In re Autostyle Plastics, Inc.

• Decision Date: 14 July 1998
• Docket Number: Bankruptcy No. SG 96-83767.
• Citation: 222 BR 812
• Parties: In re AUTOSTYLE PLASTICS, INC., Debtor.
• Court: U.S. Bankruptcy Court — Western District of Michigan

222 B.R. 812 (1998)

In re AUTOSTYLE PLASTICS, INC., Debtor.

Bankruptcy No. SG 96-83767.

United States Bankruptcy Court, W.D. Michigan.

July 14, 1998.

Butzel Long (Thomas B. Radom), Birmingham, MI, Eckert, Seamans, Cherin & Mellott, L.L.C. (William E. Kelleher, Jr., argued), Pittsburgh, PA, for Bayer Corp.

Pepper, Hamilton & Scheetz (I. William Cohen, argued), Joel D. Applebaum, Detroit, MI, for MascoTech and Citicorp Venture Capital, Ltd.

Miller, Johnson, Snell & Cummiskey (Thomas P. Sarb, argued), Grand Rapids, MI, for Venture Industries.

Donovan, Love & Twinney, P.L.C. (Michael W. Donovan, argued), Grand Rapids, MI, for Chapter 7 Trustee.

SUPPLEMENTAL OPINION

JO ANN C. STEVENSON, Bankruptcy Judge.

Following entry of a decision in this case on December 31, 1997, see 216 B.R. 784, granting in part and denying in part the Cross-Motions for Summary Judgment filed by Bayer Corporation, MascoTech and Citicorp Venture Capital, Ltd. (Citicorp) and joined by the State of Michigan as Custodian for Certain State Retirement Systems (State), the court identified one remaining issue: Is a participation agreement entered into in March of 1990 valid when the funds relating to that agreement were not actually transferred until September 1996 assuming they were transferred at all?

MascoTech argues that a valid participation agreement exists because it purchased a $1,500,000 participation interest from CIT when it executed an agreement containing a section entitled "Participation Commitment". This section created an obligation on the part of MascoTech to make contributions to CIT in the amount equal to the outstanding principal of AutoStyle's account after it was declared in liquidation or at any time prior to AutoStyle's default. MascoTech also argues that CIT made an additional $3,000,000 loan to AutoStyle in reliance on the MascoTech and Citicorp agreements¹ and; MascoTech performed its part of the agreement by posting an irrevocable letter of credit in favor of CIT which CIT drew down in October of 1996.

Bayer Corporation claims the participation agreement is invalid because the funding was not contemporaneous with the execution of the agreement; Citicorp and MascoTech were not obligated to fund CIT until after it had declared AutoStyle's account in liquidation and; the participants provided the funding after AutoStyle had commenced bankruptcy proceedings.

Although there are no cases directly dealing with this issue, the Kansas City Court of Appeals was asked to allocate rights under a participation agreement in First Bank of WaKeeney v. Peoples State Bank, 12 Kan. App.2d 788, 758 P.2d 236 (1988). The court summarized the nature of a participation agreement as ". . . a shared loan, an undertaking by one financial institution, usually called a `lead', to divide a large loan which it has or will put on its books into shares which it then offers for sale to other `participant' financial institutions. Participation agreements are simultaneously an assignment of an interest in an intangible right, a contract that prescribes duties of servicing the loan, and a document that creates an agency." The court found broad support for the conclusion that "the rights of the participant bank flow not from the participation relationship itself, but from the express terms of the specific agreement." WaKeeney at 790, 758 P.2d 236, citing Hibernia National Bank v. Federal Deposit Insurance Corporation, 733 F.2d 1403, 1408 (10th Cir.1984) (citing Franklin v. C.I.R., 683 F.2d 125 (5th Cir. 1982); Northern Trust Company v. Federal Deposit Insurance Corporation, 619 F.Supp. 1340, 1341 (W.D.Okla.1985); Clinton Federal Savings and Loan v. Iowa-Des Moines National, 391 N.W.2d 712, 716 (Iowa App. 1986)). The court concluded that parties to a participation agreement may contract to whatever terms they wish. Any such contract will generally be enforced as to its terms. WaKeeney at 790, 758 P.2d 236.

Looking to the terms of this particular participation agreement, the section entitled, "Participant Commitment" stated:

Participant\'s obligation to Fidelcor CIT\'s predecessor to make contributions (i) in an amount equal to the then outstanding principal amount of loans to Borrower under the Demand Note in the principal amount of $1,500,000 upon Fidelcor\'s demand to the Participant after Fidelcor has declared Borrower\'s account in liquidation under the Agreements or (ii) at any time at Participant\'s option prior to Borrower\'s default under the Agreements (which default has not been waived or cured) from time to time in respect of a loan to Borrower in a maximum principal amount of One Million Five Hundred Thousand Dollars ($1,500,000), evidenced by the Demand Note.

According to the contract terms, MascoTech was required to participate in the loan to AutoStyle upon Fidelcor's² demand after the loan had been declared liquidated. On September 18, 1996, in compliance with the agreement and upon CIT's demand, MascoTech issued an irrevocable letter of credit for $1,500,000. By October 31, 1996, CIT drew down on that letter of credit, thereby satisfying the participation agreement. All parties to this agreement completed their respective performances. The court sees no reason why it should undo a contract executed over eight years ago and completed almost two years ago when the terms of the contract are enforceable, reasonable and completed. The court feels compelled to uphold the contract as to its terms.

The second part of the issue asks whether a transfer was made at all. The difference between the MascoTech transaction and the Citicorp or State transactions was the issuance of an irrevocable letter of credit instead of the actual transfer of funds. As discussed in the court's previous opinion, a participation agreement is...