bankruptcy Judge
MEMORANDUM-DECISION, FINDINGS OF FACT,
CONCLUSIONS OF LAW AND ORDER
Presently before the Court is a motion filed by Resort Funding, Inc.
("RFI-2")(1) on August 5, 1998, pursuant to Rule 60(b) of the Federal Rules of
Civil Procedure ("Fed.R.Civ.P."), incorporated by reference in Rule 9024 of the
Federal Rules of Bankruptcy Procedure ("Fed.R.Bankr.P.") ("Motion"), requesting
that the Court amend its prior Order, dated November 24, 1997 ("November 1997
Order")(2) to correct certain alleged mistakes. RFI-2 asserts that at the time
of the original motion ("Swap Motion"), filed by Richard C. Breeden, the chapter
11 trustee (Trustee) of The Bennett Funding Group, Inc. ("BFG"), Bennett
Management & Development Corporation ("BMDC"), Resort Service Company, Inc.
("RSC") and other substantively consolidated debtors ("Consolidated Debtors"),
on November 5, 1997, there was a "miscalculation of the outstanding debt as of
the date of recapitalization" ("Offset Issue")(3) and
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(1) RFI-2 is a wholly owned subsidiary of Equivest Finance, Inc.
("Equivest") and is Equivest's only asset. RFI-2, while a related corporate
entity, is not a debtor in the above-referenced case.
(2) The November 1997 Order authorized, inter alia, the "exchange all [of]
the debt due to the Estate by RFI[-2] under the Notes (as defined in the Motion)
in return for (i) issuance to the Estate by Equivest of the New Shares (as
defined in the Motion), and (ii) the cancellation of debt claims of RFI[-2] and
Equivest against the Estate in the amount of $308,786.79."
(3) RFI-2 alleged that it improperly credited $360,732.51 against the debt
to BFG, resulting in an understatement in the amount of the debt owing by RFI-2
to BFG as of November 4, 1997.
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"[an]inadvertent failure to ask the Court to authorize a release of property of
which RFI-2 is the equitable owner...." ("Title Issue"). See RFI-2's Motion at
Paragraph 28.
Support for the Motion was filed on behalf of the Official Committee of
Unsecured Creditors ("Committee") on August 7,1998. The Trustee filed a response
in support of the Motion on August 13, 1998. Opposition to the Motion was filed
by the Office of the United States Trustee ("UST") on August 10, 1998;
opposition was also filed on behalf of certain creditors in the case on August
10, 1998 (hereinafter referred to as the "Objectants")(4).
The Court heard oral argument on the Motion on Thursday, August 13, 1998,
in Utica, New York. Following the oral argument, the Court granted that portion
of the Motion addressing the Offset Issue from the Bench. In view of the
assertion by those parties opposing the Motion that there was an insufficient
factual basis for the Court to approve that portion of the Motion addressing the
Title Issue, the Court agreed to schedule an evidentiary hearing.
On September 2 and 3, 1998, the Court heard testimony from several
witnesses and was presented with additional documentary evidence in connection
with the Title Issue ("Evidentiary Hearing"). At the end of the second day of
testimony, the Court opted to issue a written decision.
JURISDICTIONAL STATEMENT
The Court has core jurisdiction over the parties and subject matter of
this contested matter
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The Motion on the Offset Issue seeks to modify the November 1997 Order to
authorize the exchange of $360,732.51 in debt owed by RFI-2 to BFG for 67,113
shares of stock in Equivest.
(4) Opposition was filed by the law firms of Hancock & Estabrook LLP,
Harter, Secrest & Emery, LLP, Bond, Schoeneck & King, LLP, and Green & Seifter,
Attorneys, P.C. on behalf of said creditors.
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pursuant to 28 U.S.C. ss.ss. 1334(b), 157(a), (b)(1), (b)(2)(A) and (O)
DISCUSSION
At the initial hearing on August 13,1998, some of the Objectants asserted
that RFI-2 lacked standing to seek relief pursuant to Fed.R.Civ.P. 60(b) in
connection with the November 1997 Order because it was not the proponent of the
underlying Swap Motion and had not appeared in connection with it. Rule 60(b)
(the "Rule") authorizes a court to "relieve a party or a party's legal
representative from a final judgment, order or proceeding" in response to a
motion. "[T]he principles governing standing to invoke Rule 60 are sufficiently
flexible..." to allow a nonparty to modify a final judgment or order under
certain circumstances. See Dunlop v. Pan American World Airways, Inc., 672 F.2d
1044, 1051-52 (2d Cir. 1982). The Rule applies to "suits of a civil nature"
commenced in a U.S. district court. See 28 U.S.C ss. 1. The Rule is incorporated
by reference in Fed.R.Bankr.P. 9024 to be utilized in connection with contested
matters in the bankruptcy court which are procedurally distinct from civil
actions before a district court. As such the Court is of the opinion that the
question of standing to maintain a Rule 60(b) motion in the context of a
contested matter in bankruptcy should focus more appropriately on whether the
movant's rights were impacted by the judgment and order sought to be amended and
whether the movant is now seeking a just result in connection with those rights.
