R.I.D.C. Indus. Development Fund v. Snyder

• Decision Date: 27 September 1976
• Docket Number: No. 75-1570,75-1570
• Citation: R.I.D.C. Indus. Development Fund v. Snyder, 539 F.2d 487 (5th Cir. 1976)
• Parties: 20 UCC Rep.Serv. 188 R.I.D.C. INDUSTRIAL DEVELOPMENT FUND, Plaintiff-Appellant, v. P. L. SNYDER, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 487

539 F.2d 487

20 UCC Rep.Serv. 188

R.I.D.C. INDUSTRIAL DEVELOPMENT FUND, Plaintiff-Appellant, v.P. L. SNYDER, Defendant-Appellee.

No. 75-1570.

United States Court of Appeals Fifth Circuit.

Sept. 27, 1976.

Frank D. Newman, De Land, Fla., Robert L. Potter, Pittsburgh, Pa., for plaintiff-appellant.

Robert E. Austin, Jr., Leesburg, Fla., for defendant-appellee.

Appeal from the United States District Court for the Middle District of Florida.

Before WISDOM and MORGAN, Circuit Judges, and LYNNE, District Judge.

MORGAN, Circuit Judge.

In 1964 and 1966, defendantP. L. Snyder guaranteed two promissory notes executed by Sunnyhill Research and Manufacturing Company(Sunnyhill)¹ to plaintiff R.I.D.C. Industrial Development Fund (R.I.D.C.).Finding itself unable to pay its debts when they came due, Sunnyhill entered into an arrangement proceeding under Chapter XI of the Bankruptcy Act, 11 U.S.C. §§ 701-799.R.I.D.C., having received less than the full face amount of the debt owing to it, brought this diversity action against defendant Snyder as guarantor of Sunnyhill.The district court, 387 F.Supp. 466 held that R.I.D.C.'s participation in the Chapter XI proceedings released defendant Snyder from further obligation under the guarantee.R.I.D.C. appeals.

I.

In August of 1964, R.I.D.C. and Sunnyhill entered into a credit agreement under which R.I.D.C. lent Sunnyhill $335,000.The loan was conditioned upon Sunnyhill granting R.I.D.C. a security interest in all presently owned and after-acquired equipment, and upon defendant Snyder and his brother, the principals of Sunnyhill, guaranteeing the payment of all indebtedness under the credit agreement.

Two years later in April of 1966, R.I.D.C. and Sunnyhill entered into a second credit agreement under which R.I.D.C. lent Sunnyhill an additional $100,000.In connection with this loan, Sunnyhill granted another security interest which covered all present and after-acquired inventory and which also included a cross-collateral provision tying this security interest to the existing security interest in equipment.Once again, defendant Snyder and his brother were required to execute personal guarantees.

Five months later, in September 1966, Sunnyhill found itself unable to pay its debts as they matured.The creditors, including R.I.D.C., agreed to a six-month moratorium on collections.The Snyder brothers, as guarantors of payment under the 1964 and 1966 credit agreements, consented to the extension.

Sunnyhill's financial condition did not improve, so it sought and eventually found a purchaser for its assets.On January 22, 1968, SRM Company(SRM) and Sunnyhill entered into an acquisition agreement under which SRM purchased all of Sunnyhill's assets with the exception of its inventory which SRM agreed to buy as the need arose.Concurrently, SRM and R.I.D.C. agreed that R.I.D.C.'s security interest would continue in the equipment formerly belonging to Sunnyhill until SRM paid the entire sum due Sunnyhill.The following day, R.I.D.C. and certain other creditors of Sunnyhill entered into an agreement regarding payment of Sunnyhill's debts.²The Snyder brothers, as guarantors, consented to all of these transactions.In June of 1968, under pressure from creditors other than R.I.D.C., Sunnyhill entered into an arrangement proceeding under Chapter XI of the Bankruptcy Act.Under this arrangement, the creditors set up payment schedules quite similar to those under the Creditor's Agreement of January 23, 1968, but also provided that "any indebtedness . . . remaining unpaid after the last of the distributions . . . shall be cancelled, discharged and extinguished."³It further provided that the Chapter XI arrangement superseded the Creditors' Agreement of January 23, 1968, and that the secured creditors "agree that during the term of the Arrangement they will not take any action to enforce their rights as secured creditors of the debtor."The Snyder brothers did not execute a written consent as guarantors of debts affected by the arrangement.

The district court held that R.I.D.C. was a secured creditor by virtue of continuation of its security agreement in the equipment sold to SRM, that as secured creditors they were outside of the jurisdiction of Chapter XI of the Bankruptcy Act, that because there was no jurisdiction the arrangement was merely a contractual agreement among the parties, and that accordingly their rights against the guarantors were not protected by § 16 of the Bankruptcy Act, 11 U.S.C. § 34, because the remainder of the debt was not discharged under the coercive powers of the Bankruptcy Court.R.I.D.C. appeals, arguing that it was not a secured creditor, and even if it were secured, it was nevertheless protected by § 16.

