In re Octagon Roofing, 92 C 4239.
| Decision Date | 17 August 1993 |
| Docket Number | No. 92 C 4239.,92 C 4239. |
| Citation | 157 BR 852 |
| Parties | In re OCTAGON ROOFING, d/b/a Western Modified Roofing, Debtor. BRAAS SYSTEMS, INC., Plaintiff-Appellant, v. WMR PARTNERS, Defendant-Appellee. |
| Court | U.S. District Court — Northern District of Illinois |
Cheryl Lynn Urbanski, Jones, Day, Reavis & Pogue, Chicago, IL, for plaintiff-appellant.
Howard L. Adelman, Brad Arnold Berish, Adelman, Gettleman & Merens, Ltd., Chicago, IL, for defendant-appellee.
On September 16, 1992, Braas Systems, plaintiff/appellant, filed an appeal to this Court challenging a bankruptcy court's judgment in favor of WMR Partners, defendant/appellee. On appeal here, Appellant argues (a) that a Subordination Agreement between the two is unambiguous and compels a result contrary to that reached below; and (b) that at the time of the WMR Partners' loan to Western, Western was undercapitalized and that the WMR Partners' claim should be treated as equity. For the reasons set forth in this Order, the judgment of the bankruptcy court in favor of WMR Partners is affirmed.
This appeal is taken from a judgment in a bankruptcy court action in which the plaintiff/appellant, Braas Systems, Inc. ("BSI"), sought equitable subordination and other relief against the defendant/appellee, WMR Partners ("WMR"). The adversary proceeding was conducted in Chapter 7 bankruptcy proceedings of Octagon Roofing, d/b/a Western Modified Roofing ("Octagon"). The judgment was rendered following eight days of hearings before the bankruptcy court. The Judgment Order was accompanied by separate Findings of Facts and Conclusions of Law (hereinafter cited as "F & C at ___, ¶ ___"), 141 B.R. 968.
In its early life, Octagon — a limited partnership — was a partner in Western Modified Roofing ("Western"), an Illinois partnership. Octagon's partner in Western was MSP Systems, Inc. ("MSP"). (F & C at 4, ¶ 9). Both Octagon and MSP were affiliates of larger companies active in the roofing industry. The general partner of Octagon, Hexagon Management Company ("Hexagon"), was owned by five individuals who also owned or controlled the ownership of American Roofing Corporation ("ARC") and American Roofing Systems ("ARS"). ARC and ARS were engaged in the manufacturing and distribution of Modified bitumen roofing material. (F & C at 4, ¶ 10).
MSP was the subsidiary of plaintiff/appellant BSI, which was, in turn, the subsidiary of a German corporation, Braas & Co. GmbH ("Braas"). Braas was also a manufacturer of roofing materials (though not modified bitumen) which were distributed in the United States by another BSI subsidiary, Barra Corporation of America, Inc. ("Barra"). (F & C at 5, ¶ 11).
In 1987, ARC/ARS and Braas, through Octagon and MSP, formed the partnership Western Modified Roofing for the purpose of manufacturing modified bitumen roofing material in the western United States. Ultimately, a site in Fernley, Nevada was chosen. The venture was initially capitalized through MSP's contribution of $500,000.00 cash and Octagon's contribution of know-how and technology related to construction, equipping and operation of a modified bitumen manufacturing plant. (F & C at 6-8, ¶¶ 14 & 16). In the course of the plant's construction, MSP loaned the venture another $500,000.00 in cash. (F & C at 11, ¶ 26).
During the first year and a half of their partnership, Braas and ARC/ARS suffered a number of disagreements. During the same period, Braas revised its business strategy to focus more heavily on opportunities in Europe and to reduce its presence in the United States. As a result, the parties negotiated an agreement ("the Termination Agreement") under which the partnership was terminated and Braas and MSP had no further involvement with Western. (F & C at 12-15, ¶¶ 27-32).
The Termination Agreement provided that MSP would assign its interest in Western to Octagon, including its interest in its $500,000.00 capital contribution and its interest in the later $500,000.00 loan to Western. In exchange, MSP was released from any further obligation to the partnership, and its parent, BSI, was given a Term Note in the amount of $250,000.00. (F & C at 15, ¶ 32). This Term Note lies at the heart of this case.
The Term Note provided as follows:
The undersigned hereby grant BSI a security interest in all inventory, accounts receivable, machinery, equipment, buildings, fixtures and land now owned or hereafter acquired by Western Modified Roofing, which security interest shall only be subordinated to the security interests granted to lenders of Western Modified in connection with the construction, equipping, and operations at the plant owned by Western Modified Roofing near Reno, Nevada and consistent with the lenders\' normal advance rates. The undersigned shall promptly execute and deliver any such mortgages, financing statements, or other instruments reasonably requested by BSI to perfect its security interest in the foregoing collateral....
