In Bank of America, N.A. v. Moglia (In re Outboard Marine Corporation), (1) the us District Court to...

1. Outboard Marine Corporation
In Bank of America, N.A. v. Moglia (In re Outboard Marine Corporation), (1) the us District Court to
the Northern District of Illinois, Eastern Division, addressed the problem from the disputed
ownership of $13.5 million located in trust with the Northern Trust Company for the advantage of
certain executives from the Minnkota Marine Corporation (OMC). Moglia, the trustee for OMC's
bankruptcy estate, sought to establish the rights in the estate to the trust corpus and proceeds. Bank
of America and certain beneficiaries of the trust had their particular ideas about who had rights for
the money. After the bankruptcy trustee prevailed in an earlier decision, Bank of America and the
beneficiaries brought separate appeals that thereafter were consolidated inside the case with the
Usa District Court for the Northern District of Illinois.
The important points in the case are intriguing and, needless to say, useful in understanding the
decision. OMC established the trust on December1987 and 18, and, by an amendment on June 20,
1989, the Northern Trust Company was named the trustee. The trust was made to provide a way to
obtain payment for several unfunded employee incentive and deferred compensation plans
implemented by OMC for the main benefit of certain from the executives (beneficiaries). The trust
was known as a rabbi trust, along with the beneficiaries were not taxed on their own share of your
corpus or income before the assets were actually distributed.

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f control at OMC, it had been obligated to pay to the trust an amount sufficient to fully fund the
incentive and compensation plans. A big difference of control occurred in OMC and 1997 paid $13.8
million to the trust. The trust agreement further given that the trust corpus would be to remain at all
times susceptible to the claims from the general creditors of OMC and this the corporation would
not develop a security desire for the corpus in favour of any creditor. The trust further provided, in
the matter of the bankruptcy of OMC, the Northern Trust Company was necessary to seek direction
from the court of competent jurisdiction or another person appointed through the court on how to
make the trust corpus offered to satisfy the claims of the general creditors of OMC.
On January1998 and 6, OMC withdrew the bucks from the trust and obtained the issuance of the
irrevocable letter of credit in the level of approximately $13.8 million. The letter of credit was issued
by Nations Bank, N.A., and named the Northern Trust Company, as trustee of the trust, as

3. beneficiary. The letter of credit was issued within the terms of an restated and amended security
and loan agreement (credit agreement). Under that agreement, Bank of America, as agent to the
lender parties thereto and successor to Nations Bank, N.A., was granted a lien on and security
interest in the general intangible assets of OMC.
On December22 and 2000, OMC filed a voluntary petition for relief under Chapter 11 of Title 11 of
the usa Code. Moglia was appointed trustee of the bankruptcy estate on or about August2001 and
24, after the case was transformed into a Chapter 7 filing. During the bankruptcy filing, the letter of
credit was still outstanding. On or about August however, 2001 and 28 the Northern Trust Company
drew under the letter of credit and was paid your face amount, approximately $13.8 million, through
the issuing bank.
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tcy filing, the committee of unsecured creditors of OMC initiated the lawsuit to establish the normal
creditors' rights for the trust corpus. After Moglia was appointed trustee from the estate, he
assumed prosecution of the case from your committee. On November2001 and 13, after. On average
, 20 fire-related accidents
and injuries occur about boats each as well as every yearthe other beneficiaries were able to
intervene, the bankruptcy court entered judgment in favour of Moglia and against all defendants.
Bank of America and also the beneficiaries appealed your choice.
The details demonstrated that in the date of your bankruptcy filing of OMC, the trust corpus was
held from the Northern Trust Company as a letter of credit. The peculiar nature of your letter of
credit gave rise for the argument with the beneficiaries that its original issuance on January1998
and 6, constituted a constructive distribution in the trust corpus on the beneficiaries. Due to this
constructive distribution, the beneficiaries argued, the creditors of OMC as well as the subsequent
bankruptcy trustee had no claim to the trust corpus and, accordingly, the bankruptcy court lacked

4. jurisdiction.
The district court stated it was undisputed the trust was a grantor trust, or rabbi trust, through
which a company makes contributions to the trust within the name of beneficiaries to make a supply
of funding for otherwise unfunded benefit plans. The beneficiaries from the trust were not taxed on
the area of the trust corpus or proceeds up until the assets were actually distributed to them, since
the trust corpus technically remained the property in the employer. (The legal court cited McAllister
v. Resolution Trust Corp. (2) in support of that proposition.) As a condition on this tax benefit, rabbi
trusts are required to remain all the time subject to the claims from the general creditors from the
grantor. When a grantor files for bankruptcy, the rabbi trust corpus becomes property in the
bankruptcy estate in the grantor thus. (The legal court cited Goodman v. Resolution Trust Corp. (3)
in support of this proposition.)
The beneficiaries argued that around the issuance of the letter of credit in 1998, the rabbi trust "was
transformed into a secular trust ... [and for that reason] the overall creditors as well as subsequent
bankruptcy trustee no longer had any state they the Trust corpus." In passing, the beneficiaries cited
to Maher v. Harris Savings and Trust Bank (4) as evidence that this kind of conversion is feasible.
The district court stated the reliance of the beneficiaries on Maher was unavailing. In Maher, a
debtor company, before becoming insolvent, converted its rabbi trusts to secular trusts. This way,
the trust funds were successfully removed from the reach of the creditors. In Maher, however, there
seemed to be an explicit intention to effectuate this kind of conversion. The organization also paid
the withholding taxes that were due in the funds if the taxes protection available under the rabbi
trusts was no longer available, despite the fact that not only did the board of directors of your
company expressly approve the master plan to "secularize" the trusts. There is no indication of those
a conversion from the OMC case. The board of directors of OMC did not express an intention to
secularize its rabbi trust nor did OMC pay income tax on behalf of the beneficiaries due to this
presumed secularization. In short, the rabbi trust failed to magically develop into a secular trust-
-and thus not any longer part of the estate of OMC--merely through the issuance of your letter of
credit, as being the beneficiaries could have had the district court believe, nor was there any
authority whatsoever to indicate that such a thing was possible. The trust remained at all times a
rabbi trust as it was made where there was no constructive distribution of your minn kota for sale
trust corpus towards the beneficiaries.

