In re Kham & Nate's Shoes No. 2, Inc.
| Decision Date | 03 March 1989 |
| Docket Number | Bankruptcy No. 84 B 324,88 A 970. |
| Citation | 97 BR 420 |
| Parties | In re KHAM & NATE'S SHOES NO. 2, INC., Debtor. KHAM & NATE'S SHOES NO. 2, INC., Counterclaimant, v. The FIRST BANK OF WHITING, Counterdefendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
James H.M. Sprayregen, Rudnick & Wolfe, Chicago, Ill., for debtor.
Robert Stochel, John M. O'Drobinak, Crown Point, Ind., Robert J. Walinski, Chicago, Ill., for counterdefendant.
This cause coming on to be heard on the Debtor's Motions for Partial Summary Judgment on the Debtor's Objection to Claim and counterclaims against the First Bank of Whiting, and the Court, having considered the record and pleadings on file in this case, having considered the memoranda of law submitted by the parties in support of their respective positions, and being fully advised in the premises, now enters its ruling;
This is a core proceeding over which the Court has jurisdiction, pursuant to Title 28 U.S.C. § 157(b). For the reasons set forth below, the Debtor's Motions for Summary Judgment are granted in part, and the following constitutes the Court's findings of facts and conclusions of law, pursuant to Bankruptcy Rule 7052.
FINDINGS OF FACTS.
The facts at issue in the instant matter are essentially the same as the facts presented at the confirmation hearing on the Debtor's Third Amended Plan of Reorganization. Therefore, to the extent that questions of fact decided at confirmation are presented here, the Court adopts its findings of facts as set forth in its Memorandum Opinion and Order confirmation order, dated October 20, 1988, confirming the debtor's Third Amended Plan of Reorganization. The relevance of any factual inquiry then is whether the legal import of the facts determined at the confirmation hearing is such that the Debtor is entitled to judgment on the causes of action alleged as a matter of law.
Kham & Nate's Shoes No. 2, Inc. Debtor, is a retail shoe business in Chicago, Illinois. In the fall of 1983, the Debtor was having problems obtaining working capital to operate its expanding shoe business. In September 1983, the Debtor began discussions with the First Bank of Whiting Bank, Indiana, through its senior Vice-President, Donald O. Cassaday, concerning a loan to ease its cash flow problems. As a result of the Debtor's discussions with Mr. Cassaday, the Bank issued certain letters of credit to the Debtor. These letters of credit were unsecured.1
In December 1983, the Debtor again met with Mr. Cassaday at the Bank's offices in Indiana. At that meeting, Mr. Cassaday enumerated several conditions upon which the Bank would approve a $300,000.00 line of credit to the Debtor for working capital in order to sustain its business. On January 4, 1984, a commitment letter was issued by the Bank. One of the conditions contained therein was a requirement that the Debtor file for relief under Chapter 11 of the Bankruptcy Code. To this end, Cassaday provided to the Debtor the names of several attorneys, including one of the Debtor's attorneys, Mr. Golding. The issuance of the $300,000.00 line of credit was to be an interim step "bridge" loan. The ultimate plan was for a $1.2 million Small Business Administration guaranteed loan that would be used to fund a plan of reorganization.
On January 11, 1984, the Debtor filed its Chapter 11 petition. Since that date, the Debtor has retained possession of its assets and has continued to operate its business as Debtor-In-Possession.
On or about January 14, 1984, the Debtor filed its Application to Borrow Money and Grant Security Interests Financing Application. In the Financing Application, Debtor sought approval of a Loan and Security Agreement Loan and Security Agreement related to the $300,000.00 line of credit. On January 29, 1984, the Court entered an order Financing Order approving the Application and the Loan and Security Agreement granting the Bank a § 364(c)(1) lien on essentially all post-petition assets of the Debtor, namely the Debtor's inventory.
The Bank advanced the Debtor approximately $100,000.00 under the Loan and Security Agreement. Most of these funds were used to repay credit extended by way of draws on the eight letters of credit issued by the Bank pre-petition. These letters of credit and how they came to be used are significant in this case.
In December 1983, the Bank advised the Debtor not to pay suppliers so that cash could be accumulated prior to the filing of the Chapter 11 petition. As a result, the suppliers called upon the Bank to honor its obligations pursuant to the letters of credit. After the petition was filed, the Bank advanced funds to the Debtor pursuant to the Loan and Security Agreement to repay the Bank's advances on the letters of credit. Thus, the Bank acquired a post-petition lien on previously unencumbered assets of the Debtor in order to repay a pre-petition, unsecured obligation.
