In re Meyer-Midway, Inc.
| Decision Date | 07 August 1986 |
| Docket Number | Bankruptcy No. 80 B 07348,82 A 2446. |
| Parties | In re MEYER-MIDWAY, INC., Debtor. Jay A. STEINBERG, Trustee of the Estate of Meyer-Midway, Inc., Plaintiff, v. AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
Edward W. Rothe, James T. Malysiak, Freeman, Rothe, Freeman & Salzman, P.C., Chicago, Ill. for trustee.
Narcisse A. Brown, Ira S. Kolb, David N. Missner, Schwartz Cooper, Kolb & Gaynor, Chtd., Chicago, Ill. for defendant Bank.
This matter came before the court on cross-motions for summary judgment with respect to Count I of the TRUSTEE's Complaint to avoid preferential transfers and the AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO'S ("BANK") motion to strike and dismiss Counts I through IV of the Complaint. The TRUSTEE appeared by counsel, EDWARD W. ROTHE. The defendant BANK appeared by counsel, DAVID N. MISSNER, of the firm of SCHWARTZ, COOPER, KOLB & GAYNOR CHARTERED.
This case essentially involves the interpretation of § 9-402(7) of the Uniform Commercial Code ("U.C.C."). Ill.Rev.Stat. ch. 26, § 9-402(7) (Smith-Hurd 1984). The rights and powers of the TRUSTEE to avoid transfers under either the "strong arm clause" of 11 U.S.C. § 544 or as preferential and fraudulent transfers under 11 U.S.C. §§ 547 and 548 depend on whether the BANK is found to have a perfected security interest in the accounts receivable of the debtor, MEYER-MIDWAY, INC.
J. Meyer & Co., an Illinois corporation ("Meyer") and the Midway Tobacco Co., an Illinois corporation ("Midway") began operating from the same premises in Wheeling, Illinois in January, 1979 after a fire destroyed the Midway property. On September 27, 1979, a memorandum of agreement was signed between the two companies providing that Meyer and Midway would merge by the pooling of interests method. The memorandum called for the two companies to operate as a joint venture effective October 1, 1979 until the merger became effective.
Meyer and Midway needed financing and worked with the BANK on a loan which all the parties contemplated would not be made until the merger was completed. Delays in consummating the merger however, made it necessary for the loan to be funded immediately. Therefore, in November, 1979, the BANK made a 2.5 million dollar revolving loan ("Joint Loan") jointly to Meyer and Midway. The loan advances were secured by separate security interests in Meyer's and Midway's accounts receivable. On November 13, 1979, the BANK perfected its security interests in the accounts receivable by filing separate financing statements for Meyer and Midway with the Illinois Secretary of State.
On April 16, 1980, Meyer and Midway merged to form MEYER-MIDWAY, INC., a Delaware corporation ("MEYER-MIDWAY"). The following day, April 17, 1980, MEYER-MIDWAY executed a security agreement granting the BANK a security interest in MEYER-MIDWAY's accounts receivable and proceeds including after-acquired property.
On April 24, 1980, the BANK funded the MEYER-MIDWAY revolving loan. The Joint Loan of Meyer and Midway was redocumented to properly reflect the merger and the MEYER-MIDWAY name. In doing so, the BANK made a book entry of a draw down on the ledger, thereby showing an outstanding loan to MEYER-MIDWAY, and simultaneously marked the Joint Loan to Meyer and Midway as paid. No money was paid in connection with these bookkeeping entries.
The BANK obtained the signatures of the Vice President of both Meyer and Midway on amendments to the November 13, 1979 financing statements and on May 5, 1980, filed the separate amendments to the Meyer and Midway financing statements "to show name change." The BANK did not file a financing statement with respect to the new April 17, 1980 security agreement pledging MEYER-MIDWAY's receivables as collateral for the MEYER-MIDWAY loan.
On Wednesday, May 28, 1980, the principals of the corporation met with an officer of the BANK and informed the BANK they intended to go out of business and to make an assignment for the benefit of creditors. The BANK advanced no further funds on the account after that date and drained the funds from MEYER-MIDWAY's checking account the following day.
The assignment for the benefit of creditors was actually made on Monday, June 2, 1980. On June 13, 1980, an involuntary petition was filed against MEYER-MIDWAY and an order for relief was entered on July 23, 1980.
