In re Reliable Mfg. Corp.

• Decision Date: 18 November 1981
• Docket Number: No. 81 C 828.,81 C 828.
• Citation: 17 BR 899
• Parties: In re RELIABLE MANUFACTURING CORPORATION, Bankrupt. LIBCO CORPORATION, Appellant, v. Charles W. LEIGH and Ervin F. Dusek, Appellees.
• Court: U.S. District Court — Northern District of Illinois

17 B.R. 899 (1981)

In re RELIABLE MANUFACTURING CORPORATION, Bankrupt.

LIBCO CORPORATION, Appellant, v. Charles W. LEIGH and Ervin F. Dusek, Appellees.

No. 81 C 828.

United States District Court, N.D. Illinois, E.D.

November 18, 1981.

Malcolm M. Gaynor, Louis W. Levit, Arnold Pagniucci, Chicago, Ill., for debtor-appellee.

Fay Clayton, Sachnoff, Schrager, Jones, Weaver, Rubenstein, Ware Adams, Chicago, Ill., for appellant.

MEMORANDUM ORDER

MARSHALL, District Judge.

On April 5, 1977, Libco Corporation ("Libco") acquired all of the shares of the capital stock of the bankrupt, Reliable Manufacturing Corporation ("Reliable"), from Charles Leigh and Ervin Dusek ("Leigh" and "Dusek"). The sales contract required Libco to pay Leigh and Dusek $1,750,000 for the stock. The money was to be paid in four installments. The last two payments, totalling $940,000, were to be made on January 31, 1979, and January 31, 1980. These payments were guaranteed by the bankrupt, Reliable. The guarantee was dated April 5, 1977, and was signed by Leigh on behalf of Reliable. Reliable's guarantee was accompanied by a security agreement, also dated April 5, 1977. The security agreement purported to grant Leigh and Dusek a security interest in all of Reliable's machinery, equipment, tools and dies. Leigh also signed this security agreement on behalf of Reliable. On April 8, 1977, a financing statement was filed with the Illinois Secretary of State which purported to cover Leigh and Dusek's security interest.

Libco soon became dissatisfied with its purchase of Reliable's stock. Six months after the sale, it filed suit against Leigh and Dusek, alleging fraud and misrepresentation in connection with the transaction. Libco Corp. v. Dusek, No. 77 C 4386 (N.D. Ill.). That litigation remains unresolved.

On March 8, 1979, a Creditors' Petition was filed against Reliable. On March 16, Reliable responded by filing a petition under Chapter 11 of the Bankruptcy Act of 1898, as amended, 11 U.S.C. §§ 701-87 (1976).¹

On September 18, 1979, Reliable, as debtor in possession, filed a complaint to sell its machinery and equipment free and clear of all liens, including the security interest purportedly granted by the Security Agreement of April 5, 1977. Leigh and Dusek responded by asserting the validity of their claimed security interest, and moving for summary judgment. Reliable, the trustee, Libco² and the Creditors' Committee contested Leigh and Dusek's claim. The Bankruptcy Court subsequently ordered the machinery and equipment sold, so that the proceeds of that sale became the object of the dispute.

In an order and opinion dated November 21, 1979, Judge James granted Leigh and Dusek's motion for summary judgment. Upon motions for reconsideration, the Bankruptcy Court, on December 9, 1980, again granted the motion for summary judgment of Leigh and Dusek. It held that the guarantee and security agreement were supported by adequate consideration, that they served a valid corporate purpose of Reliable, and did not illegally impair Reliable's capital. Only Libco has appealed the ruling of the Bankruptcy Court.

Libco mounts two challenges before this court to the validity of Leigh and Dusek's security interest. The first is Libco's contention that the guaranty and/or security interest is invalid because it was not supported by consideration. Libco contends that Reliable received no consideration for its guaranty, and therefore the security agreement is unenforceable.

We find it unnecessary to resolve the question of whether Reliable received sufficient consideration, for we hold that the security agreement is enforceable even if Reliable received no consideration.

Ill.Rev.Stat., Ch. 26, § 9-203(1) (1979) governs the question of whether a security interest is enforceable. It provides:

A security interest is not enforceable against the debtor or third parties with respect to the collateral and does not attach unless

(a) the collateral is in the possession of the secured party pursuant to agreement, or the debtor has signed a security agreement which contains a description of the collateral and in addition, when the security interest covers crops growing or to be grown or timber to be cut, a description of the land concerned; and

(b) value has been given; and

(c) the debtor has rights in the collateral.

Here, there is no dispute that Leigh and Dusek's security interest satisfies requirements (a) and (c) of § 9-203(1). The debtor, Reliable,³ signed a written security agreement describing the collateral as machinery, equipment, tools and dies,⁴ and had rights in the collateral. The only dispute is whether requirement (b) is satisfied.

