U.S. v. Lair, 87-2152

• Decision Date: 09 August 1988
• Docket Number: No. 87-2152,87-2152
• Citation: 854 F.2d 233
• Parties: 8 UCC Rep.Serv.2d 1128 UNITED STATES of America, Plaintiff-Appellee, v. Clarence A. LAIR, and Nellie M. Lair, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 233

854 F.2d 233

8 UCC Rep.Serv.2d 1128

UNITED STATES of America, Plaintiff-Appellee, v. Clarence A. LAIR, and Nellie M. Lair, Defendants-Appellants.

No. 87-2152.

United States Court of Appeals Seventh Circuit.

Argued Jan. 5, 1988.

Decided Aug. 9, 1988.

Patricia L. Marshall, Hostetler & Kowalik, Indianapolis, Ind., for defendants-appellants.

Robert C. Perry and Gerald A. Coraz, Asst. U.S. Attys., John D. Tinder, U.S. Atty., Indianapolis, Ind., for plaintiff-appellee.

Before CUMMINGS, FLAUM, and RIPPLE, Circuit Judges.

FLAUM, Circuit Judge.

The defendants-appellants, Clarence Lair and Nellie Lair, appeal from the district court's grant of summary judgment in favor of the United States for the unpaid principal and interest due and payable on a Small Business Administration ("SBA") loan that the Lairs personally guaranteed. The Lairs contest the grant of summary judgment, claiming that genuine issues of material fact exist regarding whether the SBA willfully caused deterioration, waste, or loss of the collateral for the loan, disposed of the collateral in a commercially reasonable manner, or should be estopped from pursuing them on the guaranty. Because we conclude that there are no genuine issues of material fact and the United States is entitled to judgment as a matter of law, we affirm.

I.

On May 25, 1979, the Richmond Block Company borrowed $750,000 from the Second National Bank of Richmond, Indiana. Clarence Lair, President of Richmond Block, and Kenneth Lair, its Secretary, executed a promissory note in the amount of the loan. To secure the loan, the bank took the assets of Richmond Block as collateral. In addition, Clarence Lair and Nellie Lair each executed a personal guaranty in favor of the bank. To further secure the note, the appellants executed a mortgage on real estate located in Richmond, Indiana. The mortgage was properly recorded in the Office of the Recorder of Wayne County on June 1, 1979.

Eventually, Richmond Block defaulted on the loan. Pursuant to a participation agreement between the bank and the SBA, the bank assigned all of its rights, title, and interest in the note, guaranty, and mortgage to the SBA on August 19, 1983. Because the SBA guaranteed the Second National Bank's loan, it paid the bank the outstanding balance on Richmond Block's promissory note. The SBA then accelerated the maturity of the note, and declared the principal and interest immediately due and payable.

On December 22, 1983 the SBA entered into a Caretaker's Agreement with Jay C. Edwards. Edwards was responsible for liquidating the assets of Richmond Block. Clarence Lair strongly objected to Edwards' appointment as Caretaker of Richmond Block. He informed the SBA that in his opinion Edwards was likely to mismanage Richmond Block and allow its assets to be sold for less than their fair market value. The Lairs allege that in fact some of the collateral was stolen, and that Richmond Block's recycling process was sold for less than its fair market value to a company in which Edwards held an interest.

The assets of Richmond Block were auctioned on May 9, 1984, but the proceeds of the auction were insufficient to cover the company's outstanding debt on the promissory note. The SBA therefore sued the Lairs on their personal guaranty and sought to foreclose the Lairs' real estate mortgage. On May 20, 1987 the district court granted the United States' motion for summary judgment. The court concluded that the Lairs owed the SBA $326,174.56; the judge also entered a decree of foreclosure.

On appeal, the Lairs raise three issues. First, they argue that summary judgment was inappropriate because there is a genuine issue of material fact regarding whether the SBA willfully caused deterioration, waste, or loss of the collateral, thereby absolving the Lairs of all liability on their personal guaranty. Second, they insist that a genuine issue of material fact exists in view of their contention that the SBA failed to dispose of the collateral in a commercially reasonable manner. Finally, the Lairs assert that there is a genuine issue of material fact on their claim that the United States should be estopped from pursuing them on their personal guaranty.

II.

