In re Klein
| Decision Date | 23 March 1988 |
| Docket Number | Bankruptcy No. 87 A 0535,86 B 19937. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In re Wayne J. KLEIN, Debtor. HARRIS TRUST AND SAVINGS BANK, Plaintiff, v. Wayne J. KLEIN and Klein Corporation, Defendants. |
Ilene F. Goldstein, Andrea M. Hauser, Chadwell & Kayser, Ltd., Chicago, Ill., for the trustee of the Estate of the defendant, Wayne J. Klein.
Melanie Rovner Cohen, John H. Ward, Antonow & Fink, Chicago, Ill., for the plaintiff.
This matter comes before the Court on plaintiff's motion for summary judgment. It presents two issues for this Court to decide. First, is it proper to decide on summary judgment the plaintiff's claim that it possesses a security interest in certain collateral pledged by the defendant? Second, if so, does the plaintiff, as a matter of law, possess such a security interest?
Beginning in 1984, plaintiff Harris Trust and Savings Bank ("Harris") made certain unsecured loans to defendant Wayne J. Klein and his wholly-owned company, Klein Construction Co. ("Klein Construction"). On June 22, 1984, Harris loaned $350,000.00 to Klein individually and on August 14, 1984, Harris provided Klein Construction with a $2,000,000.00 line of credit.
On February 19, 1986, Klein personally guaranteed the $2,000,000.00 that Klein Construction had borrowed from Harris. To secure that guarantee, Klein provided Harris with a mortgage on certain Colorado real estate on March 12, 1986. Unbeknownst to Harris, however, Klein had already transferred 99.97% of his interest in the Colorado land to several third parties.
That same day, Klein also executed a "security agreement" with Harris, and received a "side letter" therefrom. The "security agreement" stated, in pertinent part:
As security for the payment of all loans and advances now or in the future made by Bank to Debtor hereunder and for payment or other satisfaction of all other obligations, Debtor hereby assigns to Bank and grants to Bank a continuing security interest in the following collateral. . . .
The collateral consisted of all of Klein's outstanding shares of Titan Trading; 172.2 shares of Eagle Ridge Utilities, Inc., 172.2 shares of Eagle Ridge Investment Corp.; and Klein's limited partnership interest in Eagle Ridge Golf & Tennis Club, Ltd.
The one-sentence "side letter", addressed from H. Donald Peterson, Vice-President of Harris, to Klein, briefly stated:
This is to confirm our understanding that when all loans made by Harris Bank to you personally next week are paid in full by their terms and without default, we will return to you the original of your Security Agreement together with stock certificates you have pledged today.
One week later, on March 19, 1986, Klein executed a $700,000.00 note with Harris, which stated in pertinent part:
To secure the payment of this and any and all other liabilities of the undersigned or any of them to said Bank, whether now existing or hereafter arising and howsoever evidenced or acquired . . . the undersigned hereby grants a security interest to said Bank in all property of the undersigned of any kind and description now or at my time hereafter transferred or delivered to or left in or coming into the possession, control or custody of the Bank. . . .
Klein paid the March 19th note in full on May 5, 1986. Before he did, however, he allegedly attempted to transfer the Eagle Ridge collateral to a Mr. Frederick Quinn, on April 20, 1986. On June 19, 1986, Klein executed another $700,000.00 note with Harris, which contained a security interest provision identical to the above-quoted terms from the March 19th note. Klein repaid this second $700,000.00 note in full on August 8, 1986.
On August 20, 1986, Klein Construction filed a petition in U.S. Bankruptcy Court for protection under Chapter 11 of the bankruptcy laws of the United States. Although at the time of filing Klein had repaid both $700,000.00 notes, Klein Construction had not fully repaid to Harris the $2,000,000.00 loan of August 14, 1984, that Klein had guaranteed, nor had Klein, himself, fully repaid to Harris the $350,000.00 personal loan of June 22, 1984. On October 2, 1986, Harris filed suit in the Circuit Court of Cook County against Klein and another of his wholly-owned companies, Klein Corporation, seeking, inter alia, a declaratory judgment that it possessed a valid security interest in the collateral Klein had pledged to it. In the meantime, Klein had individually become a debtor in this court. On June 12, 1987, Harris removed its action against Klein to this Court. On September 10, 1987, Harris filed a motion for summary judgment on the grounds that, as a matter of law, it possessed a security interest in the collateral Klein pledged to it.
