Rivinius, Inc., In re, 91-3474

• Decision Date: 21 December 1992
• Docket Number: No. 91-3474,91-3474
• Citation: 977 F.2d 1171
• Parties: In re RIVINIUS, INC., Debtor. RIVINIUS, INC., Plaintiff-Counterdefendant-Appellant, v. CROSS MANUFACTURING, INC., Defendant-Counterplaintiff-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1171

977 F.2d 1171

24 Fed.R.Serv.3d 74

In re RIVINIUS, INC., Debtor.

RIVINIUS, INC., Plaintiff-Counterdefendant-Appellant, v. CROSS MANUFACTURING, INC., Defendant-Counterplaintiff-Appellee.

No. 91-3474.

United States Court of Appeals, Seventh Circuit.

Argued June 3, 1992.

Decided Oct. 21, 1992.

Rehearing and Rehearing En Banc

Denied Dec. 21, 1992.

Timothy L. Bertschy (argued), William I. Covey, Heyl, Royster, Voelker & Allen, Peoria, Ill., for defendant-counterplaintiff-appellee.

David B. Radley (argued), Andrew Covey, Baymiller, Christison, Radley & Covey, Peoria, Ill., for debtor.

Before CUDAHY, POSNER and KANNE, Circuit Judges.

KANNE, Circuit Judge.

Plaintiff Rivinius, Inc. brought this suit seeking a declaration that its obligation to defendant Cross Manufacturing, Inc. on a mortgage had been discharged by Rivinius' prior bankruptcy. Cross counterclaimed for foreclosure of the mortgage. After trial, however, the bankruptcy court determined that Cross could only raise a counterclaim for contribution. Cross then sought to amend its answer pursuant to Rule 15(b) of the Federal Rules of Civil Procedure to state a contribution claim. The bankruptcy court and the district court found that the amendment was proper under Rule 15(b). Cross recovered on the counterclaim and Rivinius appealed on the ground that the amendment of Cross' counterclaim was improper. Before we address the district court's determination under Rule 15(b), we will review the complex procedural history of this case.

I.

In the 1970s, James H. Cross was the president and CEO of Rivinius as well as a majority shareholder of Cross. ¹ Rivinius manufactured road maintenance equipment, while Cross owned a variety of related manufacturing companies, some of which were involved in road maintenance.

Both Rivinius and Cross experienced financial difficulties during the late 1970s. To remedy the problems, James Cross arranged for a $10,000,000 loan to Rivinius and Cross from Associates Finance Company. Under the terms of the loan, each company was jointly responsible for repayment of the loan to Associates; Rivinius was a co-guarantor on Cross' debt, and Cross was a co-guarantor on Rivinius' debt.

After receiving the loan, Rivinius continued to experience financial problems and, in 1978, Rivinius filed for Chapter XI bankruptcy. In its reorganization plan, Rivinius proposed to pay Associates only a portion of the total debt, with payments spread over the five-year period of the plan. On July 7, 1978, the plan was confirmed by the bankruptcy court without objection by any creditors.

Three months after Rivinius declared bankruptcy, James Cross attempted to arrange for the satisfaction and assignment of Rivinius' debt to Associates. To accomplish this, Cross borrowed money from the Farmers Home Administration and, on August 4, 1978, paid Associates in full. The parties agree that this released Rivinius from its loan obligation to Associates. In return for its payment of Rivinius' debt, Cross received from Associates the Rivinius note which was secured by a mortgage on Rivinius' real property. As James Cross saw it, Associates' assignment of the Rivinius note and mortgage did not release Rivinius from its obligation, but merely changed the party to whom Rivinius would be making payments.

In 1983, Rivinius completed its five-year bankruptcy reorganization plan, and its debts in the plan were discharged. However, because Cross was not listed in the plan as a creditor, Rivinius could not determine if its obligation to Cross on the Associates note had been discharged by the bankruptcy plan. In fact, the potential outstanding obligation to Cross made it impossible for Rivinius to secure other credit. Consequently, in 1983, Rivinius brought this suit against Cross in the bankruptcy court requesting a declaration that the debt to Cross had been discharged in the prior bankruptcy proceeding. In response, Cross denied that the debt had been discharged and filed a counterclaim against Rivinius, seeking foreclosure on the mortgage originally obtained by Associates.

