911 F.2d 1223 (7th Cir. 1990), 89-1047, Matter of Vitreous Steel Products Co.
|Citation:||911 F.2d 1223|
|Party Name:||In the Matter of VITREOUS STEEL PRODUCTS COMPANY, Debtor. Appeal of Lynn M. MILLER, Trustee and Northern Indiana Public Service Company.|
|Case Date:||August 07, 1990|
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
Argued May 25, 1989.
Rehearing and Rehearing In Banc
Denied Oct. 5, 1990.
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
Lynn M. Miller, Trustee Miller & Miller, Elkhart, Ind., pro se.
Joel R. Page, Jr., Paul A. Rake, Eichhorn, Eichhorn & Link, Hammond, Ind., for appellant Northern Indiana Public Service Co.
Gary D. Boyn, Elkhart, Ind., for appellee Midwest Commerce Banking Co.
William I. Kohn, Lynn C. Tyler, Seth D. Linfield, Barnes & Thornburg, South Bend, Ind., for appellees VITCO, Inc. and Richard Champlin.
Paul A. Rake, Eichhorn, Eichhorn & Link, Hammond, Ind., for debtor.
Before WOOD, Jr., COFFEY and FLAUM, Circuit Judges.
COFFEY, Circuit Judge.
Vitreous Steel Products ("Vitreous") is a manufacturer of enamelled steel goods with a manufacturing facility in Nappanee, Indiana and executive offices in Cleveland, Ohio. Thomas Weil was President, and all of the company's stock was owned by the Weil family until 1986. In 1981, the company borrowed money from the Saint Joseph Valley Bank (now known as Midwest Commerce Banking Company, hereinafter "the Bank"), and gave a mortgage on the plant's realty and fixtures and a security interest in all the company's personal property. The security agreement covered all presently owned and after acquired personal property; however, the financing statement listed "All Inventory; Accounts Receivable; General Intangibles; and Equipment described in Exhibit A attached hereto and incorporated herein." Exhibit A listed the property owned by the corporation, piece by piece. The financing statement fails to reflect any reference to property acquired subsequent to the date of the loans. Thus the Bank's security interest in after-acquired property was unperfected.
Not long after taking the loan from the Bank, Vitreous borrowed additional money from the Florence M. Weil Trust, and gave a second mortgage and a junior security interest on the same goods. The security agreement and the financing statement both contained a reference to after acquired personal property. The note provides that payment cannot be made if the payment would cause Vitreous to be in violation of its loan agreement with the Bank. The Bank's agreement provides that Vitreous may make payments on the
Trust note only from profits from the preceding quarter, and only when the loan from the Bank is not in default.
Through the 1980s the business was in financial difficulty, principally because of lack of executive leadership. In 1985, the business lost $1,000,000, and its net worth dropped below zero, thus technically putting it in default to the Bank. The Bank announced that it deemed itself insecure, but did not declare a default at that time. Rather, it commenced discussions with Thomas Weil about letting someone else run the company. Weil looked for a buyer for his stock without success. In April, 1986, the Bank called a Richard Champlin, and asked him to look at Vitreous' operations. Champlin was a private investor who had a reputation of purchasing failing companies, making them financially sound, and selling them. The Bank, trusting Champlin's business ability, had asked him to step in on other occasions where outstanding loans were in jeopardy. Champlin, a resident of Northern Indiana, determined that it was financially feasible to move the executive offices from Cleveland to the manufacturing plant in Nappanee; thus the closing of the Cleveland office realized a savings to the company. In his role as potential investor, Champlin worked with Vitreous' creditors beginning in June, 1986 in an attempt to work out a composition agreement. These efforts were unsuccessful. Finally, on July 10, Champlin bought 64% of the stock of Vitreous from the Weils at a cost of $240. At the same time, he purchased the Florence M. Weil Trust's secured note (principal amount $180,000) for $100. Champlin named himself President and sole Director of Vitreous the same day. From that time, Champlin caused Vitreous to pay for all new purchases in cash. All current bills were paid immediately, but no payments were made on debts incurred before July 10.
Champlin continued his efforts to reach a composition of creditors, but was unable to reach an agreement on acceptable terms. Toward the end of August 1986, the Bank informed Champlin that it intended to repossess. Champlin asked them to give him a short time to get operations ready for the foreclosure, so as to maximize the accounts receivable. The idea was to have as much enamelling work as possible ready to deliver, and as little as possible in process.
