March 21, 2023
A Stroock team led by senior counsel Michael Luskin and partners Stephan Hornung and Alex Talesnick secured victory for a group of senior secured lenders (the “Lenders”) in an appeal before the United States District Court for the Southern District of New York. The District Court affirmed the Bankruptcy Court’s holding that a customer’s delivery of property (precious metal) to a refinery for refining was a sale and not a bailment and that the resulting refined metal belonged to the debtors and was therefore subject to the Lenders’ liens.
The appeal arose out of the Chapter 11 bankruptcy case of Miami Metals II, Inc. (f/k/a Republic Metals Corporation), a precious metal refinery based in Miami, and a dispute between the Lenders and more than 50 of the debtors’ refining customers over the ownership of the debtors’ precious metal inventory. The customers, who had delivered scrap metal and other raw materials to the debtors for refining, contended that they continued to own the delivered metal throughout the refining process and therefore were entitled to return of the refined metals or payment in full. The Lenders, who held liens on substantially all of the debtors’ assets, argued that title had transferred to the debtors upon delivery to the refinery because the debtors were entitled to return “like kind” metal of equal value or cash to the customers. Ultimately, the debtors, the Lenders, and the customers agreed to a set of bespoke litigation procedures that allowed the parties to adjudicate the customer claims without the need to file 50 separate adversary proceedings, by grouping the customers into eight “buckets” based upon the characteristics of each customer’s agreement with the debtors.
At issue on appeal was a claim filed by a company and its principal who had delivered scrap metal worth more than $8 million to the debtors for refining years prior to the petition date but had never sought return of any refined metals or payment in cash. Instead, the customer carried his precious metals balance in a “pool account” with the debtors pursuant to the debtors’ standard terms and conditions, which provided that any refined metal returned to the customer would be “like kind” metal from the debtors’ common inventory. The customer contended that he was not bound by the standard terms and conditions because he had an oral agreement with the debtors’ founder (since deceased) pursuant to which the debtors had agreed to hold “his” metal for safekeeping. Additionally, the customer contended that he and the debtors had agreed that he would “lease” the precious metals in his pool account to the refinery in exchange for monthly payments.
The Bankruptcy Court rejected each of the customer’s arguments, finding that title to the scrap metal had transferred to the debtors upon delivery because the debtors were not required to return refined metal derived from the customer’s scrap metal. Rather, because the debtors could return like kind metal, the transaction was a sale and not a bailment. The Bankruptcy Court concluded that this was set forth explicitly in the debtors’ standard terms and conditions, which the customer had signed multiple times, and broadly applied to all business dealings between the parties. Additionally, the Bankruptcy Court rejected the customer’s contention that he retained title to the metal in his pool account as a result of the parties’ oral “lease” agreement, concluding that extrinsic evidence was inadmissible to vary or contradict the debtors’ standard terms and conditions. Accordingly, the Lenders’ liens attached to all scrap metal delivered by the customer, any refined metal derived from the customer’s scrap metal, and all cash proceeds.
On appeal, the customer made two arguments. First, the customer argued that the Bankruptcy Court erred when it applied the debtors’ standard terms and conditions to the customer because the customer had delivered all of his scrap metal to the debtors for refining long before he executed the standard terms. Second, the customer argued that the Bankruptcy Court erred when it found that the parol evidence rule precluded the Bankruptcy Court from considering evidence of a subsequent oral lease agreement. The District Court rejected each of these arguments and affirmed judgment in favor of the Lenders.
The District Court found that the customer’s ownership claim was precluded by the debtors’ unambiguous standard terms and conditions. According to the District Court, it did not matter that the parties later called their arrangement a “lease” because title to the scrap metal had transferred to the debtors years earlier when it was delivered for refining; “[i]n other words, there could be no leases because the [customers], the so-called lessors, entered the transactions without any property to lease.”
March 21, 2023
A Stroock team led by senior counsel Michael Luskin and partners Stephan Hornung and Alex Talesnick secured victory for a group of senior secured lenders (the “Lenders”) in an appeal before the United States District Court for the Southern District of New York. The District Court affirmed the Bankruptcy Court’s holding that a customer’s delivery of property (precious metal) to a refinery for refining was a sale and not a bailment and that the resulting refined metal belonged to the debtors and was therefore subject to the Lenders’ liens.
The appeal arose out of the Chapter 11 bankruptcy case of Miami Metals II, Inc. (f/k/a Republic Metals Corporation), a precious metal refinery based in Miami, and a dispute between the Lenders and more than 50 of the debtors’ refining customers over the ownership of the debtors’ precious metal inventory. The customers, who had delivered scrap metal and other raw materials to the debtors for refining, contended that they continued to own the delivered metal throughout the refining process and therefore were entitled to return of the refined metals or payment in full. The Lenders, who held liens on substantially all of the debtors’ assets, argued that title had transferred to the debtors upon delivery to the refinery because the debtors were entitled to return “like kind” metal of equal value or cash to the customers. Ultimately, the debtors, the Lenders, and the customers agreed to a set of bespoke litigation procedures that allowed the parties to adjudicate the customer claims without the need to file 50 separate adversary proceedings, by grouping the customers into eight “buckets” based upon the characteristics of each customer’s agreement with the debtors.
At issue on appeal was a claim filed by a company and its principal who had delivered scrap metal worth more than $8 million to the debtors for refining years prior to the petition date but had never sought return of any refined metals or payment in cash. Instead, the customer carried his precious metals balance in a “pool account” with the debtors pursuant to the debtors’ standard terms and conditions, which provided that any refined metal returned to the customer would be “like kind” metal from the debtors’ common inventory. The customer contended that he was not bound by the standard terms and conditions because he had an oral agreement with the debtors’ founder (since deceased) pursuant to which the debtors had agreed to hold “his” metal for safekeeping. Additionally, the customer contended that he and the debtors had agreed that he would “lease” the precious metals in his pool account to the refinery in exchange for monthly payments.
The Bankruptcy Court rejected each of the customer’s arguments, finding that title to the scrap metal had transferred to the debtors upon delivery because the debtors were not required to return refined metal derived from the customer’s scrap metal. Rather, because the debtors could return like kind metal, the transaction was a sale and not a bailment. The Bankruptcy Court concluded that this was set forth explicitly in the debtors’ standard terms and conditions, which the customer had signed multiple times, and broadly applied to all business dealings between the parties. Additionally, the Bankruptcy Court rejected the customer’s contention that he retained title to the metal in his pool account as a result of the parties’ oral “lease” agreement, concluding that extrinsic evidence was inadmissible to vary or contradict the debtors’ standard terms and conditions. Accordingly, the Lenders’ liens attached to all scrap metal delivered by the customer, any refined metal derived from the customer’s scrap metal, and all cash proceeds.
On appeal, the customer made two arguments. First, the customer argued that the Bankruptcy Court erred when it applied the debtors’ standard terms and conditions to the customer because the customer had delivered all of his scrap metal to the debtors for refining long before he executed the standard terms. Second, the customer argued that the Bankruptcy Court erred when it found that the parol evidence rule precluded the Bankruptcy Court from considering evidence of a subsequent oral lease agreement. The District Court rejected each of these arguments and affirmed judgment in favor of the Lenders.
The District Court found that the customer’s ownership claim was precluded by the debtors’ unambiguous standard terms and conditions. According to the District Court, it did not matter that the parties later called their arrangement a “lease” because title to the scrap metal had transferred to the debtors years earlier when it was delivered for refining; “[i]n other words, there could be no leases because the [customers], the so-called lessors, entered the transactions without any property to lease.”
