In Uncategorized on 12/03/2019 at 16:57

All y’all (warming up for visit to nearest and dearest in The Bayou City later this month) will remember 5 Cir’s interest in discounts in the run-up to MoneyGram International, Inc. and Subsidiaries, 153 T.C. 9, filed 12/3/19. What, no? I’m aghast. So check out my blogpost “Maybe You Can Bank On It,” 2/15/17.

When Tax Court zapped MoneyGram for taking $82 million in worthless securities losses by claiming to be a bank, 5 Cir said they were a wee bit casual about whether or not MoneyGram made discounts. Don’t confuse “made discounts” with “gave discounts.” Banks make discounts, they don’t give discounts.

The classic definition I learned in the negotiable instruments class from the late lamented Norm Penny, Esq., on The Hill Far Above, was that banks took in third-party promissory notes payable to the bank’s customer at a discount from face value and collected face, the difference between what bank gave the customer and the face amount collected being the “discount,” or interest on a loan.

Looks like I got Prof. Penny’s concept.

“If a bank customer needing immediate cash held a ‘bill’ or promissory note from a third party (perhaps due in 180 days), he might ask his bank to ‘discount’ the bill by giving him (say) 90 cents on the dollar in exchange for the bill.  As the Supreme Court explained in 1823, ‘a discount by a bank means, ex vi termini, a deduction or draw-back made upon its advances or loans of money, upon negotiable paper, or other evidences of debt, payable at a future day, which are transferred to the bank.” Fleckner v. Bank of U.S., 21 U.S. (8 Wheat) 338, 350-351 (1823).  In effect, a ‘bank discount’ is the ‘interest that a bank deducts in advance of the maturation of a note.’  Black’s Law Dictionary (11th ed. 2019).  The bank’s customer receives proceeds reduced by the unstated interest, and the bank receives the unstated interest when the note is repaid at maturity.” 153 T. C. 9, at pp. 68-69.

MoneyGram provides payment services, that is, collects money and a fee from a customer, and transmits it to a third party, whether at home or abroad. Everyone agrees that doesn’t make MoneyGram a bank. Treasury regulates those separately from banks.

But MoneyGram sells money orders, either in its name or co-branded. These are essentially checks, drawn on MoneyGram’s own deposits, which, according to a survey, the purchasers can use “’to pay personal bills’ (65%), ‘to pay for goods or services’ (43%), ‘to help a friend’ (21%), to make ‘a gift’ (15%), and ‘to invest in a business’ (4%).  Customers in the survey indicated that they preferred money orders over other payment methods, such as cash or bank checks, because of the ‘security of * * * [the] transaction’ (41%), because the ‘transaction can be tracked’ (40%), because money orders are ‘required by biller’ (32%), and because cash ‘is not accepted everywhere’ (23%).” 153 T. C. 9, at p. 8.

Banks hold money for safekeeping. None of the foregoing is “safekeeping.”

MoneyGram has agents who are empowered to issue MoneyGram’s money orders, pursuant to a Master Trust Agreement (MTA). And thereby hangs the cliché.

“MoneyGram historically has taken the position that an MTA creates an express trust that gives it a preferred position over its agent’s other creditors in the event of its agent’s bankruptcy.  In at least 27 bankruptcy proceedings filed by its agents, MoneyGram has contended that it is not an ordinary creditor because the MTA gives rise to a fiduciary relationship between MoneyGram and its agent.  For that reason MoneyGram has asserted that its agent’s failure to pay over Trust Funds constituted ‘defalcation while acting in a fiduciary capacity,’ 11 U.S.C. sec. 523(a)(4) (2006), so that the agent’s debts to MoneyGram were not dischargeable.” 153 T. C. 9, at p. 10 (Footnote omitted).

Thus MoneyGram doesn’t lend money to its money-order agents or to the people who buy the money orders. They sell a product.

The basis for the $82 million hit MoneyGram wants to write off is that MoneyGram invested in debt instruments (commercial paper, or CP) that it purchased below par (thus generating OID, or Original Issue Discount), but OID wasn’t a loan to a customer. They were investments required by State regulators.

“In making these investments MoneyGram did not lend money to a customer by discounting a note.  Any lending was done by the underwriters who initially purchased CP from the issuer.  By acquiring CP in the aftermarket, MoneyGram was not lending to the corporation that issued the CP but was simply acquiring an asset from another investor.  The fact that MoneyGram—like all other investors in the $1.78 trillion CP market–would receive OID as part of its investment return does not mean that it was “making discounts” within the meaning of section 581.  Money market funds held massive investments in CP during 2007 and 2008, but they could not plausibly contend that they ‘made discounts’ for purposes of this statute.

“Assuming arguendo that MoneyGram’s purchases of CP directly from issuers involved ‘making discounts,’ we find that petitioner has not shown that investing in such CP was a “substantial part” of its business, either in a quantitative or in a qualitative sense.  Over the course of 2007 MoneyGram invested more than $66 billion in CP, about 8.5% of which it purchased directly from the issuer. Of the $5.7 billion purchased directly from issuers, MoneyGram’s exposure was typically only one day and never more than seven days.  From this $5.7 billion investment MoneyGram earned OID of $1.2 million during 2007.  Relative to MoneyGram’s revenues generally, this amount is insubstantial.” 153 T. C. 9, at pp. 73-74.

Judge Albert G (“Scholar Al”) Lauber does this drill-down to show 5 Cir that Tax Court seriously considered the remand. MoneyGram’s seven (count ‘em, seven) lawyers, including but not limited to two of them with “III” after their names, have the long walk back. I’ve done that, and it ain’t fun.

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