Advance Process Supply Co. v. Litton Industries Credit Corp.

• Decision Date: 27 September 1984
• Docket Number: No. 83-2292,83-2292
• Parties: 39 UCC Rep.Serv. 565 ADVANCE PROCESS SUPPLY COMPANY, an Illinois corporation, Plaintiff-Appellant, v. LITTON INDUSTRIES CREDIT CORPORATION, a Delaware corporation, Defendant- Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1076

745 F.2d 1076

39 UCC Rep.Serv. 565

ADVANCE PROCESS SUPPLY COMPANY, an Illinois corporation Plaintiff-Appellant, v. LITTON INDUSTRIES CREDIT CORPORATION, a Delaware corporation, Defendant- Appellee.

No. 83-2292.

United States Court of Appeals Seventh Circuit.

Argued April 20, 1984.

Decided Sept. 27, 1984.

Donald F. Spak, Arvey, Hodes, Costello & Burman, Chicago, Ill., for plaintiff-appellant.

Keith A. Klopfenstein, Burke, Bosselman, Freivogel, Weaver, Glaves & Ryan, Chicago, Ill., for defendant-appellee.

Before BAUER and WOOD, Circuit Judges, and WEIGEL, Senior District Judge. ^*

HARLINGTON WOOD, Jr., Circuit Judge.

In this dispute between a seller/guarantor and a creditor, we must decide who shall bear the burden of an improper filing that failed to secure an interest in the collateral, the equipment sold. We hold that although the creditor was responsible for the faulty filing, the seller/guarantor remained liable under the with-recourse agreement due to its warranty of proper filing.

I.

Advance Process Supply Company is a Chicago-based manufacturer of screen printing equipment. On August 10, 1981, Advance sold some equipment to Steel City Screen Printers of Canonsburg, Pennsylvania, under an installment sale contract. Under the contract, Steel City was to pay $16,000 as a down payment and obtain financing for the balance of $43,404. Litton Industries Credit Corporation agreed to provide the financing by taking an assignment of the sales contract without recourse to Advance. On September 23, 1981, Litton's branch manager obtained from Advance's office UCC-1 financing statements signed by Advance. The next day, Advance's credit manager mailed Litton a copy of the installment sale contract with a request that Litton "be sure that a copy of this contract accompanies your filing of the UCC-1 forms with the state."

Litton filed the forms with the Pennsylvania Secretary of State on September 29, 1981, but neglected to file with the appropriate county prothonotary, ¹ as necessary under Pennsylvania law to secure an interest in the collateral. The security interest thus was not perfected.

On October 5, 1981, Litton informed Advance that it now wanted the assignment to be with recourse to Advance for one year. Advance agreed, and the formal assignment agreement was executed on October 28, 1981, on a form supplied by Advance. The assignment agreement provided that Advance would guarantee payment to Litton for one year. If Steel City defaulted within that time, Advance would enforce the security interest in the equipment, sell the equipment, and use the proceeds to repay Litton. Advance warranted that the contract and any applicable notices and statements "have been correctly filed" as necessary to perfect Advance's interest in the collateral. Advance also "unconditionally and absolutely" guaranteed payment to Litton, and waived notice of and consented to any subordinating, compromising, discharging, or releasing of any security "in such manner and at such times as [Litton] may deem advisable" without impairing Advance's liability for payment in full.

The purchaser, Steel City, went into involuntary bankruptcy on March 8, 1982. Under the assignment agreement, Advance became immediately liable for repayment to Litton of the full amount of Litton's loan to Steel City. When Advance attempted to repossess the equipment, it discovered that Litton's filing of the financing statements was inadequate to protect the security interest in the equipment. The equipment remained in Steel City's bankruptcy estate.

Litton demanded payment in full from Advance pursuant to the assignment agreement. Advance refused, claiming Litton had impaired the collateral and discharged Advance. Advance sought declaratory relief in an Illinois state court; Litton removed the action to the federal district court for the Northern District of Illinois under its diversity jurisdiction and counterclaimed for the amount due, plus attorney's fees and expenses. The parties had provided in the assignment agreement that Illinois law would govern any dispute.

The district court granted summary judgment for Litton, finding that Advance had warranted that the necessary papers were filed correctly and had consented unconditionally to Litton's impairment of collateral. The district court awarded Litton $48,546. Advance appeals.

II.