Defendant's Ex. 66 (emphasis added). The Term Note was signed by Eugene C. Scott as President of Hexagon, Octagon's general partner.
Octagon proceeded to open the plant and to operate it with financial support from ARC. By mid-1989, however, ARC was in financial trouble due to product problems and warranty claims, and Octagon needed cash. (F & C at 21, ¶ 43). After investigating the availability of outside financing, the ARC/ARS principals formed WMR Partners with a sixth individual who was a limited partner in Octagon. (F & C at 20, ¶ 42). These individuals contributed an aggregate $525,000.00 to WMR Partners and, on June 9, 1989 WMR Partners loaned that amount to Octagon and took a mortgage on the plant to secure repayment. (F & C at 17-18, ¶ 36). The deed of trust perfecting that mortgage was recorded shortly thereafter. The financial fortunes of the ARC/ARS group did not improve. The mortgage to BSI (the BSI Note) was never perfected.
Octagon was placed in bankruptcy on May 10, 1990. (F & C at 1, ¶ 1). BSI was not scheduled as either a secured or unsecured creditor. (Tr. at 381-82). A Chapter 7 Trustee was appointed who sought to sell the Nevada Plant free and clear of liens pursuant to 11 U.S.C. § 363. (F & C at 2, ¶ 2). WMR Partners filed a motion for allowance of its claim and valuation of its security pursuant to 11 U.S.C. §§ 502 and 506. (F & C at 2, ¶ 3). Although not served with WMR Partners' motion, BSI did receive notice of the proposed Order granting that motion and appeared to assert its priority over WMR Partners in the proceeds of the sale. The bankruptcy court ordered that $275,000.00 of WMR Partners' claimed proceeds be escrowed pending a determination of BSI's claims. (F & C at 3, ¶ 6). This adversary proceeding followed.
BSI's Complaint against WMR Partners sought relief on four counts. After eight days of trial, the bankruptcy court announced its judgment for the defendant on all counts. Central to its decision was its conclusion that the subordination language of the Term Note, quoted in full supra, would have operated to subordinate BSI's security interest — even if perfected — to that of WMR Partners, rendering equitable subordination of WMR Partners' claim inappropriate. Further, the bankruptcy court concluded that no basis for subordinating the claim to the level of equity had been established. It is with these two conclusions that BSI takes issue and from which they appeal.
In Air Line Stewards & Stewardesses Ass'n, Local 550 v. American Airlines, Inc., 763 F.2d 875 (7th Cir.1985), cert. denied, 474 U.S. 1059, 106 S.Ct. 802, 88 L.Ed.2d 778 (1986), the Seventh Circuit set forth the basic principles of Illinois law regarding the construction of contracts. There, the court noted that "the primary object in construing a contract is to give effect to the intention of the parties." Id. at 877 (citing Schek v. Chicago Transit Auth., 42 Ill.2d 362, 364, 247 N.E.2d 886, 888 (1969)). The starting point must be the contract itself. If the language of the contract unambiguously provides an answer to the question at hand, the inquiry is over. Id. at 878. The question of whether the contract is ambiguous is a conclusion of law subject to de novo review by the court on appeal. Id. (citing National Tea Co. v. American Nat'l Bank & Trust Co., 100 Ill.App.3d 1046, 1049, 56 Ill.Dec. 474, 476, 427 N.E.2d 806, 808 (1981)). If the trial court determines that the contract is unambiguous, it must then proceed to declare its meaning. Such a declaration is also a conclusion of law and is reviewed de novo. Id. On the other hand, if the court holds that the contract is ambiguous, its meaning becomes a question of fact and must be submitted to the trier of fact. Id. (citing Hagerty, Lockenvitz, Ginzkey & Assocs. v. Ginzkey, 85 Ill.App.3d 640, 641, 40 Ill.Dec. 778, 779, 406 N.E.2d 1145, 1146 (1980)). In this circumstance, the trier of fact considers not only the language of the contract but also any extrinsic or parol evidence presented by the parties. Its determination is a finding of fact and this court must review that finding of fact under the clearly erroneous standard. See Anderson v. Bessemer City, 470 U.S. 564, 573-74, 105 S.Ct. 1504, 1511-12, 84 L.Ed.2d 518 (1985).
The issue here is whether the $525,000.00 loan from partners to Western was of a type, and from a source, to which BSI had agreed in the Term Note to subordinate its security interest. Analysis of the language of the subordination agreement indicates that it clearly was.
The first question is whether the contract is clear and unambiguous. The bankruptcy court found the terms of the BSI Note and the Subordination Provision "clear and unambiguous." (F & C at 15, 30). In fact, both parties agree with the bankruptcy court that the BSI Note and the Subordination Provision are clear and unambiguous. (Appellant's brief at 9; Appellee's brief at 30). Appellant argues,...
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