745 F.2d 1076 (7th Cir. 1984), 83-2292, Advance Process Supply Co. v. Litton Industries Credit Corp.

Docket Nº:83-2292.
Citation:745 F.2d 1076
Party Name:ADVANCE PROCESS SUPPLY COMPANY, an Illinois corporation, Plaintiff-Appellant, v. LITTON INDUSTRIES CREDIT CORPORATION, a Delaware corporation, Defendant- Appellee.
Case Date:September 27, 1984
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit
 
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Page 1076

745 F.2d 1076 (7th Cir. 1984)

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

September 27, 1984

Argued April 20, 1984.

Page 1077

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

Page 1078

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...

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