The BANK continued to collect the accounts receivable after MEYER-MIDWAY closed its doors on Friday, May 30, 1980. The principal balance of the MEYER-MIDWAY loan was $1,571,341.76 on that date. That amount, together with $117,738.25 interest, was fully repaid by June 24, 1980, through the BANK's collection of the MEYER-MIDWAY accounts receivable. This Court entered an order on June 20, 1980, approving the BANK's continued collection of MEYER-MIDWAY's accounts receivable and allowing the application of the proceeds to repay the loan, with any surplus to be turned over with interest to the TRUSTEE. The order was without prejudice to the right of the TRUSTEE to contest the BANK's priority status.
On July 2, 1982, the TRUSTEE filed this adversary proceeding against the BANK claiming: Count I: MEYER-MIDWAY's accounts receivable collections received by the BANK and applied on the MEYER-MIDWAY revolving loan after April 24, 1980, totalling $2,543,647.84, constituted preferential transfers voidable by the TRUSTEE under 11 U.S.C. § 547; Count II: The conversion (through sales) of approximately $1 million dollars worth of unsecured inventory into alleged secured accounts receivable after May 28, 1980 (the time when the BANK learned MEYER-MIDWAY intended to make an assignment for the benefit of creditors) constituted voidable preferential or fraudulent transfers under 11 U.S.C. §§ 547, 548; Count III: The TRUSTEE, under 11 U.S.C. § 544 has priority over the BANK under the "strong arm clause" as to all MEYER-MIDWAY receivables collected after the filing of the involuntary petition on June 13, 1980; and Count IV: The BANK violated its fiduciary duty to MEYER-MIDWAY in collecting and accounting for MEYER-MIDWAY's accounts receivable.
In lieu of an answer the BANK moved to strike and dismiss all four counts of the TRUSTEE's Complaint for failure to state a claim upon which relief could be granted and alternatively moved for summary judgment on Count I. The TRUSTEE resisted the motions and then cross-moved for summary judgment on Count I after the briefs revealed that there was no dispute as to any material fact and that summary judgment could be entered as a matter of law.
Summary judgment is appropriate only when there are no genuine issues of material fact. Fed.R.Civ.P. 56(c); Hermes v. Hein, 742 F.2d 350 (7th Cir.1984). After an exchange of briefs, the BANK and the TRUSTEE agreed the material facts were undisputed and each party felt that the facts as presented would support summary judgment in their favor.
The Court will address the summary judgment motions before considering the BANK's Motion to Strike or Dismiss the other counts of the Complaint.
The Bankruptcy Code empowers the TRUSTEE to avoid certain transfers of the debtor's interest in property if they are fraudulent and preferential transfers. Additionally, under the "strong arm clause" the TRUSTEE may assert the priority of a hypothetical lien creditor over any other lienholder who is not properly perfected at the commencement of the case.
It is these rights which the TRUSTEE claims entitle him to recover, for the benefit of the estate, the accounts receivable collected by the BANK after April 24, 1980, the day the BANK funded the loan to MEYER-MIDWAY. The TRUSTEE may assert these rights if it is determined that the BANK's security interest in MEYER-MIDWAY's accounts receivable was not properly perfected.
The TRUSTEE admits that the BANK had a first and valid lien on the accounts receivable of Meyer and Midway. He contends, however, that the BANK lost its security interest on April 24, 1980 when the remaining accounts receivable were transferred to MEYER-MIDWAY in the merger and the BANK's loan to those two companies was paid off. The TRUSTEE submits that the BANK's failure to file a financing statement naming MEYER-MIDWAY as the debtor, signed by MEYER-MIDWAY, and identifying the MEYER-MIDWAY receivables as collateral for the MEYER-MIDWAY loan results in the BANK's unperfected security interest being subordinate to the TRUSTEE's rights. 11 U.S.C. § 544; U.C.C. § 9-301(1)(b) and (3).
The parties have spent pages of their briefs arguing whether the Joint Loan was "paid off" and whether a "new loan" was granted. They have focused on the entries on ledger cards and the notations on the original note. The courts have frequently considered the redocumentation of loans of this type and have looked at the substance of the transaction rather than its form. Whirlpool Corp. v. Bank of Naperville, 97 Ill.App.3d 139, 52 Ill.Dec. 215, 421 N.E.2d 1078 (1981). In Whirlpool, the court stated that 97 Ill. App.3d at 142, 52 Ill.Dec. at 217, 421 N.E.2d at 1080. This Court is of the opinion that the paper changes in the redocumentation of the MEYER-MIDWAY loan are of the type routinely done in banks and are simply changes in form rather than substance. Whatever notations were used in the redocumentation, the Court believes the Joint Loan was not really "paid off,"...
To continue reading
Request your trial