At the hearing on August 13, 1998, the Court concluded that RFI-2 had
standing to bring the Motion and to seek resolution of the Offset Issue, as well
as the Title Issue. It is clear that RFI-2's rights were affected by the
November 1997 Order in that the so-called intercompany debt it owed to the
Consolidated Debtors was canceled in exchange for the issuance to the estate of
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the Consolidated Debtors of shares of stock in Equivest.
Some of the Objectants also expressed concerns that they had not received
timely notice of the Motion and had not had an opportunity to investigate and
analyze the materials presented in support of it. In response to the request by
several parties, the Court agreed to conduct an evidentiary hearing. Therefore,
any arguments with regard to notice and an opportunity for discovery and a
hearing have now been rendered moot.
The argument was also made by some of the Objectants that a motion
pursuant to Fed.R.Civ.P. 60(b) is not intended to allow a party to seek relief
which the original movant never sought. However, nothing in the Rule places such
a restriction on the relief. Indeed, it references relief to a "party" from
which the Court infers that it is not limited to the "original movant."
A motion to amend or alter an order is a matter left to the sound
discretion of the Court. See Schorpp v. Lake George Park Commission, 1995 WL
283768 (N.D.N.Y. April 24, 1995) at *1 (citations omitted). Rule 60(b) provides
the Court with "a grand reservoir of equitable power to do justice in a
particular case... [and] should be liberally construed when substantial justice
will thus be served." Radack v. Norwegian America Line Agency, Inc., 318 F.2d
538, 542 (2d Cir. 1963) (citations omitted). At the same time, the relief may be
granted only upon the showing of "exceptional circumstances" by the movant. See
Paddington Partners v. Bouchard, 34 F.3d 1132, 1142 (2d Cir. 1994) (citations
omitted). It is RFI-2's position that as a result of the cancellation of the
intercompany debt to the Consolidated Debtors in November 1997, it is entitled
to a return of any property held by the Consolidated Debtors in connection with
that debt. In this case, RFI-2 contends that some of the Consolidated Debtors
hold title to certain of its property under what has been referred to as a
"nominee" arrangement. The Trustee agrees that based on his investigation and
that of others under his direction, the Consolidated Debtors do not
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have a basis for claiming legal title to the property at issue herein. See
Trustee's Affidavit, filed September 1, 1998, at Paragraph 5.
By way of the Motion herein, RFI-2 seeks to implement the exchange of debt
for equity as set forth in the November 1997 Order by correcting two mistakes it
made. See RFI-2's Motion at Paragraph 2. In support of the relief sought, RFI-2
argues that Fed.R.Civ.P. 60(b)(l) is applicable to the issues before the Court
and provides a basis for relief from a judgment or order in the event of
mistake, inadvertence, surprise or excusable neglect.(5)
On the other hand, Fed.R.Civ.P. 60(b)(6) permits the Court to amend the
November 1997 Order for any reason justifying relief from the operation of the
Order if the reasons specified in subsections 1-5 of the Rule are inapplicable.
Upon review of the evidence, the Court concludes that Fed.R.Civ.P. 60(b)(6) is
more applicable to the matter herein and that none of the parties will be
prejudiced by its consideration thereunder.
Based on the evidence presented. the Court concludes that certain facts
which were not apparent at the time of the November 1997 Order warrant its
amendment. In this regard, it makes the following findings:
1. Since its inception and through February 16, 1996, RFI-2 and/or its
predecessors(6) was a wholly-owned subsidiary of BFG. See RFI-2's Exhibit 48.
2. RFI-2 and/or its predecessors relied on various sources of funding in
providing financing to time share developers in connection with acquisition and
development ("A&D Loans" or
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(5) At the conclusion of the Evidentiary Hearing on September 3, 1998, the
Court commented that it was not convinced, based on the evidence presented, that
the failure to raise the Title Issue at the time of the Swap Motion was a
mistake.