§ 1-201(44)(d) provides that a person gives value for rights if he acquires them in return for any consideration sufficient to support a simple contract. There can be no question but that Leigh and Dusek satisfy this definition. They gave ample consideration, their Reliable stock, in return for the rights they received. There is no requirement, either in 9-203 or 1-201(44), that the value be given to the debtor. The UCC only requires that value be given to someone. In fact, the UCC expressly contemplates the case where the debtor never receives any consideration from the secured party. It states that a debtor can be a surety who does not receive consideration himself, but merely guarantees another's debt. See 9-105, Official Comment 2. The fact that the surety received no consideration, or that the consideration is not recited in the security agreement, is entirely irrelevant.⁵ The UCC contains no such requirements.

The correct analysis of this problem is contained in In Re Terminal Moving & Storage Co., 631 F.2d 547 (8th Cir. 1980) (en banc). In that case, one Walker bought shares of Terminal from their previous owner, a holding company. Walker gave the seller his note for the purchase price. Simultaneously, Terminal granted the seller a security interest in its assets, as security for the note. The court upheld the security interest, even though Terminal never received any consideration but merely secured Walker's debt:

The focus of Ark.Stat.Ann. § 85-9-203(1)(b) which provides that a security interest does not attach unless "value has been given" is on whether the secured party gives value and not whether the person whose assets are pledge receives consideration. Id. at 551 (emphasis in original).

The second challenge Libco mounts to the validity of the security interest is made under 8 Del.C. § 160 (1978). Libco contends that Reliable's guaranty and grant of a security interest constituted a purchase of its own stock which impaired its capital and therefore was invalid under § 160.⁶

Initially, we note some hesitation in reaching the question of whether § 160 is applicable to this case. This is because Libco never raised this argument before the Bankruptcy Court, and as a result we are deprived of a ruling from Judge James on the question of whether Libco can assert the protections of § 160. Under such circumstances, parties are normally not allowed to raise arguments on appeal which were not raised below. See Stern v. United States Gypsum, Inc., 547 F.2d 1329, 1333-34 (7th Cir.), cert. denied, 434 U.S. 975, 98 S.Ct. 533, 54 L.Ed.2d 467 (1977); Lektro-Vend Corp. v. Vendo Corp., 545 F.2d 1050, 1059 (7th Cir. 1976), rev'd on other grounds, 433 U.S. 623, 97 S.Ct. 55, 50 L.Ed.2d 74 (1977). However, while we do not condone Libco's failure to present this argument to Judge James, the argument was presented by the trustee, so that Libco might reasonably have thought that it need not duplicate the trustee's arguments. Thus, even though we are forced to decide a question not presented below, whether Libco, as opposed to the trustee, can assert § 160, we find that Libco's failure to argue this point below is justifiable. See generally Singleton v. Wulff, 428 U.S. 106, 120-21, 96 S.Ct. 2868, 2877, 49 L.Ed.2d 826 (1976); Youakim v. Miller, 425 U.S. 231, 96 S.Ct. 1399, 47 L.Ed.2d 701 (1976) (per curiam).

8 Del.C. § 160 (1978) provides, in pertinent part:

(a) Every corporation may purchase, redeem, receive or otherwise acquire, own and hold, sell, lend, exchange, transfer or otherwise dispose of, pledge, use and otherwise deal in and with its own shares; provided, however, that no corporation shall:

(1) Purchase or redeem its own shares of capital stock for cash or other property when such purchase or redemption would cause any impairment of capital of the corporation. . . .

On its face, § 160 does not seem to apply to this case. The restriction on purchase or redemption of stock that is urged by Libco seems not to apply to what Reliable did in this case. Reliable did not purchase or redeem its own stock, it merely created a security interest through a pledge of its equipment⁷ that secured the purchase price of its stock. The restriction mentioned in § 160(a)(1) does not include pledges of stock, which, in contrast, are mentioned in the preceding sentence.

In response, Libco argues that Reliable did purchase its stock: "By guaranteeing Libco's agreement to purchase Reliable stock, Reliable was actually agreeing to purchase its own stock in the event that Libco failed to do so."⁸ This is far from evident. A contract to guarantee a debt is much different than the principal contract of purchase which created the debt. A guarantor "makes a contract, distinct from the principal obligation, to be collaterally liable to the creditor if the principal fails to perform." 10 S. Williston, on Contracts § 1211, at 686-87 (W. Jaeger ed. 1967). Reliable never promised to purchase; it promised to pay the debt of another. Since the term "purchase" should be given its normal meaning under § 160, In re Kettle Fried Chicken of America, 513 F.2d 807, 810 (6th Cir. 1975); see Alcott v. Hyman, 42 Del.Ch. 233, 208 A.2d 501 (1965); a guaranty may very well not qualify as a purchase under § 160.

However, in one crucial respect a guaranty is...