5. The claim of Bank of America was that this perfected a lien on the general intangible assets of OMC
pursuant for the credit agreement and that lien included a desire for the trust corpus. Moglia did not
dispute that Bank of America possessed a properly perfected security fascination with the normal
intangibles 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 cabability to assign its rights to
the trust corpus to Bank of America if it executed the credit agreement. It argued that, with regards
to rabbi trusts, "nothing restricts the power of a grantor-company to assign its ownership fascination
with the funds to your lender as collateral for a financial loan." Indeed, Bank of America continued,
Illinois commercial law and also the Uniform Commercial Code (UCC) generally promote and
recognize the free assignability of contracts. Engine Maintenance

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damaged gasoline tanks or
deteriorating hoses.The district court stated, however, how the argument of Bank of America
regarding assignability failed. The legal court claimed that though it was genuine that contracts
usually are freely transferable, in Illinois that freedom might be expressly proscribed with the
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 ... to opt for ... any creditor"
unquestionably included Bank of America. Whatever interests and rights OMC had inside the trust
corpus were based on the trust agreement, and OMC could not grant rights it failed to possess.
Therefore, at that time OMC and Bank of America executed the credit agreement, OMC was without
the energy to grant a security fascination with the trust corpus. In accordance with the district
court, it was actually simply never on the bargaining table.
Bank of America also argued the UCC rendered ineffective the trust agreement's limitation on
assignment. This argument hinged about the status of the Northern Trust Company for an "account
debtor" requiring it to produce payment to OMC in the event of insolvency. The Northern Trust
Company, however, was needed to seek direction from your court concerning how to make the trust
corpus accessible to fulfill the claims in the general creditors of OMC and was not to create payment
to OMC.
Bank of America further argued that OMC enjoyed a sufficient ownership curiosity about the trust
corpus to assign that interest as http://www.centerforoceansolutions.org/education/marine part of its
security obligations within the credit agreement. OMC, however, claimed that if it did not have the
ability to grant a security alarm fascination with the trust corpus, it could not have access to granted
Bank of America such an interest. OMC argued that it simply did not have sufficient ownership
desire for the trust corpus to grant Bank of America its lien. Bank of America revealed, however,
that parts of the trust agreement supported a finding that OMC was the property owner of your trust
corpus.

7. The district court noted how the difficulty from the issue stemmed from the nature of the trust itself
as a trust operates by separating the legal and equitable interests in property. Normally, the trustee
of a trust is claimed to support legal fascination with the trust property for the advantages of the
beneficiary, who holds equitable interest. This separation of interests will make it hard to describe
the trust property in ways in which the district court is normally accustomed, by its very nature.
Thus, when ownership interests in property are separated because that property is located in trust,
it is difficult to clearly define with any certainty which party will be the "owner" of that particular
trust property.
A legal court, therefore, looked on the trust agreement to solve the disagreement as to the
ownership of your trust property. The trust agreement specified that, over a change of control at
OMC, no part of the trust corpus would be to be returned to OMC except pursuant to particular
limited exceptions. The rights of OMC for the trust corpus were based on the relation to those
provisions, because such a change of control happened in 1997. Pursuant to those limited
exceptions, OMC had a lot more than just a nominal desire for the trust corpus at the time it
executed its credit agreement with Bank of America; indeed, it enjoyed a remainder interest
specifically defined in the trust agreement itself.
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d that this rights of OMC for the trust corpus were similarly based on provisions from the trust
agreement that clearly proscribed the granting of any security curiosity about the trust corpus to the
creditor. Again, OMC failed to grant a security fascination with the trust corpus to Bank of America
since it simply had not been the correct of OMC to do this. The ownership interest of OMC from the
trust was based on the trust agreement and this ownership interest failed to include the ability to
grant a security alarm interest in support of any creditor.
In line with the district court, to rule otherwise might have had the impermissible effect of amending
the trust agreement by operation of the subsequently executed and separate credit agreement, this
result also was required because. The trust agreement set forth the specific conditions required to
amend its terms. Any possibility that this credit agreement operated as being an amendment for the
trust agreement was foreclosed as the conditions necessary for this sort of amendment were not
met.

8. Therefore, the district court affirmed the choice of your bankruptcy court regarding the lack of a
security alarm interest in the trust corpus. Bank of America had a properly perfected and valid lien
on the general intangibles of OMC; however, that lien did not extend to the trust corpus.