(6) There was testimony to the effect that RFI-2 had previously done
business as "The Processing Center" and also as "Bennett Funding International,
Ltd."
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"Construction Loans")(7) and also in purchasing time share receivables from the
developers ("Consumer Receivables"), see, e.g., RFI-2's Exhibit 11 ("Contract of
Sale of Contracts, Notes and Mortgages with Recourse").
3. RFI-2 and/or one of its predecessors obtained a line of credit of $50 million
from BFG on or about June 1, 1991. See RFI-2's Exhibit 9.
4. As of the Petition Date, the debt from RFI-2 to the Consolidated Debtors
amounted to approximately $25 million. See RFI-2's Exhibit 47.(8)
5. As a result of the November 1997 Order, that debt was paid in full.
6. The testimony of RFI-2's various witnesses indicates that various mortgages
and contracts were executed in the name of one or more of the Consolidated
Debtors even though serviced by RFI-2. At the Evidentiary Hearing, this was
referred to as a "nominee" arrangement whereby the "wrong name" appeared on the
documents, rather than that of RFI-2.
8. As early as July 10, 1997, the fact that the security at least for the A&D
loans were in the "wrong name" was known to RFI-2. See Objectants' Exhibit A-2.
James Petrie, Controller of RFI-2 since September 25, 1996, confirmed that
he had verified that none of the transactions he reviewed between November 1993
and October 1995 were improperly recorded and that the records he reviewed
indicate that RFI-2 funded the
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(7) According to the testimony of Paul Szlosek ("Szlosek"), he reviewed
the A&D loans made in connection with four time share developments, namely
Debbie Reynolds Hotel and Casino, Harbor Ridge, Pier 7 and Mountain Lodge
Development. See Szlosek's Affidavit, filed September 1, 1998, at Exhibit A and
B. RFI-2's Motion identifies three other time share developments in its
"Nominee Development Loan Summary," including Pollard Brook, Killarney and Ocean
Smugglers. See RFI-2's Motion at Exhibit 3.
(8) Lisa Henson, Vice President of RFI-2, in her role overseeing the
operations of RFI-2, testified that as of the Petition Date there were
approximately $4-5 million in A&D loans and approximately $21.5 million in
Consumer Receivables outstanding.
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Consumer Receivables at issue herein in full without exception.
The Court also heard testimony from Szlosek, who first joined BFG in July
1990 and since the Petition Date has been responsible for the accounting
activities in connection with the one or more of the Consolidated Debtors. Based
on his review of approximately 69,000 records, including wire transfers and
canceled checks, he verified that payments made by one or more of the
Consolidated Debtors to RFI-2 or directly to the developers on behalf of RFI-2
appeared as liabilities on RFI-2's books and were accounted for in the
intercompany debt account. He testified that he reviewed every wire transfer
between 1991 and the Petition Date, and every intercompany transfer and also
went into the Consolidated Debtors' vendor system which contains records of all
checks issued by one or more of the Consolidated Debtors. See Trustee's Exhibits
D and F. He focused his investigation on whether all monies going out from one
or more of the Consolidated Debtors to RFI-2 appeared on RFI-2's books as
liabilities. He cross-referenced information found in Exhibit "D" with
Information in Exhibit "F", item by item, and confirmed transfers from one or
more of the Consolidated Debtors to RFI-2 were recorded as liabilities of RFI-2.
He also testified that as of the date of the Swap Motion, no additional
intercompany debt had been incurred by RFI-2 and remained outstanding.
Edward J. Moran ("Moran"), a certified public accountant and a principal
in the accounting firm of Firley, Moran, Freer & Eassa ("Firley Moran"(9)),
testified that he had been engaged on July 24, 1998, to perform an analysis in
connection with the Motion herein. At the request of
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(9) Firley Moran has been the independent auditor for Equivest and RFI-2
since the fall of 1996. See Moran Affidavit, filed August 26, 1998. Firley Moran
has also performed limited services on behalf of the Trustee. Id.