On August 26, 1986, Champlin formed a new corporation, VITCO, supplying the statutory minimum capitalization of $1000. On August 28, Champlin, as Vitreous' president, caused Vitreous to pay him (Champlin) $13,860 as reimbursement for travel expenses which were incurred "back quite a ways." On August 29, 1986, Champlin caused Vitreous to voluntarily surrender possession of all of Vitreous' assets to the Bank. At that time, Vitreous owed the Bank $848,342.78, with interest at one point over the prime rate accruing at a rate of $215.53 per day. Vitreous owed Champlin $180,000 on the Trust loan. It owed its largest unsecured creditor, Northern Indiana Public Service Company ("NIPSCO"), about $500,000.
On August 29, the same day as the surrender of the assets, the Bank entered into a short term lease agreement with the newly-formed VITCO. VITCO was to operate Vitreous' assets on behalf of the Bank while the Bank looked for a buyer for the going concern. Meanwhile, VITCO was to receive a management fee of $2500 per week (from which Champlin took a salary equivalent to $100,000 per year). VITCO worked on the Bank's behalf until November 1, 1986. All the witnesses agree that the company turned a small profit during September and incurred a loss during October. The Bank and Champlin say that the overall loss was something like $140,000, while the Trustee and NIPSCO say it was about $6,000. In any case, the Bank claimed that, as of November 1, the total amount due had increased to $1,027,781.85, with the increase over the amount owed on August 29 due primarily to business losses.
While VITCO ran the operation, the Bank commenced its search for a buyer and ran an advertisement in the Wall Street Journal, East and Midwest editions, on September 10 and 11. The advertisement said that bids were to be made on the whole business before September 30, and the minimum bid acceptable had to be at
least $900,000. To the surprise of Champlin and the Bank, considerable interest was expressed. The Bank took several calls from interested parties, and some of them toured the facility. In the end, three formal offers were received. One, from Paul Ehrlich of FAMCO, offered $1,200,000, of which $900,000 was to be in cash. The Bank was to guarantee that a certain (rather high) amount of the accounts receivable would actually be collectible, and to hold FAMCO harmless from any liability arising from toxic wastes possibly on the property. The risk of a toxic waste problem was quite real, and the Bank did not agree to accept that possible liability. After subtracting for that contingent liability, and for the likelihood of having to pay off on some of the receivables, the Bank found the offer inadequate. A second offer was received from Edgar Gray, a former employee of Vitreous. He offered $900,000 plus 80% of the book value of accounts receivable plus 60% of the book value of the inventory, for a total of about $1,500,000. Gray actually had only $150,000 in hand at the time the offer was made. He required another thirty days to arrange financing (to allow lenders to do their due diligence investigations). The Bank did not believe that Gray would be able to arrange financing, and did not have any confidence in Gray's ability to run the business. Viewing the offer as pie-in-the-sky, the Bank rejected it. Gray's alternate proposal, received in mid-October, of $550,000 for all assets except the accounts receivable, was rejected as untimely.
The third offer was from VITCO. Originally, VITCO offered $900,000, but by the time the sale was closed on November 1, the price was raised to $1,027,781.85--exactly the same as the amount of the debt owed the Bank. VITCO was unwilling to make the deal before soil tests were completed which would show the absence of toxic waste on the site, but VITCO did not demand a hold-harmless agreement. The deal also required 100% financing by the Bank, plus a $300,000 line of credit for working capital, secured by all the assets of VITCO, real and personal, plus a personal guarantee by Champlin of amounts drawn on the line of credit.
While VITCO and the Bank waited on soil sample results, Vitreous became the subject of an involuntary Chapter 7 petition, filed by three small creditors on October 14, 1986. The Bank and VITCO signed the deal described above on November 1, before the bankruptcy court's order for relief was entered, transferring all the personalty of Vitreous to VITCO. The real estate was to be transferred as soon as foreclosure proceedings in the state court would allow. The parties agreed that the real estate had a value of $350,000. Therefore they prepared a bill of sale for the personalty at a price of $677,781.85 (the total price of $1,027,781.85 minus $350,000 for the realty), which was paid by VITCO's secured note in that amount. The mortgage securing the note stated that the Bank's lien was the first lien on...
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