Outboard Marine Corporation

In Bank of America, N.A. v. Moglia (In re Outboard Marine Corporation), (1) america District Courtfor your Northern District of Illinois, Eastern Division, addressed the problem of the disputedownership of $13.5 million located in trust from the Northern Trust Company for the advantage ofcertain executives from the Minn kota Marine Corporation (OMC). Moglia, the trustee for OMC'sbankruptcy estate, sought to build the rights in the estate for the trust proceeds and corpus. Bank ofAmerica and certain beneficiaries of the trust had their own ideas about who had rights to themoney. Right after the bankruptcy trustee prevailed inside an earlier decision, Bank of Americaalong with the beneficiaries brought separate appeals that thereafter were consolidated within thecase using the U.S. District Court for the Northern District of Illinois.

The details in the case are intriquing, notable and, needless to say, helpful in knowing the decision.OMC established the trust on December18 and 1987, and, by an amendment on June 20, 1989, theNorthern Trust Company was named the trustee. The trust was created to offer a way to obtainpayment for a number of unfunded employee incentive and deferred compensation plansimplemented by OMC for the advantages of certain of its executives (beneficiaries). The trust wasknown as the rabbi trust, as well as the beneficiaries were not taxed on the share of the corpus orincome before the assets were actually distributed.

The trust agreement provided that, with a change of control at OMC, it absolutely was obligated topay for into the trust an amount sufficient to completely fund the compensation and incentive plans.A big difference of control took place 1997 and OMC paid $13.8 million into the trust. The trustagreement further provided the trust corpus was to remain constantly susceptible to the claims of

the general creditors of OMC which the business would not produce a security fascination with thecorpus in support of any creditor. The trust further provided that, when it comes to the bankruptcyof OMC, the Northern Trust Company was expected to seek direction from a court of competentjurisdiction or some other person appointed through the court concerning how to make the trustcorpus open to satisfy the claims from the general creditors of OMC.

On January1998 and 6, OMC withdrew your money through the trust and obtained the issuance ofyour irrevocable letter of credit in the volume of approximately $13.8 million. The letter of creditwas issued by Nations Bank, N.A., and named the Northern Trust Company, as trustee from thetrust, as beneficiary. The letter of credit was issued under the relation to an amended and restatedsecurity and loan agreement (credit agreement). Under that agreement, Bank of America, as agentto the lender parties thereto and successor to Nations Bank, N.A., was granted a lien on and securityinterest in the normal intangible assets of OMC.

On December22 and 2000, OMC filed a voluntary petition for relief under Chapter 11 of Title 11 ofthe us Code. Moglia was appointed trustee of the bankruptcy estate on or about August24 and 2001,after the case was changed into a Chapter 7 filing. During the bankruptcy filing, the letter of creditwas still outstanding. On or about August 28, however and 2001 the Northern Trust Company drewbeneath the letter of credit and was paid your face amount, approximately $13.8 million, by theissuing bank.

Subsequent to the bankruptcy filing, the committee of unsecured creditors of OMC initiated thelawsuit to determine the general creditors' rights to the trust corpus. After Moglia was appointedtrustee in the estate, he assumed prosecution in the case through the committee. On November2001and 13, after the other beneficiaries were permitted to intervene, the bankruptcy court enteredjudgment in favor of Moglia and against all defendants. Bank of America and also the beneficiariesappealed your decision.

The facts demonstrated that on the date of the bankruptcy filing of OMC, the trust corpus was heldwith the Northern Trust Company in the form of a letter of credit. The peculiar nature of the letter ofcredit gave rise on the argument by the beneficiaries that its original issuance on January1998 and6, constituted a constructive distribution of the trust corpus for the beneficiaries. Due to thisconstructive distribution, the beneficiaries argued, the creditors of OMC and also the subsequentbankruptcy trustee had no claim to the trust corpus and, accordingly, the bankruptcy court lackedjurisdiction.

The district court stated which it was undisputed that the trust had been a grantor trust, or rabbitrust, by which a business makes contributions on the trust within the name of beneficiaries to makea source of funding for otherwise unfunded benefit plans. As the trust corpus technically remainedyour property in the employer, the beneficiaries of the trust were not taxed on their area of the trustcorpus or proceeds up until the assets were actually given to them. (A legal court cited McAllister v.Resolution Trust Corp. (2) in support of this proposition.) Like a condition with this tax benefit, rabbitrusts are needed to remain all the time at the mercy of the claims of the general creditors of yourgrantor. Engine Maintenance

? Do not permit oil as well as debris build-up

in your bilges.

? Inspect the actual lagging involving engine

and heater exhausts with regard to

damage and deterioration and

nearbyobjectsregardingheat damage

or charring.

? Examine exhaust systems involving

inboard engines regarding leaks.

? Verify with regard to free fuel joints,

damaged gas tanks as well as

deteriorating hoses.Thus, after a grantor files for bankruptcy, the rabbi trust corpus becomesproperty of your bankruptcy estate of the grantor. (The legal court cited Goodman v. ResolutionTrust Corp. (3) in support of that proposition.)

The beneficiaries argued that on the issuance from the letter of credit in 1998, the rabbi trust "wastransformed into a secular trust ... [and so] the general creditors as well as subsequent bankruptcytrustee will no longer had any claim to the Trust corpus." In passing, the beneficiaries cited toMaher v. Harris Savings and Trust Bank (4) as evidence that this type of conversion can be done.

