Opinion ID: 496811
Heading Depth: 2
Heading Rank: 2

Heading: The Offset of CSI's Account

Text: 4 On February 15, 1983, the Plan obtained a $500,000 loan from BancTexas-Houston (the Bank) for the purpose of investing in long term residential mortgages. 6 On the same day, a guaranty of contribution was executed in which CSI guaranteed to the Bank that it would make annual contributions to the Plan in an amount not less than $150,000 per year until the loan was repaid. This guaranty of contribution gave the Bank the right to offset any amounts owing on the loan against CSI accounts with the Bank in the event that CSI failed to make the required contributions. 7 The Plan, in turn, executed a negative pledge of its assets and agreed to apply any and all contributions from CSI toward payment of the loan. On March 9, 1983, CSI's board of directors resolved that CSI would contribute not less than $150,000 annually to the Plan until the loan obligation was discharged. On September 1, 1983, CSI contributed $150,000 to the Plan. This contribution was applied toward payment of the loan and, when combined with earlier payments by the Plan, resulted in a reduction in the principal balance to $300,000. By late 1985, the loan had been renewed twice and the principal had been reduced to $260,000. CSI failed to make its $150,000 contributions to the Plan in 1984, 1985, and 1986. 5 On November 20, 1985, the Bank advised MBank-Houston (MBank), the Plan's independent fiduciary, 8 that the Bank was amenable to allowing the note to remain past due until December 1, 1985. On December 15, 1985, MBank received $138,869.01 from a third party from the purchase of real estate owned by the Plan and made a $100,000 payment on the loan. After the payment was allocated between interest and principal, the principal balance stood at $174,953.61. Because CSI had failed to make the annual $150,000 contributions that it had guaranteed would be made to the Plan, the Bank exercised its option under the guaranty of contribution and offset CSI's corporate account in the amount of $179,580.49 on January 29, 1986. 6 On February 7, 1986, Pennington's counsel met with MBank representatives regarding the offset and agreed that on March 1, 1986, the required date of a payment under the consent order, Pennington would be credited for the offset and would be refunded the difference between the amount due under the consent order and the amount of the offset. The agreement envisioned a $179,932.51 payment from MBank to CSI followed by a $101,390.22 payment to the Plan by Pennington. The Secretary determined that the Plan did not in fact owe CSI any money and disallowed the transaction. 9 On March 28, 1986, the Secretary advised Pennington's counsel that he considered all of the 1986 payment as unpaid and made formal demand for payment. 10