Both the Trustee of Wayne J. Klein's bankruptcy estate, and Klein Construction's bonding company, United States Fidelity and Guarantee ("USF & G"), which have not been joined as formal parties to this action, have filed briefs with this Court opposing Harris' motion for summary judgment, on two grounds. First, they argue that this case presents genuine issues of material fact for this Court to decide and, therefore, it would be improper for this Court to grant summary judgment. Second, they argue that even if summary judgment is proper, Harris does not, as a matter of law, possess a security interest in the Klein collateral that it continues to hold.
Under Federal Rule of Civil Procedure 56(c) it is proper for this Court to grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). In its brief to this Court, which USF & G has adopted, the Trustee argues that the Supreme Court has interpreted Fed.R.Civ.P. 56 as imposing upon the moving party the burden of presenting "evidence (which is) not merely colorable, but which is significantly probative and which precludes the rendering of a contrary verdict" (emphasis added). The Trustee cites two recent Supreme Court cases, Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986), and Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986), for this proposition. The Trustee goes on to argue that since Harris has failed to meet this burden, this Court should deny Harris' motion for summary judgment.
The Trustee has misread Celotex and Anderson. In Celotex, the Court clarified the following language from its decision in Adickes v. S.H. Kress & Co., 398 U.S. 144, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970): "both the commentary on and the background of the 1963 Amendment (to rule 56) conclusively show that it was not intended to modify the burden of the moving party . . . to show initially the absence of a genuine issue concerning any material fact." 398 U.S. at 159, 90 S.Ct. at 1609. Interpreting this language, the Celotex Court stated:
We do not think the Adickes language quoted above should be construed to mean that the burden is on the party moving for summary judgment to produce evidence showing the absence of a genuine issue of material fact, even with respect to an issue on which the nonmoving party bears the burden of proof. Instead, as we have explained, the burden on the moving party may be discharged by "showing"—that is, pointing out to the District Court — that there is an absence of evidence to support the non-moving party\'s case.
Celotex, 106 S.Ct. at 2554 (emphasis added). The Court went on to note that "it would surely defy common sense to hold that the District Court could have entered summary judgment sua sponte in favor of petitioner . . . but that petitioner's filing of a motion requesting such a disposition precluded the District Court from ordering it." Id.
Thus, under Celotex, all Rule 56 requires Harris to do is "show" — i.e., "point out" — to this Court that there is no genuine issue of material fact. This Court is persuaded that Harris has met this burden. Therefore, the burden of proof shifts to the adverse party — i.e. the Trustee — to set forth "specific facts showing that there is a genuine issue for trial." Anderson, 106 S.Ct. at 2511. It is true, as the Trustee argues, that, under Anderson, this evidence must not be "merely colorable" but instead must be "significantly probative." Id. But it is the Trustee, not Harris, who must make this showing. Id.
In its surreply and its "Statement of Genuine Issues Disputed Facts" (sic) the Trustee sets forth numerous matters allegedly in dispute in this case. As the Anderson Court noted, however, "only disputes about facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson, 106 S.Ct. at 2510. The outcome of this suit turns on whether Harris possesses a security interest in the Klein collateral it holds. Under the governing law, a security interest is a "lien created by agreement." 11 U.S.C. § 101(43). Whether an agreement creates a lien depends on state law. See Butner v. United States, 440 U.S. 48, 54-57, 99 S.Ct. 914, 917-19, 59 L.Ed.2d 136 (1979). Under the Uniform Commercial Code ("U.C.C."), a security interest is not enforceable against the debtor or a third party and does not attach to collateral unless:
Ill.Rev.Stat. ch. 26, para. 9-203(1) (1987).
The issue that the parties ask this Court to decide is, then, whether Harris possesses the Klein collateral "pursuant to agreement," and, if so, what...
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