The district court stated the reliance of your beneficiaries on Maher was unavailing. In Maher, a

debtor company, before becoming insolvent, converted its rabbi trusts to secular trusts. In this way,the trust funds were successfully taken from the reach of the creditors. In Maher, however, thereseemed to be an explicit intention to effectuate this sort of conversion. Not simply did the board ofdirectors of your company expressly approve the blueprint to "secularize" the trusts, neverthelessthe company also paid the withholding taxes that had been due on the funds as soon as the taxprotection available under the rabbi trusts was no longer available. There seemed to be no indicationof these a conversion from the OMC case. The board of directors of OMC did not express anintention to secularize its rabbi trust nor did OMC pay taxes for the beneficiaries due to thispresumed secularization. In a nutshell, the rabbi trust failed to magically become a secular trust--and therefore will no longer section of the estate of OMC--merely by the issuance of your letter ofcredit, since the beneficiaries would have had the district court believe, nor was there any authoritywhatsoever to indicate that this was possible. The trust remained always a rabbi trust because itcame to be where there was no constructive distribution of your trust corpus towards thebeneficiaries.

The claim of Bank of America was that it perfected a lien about the general intangible assets of OMCpursuant towards the credit agreement and therefore lien included a desire for the trust corpus.Moglia did not dispute that Bank of America possessed a properly perfected security curiosity aboutthe normal intangibles of OMC; rather, the dispute was whether that security interest included thetrust corpus.

Bank of America argued that OMC, as owner of your trust, had the ability to assign its rightstowards the trust corpus to Bank of America if it executed the credit agreement. It argued that,regarding rabbi trusts, "nothing restricts the potency of a grantor-company to assign its ownershipinterest in the funds to your lender as collateral for a loan." Indeed, Bank of America continued,Illinois commercial law along with the Uniform Commercial Code (UCC) generally recognize andpromote the free assignability of contracts. The district court stated, however, that this argument ofBank of America regarding assignability failed. The legal court said that though it was correct thatcontracts usually are freely transferable, in Illinois that freedom might be expressly proscribed withthe contract itself. The district court noted that the intent to prohibit assignment was quite clear.The trust agreement's proscription against the roll-out of a "security interest ... to opt for ... anycreditor" unquestionably included Bank of America. Whatever interests and rights OMC had fromthe trust corpus were based on the trust agreement, and OMC could not grant rights it failed topossess. Therefore, at that time OMC and Bank of America executed the credit agreement, OMC waswithout the ability to grant a security alarm desire for the trust corpus. In line with the districtcourt, it was simply never about the bargaining table.

Bank of America also argued the UCC rendered ineffective the trust agreement's limitation onassignment. This argument hinged in the status of your Northern Trust Company as an "accountdebtor" requiring it to produce payment to OMC in case of insolvency. The Northern TrustCompany, however, was expected to seek direction from the court on the way to make the trustcorpus available to fulfill the claims from the general creditors of OMC and had not been to helpmake payment to OMC.

Bank of America further argued that OMC possessed a sufficient ownership curiosity. On average ,twenty fire-related accidents

and injuries occur upon boats each along with every yearabout the trust corpus to assign thatinterest as part of its security obligations from the credit agreement. If it was without the right togrant a security interest in the trust corpus, it could not have access to granted Bank of Americasuch an interest, OMC, alternatively, claimed that. OMC argued that it simply did not have sufficient

ownership fascination with the trust corpus to grant Bank of America its lien. Bank of Americanoted, however, that sections of the trust agreement supported a finding that OMC was thehomeowner of your trust corpus.

The district court noted that the difficulty of the issue stemmed from the nature of the trust itselfjust because a trust operates by separating the equitable and legal interests in property. Normally,the trustee of the trust is claimed to support legal interest in the trust property for the advantages ofthe beneficiary, who holds equitable interest. By its very nature, this separation of interests canmake it challenging to describe the trust property in such a way to which the district court iscommonly accustomed. When ownership interests in property are separated because that property islocked in trust, it is difficult to clearly define with any certainty which party is definitely the "owner"of that trust property thus.

The legal court, therefore, looked to the trust agreement to eliminate the disagreement regardingthe ownership of your trust property. The trust agreement specified that, over a change of control atOMC, no section of the trust corpus would be to be returned to OMC except pursuant to specificlimited exceptions. The rights of OMC towards the trust corpus were based on the regards to thoseprovisions, because this kind of change of control took place 1997. Pursuant to individuals limitedexceptions, OMC had greater than merely a nominal desire for the trust corpus during the time itexecuted its credit agreement with Bank of America; indeed, it enjoyed a remainder interestspecifically defined in the trust agreement itself.

The legal court then noted how the rights ofOMC to the trust corpus were similarlydefined by provisions from the trustagreement that clearly proscribed thegranting of a security desire for the trustcorpus to your creditor. OMC did not grant asecurity alarm curiosity about the trust corpusto Bank of America as it simply minn kota forsale was not the correct of OMC to do soagain. The ownership interest of OMC withinthe trust was defined by the trust agreementwhich ownership interest failed to include theopportunity to grant a security alarm interestin favor of any creditor.

Basedonthedistrictcourt,torule otherwise will have had the impermissible effect of amending the trust agreement by operationof the subsequently executed and separate credit agreement, this result also was required because.The trust agreement set forth the particular conditions expected to amend its terms. Any possibilitythat this credit agreement operated being an amendment for the trust agreement was foreclosedsince the conditions necessary for such an amendment were not met.

Therefore, the district court affirmed the choice from the bankruptcy court regarding the absence ofa security fascination with the trust corpus. Bank of America enjoyed a properly perfected and validlien on the general intangibles of OMC; however, that lien failed to extend to the trust corpus.