Advance's principal argument on appeal focuses on its construction of the "deem advisable" language in the assignment agreement, which Advance argues limited its consent to impairment of collateral to Litton's intentional actions. ² Advance claims it did not consent to a negligent action such as the faulty filing here, and thus Litton unjustifiably impaired the collateral without its consent, which would discharge Advance under the Uniform Commercial Code (Code) as enacted in Illinois. ³

We need not reach the issue of whether the "deem advisable" clause conditioned Advance's consent to impairment of collateral. Elsewhere in the assignment agreement, Advance unconditionally warranted that the applicable statements had been filed correctly. ⁴ Although we must construe the guarantee agreement strictly in favor of the guarantor, see Vilter Manufacturing Co. v. Loring, 136 F.2d 466, 468 (7th Cir.1943); McHenry State Bank v. Y & A Trucking, Inc., 117 Ill.App.3d 629, 633, 73 Ill.Dec. 485, 488, 454 N.E.2d 345, 348 (1983), we also must view the assignment agreement as a whole, see Laurentide Finance Corp. of America v. Capitol Products Corp., 392 F.2d 444, 447 (3d Cir.1968); Zannis v. Lake Shore Radiologists, Ltd., 73 Ill.App.3d 901, 906, 29 Ill.Dec. 569, 572, 392 N.E.2d 126, 129 (1979). The "deem advisable" language in no way can be construed to condition the warranty of proper filing here. Further, the agreement provided other reassurances that Advance's guarantee was unconditional. ⁵ The agreement must be construed to bind Advance to its warranty of proper filing.

We thus hold that Advance agreed to bear the burden of Litton's negligence. While that result may seem harsh, we note that when Litton undertook to file the statements, it presumably believed that it was protecting its own interest in the collateral because, at that stage of the negotiations, the parties were discussing a no-recourse agreement. More than three weeks before the assignment agreement was executed, Litton informed Advance that it wanted the agreement to be with recourse for one year, which gave Advance sufficient time to verify proper filing. Advance supplied the form for the assignment agreement, which included the warranty of proper filing. We must construe an instrument against its drafter. See National Acceptance Co. of America v. Demes, 446 F.Supp. 388, 391 (N.D.Ill.1977). Here, as in Demes, the agreement's allocation of risk concerning perfection of the security interest was plain on its face and, "however justifiable [Advance's] expectations that [Litton] should proceed with care to perfect its security interests properly, these expectations were not protected by the guarantee agreement they signed." Id.

Advance argues that despite its warranty of proper filing, evidence of trade usage ⁶ and course of dealing ⁷ would show that Litton in fact was responsible for proper filing. No such evidence was admitted because the district court, concluding that there was no genuine issue of material fact, granted summary judgment to Litton on the basis of the agreement alone.

The Code provides that express contract terms control trade usage and course of dealing where they are inconsistent, ⁸ but trade usage and course of dealing may be used to explain or supplement the express terms of an unambiguous contract, complete on its face. See Ill.Rev.Stat. ch. 26, Sec. 2-202 (1983); ⁹ Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3, 9-10 (4th Cir.1971); see also J. White & R. Summers, Uniform Commercial Code 99-100 (2d ed. 1980). The assignment agreement apparently was intended by the parties to be a final expression of their agreement on the terms contained therein, and appears to be unambiguous and complete on its face. Evidence that trade usage and course of dealing would place the burden of proper filing on the creditor rather than the guarantor, and that this was the true intention of the parties, would contradict rather than explain or supplement Advance's express warranty of proper filing, and the district court correctly excluded such evidence.

Advance asserts three other arguments against enforcement of the with-recourse agreement. First, Advance argues that Article 9 of the Code applies to void any consent to Litton's negligent filing. Assuming that the equipment sale was a secured transaction governed by Article 9, Advance argues that Litton was required by Article 9 to use reasonable care to preserve the collateral, which included the duty to record statements as necessary to perfect security interests. See Ill.Rev.Stat. ch. 26, Sec. 9-207(1) (1983). ¹⁰ Advance then argues that the duty of reasonable care imposed by section 9-207(1) cannot be waived. See Ill.Rev.Stat. ch. 26, Sec. 1-102(3); ¹¹ Congress Financial Corp. v. Sterling-Coin Op Machinery Corp., 456 F.2d 451, 455-56 (3d Cir.1972).

Section 9-207(1) may be used to define unjustifiable impairment of collateral under section 3-606(1)(b), see Ill.Ann.Stat. ch. 26, Sec. 3-606 (Smith-Hurd 1963) (Code Comment 5), and to show that failure to perfect a security interest in collateral is an unjustifiable impairment. See, e.g., McHenry State Bank v. Y & A Trucking, Inc., 117 Ill.App.3d 629, 633, 73 Ill.Dec. 485, 488, 454 N.E.2d 345, 348 (1983) (citing cases); J. White & R. Summers, Uniform Commercial Code 525-26 (2d ed. 1980). Section 3-606 "unjustifiable impairment" discharges a guarantor, however, only "without such party's consent." Under Advance's reading of the Code, the phrase "without such party's consent" would be meaningless because a party would never be able to consent...