A motion for summary judgment is properly granted only when there are no genuine issues of material fact, and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). In reviewing the district court's grant of summary judgment, we must view the record and all reasonable inferences therefrom in the light most favorable to the Lairs, the non-moving party. Beard v. Whitley County, 840 F.2d 405, 410 (7th Cir.1988) (citing United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962)). The party that bears the burden of proof on a particular issue at trial, however, cannot resist a motion for summary judgment by resting on its pleadings. Rather, the party must "affirmatively demonstrate, by specific factual allegations, that there is a genuine issue of material fact which requires trial." Beard, 840 F.2d at 410 (citing Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)) (emphasis in original). Whether a fact is considered material depends on the underlying law. Walter v. Fiorenzo, 840 F.2d 427, 434 (7th Cir.1988). " '[O]nly disputes over facts that might affect the outcome of the suit under governing law will properly preclude the entry of summary judgment.' " Id. (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986)) (emphasis in original).

A.

The Lairs' first argument on appeal is that summary judgment was improperly granted because there is a genuine issue of material fact regarding their claim that the SBA willfully caused deterioration, waste, or loss of the collateral. ¹ To secure the Richmond Block loan, the Lairs signed a personal guaranty. Courts which have reviewed the language of the personal guaranty form that the Lairs signed (SBA Form 148) have concluded that it is an absolute and unconditional guaranty--a guarantor will be released from liability under this guaranty only if he or she can demonstrate that the SBA willfully caused deterioration, waste, or loss of the collateral. See, e.g., United States v. New Mexico Landscaping, Inc., 785 F.2d 843 (10th Cir.1986); United States v. Mallett, 782 F.2d 302 (1st Cir.1986); United States v. Meadors, 753 F.2d 590 (7th Cir.1985); United States v. Kukowski, 735 F.2d 1057 (8th Cir.1984); First Nat'l Park Bank v. Johnson, 553 F.2d 599 (9th Cir.1977); United States v. Proctor, 504 F.2d 954 (5th Cir.1974).

The guaranty itself provides in part that:

The obligation of the Undersigned hereunder [the Lairs], and the rights of Lender [SBA] in the collateral, shall not be released, discharged or in any way affected, nor shall the Undersigned have any rights against Lender: by reason of the fact that any of the collateral may be in default at the time of acceptance thereof by Lender or later; ... nor by reason of any deterioration, waste, or loss by fire, theft, or otherwise of any of the collateral, unless such deterioration, waste, or loss be caused by the willful act or willful failure to act of Lender.

(Emphasis added). Thus, the Lairs will be released from their otherwise unconditional obligations under their personal guaranty only if they can establish that the SBA willfully acted or failed to act in such a manner as to cause deterioration, waste, or loss of the collateral.

Reviewing the same SBA Form 148, the Tenth Circuit concluded that a "guarantor seeking to establish 'willfulness' under this guaranty agreement must allege 'a purpose by the SBA to diminish the value of the security in order to intentionally injure the defendants.' " New Mexico Landscaping, 785 F.2d at 848 (quoting Austad v. United States, 386 F.2d 147, 151 (9th Cir.1967)). By signing this unconditional guaranty, the Lairs clearly waived any legal duty the SBA may have had to protect the collateral. ² See Meadors, 753 F.2d at 595 (protection against SBA's negligent impairment of collateral waived under SBA guaranty agreement). ³ We therefore agree that intentional injury is the appropriate definition of "willfulness" under the SBA's personal guaranty agreement. At trial, the Lairs would bear the burden of proof on this issue. Thus, to avoid summary judgment they must affirmatively demonstrate by specific factual allegations that the SBA acted, or failed to act, with a purpose to intentionally injure the Lairs. Celotex, 477 U.S. at 322, 106 S.Ct. at 2552.

Viewing all of the pleadings and the inferences therefrom in the light most favorable to the Lairs, we do not believe that they established that a genuine issue of material fact exists with regards to the "willful" actions of the SBA. In his affidavit, Clarence Lair stated only that he objected when the SBA appointed Edwards as Caretaker of Richmond Block, and that as a result of Edwards' actions certain unidentified parts of the collateral were "stolen." The Lairs did not assert that by appointing Edwards, the SBA acted for the purpose of causing them intentional injury.

On appeal the Lairs contend that by alleging that the SBA knew or should have known that Edwards' appointment would lead to the deterioration of the collateral, they sufficiently alleged a purpose by the SBA to diminish the value of the collateral. In resisting a motion for summary judgement, however, a party may not rely upon mere conclusory allegations unsupported by other evidence. Beard, 840 F.2d at 410. The appellants failed to specify what deterioration of the collateral occurred, how it occurred, what collateral was "stolen," or what specific facts the SBA was allegedly aware of which should have caused it not to select Edwards as the Caretaker of Richmond Block. The only specific allegation--that a particular metal block recycling process was sold for less than its fair market...