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Equivest and pursuant to procedures designed by Paul Dzera, of the firm of Zolfo
Cooper, LLC,(10) and approved by the Trustee, Equivest and the Committee, he
performed an analysis on a sample of 80 transactions to determine the funding
source of each. See RFI-2's Exhibit 52. RFI-2 was able to provide him with 72
canceled checks in connection with the sample transactions which he examined
along with wire transfers and intercompany transfers. Each check was made
payable to a developer for the purchase of several loans made by the developer
to the consumers purchasing time shares. The 72 canceled checks which Moran was
able to review covered 597 out of the 4,361 Consumer Receivables at issue
herein. He testified that with respect to each of the 72 transactions the books
of RFI-2 reflected an increase in the debt owed to the Consolidated Debtors in
each instance and his review established that RFI-2, in fact, funded the
receivables.(11) He also indicated that in all cases the A&D Loans were also
reflected in RFI-2's books as an increase in its liability to at least one of
the Consolidated Debtors.
The Court received into evidence the Independent Accountant's Report, and
Addendum thereto, of Loguidice & Kamide, certified public accountants appointed
by the Court at the request of the UST to perform an "independent forensic
analysis or audit of the underlying intercompany transactions between Resorts
Funding, Inc. and Bennett Funding Group." See Objectants' Exhibit A-7 and A-6,
respectively. Michael Loguidice ("Loguidice") testified that he followed the
same procedure as Moran with respect to the Consumer Receivables but used a
sample of 158 from the list of "Mortgages Assigned to RSC that should be RFI."
He examined
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(10) Zolfo Cooper, LLC serves as the financial advisor to the Committee.
(11) Moran testified that he originally felt that an 85% level of
confidence was appropriate under the circumstances but Dzera indicated to him
the need for a 90% confidence level. That level was not achieved, however.
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the Consolidated Debtors' vendor system, verifying the contract number, check
number, date and amount of the check. While he was unable to examine canceled
checks in connection with all 158, he testified that he had found no evidence in
his review of the records available to him of anything inconsistent with RFI-2's
position with respect to its interest in the Consumer Receivables. He also
indicated that although time did not permit a detailed analysis of the A&D
Loans, his review of the information provided by the UST indicated that postings
were "correctly recorded." See Objectants' Exhibit A-7 at 5.
Conclusion
During the two days of testimony, the Objectants attempted on numerous
occasions to delve into matters not presently before the Court. It is obvious to
the Court that there are serious concerns about the less than clear path taken
and the lack of "fair and full disclosure" as alleged by one party, beginning
with the motion by the Trustee to subordinate the intercompany debt owed by
RFI-2 to the Consolidated Debtors, filed on September 5, 1997, followed by the
Swap Motion filed on November 5, 1997, which resulted in the exchange of all of
RFI-2's debt for an equity interest to the Consolidated Debtors in Equivest. As
John R. Weider, Esq., counsel for three bank creditors in the case, in
acknowledging some of these concerns, stated at the close of the evidentiary
hearing, it is not possible at this point to "put Humpty Dumpty back together."
The Court agrees. RFI-2's Motion is presently before the Court and it is not
feasible to revisit the two prior motions. In this instance, the parties have
had an opportunity to depose various witnesses in connection with the Motion and
also have participated in the Evidentiary Hearing. The Court finds, based on the
evidence presented, that as a result of the November 1997 Order which canceled
all debt owing from RFI-2 to the Consolidated Estate, that RFI-2 has established
11
"exceptional circumstances" which justify amendment of the November 1997 Order
pursuant to Rule 60(b)(6).
Based on the foregoing, it is hereby
ORDERED that the Trustee is authorized to adjust the recapitalization
amount, as set forth in the second decretal paragraph of the November 1997
Order, on a nunc pro tunc basis by means of an exchange of an additional
$306,732.51 in debt for 67,311 shares of common stock in Equivest;(12) it is
further
ORDERED that the Trustee is authorized to convey to RFI-2 all of the
Consolidated Debtors' record right, title and interest in the Consumer
Receivables and A&D Loans, as identified in Exhibits 2 and 3 of the Motion,
including any and all record liens, interests and documentation of whatever kind
and description appurtenant to or relating to record ownership of the property,
or any record rights therein, and to execute such documents as are reasonably
necessary to transfer any such rights and documentation to RFI-2; and it is
finally
ORDERED that any objection to the conduct of any persons employed by or
otherwise related to Equivest or RFI-2 in connection with the transactions
referred to in this Motion is hereby reserved and left unaffected by this Order.
Dated at Utica, New York
this 8th day of September 1998
/s/ Stephen D. Gerling
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STEPHEN D. GERLING
Chief U.S. Bankruptcy Judge
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(12) Although the relief was granted from the Bench at the hearing on
August 13, 1998, as of the date of this Decision no written order had been
entered.