The Financing Order provided that the Loan and Security Agreement could be terminated by either party upon five days' written and telephonic notice. On or about February 14, 1984, the Bank's Board of Loan and Investment Committee BLIC directed Cassaday to terminate the line of credit. The reason given for the termination was that the BLIC did not like the nature of the credit with the Debtor in a Chapter 11 case, the BLIC did not like the location of the Debtor's business, and did not think that the Bank should be doing business on the south side of Chicago. The Bank claims that the BLIC was unaware of the letters of credit issued prior to the Chapter 11 case until the post-petition financing arrangement was presented to the BLIC after the Financing Order had been entered. The Court finds this testimony incredible.
Although the Bank decided to terminate the line of credit on February 14, 1984, it did not inform the Debtor until two weeks later. In fact, counsel for the Bank, Mr. Stochel, attended a creditor's meeting, fully aware of the Bank's decision to terminate, and failed to mention the Bank's decision while affirming to those present that the Court had entered the Financing Order approving the Loan and Security Agreement. This amounts to a representation that the Bank would be financing the Debtor's reorganization. Mr. Stochel denies that he ever affirmatively represented that the Bank would be financing the Debtor's reorganization, but there is no doubt that the Debtor and others present at that meeting of creditors believed that this was the case. Failure to disclose the Bank's decision to terminate the line of credit under these circumstances had the same effect as would have an affirmative representation.
On February 29, 1984, some 30 days from the effective date of the Loan and Security Agreement, the Bank notified the Debtor, in writing, that it intended to terminate the line of credit with five days' notice. The required five-day telephonic notice was never provided. The Bank gave the Debtor no reason for the termination in its written notice. There had been no material change of circumstances between the time the Bank and the Debtor entered into the Loan and Security Agreement and the date on which the Bank terminated the Loan and Security Agreement. The Debtor had complied with each condition required by the Bank, and was current in its payments without any difficulty whatsoever.
In April 1984, Bank's President, Michael Schrage, explained to Khamalow Beard, one of the principals of the Debtor, that he did not understand why the Debtor had come to Indiana for financing, that the Bank did not want to do business with the Debtor, and that the Debtor should go back to its own neighborhood to obtain financing.
Schrage's April 26, 1988, deposition suggests that an alternative reason for the termination was an internal conflict at the Bank between Cassaday, as Senior Vice President/Senior Lending Officer and Schrage, as President.
After the Bank terminated the line of credit, the Debtor was unable to borrow funds from other sources because its assets were encumbered by the Bank's lien. As a result, the Debtor sustained substantial damage to its business; the Debtor incurred additional inventory costs as it became necessary for the Debtor to purchase all of its inventory on a COD basis, and the Debtor forfeited a discount for its non-COD cash purchases of inventory; the Debtor was unable to purchase inventory from its former suppliers and was thereby compelled to purchase inventory of an inferior quality from other sources at higher prices; and the Debtor sustained substantial sales losses because of its inability to obtain adequate quantities of inventory of a proper quality by purchasing on a COD basis. This resulted in the closing of stores, and the cancellation of plans to open a new store. Projected income under the Debtor's business plan was not realized.
The Bank was very much aware of the Debtor's arrangements with its suppliers as the Bank was informed of all the Debtor's obligations and agreements with its suppliers prior to the structuring of the Loan and Security Agreement.
The Debtor repaid approximately $81,000.00 of the funds the Bank advanced to it, approximately $35,000 of which was repaid prior to the termination. In January 1985, the Debtor made a $10,000.00 payment to the Bank which the Debtor claims was an attempt to show its good faith and to help negotiate a reasonable interest rate on its remaining outstanding debt under the Loan and Security Agreement. The Bank accepted the $10,000.00 but rejected the Debtor's proposed payment plan.
Having failed in its efforts to reconcile its differences with the Bank, the Debtor sought to equitably subordinate the Bank's claim and transfer the Bank's lien to the estate as part of the Debtor's Third Amended Plan of Reorganization.
The Court confirmed the Debtor's Third Amended Plan of Reorganization in a Memorandum Opinion and Order confirmation...
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