II.

One of the primary purposes for obtaining a guarantor to a note is to provide an alternative source of repayment in the event that the principal obligor's debt is discharged in bankruptcy.⁴Accordingly, the Bankruptcy Act provides that discharge in bankruptcy will not alter the liability of a guarantor.Section 16 of the Act states:

The liability of a person who is a codebtor with, or guarantor or in any manner a surety for, a bankrupt shall not be altered by the discharge of such bankrupt.⁵

The district court held this section inapposite because the Bankruptcy Court lacked jurisdiction to discharge secured debts.The plaintiff attacks that ruling, arguing alternatively that he was not a secured creditor, and that even if he were, his participation in the Chapter XI proceedings is protected by § 16.

The conclusion of the district court that R.I.D.C. was a secured creditor is based on the security interest that R.I.D.C. held in the equipment in the hands of SRM.In support of this proposition, the district court cites § 9-105 of the Uniform Commercial Code and Official Comment 2 to that section.We find, however, that the district court's reliance on the Uniform Commercial Code is misplaced.

To determine who is a secured creditor for purposes of the Bankruptcy Act, one must turn not to the Uniform Commercial Code, but to the definitions within the Act. ⁶11 U.S.C. § 1(28) provides:

"Secured creditor" shall include a creditor who has security for his debt upon the property of the bankrupt of a nature to be assignable under this title or who owns such a debt for which some endorser, surety, or other person secondarily liable for the bankrupt has such security upon the bankrupt's assets.

This definition is narrower than the popular meaning of the term "secured creditor" and clearly excludes cases in which the security interest is in property not belonging to the bankrupt, ⁷ even if the security interest originally encumbered property of the bankrupt that the bankrupt parted with prior to bankruptcy.In Ivanhoe Building and Loan Association v. Orr, 295 U.S. 243, 55 S.Ct. 685, 79 L.Ed. 1419(1935), the bankrupt's trustee attempted to have the plaintiff classified as a secured creditor because it continued to hold a security interest in some property which the bankrupt had previously held while the property was under the plaintiff's security interest.The court ruled that the decision must be governed by the definition in § 1 of the Act and that the plaintiff did not come within the definition because it held no security against the bankrupt's property at the date of bankruptcy.⁸

The circumstances in the present case are nearly identical to those in Ivanhoe.R.I.D.C., like the claimant in Ivanhoe, held a security interest in property in the possession of the bankrupt, but prior to bankruptcy the property was conveyed to a third person.⁹Thus, with respect to the 1964 security interest in equipment, R.I.D.C. was not a secured creditor.¹⁰

Although we must reverse the district court's ruling that R.I.D.C. was a secured creditor by virtue of its security interest on equipment sold to SRM, the 1966 security interest on the inventory operates to render R.I.D.C. a secured creditor because part of the inventory remained in the possession of Sunnyhill after the sale of its other assets to SRM.¹¹Moreover, R.I.D.C. conceded at argument that the 1964 and 1966 loans were cross-collateralized.Consequently, R.I.D.C. was a secured creditor with regard to all of the debts owed it by Sunnyhill.

III.

Once the district court determined that R.I.D.C. was a secured creditor, the court went on to consider whether it could avail itself of the protection of § 16 of the Bankruptcy Act.The court reasoned that since R.I.D.C. was a secured creditor, the debt owed it by Sunnyhill could not be discharged in a Chapter XI proceeding.Accordingly, the discharge of Sunnyhill's debt was not a coercive effect of the Bankruptcy Act, but a contractual agreement voluntarily entered into by R.I.D.C.Since the discharge was not accomplished under the Bankruptcy Act, § 16 could not protect R.I.D.C. from the effect of its "voluntary discharge of Sunnyhill" upon the guarantee agreement with Snyder.Our examination of the problem leads us to a contrary conclusion: bankruptcy courts may have jurisdiction over secured creditors in Chapter XI proceedings and, if the debt owed the secured creditor is altered by a Chapter XI arrangement, the secured creditor's guarantee is insulated by § 16 of the Bankruptcy Act.

In both SEC v. American Trailer Rentals, 379 U.S. 594, 605, 85 S.Ct. 513, 13 L.Ed.2d 510(1965), andSEC v. U. S. Realty and Improvement Co., 310 U.S. 434, 446, 60 S.Ct. 1044, 84 L.Ed. 1293(1940), the Supreme Court stated that the purpose of Chapter XI proceedings is to secure judicial confirmation to an arrangement, or adjustment, of a debtor's unsecured obligations.¹²In the recent case of In re Texas Consumer Finance Corp.,480 F.2d 1261(5th Cir.1973), this court discussed the meaning of those cases and the complementary roles of Chapter X and Chapter XI.In that casethe bankruptcy court had attempted to impose upon certain parties a requirement...