In 1986, the bankruptcy court conducted a bench trial, after which the parties filed post-hearing briefs. Rivinius argued that Cross could not foreclose on the mortgage because it had been a co-maker of the note. Rivinius insisted that Cross could have brought an action for contribution, but pointed out that it had failed to plead a contribution claim. In its response, Cross sought to raise a claim for contribution even though the trial had concluded.

The bankruptcy court ruled that the promissory note to Cross Manufacturing had not been discharged, but the court also ruled that the amount of the debt would be substantially reduced from the face value of the note because of inequitable conduct on the part of James Cross. ² As for Cross' contribution theory, the bankruptcy court ruled that any claim for contribution was barred by the Illinois statute of limitations.

Cross appealed to the district court, which reversed in part. The district court agreed that the promissory note to Associates was discharged as a matter of law when Cross paid that debt on behalf of Rivinius. The only remaining obligation was Rivinius' obligation on the note to Cross. In contrast to the bankruptcy court, the district court ruled that James Cross' inequitable conduct was not attributable to Cross Manufacturing and therefore could not be used to reduce Rivinius' debt on the note. Turning to Cross' counterclaim for foreclosure on the mortgage, the district court agreed with Rivinius that Cross and Rivinius had been co-makers of the note. Consequently, because the note to Associates had been discharged when Cross paid the debt to Associates in August of 1978, Cross could not foreclose against a co-maker. Instead, only a contribution action could be brought against Rivinius. The court explained that because the note was discharged, Cross could not sue Rivinius on the note per se, but it could sue Rivinius for contribution of the payments Cross made on its behalf.

The district court remanded the case to the bankruptcy court with instructions to determine whether under Rule 15(b) Cross should be allowed to amend its counterclaim to include a claim for contribution. If the bankruptcy court allowed the amendment, it was also to determine whether the contribution claim was barred by the statute of limitations.

On remand, the bankruptcy court held that Cross could amend its counterclaim to include a claim for contribution, finding Rivinius had impliedly consented to the amendment because issues relevant to the contribution theory had been raised during the trial. The bankruptcy court stated:

In this case Cross did not plead, nor did the parties proceed to trial, on the theory of contribution. However, in the course of the trial, the facts did come out which established the right of contribution. The record is quite clear that Debtor, Cross, and its subsidiaries all signed the note. The record is equally clear that Cross paid Associates and took an assignment of the note.

(Emphasis added). The court further found that Rivinius would not be prejudiced by amendment and that there was no statute of limitations which would bar the claim.

The bankruptcy court allowed Cross to present further evidence on its contribution theory. One of Cross' officers testified concerning the loan from Associates to the companies, and explained how the funds from the loan were distributed and how the loan was to be repaid. Rivinius' objection to the admission of that evidence was overruled. After considering the evidence and reviewing the transcript of the bench trial, the bankruptcy judge found that the evidence established that Rivinius owed Cross approximately $500,000 on the contribution claim. Rivinius appealed that determination to the district court.

Before the district court, Rivinius argued that under Rule 15(b) Cross should not have been allowed to amend its complaint because it had not consented to the amendment. Rivinius also contended that Rule 15(b) did not permit amendment because the factual issues involved in the contribution action were not actually tried in the bench trial. Alternatively, Rivinius argued that it was denied its right to a jury trial on the issue of contribution.

The district court affirmed the judgment of the bankruptcy court. It agreed with Cross that the issues relevant to the contribution claim had been raised in the original bench trial in the bankruptcy court. It also found Rivinius' argument that Cross' counterclaim was barred by the statute of limitations to be without merit because Rivinius had waived any statute of limitations defense when it filed its complaint. See ILL.REV.STAT. ch. 110, p 13-207. This appeal followed.

II.

The district and appellate courts review the factual findings of the bankruptcy court for clear error but review the bankruptcy court's legal conclusions under a de novo standard. Matter of Newman, 903 F.2d 1150, 1152 (7th Cir.1990); Matter of Bonnett, 895 F.2d 1155, 1157 (7th Cir.1989); Bankruptcy Rule 8013. Moreover, our review of the factual findings is not limited to the district court's decision but extends to the bankruptcy court's findings of fact. Id.; In re First Wisconsin National Bank, 849 F.2d 284, 286 (7th Cir.1988); In re Kimzey, 761 F.2d 421, 423 (7th Cir.1985).

In this court Rivinius presses its argument that the bankruptcy court erred in applying Rule 15(b) to allow Cross to bring its counterclaim. Because that is a question of law, our review is de novo. Bonnett, 895 F.2d at 1157. Rule 15(b) provides that:

When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time,...